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McDermott International (NYSE:MDR)

Q4 FY07 Earnings Call

February 28, 2008, 10:00 AM ET

Executives

Jay Roueche - VP, IR and Corporate Communications

Michael S. Taff - Sr. VP and CFO

Bruce W. Wilkinson - Chairman of the Board and CEO

Analysts

Andy Kaplowitz - Lehman Brothers

John Rogers - D.A. Davidson & Co.

Joe Agular - Johnson Rice

Brad Handler - Wachovia Capital

Jamie Cook - Credit Suisse

Joe Gibney - CapitalOne Southcoast

Stephen Gengaro - Jefferies & Company

Operator

Ladies and gentlemen, thank you for standing by, and welcome to McDermott International’s Fourth Quarter 2007 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later in the call we will conduct a question-and-answer session and instructions will be given at that time. I would now like to turn the conference over to our host, Mr. Jay Roush, McDermott’s Vice President of Investor Relations. Please go ahead.

Jay Roueche - Vice President, Investor Relations and Corporate Communications

Thanks, Pat and good morning to all. We appreciate you participating today in McDermott’s fourth quarter 2007 conference call to discuss our financial results, which we reported yesterday. Participating with me this morning are Bruce Wilkinson, Chairman and CEO of McDermott and Mike Taff, Senior Vice President and Chief Financial Officer. Mike will begin shortly with a review of our financial results for the quarter and Bruce will follow with an overview of our operations. After their prepared comments, we’ll open the lines up for your questions. Before turning the call over to Mike, let me remind everyone that this event is been recorded and the replay will be available for a limited on our website. Also some of our comments today will include forward-looking statements and estimates. These comments are subject to various risks and uncertainties. Please refer to our filings with the Securities and Exchange Commission which are available on our website including our recently filed form 10-K for the year ended December 31, 2007, for a discussion of the factors that may cause our actual results to differ from management's projections, forecasts, estimates, and expectations. With that I will now turn the call over to Mike Taff, Chief Financial Officer of McDermott.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Thanks Jay and good morning everyone. For the fourth quarter of 2007, McDermott reported net income of $160 million or $0.70 per diluted share, the best quarterly result of 2007. This amount compares to $125.5 million or $0.55 per share in last year's fourth quarter. However, last year’s fourth quarter included numerous items which were outside normal operations that in total significantly benefited that quarter, all together including the related 2007 adjustments. The net benefit added about $41 million in the 2006 fourth quarter net income. You can easily divide this sum by the 228.7 million shares to calculate the per share impact on last year's results for comparison purposes. As would be expected, our earnings per share figures for all periods presented include the impact of our two-for-one stock split completed in the fall of 2007. McDermott's net income increased compared to last year primarily due to a more than doubling of our operating results in the Offshore Oil and Gas Construction segment and from increased year-over-year profitability in both Power Generation and Government Operations segments. Looking at the top line, revenue in the quarter exceeded $1.5 billion, approximately 17% above a year ago. This top line increase was again primarily attributable to our Offshore Oil and Gas Construction segment which had a 54% increase. McDermott's operating income was $186.8 million in the fourth quarter of 2007, an improvement of $100 million from the prior year and 20% sequentially. Our offshore oil and gas constructions and power generation systems segments provided most of the year over year growth, improving over $50 million and $40 million respectively.

However, we should note that the Power Generation segment was burdened a year ago with about $27 million of identified settlement, warranty and insurance expenses. Our government segment also recognized a nice year-over-year increase in segment income of approximately 67% compared to our 2006 fourth quarter.

McDermott's other income and expense line item improved by $11.5 million compared to a year ago, generating other income of $7.3 million in 2007, compared to an expense of $4.2 million last year. This improvement related to lower interest expense in the current quarter combined with a loss on the early retirement of debt experienced in the 2006 fourth quarter.

One of the largest fourth quarter year-over-year changes took place in our income tax line. In 2006 quarter, we reported a $94.1 million tax benefit. Through an accounting pronouncement we adopted in 2007, this benefit was subsequently reduced by about $16 million. But we still had a significant tax benefit from income taxes in last year's quarter of $43 million, which contributed to our net income.

During the 2007 quarter, we had a more traditional provision of taxes of $34 million, or a little over 17% of our pretax income. As usual, income taxes are primarily determined by where we're making money in the world. Long story short, taxes were over a $75 million swing between the two periods. I'll let Bruce go into more detail about the business, but let me quickly mention some of the catalysts behind the strong segment financial results.

At $100 million of segment income, the strong offshore oil and gas construction results were the second best quarter during 2007 year. Three main regions, the Caspian, the Middle East, and Asia Pacific were the key drivers this period. In government operations, segment income rebounded sequentially from last quarter to a strong $33.3 million this quarter compared to $19.9 million a year ago.

These results were driven by the best quarter of equity income of the year, representing a full third of this quarter's segment income. The catalyst behind this equity income was exceptional full-year performance grade received by our Technical Services Group from the DOE and NNSA for sites we account for in this method.

