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Executives

W. Scott Lamb - VP of IR

Raymond J. Milchovich - Chairman and CEO

Franco Baseotto - EVP and CFO of Foster Wheeler Continental Europe

Umberto della Sala - President, COO and CEO, Global Engineering and Construction Group

Gary Nedelka - CEO of Foster Wheeler North America and Power Group Asia

Analysts

Barry Bannister - Stifel Nicolaus

Andrew Kaplowitz - Lehman Brothers

John Rodgers - D. A. Davidson & Co

Brian Chin - Citi Investment Research

Nicholas Capuano - Imperial Capital

Simon Wilson - Sarasin Investment Management

Foster Wheeler Ltd. (FWLT) Q4 FY07 Earnings Call February 26, 2008 12:00 PM ET

Operator

Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Foster Wheeler Fourth Quarter Year-End 2007 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. Thank you. It is now my pleasure to turn the floor over to Scott Lamb, VP of Investor Relations. Sir, you may begin your conference.

W. Scott Lamb - Vice President of Investor Relations

Good day everyone and thanks for joining us. Our news release announcing financial results for the quarter and the year was issued this morning and has been posted to our website at www.fwc.com. The presentation that we'll use this morning has also been posted to the website in the Investor Relations section.

Before turning to our discussion, I need to remind you that any comments made today about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ substantially from such forward-looking statements. A discussion of factors that could cause actual results to vary is contained in Foster Wheeler's annual and quarterly reports filed with the SEC and the company's Form 10-K for 2007 is being filed today.

Joining me on the call today are Ray Milchovich, Chairman and CEO, Umberto della Sala, President and Chief Operating Officer and Franco Baseotto, who is Executive VP, CFO and Treasurer. Also here with us today our Peter Ganz, Executive VP and General Counsel; Lisa Wood, VP and Controller and Gary Nedelka, President and CEO of Foster Wheeler North America Corporation. Gary manages our North American and Asian global power operating units.

After our prepared remarks and the accompanying presentation slides, we'll have time to take questions. Now I'll turn the call over to Ray.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you, Scott, and good afternoon everyone and thank you for joining us. I'd like to first go through our prepared remarks and then, as Scott said, we'll deal with Q&A at that time.

I'd like you to turn to page 3 of the slides to which Scott referred, and I'd first like to highlight 2007 results. 2007 was the best year in our company's 116-year history. We set all-time annual records for net income, EBITDA and scope backlog.

Looking to our Global Engineering and Construction or E&C Group, this group enjoyed an all-time record EBITDA of $505 million, up 56% from 2006, which at the time was an all-time record for that group. We had a 21% increase in capacity measured by people who liquidate to contracts in 2007. And you'll recall that this was after adding 47% capacity in 2006. We also enjoyed a 16% increase in man hours placed in backlog in 2007, and this is particularly important with our mix shift away from lump sum turnkey contracts to almost exclusively a reimbursable backlog.

Turning to our Global Power Group, as many of you will recall, we were somewhat critical of this group's performance in '06, and I'm very happy to report that this group posted $139 million in EBITDA or a 46% increase in EBITDA performance from '06. They did this by enjoying continued improvement in commercial performance as well as contract operations, and we also continue to make progress on the world's largest rather 460 megawatt and world's first supercritical CFB in Lagisza, Poland.

We enjoyed market capitalization increase of 195% to $11.2 billion from year-end '06 to year-end '07. We currently enjoy the strongest balance sheet in Foster Wheeler history having total cash exceeding $1 billion at year-end '07 and market conditions were and continue to be very strong.

Page 4, I'll now cover highlights of Q4. In Q4, I would term our results solid with $78 million of net income in the quarter and $132 million of EBITDA. However, our consolidated EBITDA was below the average for the first three quarters of 2007. Our Q4 2000 was negatively impacted primarily by three E&C items. First of which was an 8.3 million repeal of an Italian power tariff, which I'm going to ask Franco Baseotto to explain in detail. Franco?

Franco Baseotto - Executive Vice President and Chief Financial Officer of Foster Wheeler Continental Europe

Yes, we, first, we had minority equity and interest in two gas generation facilities in Italy, which sell their power output to the Italian national grid operator. In Q3 of 07, an electricity tariff increase was enacted by a ruling of a regional court. This ruling has been then repealed by a higher court in January '08, and of course we have adjusted our accounting accordingly and you will remember in Q3 we did disclose $6 million of increased EBITDA associated to the ruling of the regional tribunal.