Power Generation Systems had an outstanding quarter at almost $66 million. Virtually all of our operations contributed. But clearly we enjoyed the highest book and burn activity of the year, largely on parts and service, which tends to be among our best margin work. As power demand in this country increases, we expect this part of our business to remain strong in the near term. Now turning quickly to the balance sheet.

We ended the quarter with over $1.45 billion in cash and investments, and our working capital ended the year on a positive note after a dip into the red last quarter. Just to confirm, we're also constructively utilizing cash. During 2007, we retired substantially all of our debt over $250 million. We made two acquisitions for about $330 million, invested in capital expenditures of approximately $230 million and funded about $130 million to our defined benefit pension plans. Another source of liquidity our bank facilities are committed until about 2011 and we have no outstanding borrowings. During the year, the major credit rating agencies improved their published view of McDermott's risk profile. All together, our company is well positioned to continue to pursue organic and inquisitive growth initiatives and I believe our operations are largely immune to the current credit markets.

The strong fourth quarter completed a record year for McDermott. Our revenues were approximately $5.6 billion, up 36% from consolidated full-year 2006. Operating income grew almost $330 million for a 2007 amount of $716 million or an increase of 85%. And finally, net income totaled $608 million or $2.66 per diluted share.

I will now turn the call over to Bruce, for his business and operational update.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Thanks, Mike, and good morning everyone. McDermott delivered strong results again this quarter even exceeding the level I implied on our last call. McDermott finished the year with record revenues, income, bookings and backlog. The energy markets we serve continue to be robust, which provides a good tailwind to the operational improvements we have made over the last few years.

As Mike mentioned, each business was up not only compared to a year ago in segment income, but also on more… and probably more impressive, each was up sequentially to finish the year on a high note. As I remind investors each quarter and in every meeting there are numerous puts and takes in the E&C business and make it difficult to ever annualize any one quarter good or bad. But McDermott has continued to deliver substantial income for our shareholders. In fact as I compare the E&C companies have reported the 2007 fiscal-year, McDermott earned about $75 million more in net income than our nearest E&C peer and $200 million more if we exclude one-time tax benefits.

McDermott's consolidated backlog at the end of the year exceeded $9.8 billion, up a $0.5 billion from last quarter and up $2.2 billion from a year ago despite this year's roll off of $5.6 billion in revenues. Strong levels of bookings in Government Operations and Power Generation Systems provided the sequential quarter improvement. While backlog changes will also be somewhat choppy, this periods consolidated increase is another positive sign and leading indicator for our company. In addition, these two businesses are operating in higher throughput and earnings than over prior years.

Turning to each segment for a little more detail. Offshore Oil & Gas Construction segment revenues up $700 million for the first time in my memory and therefore obviously both up sequentially and year-over-year. With the high levels of revenues in 25% of the quarter, nearly 3 weeks pretty well short due to holidays, this segments year-end backlog was down modestly on a sequential basis to $4.75 billion indicating bookings in the quarter of about $580 million. However due to the active market, we currently participate in our worldwide bids outstanding in the Oil and Gas segment grew to over $3.6 billion at year-end, and while our focused project list remains much more sizeable at about $7 billion, what I'm particularly pleased with is that we currently believe there are handful of large projects that we will book in the next month or two that will represent well over $1 billion in new awards.

For these projects, we generally have either a letter of intent or actively negotiating the contract. Stay tuned as always, we'll wait until contracts are signed before we begin making talking specifically about the projects or issuing press releases.

In addition to these large awards, we also have a good number of what I'd call bread and butter work projects that range in size between $100 million and $300 million. Clearly if this comes to past our oil and gas backlog at March 31, will improve sequentially from year-end. Despite this active market however, our company will remain to be selective on projects we pursue and will avoid work that doesn't fit our criteria for risk and return.

Moving on to Power Generation Systems. This segment generated over $600 million in revenues during the quarter. Backlog in the quarter grew about $300 million sequentially, ending the year at about $3.3 billion, clearly the highest in recent memory, if not ever.

During the quarter, our bookings were over $800 million as we recorded several scrubber projects, sizeable awards for nuclear steam generators in the U.S., and nuclear components in Canada plus the engineering and procurement for the boiler and associated environmental equipment on the new Wygen III 100-megawatt coal-fired project in Wyoming.

Even with this good bookings quarter and our growing backlog, we still have about $2 billion of bids outstanding in this segment at year-end. Going forward, we expect strong performance to continue in the service and environmental business as well as some new boiler opportunities in the U.S. Our Congress still does not seem to have a consensus around the greenhouse gas bill. [inaudible] over a 150 different bills, resolutions, and amendments were being discussed in Washington. The need for a new electricity generation in this country remains. In 2007, there were 4.5 gigawatts of new generation capacity awarded in the U.S. and our market share was about two-thirds of that total.

Despite not a day passing without Al Gore global warming being in the news, 2007 proved to be one of the best years for new projects that we've had in over the last 20 years. Yes, the uncertainty of new legislation may prevent the floodgates from fully opening at this moment, but once resolved, we would expect an accelerating building program for new capacity to proceed.

However, there is no doubt that the lowest cost source of base load electric capacity currently comes from existing coal and nuclear plants. As resolved and as we saw in the fourth quarter, running these plants longer and harder should mean increased demand for replacement parts and service work.

Perhaps not always at these levels, but enhanced nonetheless. In addition, there remains solid demand for environmental equipment projects such as scrubbers and SCRs. All of our energy forecast point to several years of strong demand, our serviced parts and outage work to keep both nuclear and coal units operating at high capacity utilization.

In China, our joint venture remains very active, with Chinese and export work to Asia and the U.S. We were recently awarded two 1000 megawatt units in China, which utilize some of our most advanced technologies. In addition to our pulverized coal and CFB product lines, we are looking further to expand our OEM offerings overseas, particularly in Asia and the eastern hemisphere. We recently license our sub-critical technology the Thermax for use in the Indian market as one example of how we can participate early in this market. In addition, we are increasing our R&D effort and spend on the pursuit of cost-effective CO2 solution, which we believe will ultimately be a major business opportunity for both retrofits and new builds.

Finally, we have offerings for solar biomass and waste energy to go with our coal and nuclear capabilities. Our European subsidiary Volan [ph] is a leader in that region in waste energy and biomass, which may offer products also in selected U.S. markets. While these product lines as modest at this point, certainly if the Green trends continue, these areas could become much more significant and initial bidding for these types of projects has increased of late.

Lastly, in the Power Generation segment, in 2007, we formed a new nuclear power generation group combining all our nuclear offerings in one entity. As the Nuclear Renaissance commences we intend to be a participant from project start up through construction in heavy components and continue through the life of the plant. We expect this to be a growing area for McDermott for the foreseeable future. I'm encouraged by our bookings in this area recently. In addition to this steam generator in both the U.S. and Canadian market, we've also entered agreements to fabricate fuel storage containers and have other near-term opportunities. Our re-entry into the U.S. service market has been welcomed by our strong base of utility customers.

The approach is the leverage of our unique manufacturing capability with our engineering and construction capabilities to the greatest extent. Ramping up with Government Operations segment, our revenues in this segment during the quarter were up to a $188 million including revenues from the recent acquisition of Marine Mechanical. There are items we are watching closely in this segment. Congress and administration recently authorized a second nuclear submarine procurement, which was… will result in some additional work for us in 2008 but even more in 2009.

Additionally our contract to manufacturer centrifuges at Clinch River has continued to expand in scope. And while further out and still specialty, discussions are increasing about the use of nuclear power for future new builds of Navy surface ships.

We also continue to pursue opportunities within our site management and operations' offering. Some of the sites are large and others are smaller but our goal is to add our experience to projects were we will make a difference. We don't bid them all, just the sites where add value. We are one of the four teams left in the bidding for the Sellafield project, where we're partnering with Bechtel and Serco, which is likely to be awarded in the summer of 2008 with a contract start date in 2009.

This pretty well wraps up my prepared remarks for the businesses. In summary the strong fourth-quarter completed the tremendous year of operation. There is significant opportunities ahead in all of our businesses and the energy, E&C markets, in which we participate continue to be strong.

Our primary focus continues to be on execution. There are two other issues I'd like to say a few words about. While I acknowledge, I'm not an economist or prognosticated probably the most frequent question investors would ask of late is how this is a slowing economy and tight credit market affect McDermott. My short answer is probably not much. I think our comments today and the results we posted probably answer the question. But, let me add some additional color. The low dollar keeps our products relatively inexpensive on a rural market. As Mike alluded to, our cash position is strong and we have committed credit facilities for several years remaining. Oil and gas demand is no longer dependant on the U.S. and OECD countries as Asia and other developing areas are just starting to truly consume energy that is 3 billion plus consumers who are just beginning modern energy usage. Whether oil is at $70 or $100 the oil and gas industry is strong and growing. We do not expect the Department of Energy spending to be affective or slow. For U.S. electricity generation we have limited work reserve margins, high natural gas prices and LNG isn’t here yet. Plus the environmentalist efforts have generally been a good source of business for us.

To sum up, I would never say we are completely immune to the broader markets. But I don't know of a company better positioned than McDermott for this current environment.

Finally as some of you may have also noticed, in addition to our earnings yesterday, McDermott announced my intent to retire by the end of 2008. I'm addressing this issue last because I believe it is of least importance. I truly have enjoyed my McDermott experience, so much that I stayed on several years longer than I originally intended. However there as the company prepares for the new phase of growth and with these strong market as a backdrop, the time is right for me to step aside in 2008. I believe this is the best job in the engineering and constructions space and I'm confident that my successor will be outstanding whether from within or the outside as my successor will be inheriting a company well positioned for a strong future. Even though I have largely been McDermott's face to the financial community and probably received more of the recognition than I deserve. Let me assure you that all of the entire management team at McDermott is outstanding. Our bench strength is strong and our 28,000 employees are the best in the industry, at least in my view. The best legacy a Chief Executive can leave is a continued success of the company and a lasting performance culture. I am confident that our management team in our management team and fully expect this legacy of performance to continue. Since I am fully committed to staying through 2008 or until my successor is named in an orderly transition complete, our business continues as normal. For investors, that means you'll see me next week at Citi's Industrial Conference in New York and on our planned road trips in April. We all look forward to seeing you in one or more of these venues.