If we take into account the combined effect of the two court decisions and if we wanted to normalize 07 activity, we would have to reduce Q3 EBITDA by $6 million and increase Q4 EBITDA by a corresponding amount and this system [ph] will be $8.3 million comparing Q4 with be average of the prior three quarters.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you, Franco. Second issue was a $5 million reserve due to an issue that we have with a client over scope growth on a reimbursable contract in E&C. And finally as we analyzed our performance in Q4 as we typically do when we close a quarter, there was simply fewer profit enhancement opportunities in the quarter in E&C due to incentives that were available due to contract timing, bonuses and just overall cost savings opportunities if we compare the contract cycle in Q4 to the previous three quarters of the year.

We enjoyed a very key booking during Q4. The Pluto LNG contract that's previously been announced and demand remained very strong in E&C and in GPG.

Turning to page 5, if we look at consolidated scope bookings, they continue to be strong. As we stated continuously throughout the year, we see quarter-to-quarter variability in both years 06 and 07 and we assume that we'll continue to see that in 08. However, when we compare 06 to 07, we enjoyed a 37% increase in scope bookings in 07 over 06.

Turning to page 6. If we look at the impact that has on consolidated scope backlog, it has steadily increased. We've enjoyed a 30% increase from 06 to 07 even with a 27% increase in scope revenues.

We turn to page 7. We look at Global E&C group EBITDA. This group enjoyed a 56% increase in average quarterly run rate from 06 to 07.

Turning to page 8, we also have three projects currently underway that have significant strategic implications on the company as we go forward. I am going to ask Umberto della Sala to speak to these three contracts. Umberto?

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

Yes, okay, thank you Ray. Now the first one is Pluto you already mentioned in the opening remarks. This LNG project which we started early pre-FEED [ph] activities and we develop the FEED and now we got in the same with conversion to EPC. These are ₤4.3 million tons per year LNG liquefaction project which is scheduled to start LNG production at the end of 2010.

It is worth mentioning that the execution of this project is based on a very innovative use of modernization. It is very extensive modernization as compared to any other previous facilities we have so far. Second major award was the QPCC, the client is a joint venture between Qatar Petrochemical and the Honam, which is a chemical, Korean chemical company. We have spoke about our project ease of FEED... the [indiscernible]. This is important because number one, demonstrates our strong position in petrochemicals, number two, because it builds our position in Qatar.

The number three, the ExxonMobil -- Parallel Train in Singapore. Again, we started here with the FEED activities and we have converted into EPC. And this is the ExxonMobil Chemical's single largest investment ever.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you Umberto. Turning to page 9, we look at Global Power Group EBITDA, and we look at average quarter 06 versus average quarter 07. This group enjoyed a 46% increase in the average quarterly run rate between the two periods.

Turning to page 10, I am going to ask Gary Nedelka to speak to the four projects noted in GPG on page 10. Gary?

Gary Nedelka - Chief Executive Officer of Foster Wheeler North America and Power Group Asia

Thank you, Ray. The first project we'd like to speak about is the Lagisza project which was mentioned earlier. Located in Poland, this is the world's largest CFB unit and also the first supercritical CFB unit in the world. At 460 megawatts inside, it is still on schedule to begin operation in early 2009. Also of note is the Novocherkasskaya project which we have been awarded in Russia. In addition to being the first CFB in Russia, it's the second supercritical CFB sold in the world after Lagisza. This project clearly demonstrates Foster Wheeler's leadership in the CFB product line and this is sized at 330 megawatts.

The Longview project in West Virginia represents GPG's reentry into the supercritical PC boiler market. This is the largest sector of the global boiler market and the 750 megawatt unit will utilize vertical-tube advanced super critical technology.

In Spain, Foster Wheeler is designing a demonstration facility for CIUDEN, which will demonstrate oxy-fired CFB and PC technology which will open the way for Foster Wheeler to offer carbon capture and sequestration technology in the future.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you Gary. Turning to page 11, page 11 simply shows the growing cash position of Foster Wheeler and shows that we were in excess of $1 billion of cash at year end.

And turning to page 12 to conclude our prepared remarks, if we look at the key takeaways, number one, we remain very positive on market demand. Number two, in terms of Global E&C group, our average EBITDA margins, we've stated previously and continue to state that they will be sustainable in 2008 at levels comparable to full year 2007. We also expect meaningful organic growth to continue in our Global E&C group in 08.

Turning to our Global Power Group, as we stated previously, we expect a material increase in '08 EBITDA margins as well as revenues compared to the improved performance that this group posted in 2007. We just announced a recent acquisition of Biokinetics. This strengthens our global pharma capabilities in Global E&C. And finally, we are aiming for growth by strategic acquisition in addition to Biokinetics as we go through the year of 2008. Thank you.

W. Scott Lamb - Vice President of Investor Relations

Okay, we are ready for Q&A operator.

Question And Answer

Operator: [Operator Instructions]. Your first question comes from Barry Bannister of Stifel Nicolaus.

Barry Bannister - Stifel Nicolaus

Can you address the scope margin? It dropped to about 17: 1, and even if I back out some of the contract completion bonuses and other factors, it was still... looks like it was down versus 22.6% a year ago in E&C in the quarter. On a run rate basis going forward, are you at the front end of so many projects that the margin would be lower, but the revenues net-net higher or can we expect to bounce back in those margins?

Raymond J. Milchovich - Chairman and Chief Executive Officer

This is... I missed the early part of your question, Barry. This is specifically E&C margins in Q4?

Barry Bannister - Stifel Nicolaus

Yes, just E&C.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Just E&C in Q4. I'll defer to Franco.

Franco Baseotto - Executive Vice President and Chief Financial Officer of Foster Wheeler Continental Europe

Barry, I think first, as we all know there, is quarter-to-quarter variability. So in any given quarter, due to the portfolio mix and the timing of accrual within that portfolio mix, margin can change. I think we have clearly stated and we can see it from our disclosure of changes in contract estimate that Q4 was a very clean quarter for E&C in terms of changes in contract estimate. And again, this is both a consequence of the portfolio mix, but as well, as Ray indicated, timing of accrual of profit on our reimbursable [ph] portfolio for instance. Some of our key win in the second half of the year do have material incentive schemes and we will start to accrue against those schemes when it is probable that the incentives will... is likely to be recognized. And in addition to that, we have called out the 5 million of unfavorable changes in estimate which did impact the quarter. And we have also indicated with respect to E&C margin, we do expect the margins in 08 to remain sustainable as compared to the yearly average of 2007.

Raymond J. Milchovich - Chairman and Chief Executive Officer

I guess the important thing Barry is as we did intense analysis on the quarter as we always do. If you normalize for the tariff change and you include the 5 million reserve that we discussed, it's no more complicated than there were simply upside opportunities in the early three quarters that we didn't have to get in the fourth quarter, which reinforced our assertion about 08 versus average year 07 in E&C.

Barry Bannister - Stifel Nicolaus

When I look at E&C reevaluation of contract profit or cost estimates, a year ago, it was $20.4 million and it helped the profit margin. In the first three quarters of this year, it was between $11 million and $19 million. And Franco said it was lower in the fourth quarter. Have you simply exhausted the positive contract reevaluations from legacy work, or are you likely to see that number bounce around?

Franco Baseotto - Executive Vice President and Chief Financial Officer of Foster Wheeler Continental Europe

I think we are likely to see that number bounce around and change quarter-to-quarter even in '08. And again, this is a function and you are correct, Barry, that part of the overall $54 million of favorable changes in contract estimates in E&C in 07 is also due to the portfolio mix because we did execute and bring... brought to completion some lump sum turnkey contracts in 07. But the low Q4, which is a single-digit change contract estimate is really more due to timing of accrual on our cost plus reimbursable portfolio and we do expect this to change in 08.

Barry Bannister - Stifel Nicolaus

Okay. And then just before I get off, the gross profit on a scope basis in Global Power is still below 10. It was 7.7 versus 8.4 a year ago. Is there any chance of that getting to 10% as we have been expecting in the near future?

Raymond J. Milchovich - Chairman and Chief Executive Officer

What we've said Barry is if you look at year-on-year margin improvement, 07 to '06, double-digit movement in GPG. I expect a material margin movement 07 to 08 based on... let me just... let me back up. Assuming we operate as well I think we're going to operate in '08, and there were some very good signs and very good improvement in the operations in '07, the as book [ph] margins would support a material margin pick up in 08 in GPG, and that's what we're expecting.

Barry Bannister - Stifel Nicolaus

Okay. Thanks a lot.

Operator

Your next question is coming from Andrew Kaplowitz of Lehman Brothers.

Andrew Kaplowitz - Lehman Brothers

-- that terms rate that you're seeing in E&C, has there been any change? Are contract terms actually still getting better? Are they getting worse? Has that had any impact on your E&C margin that we see?

Raymond J. Milchovich - Chairman and Chief Executive Officer

We missed the first part of your question Andy, I'm sorry.

Andrew Kaplowitz - Lehman Brothers

Yes, I just said I'm wondering about contract terms on your contracts in E&C.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Okay. I defer to Umberto.

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

Andy, we don't see any material change of contract terms. Maybe the only comment I can offer to you that we start seeing some early signs of some clients trying again to go to lump sum turnkey. But it is too early to say how the market is going to answer... to respond to this attempt. But so far no major change in contract terms and conditions.