Now I will open the call up for your questions.

Question and Answer

Operator

[Operator Instructions]. And your first question comes from the line of Andy Kaplowitz from Lehman Brothers.

Andy Kaplowitz - Lehman Brothers

Good morning guys. Nice quarter.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Thanks Andy.

Andy Kaplowitz - Lehman Brothers

Looking at the Power margins, the Power generally had a very good quarter and I know it's lumpy, I guess my question is you mentioned already that parts and service have relatively higher margins, do you... nuclear steam generators do replacement... nuclear steam generators also have high [inaudible] because I know you have done a few of them this quarter and going forward how sustainable is margins that are closer to what we have this quarter?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Well looking back at the year, Andy, if I look backwards over 12 months, we achieved about 9.5% operating margin. But that did include a significant number from terminated project that we referred to back in the second quarter. But if I take that out, you're probably 8% or just under. That's a pretty good look back. I think we were committed to improving margins. It's a game of inches. When we combine with B&W operations under a singular management, we began that effort, I think we're making good progress. Clearly, I think the next several years Cambridge Energy and others that we follow are projecting a strong backdrop for basically parts and service, whether it's nuclear or fossil. And I think we're well positioned in fossil and we're pulling out the staffs [ph] to get ourselves positioned in the lower 48 for nuclear service outage work as we already are in Canada. So, I'm pretty optimistic about that and yes our... at least as recent experience and is currently as sold margin the replacement steam generator business does provide good margin for us. So, I don't want to talk you into 10% to happen in the future necessarily, but I think that we are going to have a secular term towards more of the traditional environmental, more service in parts, a few more big boiler projects here and there. But if we do all of the... if we execute well across that and we continue to reduce our cost through the singular operation we are hoping to crawl up to the higher end of the range we've always given you.

Andy Kaplowitz - Lehman Brothers

Great. Thanks. And you talked about your Chinese JV. It seems like you're getting more work over there to cede the Asian market. Is that a fair assessment? Obviously your equity income was still relatively high in the quarter from that. So, I'm just maybe looking for a little bit more in depth on what's going on over there for your Chinese JV?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yeah, the Chinese JV, I guess, ultimately its greatest value probably will be when the U.S. market really gets going post greenhouse gas legislation because we think it is the low cost producing facility anywhere and it also... since we haven't built a lot of coal plants in this country, we've not only been building a lot there we've actually advanced our technology and it's really where we felt the biggest and the most advanced supercritical units. And so it's more than just projects, these are projects in which we've learnt an extraordinary amount about performance of plants. But in the mean time, clearly the Chinese market is on a roll. We also export out of China through Japanese trading companies and others we've... they have sold some units that are destined for Indonesia, some for India. And so what we are really thinking about longer term is how to capture greater value of that beyond just equity income and royalty. And consider ways using that ramping other services around it more like we do in this country for the Asian market. And so, it's China, but we think longer term actually India could be as good or better a market for us than even China. So, we've got ways to go. As you know we have been traditionally more heavily domestic in our focus in the traditional boiler work. But clearly you will see a shifting more to Asia and I emphasize in the future.

Andy Kaplowitz - Lehman Brothers

Great. One more question if I... before I get back in queue. The excitement over the nuclear market seems like it's been ramping up over just the last several months even as these COLs [ph] have started to get submitted. And so, I guess my question to you is you’ve obviously mentioned that there is more activity that you are seeing on the replacement side. On the new generation side, can you tell us what's going on behind the scenes with you and some of the partners you could potentially have, when do you think you could get significant work on the new generation side, has that timeline changed at all?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Well, I guess if anything, it's... I'd like to tell you it's moving to the left, I don't think it is. It seems to us that nobody wants to be the first. I think everybody has concerns over what the cost may be, notwithstanding the legislation we have. I don't think we have assurances that there won't be challenges to people who get started. So, I think it's still sorting itself out when the new build activity begins. Our strategy is…hello?

Andy Kaplowitz - Lehman Brothers

I am still here.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Okay. Our strategy has been to not simply sit idly by waiting for that to come to us but to be more aggressive in developing and reestablishing our relationships with the nuclear generating utilities on the service side.

Michael S. Taff - Senior Vice President and Chief Financial Officer

And I think it's probably a fair comment Andy, to say that while some of our peers may be relying upon and frankly dependent upon only the new build activity, we are actively participating in the replacement markets now such as the recent award for the first synergy Davis-Besse project as well as some replacement activity going on in Canada.