Raymond J. Milchovich - Chairman and Chief Executive Officer

And certainly, Andy, nothing that impacted the fourth quarter.

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

Yes, absolutely.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Certainly nothing... there was nothing in contract terms that impacted the fourth quarter.

Andrew Kaplowitz - Lehman Brothers

I guess could I ask this way too? The terms that are in backlog, are they still in general better than what you are currently reporting on the E&C side or are they now sort of leveling off?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Umberto, you want to speak to that?

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

Well, and I think is... I think what we have in the backlog, as Ray said, number one, we only have reimbursable contracts. And some of them offer in my opinion very good profit enhancement opportunities. The issue is that the timing is going to affect... the time of performance of this project is going to affect the accrual of this profit enhancement opportunity. Now it is not a secret that typically on a FEED contract, you don't have many profit enhancement opportunity. Typically, these profit enhancement opportunities are linked to EPC execution. And if have your bonuses, typically, you get the bonuses towards the end of the project. So in the backlog, I think we have very good projects with very good profit enhancement opportunities. The time of execution is going to dictate the accrual of this profit enhancement opportunity.

Raymond J. Milchovich - Chairman and Chief Executive Officer

The only thing I would add... Andy, let me just add one thing to what Umberto said as I sit here and think about the broad definition of your question. We have forecasts that 08 E&C margins will be flat with full year 07 in the aggregate. We're doing that with a reasonable material movement to reimbursable from some level of lump sum turnkeys that we enjoyed in 07. To be able to do that, the reimbursable contract margins that we have as booked have to be better than that which we enjoyed in 07 because the lump sum turnkeys that we enjoyed in 07 were very, very good contracts. So to stay flat in margins with the mix shift, we have to have improved reimbursable margins.

Andrew Kaplowitz - Lehman Brothers

That's helpful.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Yes. Okay.

Andrew Kaplowitz - Lehman Brothers

Yes, Ray, when you look at 2008 and beyond, obviously it's no secret that a lot of big customers have announced huge spending plans over the next several years and so the question is I'm sure the faster we work can get us the piece of the pie. You start to see because you did so much work out there more foreign competitors start to compete with you, and you've historically done a good job of having very high margins. Are you still confident that you can keep these high margins on new contracts? And I guess the other question is do you still see a significant work [ph] on the E&C side of table as we go forward over the next couple of years?

Raymond J. Milchovich - Chairman and Chief Executive Officer

I would just... I am going to answer your question generally, then I'll ask Umberto to add to it if he can. We see the same thing you see. I mean I listen every Monday to the E&C sales call, and there is a tremendous amount of work that's available worldwide just as you said. Is there competition? Well, there is, but there has been. Do we believe there is a market for our services? We obviously do and we think we get paid fairly for the value that we provide, and we think that... we see no reason that that isn't going to continue. If we didn't think it was going to continue, we wouldn't be forecasting additional organic growth in E&C in 08. So I mean as I have stated publicly a number of times, we intend to continue to grow this business organically and to add to organic growth by strategic acquisitions in the event we are able to do so by the standards that we have set for ourselves. So I think that's... I think that's a yes. Umberto, you want to add to that if you can?

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

No, I agree with you. I believe market... the opportunities of the market are very strong, lower investments [ph] coming on stream. So no reason to change the assessment, no.

Andrew Kaplowitz - Lehman Brothers

Ray, one more question if I could on the --

Raymond J. Milchovich - Chairman and Chief Executive Officer

Sure.

Andrew Kaplowitz - Lehman Brothers

On the power side of business. The CFB, it looks like your power bookings in the quarter were very strong. And so as we go forward, maybe you could comment on the events primarily in CFB that, how you see any sort [indiscernible] of edges of demand. Get to know what's going on around coal, or is your technology very preferred and so it continues to be robust?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Let me just... let me make a couple of comments and then I am going to turn to Gary who is closer to the market. Let me just say this, Andy, not only did we have very strong bookings in GPG for the quarter; GPG had a very, very strong booking year. And they are going into '08 within my opinion a very strong backlog and a level of operational momentum that we just simply didn't have a year ago. I also think we continue to see the market as strong as we go into... we continue to see the market opportunities foresee it to be strong in '08 just as we did in '07. And I'll refer to Gary for specifics but I think we continue to see strong demand for our product which seems to be niche in opportunity fuels perhaps materially differently from just pure high BTU coal PC applications, Gary?

Gary Nedelka - Chief Executive Officer of Foster Wheeler North America and Power Group Asia

Andy, we've seen a lot and we share I think the concern of everybody in this industry when we see that some of the regulatory and permitting issues that predominantly exist in the U.S.. But most of those as Ray said have been aimed at the large PC units and have not really hit the CFB market as hard. And one of the reasons for that is the CFB's fuel flexibility. We were able to burn biomass and other certain opportunity fuels which I think helps keep our CFB in play when other larger PC units suffer from problems.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Market continues to look strong Andy.