Andy Kaplowitz - Lehman Brothers

Great. That is very helpful. Thanks guys.

Operator

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

John Rogers - D.A. Davidson & Co.

Hi, good morning and congratulations on the quarter and congratulation to you Bruce.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Hey, thanks, John.

John Rogers - D.A. Davidson & Co.

You mentioned the $1 billion or more of new awards that you are hopeful to get in the offshore business?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yeah.

John Rogers - D.A. Davidson & Co.

Is that work that extends out into 2009, 2010 or is it shorter-term project work? [inaudible] assumed burn rates in the second... in the K and it looks like you are going to have a pretty good ramp anyway in '08?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yeah, I think as a practical matter, you need the way to think about '08 is the sales side has already been accomplished in the main. Whether… I mean we still have holes in spite of everything. There is still a gap, just a short-term gap in Asia-Pacific and some of the fab work. We still have minimal work going on here on the gulf coast in the U.S. But as far as what we've been projecting, as far in backlog, you should think of '08 as essentially what is ahead of us is execute what we have got. And what I am alluding to as far as these billion or so or more than that potentially over the next 90 days of additional backlog, think of that primarily as '09 and '10.

John Rogers - D.A. Davidson & Co.

Okay, that's helpful.

Michael S. Taff - Senior Vice President and Chief Financial Officer

That is probably also safe to say John that some of the feed work revenues and some of the early activities on these projects could contribute additionally to just what the pure backlog roll off is.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yes. And in addition to that John, you also will have our traditional improvements from change orders and things like that we... and those we would expect to continue around the amounts we've seen historically for J. Ray.

John Rogers - D.A. Davidson & Co.

Okay. And comments on margins, in the past you've talked about the offshore margins in the low mid-teens levels and then you seem to do a little better than that. Any update on your comments there?

Michael S. Taff - Senior Vice President and Chief Financial Officer

I think you've talked about them in the low and mid teens, we've talked about them 10% to 12% and see we are always sticker when we do. Looking back again at '07, it's about 16% if we just look at the year. And yet you see wide variation in that quarter-by-quarter. I think that will continue, but really the pricing remain strong, we are able to book work with good margin, with considerable contingency. I think the, reticence we have about leading you guys too far beyond our traditional way of talking about it is that, we are now going to be executing work at... I just said, we have over a $700 million dollar a quarter, which is the highest ever, where you can't just do $700 million a quarter and get to the numbers that you guys are working backwards into '08 which means that we're going to have to execute at revenue levels even beyond our highest that just occurred. And so having vessels stuck back-to-back on contracts, getting work out the potential for slippage or the need to use some of the contingency is always there. And what we're doing is just moving heaven and earth to execute every month better than the month before. And as long as we do that, and keep all this in balance, then we have the chance to beat all these numbers down in the 10% to 12% as we've been doing consistently. So I'm hoping that we prove that we can do it at these higher revenue levels and that we will please you with our performance.

John Rogers - D.A. Davidson & Co.

Okay. And last question Bruce, you mentioned $2 billion in bids outstanding on the power side. Are those, is that projects that you are... expect to be awarded, or is it worth that it's a competitive situation you have to... and you have to see what happens?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

No. Well there's always...

John Rogers - D.A. Davidson & Co.

The delays in the stock.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

No. There's always competition out there. What's interesting about the B&W work, first of all, everybody assumes GAAP, our backlog is not a GAAP term. Everybody has a different way of counting backlog and bookings. I think we are extremely conservative and what you tend to see us book things incrementally which reflects the incremental way that most electric utilities like to build capital projects, they take a step at a time, they're looking over their shoulder at permitting issues and cost issues and so we tend to creep into the number as opposed to having these much larger numbers that you see J. Ray experiencing in the offshore business. So what I'm... I guess I'm telling you is it's not $2 billion of dreams, they are real and they are the ones that we are after and think we have a real short at. So I think it's in spite of all that's been said at the peak after we were awarded the TXU job in June of '06, I believe we got to $3.1 billion in backlog. We are now beyond that $3.3 billion and still a lot of bidding activity. So, there is a lot of work out there, but the numbers are just not the way we chase someone, the way we book them are probably never going to be these huge numbers that you see in J. Ray.

Michael S. Taff - Senior Vice President and Chief Financial Officer

And probably said... a little more addition to that John on the 2 billion of bids we have outstanding, those are things that we've actually put out and adding to Bruce's comments, a lot of those projects we know have additional scope to them that should we win in the first bid would probably be well positioned for the follow-on scope.

John Rogers - D.A. Davidson & Co.

Okay. That helps a lot. Thank you.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Joe Agular of Johnson Rice.

Joe Agular - Johnson Rice

Thank you. Good morning. A couple of questions, Bruce. First of all on the J. Ray side, the awards that you referred to that may be booked in the next quarter or so, is that... did you say it was one order or is it more than one?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

No, there is several. Probably in about three or four I can give beyond 1 billion quickly. I can get that in three actually, but if you throw in some of the others, then I refer to down in the $100 million to $300 million range, it's quite a bit larger. But, again... we were optimistic at some of this... if not most of it would be in the first quarter but it may be in the second quarter.