Andrew Kaplowitz - Lehman Brothers

Great, thank you. Very helpful.

Operator

Your next question comes from John Rodgers of D.A. Davidson.

John Rodgers - D. A. Davidson & Co

Hi, good morning.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Good morning.

John Rodgers - D. A. Davidson & Co

You did talked about margin expectations for '08. But I am curious given the backlog growth in total and then scope backlog, how should we think about revenue growth in '08 on the E&C side?

Raymond J. Milchovich - Chairman and Chief Executive Officer

You're going to see meaningful revenue growth in E&C.

John Rodgers - D. A. Davidson & Co

Okay.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Scope revenue as well as pure revenue.

John Rodgers - D. A. Davidson & Co

Okay.

Raymond J. Milchovich - Chairman and Chief Executive Officer

In both businesses. And if we just look at the run...the fourth quarter run-rate on revenues on top line, if we just look at this as a run-rate into '08 which... its in excess of 10% higher than the average of '07. And I am not suggesting that that's what we are looking for because we are going to continue to add organic capacity in '08. But if you look at top line, the fourth quarter's run-rate was higher than the average of the year in '07.

John Rodgers - D. A. Davidson & Co

You know it, it built through the year. And I mean it has for a number of quarters now. And I am just wondering...

Raymond J. Milchovich - Chairman and Chief Executive Officer

Yes. And I ... we're going to see meaningful revenue growth in both businesses, John, GPG as well as E&C.

John Rodgers - D. A. Davidson & Co

Okay. And then just back to the margins for a second just so I understand the mechanics of it. When you saw very strong growth in terms of total backlog growth...total backlog, but not to the same extent in terms of scope backlog growth and yet, you are saying margins stay the same. I mean given you have got higher total backlog growth, that does means that you've got a lot pass through revenue. Shifting [ph] that much higher margins on your scope backlog?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Well, let's be very specific, and perhaps I should have been more specific in my response, John. When I forecast margins as flat in E&C --

John Rodgers - D. A. Davidson & Co

Yes.

Raymond J. Milchovich - Chairman and Chief Executive Officer

That's margins on scope revenue.

John Rodgers - D. A. Davidson & Co

Okay, that's what... okay.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Margins on scope revenue, because what you're going to see is in Q4 and for the year, on a revenue basis, we had very, very high bookings because there is a lot of flow through in a couple of those contracts. But that makes the case for why we choose to disclose scope.

John Rodgers - D. A. Davidson & Co

Yes.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Because, as we've said before, flow through is meaningless when it comes to the profitability of the business. So yes, I mean we are going to see ... the predominance of the flow through is in E&C. E&C will see very material revenue growth but E&C will also enjoy scope revenue growth in 08 versus 07 which is what we focused on and what's most important to us, obviously.

John Rodgers - D. A. Davidson & Co

Okay. That helped, I just wanted to clear that out.

Raymond J. Milchovich - Chairman and Chief Executive Officer

In my margin forecast is always based on scope revenue.

John Rodgers - D. A. Davidson & Co

Okay. Okay, that makes more sense.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you. Okay. Sorry for the confusion.

Operator

Your next question comes from Brian Chin of Citi Investment Research.

Brian Chin - Citi Investment Research

Hi. A question on the Biokinetics acquisition. Does that acquisition signal an increased willingness of management to look at acquisitions outside of the energy space more than say 12 months ago?

Raymond J. Milchovich - Chairman and Chief Executive Officer

I don't think so Brian. I mean let me just say this. I anticipated that question. We have got a global pharmaceutical business that we've always valued. It's just that when you put it inside this portfolio. It comes to be overwhelmed by the energy related business that we have and the Biokinetics acquisition was a perfect fit because if you look at our global pharma business, had a hole in it because North America was a casualty of the Foster Wheeler restructuring back in the late nineties in early part of this decade. And bio-kinetics was a perfect fit because it gave us an opportunity to reenter the North American market and filled this hole that exists. But I wouldn't say we value the pharma business Umberto, anymore today than we did a year or two ago; it's just that it doesn't get much press because it's so small relative to the energy related businesses of Foster Wheeler, would you not agree Umberto.

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

Yes, I agree and as you stated that we always behind the pharma business. Unfortunately, the pharma business in U.S. was a casualty of the restructuring, but we still kept activities in the pharma business. Now why Biokinetics acquisition? Number one, because we'll start redeveloping pharma capabilities in the U.S., which is very large, actually the largest pharma market in the world. This is the market where the major global pharma players operate and we should be able to serve them either in U.S. or abroad. And if we also through the acquisition of Biokinetics, also acquired biotech capabilities, which today are essential to be able to serve the pharma market which is moving into the biotech direction. So no, it's not an indication of the diversification. In pharma it might have been and always been part of our core business and this was just an acquisition to reinforce our capabilities in this field.

Brian Chin - Citi Investment Research

And just to make sure I get a sense of just how much the energy side of the business is that size is relative to buy and if you can just give a sense of just how big this deal was I mean are we talking double-digit million, triple-digit million, just some sense?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Do you mean how big the acquisition price was?

Brian Chin - Citi Investment Research

Yes.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Brian, we are not.., we are just not prepared to disclose that.

Brian Chin - Citi Investment Research

Okay. And then lastly with regards to the increasing balance of cash on the balance sheet and you guys talking a little bit more about strategic acquisitions, how do I think about that versus when might you actually look at share buybacks since that is an interesting deployment of cash? Can you comment on that a little bit?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Well, given the analysis that we have done, and we looked at this in a fair amount of detail over a year ago, if we can successfully do strategic acquisitions at a reasonable price, the accretion to shareholder value just far exceeds share buy back. And just anecdotally, I am preparing to visit with the Biokinetics principals on Thursday. And I've got my commercial team going to meet me in Philadelphia to do so. And when I look at the synergies that we've identified already in this acquisition, it makes the case that we should push ourselves to find acquisition targets that do for this company like the kinds of things that we and the Biokinetics team believe this acquisition will do. So what we're going to do, Brian, is let the cash put pressure on us to find additional acquisition targets making sure that we get the kind of returns from the acquisitions through the capturing of synergies that we've pushed ourselves to do. So right now I mean we're going to let the cash sit and put pressure on us to find value creating synergistic acquisitions and will obviously continue to revisit that as the year goes on.

Brian Chin - Citi Investment Research

Right. Thank you.

Operator

Your next question comes from Nick Capuano of Imperial Capital.

Nicholas Capuano - Imperial Capital

Hey guys. Can you please address your capacity growth in the quarter and for the year in both E&C and Global Power and in talking general about your utilization levels and kind of your outlook for capacity in the near term?

Raymond J. Milchovich - Chairman and Chief Executive Officer

I'll defer to Franco on the quarter and then I'll deal with 08. Franco, you want to deal with the quarter, please?

Franco Baseotto - Executive Vice President and Chief Financial Officer of Foster Wheeler Continental Europe

Capacity growth for our engineering and construction was 21% in 2007 and approximately 3% in the last quarter. And just to be sure, our capacity growth is defined as technical manpower that we can liquidate to contract. And in terms of Global Power, I think we have stated that we don't have an equivalent measure and probably the best proxy in terms of capacity is really the top line revenue growth for Global Power.

Nicholas Capuano - Imperial Capital

Right.

Raymond J. Milchovich - Chairman and Chief Executive Officer

And Nick, I mean we haven't put a number on that for either business in 08, but we have said that we expect there to be a material movement in top line growth in both businesses in '08. And as we've now obviously started the year and as we've gone through the business plan for both businesses, that continues to be our prediction for the year.

Nicholas Capuano - Imperial Capital

Okay, great. And you alluded to the contract structure of the big FEED, the big second half 07 deals, creating some incentives scheme that are going to benefit you in the future. Now given these are long-term deals, I mean to what extent are the incentive structure scheduled or due for 2008 versus farther out periods for those deals?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Frankly Nick, they are mixed throughout the whole portfolios of contracts. And we'll have incentive opportunities in 08 and we'll have obviously incentive opportunities in '09. And it's Franco, I wouldn't say that there is one year that they would fall into... in a material not more than others, would you agree?

Franco Baseotto - Executive Vice President and Chief Financial Officer of Foster Wheeler Continental Europe

Also because we look at incentive according to U.S. GAAP on a quarterly basis and we determine if the incentive is likely to be achieved and we start to accrue it. And some of these incentive schemes have different components which are cost driven, schedule driven, safety driven. So every quarter we really look at our pool of incentive contract by contract and we determine the portion that we can accrue to profit based on U.S. GAAP for principal. So it does not necessarily mean that the time that an incentive becomes contractually due is the time that we will accrue the incentive. We may acquire it before if condition current that enabled us to do it. Directionally, as Umberto said, and for the reason that I explain in terms of the drivers of these incentives, it is true that incentive accrual tends to be back ended during the life of the contract.

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

Yes, Franco, maybe I would like to offer an example. Suppose on a project we have a safety incentive, now, I don't believe there is any way to accrue the safety incentive until we finish the project. There are other incentives which can be managed differently.