Joe Agular - Johnson Rice

Is it still mainly in the eastern hemisphere?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yes. The Mid East, Asia-Pacific and yet there are several... there is one very good opportunity out in front of us, that’s in the Caspian. But it is still... the winners are still winning and the Gulf coast here is still waiting.

Joe Agular - Johnson Rice

Okay. And if heard… I heard you correctly... I think you said that bids outstanding were 3.6 and sort of your focus was beyond that was 7.6?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

About seven...

Joe Agular - Johnson Rice

Seven, I'm sorry.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

And there would be a few of... it’s not duplicity of the bids outstanding are not all in there, but some could be defined... there could be some overlap, but it is still... it is a considerable amount of work beyond the bids that are currently...

Joe Agular - Johnson Rice

Yeah, it sounded like you would... if I remember correctly you were... you said something around six last quarter and now you are saying seven...

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

That's correct.

Joe Agular - Johnson Rice

Right. So, you're still seeing increasing floods.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yeah, its still there.

Michael S. Taff - Senior Vice President and Chief Financial Officer

The activity is still very strong especially in the Middle East and Asia Pacific.

Joe Agular - Johnson Rice

Okay. And just commentary may be on when the Gulf might come into play. What are you hitting out of... out of that market?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Well, all the pundits have... it was originally going to be late '08 and early '09... now I am here and later in '09. We still frankly are bidding these alternative markets. We are still down in Morgan City, still chasing and being awarded, our plant worker that’s going up to River System for flues and ducts and absorber towers for scrubbers that sort of thing. We still are proposing on a number of refinery modules for the other E&C's and we've been awarded the first project down in Mexico for PEMEX. We're chasing several others traditional ones. So it's still all, what I would call, small pieces here and there. I think that's generally what they are writing about others who have backyards on the Gulf coast. The big market will be the floaters in the deepwater whenever that gets started. But it may be late '09 or '10 now, I mean it's... these things are large but they are taking a lot of time and I think the drilling rig availability has been an issue. So...

Joe Agular - Johnson Rice

But it's still out there.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yes it's still there, it's coming. The good news for us is, what's pretty amazing is that the other markets are strong enough that we can keep achieving new record level in revenues and bookings with the Gulf coast essentially flat. It's still as I described last time, I think the only thing that may change is, I think six months ago, I would have thought that the Gulf coast is going to come back first and the Caspian behind it. Probably by next quarter I might be predicting the opposite.

Joe Agular - Johnson Rice

Okay.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Because, it looks like the Kashagan resolution with the KazMuniGas and the major partners most of that seems to have been sorted out. I think one side gets moving then we will see the Caspian pick up and it may actually pick up before the Gulf coast, I don't know.

Joe Agular - Johnson Rice

And as I remember the Chevron's Tahiti project sort of altered your schedule somewhat I think on the DB 50?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

That's correct.

Joe Agular - Johnson Rice

And how did that impact the fourth quarter?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Well, it didn't... we didn't have any revenue.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Those are drydocks.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

I think you may drive by down at Alabama shipyards, you may have seen it down there, but... so I think my recollection is we should be going back to work probably in March... Late March, early April. And so it impacted in the sense that there was no DB 50 activity there.

Joe Agular - Johnson Rice

Which is a pretty big revenue generator when it's working?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yes. It's a big number, but ultimately the Chevron work, they worked with us and we worked with them constructively to come up with a program to get back out there probably in April I think. And so, it's still in the revenue for the future.

Joe Agular - Johnson Rice

Right. Right. Listen, I'll let somebody else get on here. I just want to again echo some of the sentiments and congratulating you on your tenure there and your retirement.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Well I am… don't write my obituary yet, I'm still here.

Joe Agular - Johnson Rice

Okay we are glad to have you Bruce.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

I am still driving everybody crazy here.

Joe Agular - Johnson Rice

Thank you, Bruce.

Operator

Your next question comes from the line of Brad Handler from Wachovia Capital Markets.

Brad Handler - Wachovia Capital

Thanks. Good morning.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Good morning, Brad.

Brad Handler - Wachovia Capital

Couple of, maybe just smaller questions about B&W numbers, you mention R&D spend for '08 going up. Can you share what it was in '07, what you guys think it will be for '08?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yes, I actually... I think last is '07, it was about 40.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Yes. Around 30s, 40s.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

And it should be slightly under that kind of in the high 30's for... yes, we are … I show about 42.6 in '08 and 39.9 projected in '09. So, it's actually... but that includes... we are including some traditional work that you probably don't think of as R&D, we have a kind of a normalized spend on engineering that has to do with simply incrementally advancing our base products. But, it's been on the rise, it's probably going to flatten out at about... in the 30s.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Yes. I think the best way to think of it Brad is that, this year we're in the upper 30s and then next year as Bruce said, we'll be in the 40, 30 range. I wouldn't be surprised if that creeps up to around 45, because there is a lot of activity going on there in Barberton related to the CO2 technology and things of that nature.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

But a way to think about it is that...it's in pie charts. There is actually, maybe about $4 million or so of that really relates to traditional environmental products. There is probably $3.5 million to $4 million that relates to advancing the state-of-the-art on ultra supercritical, the higher temperature pulverized coal technologies, and then about equal amounts of oxy-fuel type of that work and other and then CO2 scrubbing technologies, that are not... not a free combustion technology like oxy but post combustion. So, it's a pretty big number and but we're pretty optimistic about it.