Nicholas Capuano - Imperial Capital

All right, that's very helpful. Thank you.

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

Yes.

Operator

Your next question comes from the Michael Judas [ph] of Bear Stearns.

Unidentified Analyst

Good morning, gentlemen.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Hello Michael.

Unidentified Analyst

Ray, following up on the capacity question, maybe you can talk a little bit about maybe some other capacity opportunities in some of your more important offices like in Reading or in Milan or Singapore. How comfortable are you feeling with the opportunities to add the bodies and actually push those bodies through your system so they can get up and running as quickly as it looks like your backlog is going to require?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Just to be specific, the market served by our Asia Pacific group continue to be very, very hot. So we intend to add organic growth in Asia Pacific. Our Reading offices is without question our largest system, our largest office it is in... Reading is basically an export system, and they serve the very, very hot energy markets. And we would expect a level of organic growth in the Reading system as well.

We also see organic growth to our Houston operations in E&C. Getting and finding the people is not the constraint. Being able to effectively assimilate the people into project teams and do quality work for clients is the constraint to organic growth. And what we are not going to do is we are not going to jeopardize the quality of the product that we provide the marketplace by adding too quickly. So, as I've said before, our management teams are incented to grow, they want to grow, the markets are there for them to grow and I expect them to continue to do so. So I would expect, Michael, that the growth areas will be Asia Pacific, the Reading system and Houston in E&C primarily. Would you agree, Umberto?

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

Yes, I agree.

Unidentified Analyst

Have you moved into your new buildings in Houston yet?

Raymond J. Milchovich - Chairman and Chief Executive Officer

We will move in in August.

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

August, yes.

Unidentified Analyst

My second question to follow up is maybe addressed for Gary. Looking at maybe the CFB market in the U.S., does it look better for Foster Wheeler positioning today versus a year ago relative to some of the fuel flexibility you can sell to industrial or the utility side? And would you anticipate in the next two years, you'd be disappointed if you didn't have one or two 300 plus megawatt, supercritical CFB orders placed into the U.S., whether it's a repowering or a brand new plant?

Gary Nedelka - Chief Executive Officer of Foster Wheeler North America and Power Group Asia

On the first question, your question was on the fuel flexibility between the industrial and the utility?

Unidentified Analyst

Well just in a sense of high grade, low grade coal, pet coke. Coal markets are globally extremely tight. There has bee a lot of issues there. Would you... or actually maybe even seeing some combined cycle gas come back into play as people trying to meet these reserve margin issues and how you seeing that how... maybe you can benefit from that as well?

Gary Nedelka - Chief Executive Officer of Foster Wheeler North America and Power Group Asia

Sure. Sure. Well, certainly, the CFB is the best suited boiler there is for a lot of these opportunity fuels. And just about all the CFBs that we've sold here in the U.S. have been designed for either petroleum coke, biomass or some of these extremely high ash waste coals. And we expect that trend to continue with all the CFBs, both for utility and industrial applications. As I've said before, most of the larger projects, larger straight coal PC projects we have seen have been the ones that are facing the regulatory and permitting pressures.

As far as the supercritical CFB coming into the U.S., I think U.S. utilities are a bit more conservative and are taking a little bit of a wait and see right now, which is why Lagisza is such an important project to us to get that up and running. Once that's shown its colors, I expect to see a lot of movement in the supercritical CFB arena in the U.S. just because of the cycle efficiency aspects of that and the corresponding decrease in CO2 and other pollutants.

Unidentified Analyst

Can you talk about the --

Raymond J. Milchovich - Chairman and Chief Executive Officer

And Mike, the only thing I would add to what Garry said and I might defer in Umberto here is I think we view the recent win in Russia, the second supercritical CFB is a very strategic win. Umberto?

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

Yes, I agree. We see... we start seeing prospects in that part of the world which confirms what you said, Ray.

Raymond J. Milchovich - Chairman and Chief Executive Officer

So in addition to the comments that Gary made, Michael, we see that is a very strategic win for Power Group Europe.

Unidentified Analyst

Terrific. All right, thank you gentlemen. I appreciate your help.

Operator

Your next question comes from Simon Wilson of Sarasin.

Simon Wilson - Sarasin Investment Management

Hi. Has there been any change in your pricing philosophy Q4 versus previous quarters? Because the implication around your quarter on first inspection is that you've given up pricing to gain volume, implying there is a peak cycle, because the stock reaction today seems to imply that. I just wondered has anything changed there to maintenance of my commission level.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Okay let me as clear I can be, the quarter does absolutely does not imply that. And we have absolutely not changed our pricing philosophy in the market at all. So any interpretation of the quarterly data that way is a misinterpretation.

Simon Wilson - Sarasin Investment Management

Okay, great. Thank you.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Okay.

Operator

Your next question comes from Barry Bannister of Stifel Nicolaus.

Barry Bannister - Stifel Nicolaus

When I look at this quarter in terms E&C scope bookings as a percentage of total E&C bookings it was about 15% because of the inclusion of some mega projects. If we are going to go forward and get more mega projects is that number going to remain fairly lowest percentage of total bookings given that it's been about 50% on average for the last eight quarters?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Okay, Barry you talk about scope as a percent of total revenue right?

Barry Bannister - Stifel Nicolaus

Correct, with good scope bookings as a percentage of total bookings. I'm trying to determine whether mega projects are always going to be such low amounts of scope.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Okay let me just say this and I know we have had this discussion before. That is in my view a totally meaningless measure in terms of the profitability of the business. And I also think it would be wrong to conclude that mega projects will always include huge pass through revenue. Umberto, would you agree?

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

Well. It depends on the work [ph] we have in our scope. Now if our scoreboard includes services, EPCM services and in particular [indiscernible] management, you should expect our scope to be in the range of 15%, 20% of the total revenues including total cost.

Barry Bannister - Stifel Nicolaus

Total project spending.

Umberto della Sala - President, Chief Operating Officer and Chief Executive Officer, Global Engineering and Construction Group

Exactly. Now if our scope includes material supply and/or construction, then of course this percentage is going to go up. So you should not be surprised to see that our scope revenues are going to be lower... going forward, lower than the full revenues because we have only services in our bookings. We are not booking lump sum turnkey, we are not booking any major engineering and material supply contract.

Barry Bannister - Stifel Nicolaus

I understand that. Okay. And then if I look at the full year scope, EBIT margin excluding D&A. It was about 23.0% adding back the small charge of 5.2% in the quarter. But the fourth quarter was 79 and I believe I heard Ray said that you felt like you would be able to maintain the 2007 full year scope EBIT margin going into next year. Is that understanding in that number of 23%, the relevant figure to carry forward as a goal?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Our expectation is that '08 EBITDA margins on scope revenues will be virtually even, flat with full year '07, EBITDA margins on scope revenues.

Barry Bannister - Stifel Nicolaus

That is total company or E&C specifically?

Raymond J. Milchovich - Chairman and Chief Executive Officer

E&C. I'm sorry, Barry. E&C, just E&C. We are predicting a meaningful margin improvement in GPG.

Barry Bannister - Stifel Nicolaus

Great. Okay, thanks a lot.

Operator

Your next question comes from Mark Russel [ph] of Millennium Partners. Sir, go ahead.

Unidentified Analyst

Good morning guys. Just circling back on Barry's question. So I guess one thing I'm confused about is the backlog is going up, but EBITDA margins are staying flat, and that's just a function of from your last answer the fact that you are going to be doing less supply work. Am I understanding that correctly?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Backlog is going up, but that just mean we've got more unfilled orders behind the machine. But the -- as sold margin in backlog that we expect to realize in 08 is flat with full year 07.

Unidentified Analyst

Okay. I guess the confusion I'm having is what you were saying earlier is that you are booking new business at higher margin. So I'm just a little confused on why the margin stayed flat.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Okay, but let's be clear. What I said earlier was we have a mix shift taking place in E&C 08 to 07 such that we have far fewer lump sum turnkeys that we'll enjoy in 08 that we enjoyed in '07. The margins on the lump sum turnkeys that we've had in the past are very good margins. So we've lost those in '08, they weren't available in the market. So since our margin we predict will be flat in the aggregate, that means our reimbursable margins had to go up because they had to offset the loss of LSTK. Does that help clarify the message?

Unidentified Analyst

Yes, thank you.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Okay, thank you.

Operator

Ladies and gentlemen, it appears there are no further questions at this time. I will now turn the call back over to Scott Lamb.

W. Scott Lamb - Vice President of Investor Relations

Okay. Just to summarize our messages before we conclude the call. Once again, we find the markets that both of our businesses serve as very strong as we go into 08. We are coming off a very good year in 2007. We expect aggregate margins in E&C to be flat. We also expect to enjoy meaningful organic growth in E&C. In our GPG group, they enter 08 with a very strong backlog, operating momentum. We expect them to enjoy meaningful margin improvement 08 versus 07 as well as meaningful revenue improvement. We are very bullish about Foster Wheel in 08 and beyond and we look forward to working with you as we go through the year. Thank you very much.

Operator

This does conclude today's conference call. You may now disconnect.

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Source: Foster Wheeler Ltd. Q4 2007 Earnings Call Transcript
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