Michael S. Taff - Senior Vice President and Chief Financial Officer

And the other thing to note Brad is also we're... that obviously excludes the amount we're investing from a capital standpoint, and we've invested a significant amount in our new R&D center there in '07, and I think we've got about $10 million of additional capitalized amounts approved for '08. So, we are certainly investing a lot of money in this endeavor over the next several years.

Brad Handler - Wachovia Capital

Okay. I guess I'd have to come back to a couple of other numbers questions, but since you've mentioned the CO2 capture, can you give us an update on kind of your evaluations and discussions with AEP?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yes. We... on first on the oxy-fuel, we completed... we have this 30 megawatt unit... test unit up in Northeastern Ohio, so, we actually have run significant amount of bituminous coal through that testing and absolutely proved our satisfaction at the oxy concept work. The next step is really working with Air Lockheed to jointly optimize a designed to bring down the cost of air separation, air handling units. In other words to really more… work hand gloved optimized design and then here when the spring fall comes, we are going to go back into testing both Powder River Basin and lignite fuels in the same unit. We believe we'll be successful there, and then further out what we would then want to do is find a host of futility and we think we have a number of them who would like to do this to... and go to maybe a 100 megawatt to 300 megawatt range demonstration unit at a utility site, so that's ongoing. We...as Mike mentioned, we have committed another nearly $10 million of capital to a so-called re-generable solvent absorption technology, pilot plant, that's going to be built and co-located at the R&D facility there in Barberton, wherein we will evaluate lots of these aiming scrubbing technologies. And so I think you read a lot in the press, everybody would have you believe they've kind of got the solution. I think the answers nobody really has, everybody, there are lot of people working on it. And the proof for the pudding will come when you go beyond these pilot faces to larger demonstration tests and prove them there.

But I think we've got a lot of top-notch people, we have a great facility. We've put together a... like a Board of Advisors, if you will, of our R&D effort to include some of the best and brightest out of the research facilities in University community. So, don't count us out in this fight. B&W has a... it’s a 125 year old company, it's more than about construction. It has nearly 6,000 patents in its tradition. It has a tradition of innovation in R&D is what drives it, so don't ever count us out of this game.

Brad Handler - Wachovia Capital

Okay. Thanks for that. Mike, let me switch back to a couple of quick ones please. Can you calibrate for us the expense reduction, thanks to fund the additional pension funding that happened in '07 versus '06? Of course there are lot of variables there. But can you --?

Michael S. Taff - Senior Vice President and Chief Financial Officer

Yes, I mean there is a lot of variables and if you go to the footnote in the 10-K that goes on for about six or eight pages, on that matter. The biggest piece related to the expense versus '06 and '07, quiet frankly was return on our assets. Again we had favorable returns on the assets for the year. So, I mean, there is a number of different factors that, that factors into that I mean the largest piece of our expense actually is amortizing of prior year losses, just as required by the accounting standards. So, I mean, I think the best way to think of it Brad, is that that number continues to go down. I think in '08, we're estimating another 10% to 15% reduction in that amount and we've got other plans to that we're looking at to kind of address this situation on a go forward basis.

Brad Handler - Wachovia Capital

Okay, thanks very much and then another just a quick one and I'll hop off. So you mentioned the DB 50 from... thanks to previous questioner, but what was construction vessel utilization in the fourth quarter, maybe non-including Sikhanda [ph], because that would skew the comparison I guess.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Give me a quick second here, Brad and I'll find it for you. Okay, we got it here 117% of our standard.

Brad Handler - Wachovia Capital

Okay. Terrific.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

And think of '08 as being more booked and more utilized than '07.

Michael S. Taff - Senior Vice President and Chief Financial Officer

But I think a… probably a fair comment to add to that as we increased our standard days on several marine vessels for 2008, and so while the percentages may not seem as great in terms of our utilization, we're probably working as many or more days.

Brad Handler - Wachovia Capital

Understood, understood, interesting. The 117 that was Q4?

Michael S. Taff - Senior Vice President and Chief Financial Officer

Yes, Q4.

Brad Handler - Wachovia Capital

Great. Thanks very much again for all that.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Thank you.

Operator

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

Jamie Cook - Credit Suisse

Hi, good morning. And congratulations, Bruce.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Thanks, Jamie.

Jamie Cook - Credit Suisse

Just a follow-up on the J. Ray order outlook, you mentioned over a $1 billion of awards in, I guess in the next 90 days and then, a lot of $100 million to $300 million awards. I guess, I haven't seen an award of over $1 billion in a while from J. Ray, probably since 2006. So, should I look at that as it taking away from other quarter? And I guess my next question is just to build on that, to get this type of award are the size of projects getting bigger, are we starting to see the benefits from the Sikhanda acquisition and that you can basically bid on more job and begin to utilize those assets.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

To the first one, I don't recall that we have ever gotten or announced a $1 billion single award.

Jamie Cook - Credit Suisse

No.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

I think we may have incrementally gotten there, for instance we've talked about the Saudi long-term agreement and I think you have seen increments of 500 million kind of that range. And we have more of that...

Jamie Cook - Credit Suisse

Bruce, I just meant an over $1 billion award in total. Anything like in the third quarter of '06 you had $1.2 billion in total awards, that's what I'm talking about.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yes, well maybe you know you if you look back fourth to quarter there was only about $600 million. So, there was kind of a low, it would appear that this, the first two quarters of '08 are going to be the opposite of that low for sure. And they are significant, we're talking projects that certainly all are north of $500 million in and of each, so as well as several that are call it $250 million to $400 million. And the other thing is that what seems to happen is they start out kind of at one size and then they tend to creep and grow and have changed orders. So, looking back at some of these, they get to be much larger than initially thought. With regard to Sikhanda, I'm very pleased, I think we in fact we are tickled with that acquisition because right now I believe we've four of the vessels, we have the MLC [ph] is that work in Asia. All the capital and dry-dock has been behind us. We have the Agile, is already in the Mid East, I believe the Ryan Lite [ph] is also in the Mid East. So, effectively I think the way to think about it is that the four major vessels that the DP2 the bigger ones are ahead of schedule as far as being deployed into the traditional… in effect being integrated into the J. Ray fleet and operating in the J. Ray value added service mode with the others still being on the charter business. So, there is no question there, implementers of projects, I think will have as many as four of them permanently in either Asia or the Mid East by the end of this coming year. So, and two of them we would hope whenever this deepwater operation in the Gulf of Mexico starts, we would expect to keep probably two of them here in the Gulf to facilitate and implement part of our sub sea strategy here in the Gulf of Mexico. But, it's been a good thing and frankly the cost of chartering these types of vessels has accelerated beyond anybody's expectations and if we were out just chartering these vessels today, they would be very, very expensive. And so, it's good to have them as part of our fleet because it really facilitates our self-performed view of the world.

Jamie Cook - Credit Suisse

I guess, and just my last question, and I understand that you guys don't give guidance. But, I just sort of look at your historic earnings growth relative to your peers and it has been obviously... you've outgrown your peers, it's fair to say off of a lower base because of some of the issues that you had. But... Bruce I guess given the strength in the market that you are seeing, what you are seeing in J. Ray, coal is off a little but there is still plenty of other opportunities that were ceased around scrubber, or the service aftermarket and the new outlook looks good. Could you give me a scenario over the next sort of assuming trial stage where we... at a relative healthy basis and we're not in some sort of global recession. Could you give me some scenario over the next three years why we shouldn't see your bottom line earnings grow at least in the 20% range?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Well, I don't know about the 20%. I would tell you that we have recently completed a five-year strategic planning effort and outlook for the company. And some things remain a constant, a belief that the offshore upstream sector will stay strong, I believe that we are going to have to survive on natural gas for power generation in this country and meaning more LNG activity which is good for J. Ray. We think nuclear will come back, we are committed to expanding the B&W world into... the hardest coal building market in history has been going on in China, we think it will also begin in India. So I think we have clear targets, I think we also recognize Jamie that we can’t do it totally within the present footprint of our assets and the human resource base we have and that some of this would have to be acquisitive growth. But I think we know what the targets are, where we're interested, what we... the markets we want to chase. And so while I'm not going to share with you the details of our plan, it is one that I am and the Board proud of. I think the Board is onboard with it and so I just think the company is very well positioned, whether we can achieve one margin or another will depend upon...it's always about execution, markets are markets but what you make of it is all about execution and that's really... always the challenge.

Jamie Cook - Credit Suisse

All right. Thank you.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Joseph Gibney from Capital One Southcoast.

Joe Gibney - CapitalOne Southcoast

Good morning everybody.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Good morning, Joe.

Joe Gibney - CapitalOne Southcoast

Most of my questions have been answered. Just a few more. Just wanted to touch a little bit on the outlook for Mexico, obviously the one platform you have there, you'd mentioned I think that you're bidding on a couple of other opportunities. Just curious how Altamira is working out, whether it's executing to your content right now and kind of the outlook overall and the tendering activity with PEMEX?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

I think we're beginning that first project. I think we begin as we call it cutting steel soon. I think we’ve put together a top-notch team of veteran J. Ray people plus Mexican nationals who have proved themselves in comparable facilities in Mexico. The first one, that project and the other ones that we're bidding at first would be very modest projects by J. Ray scale there, it's all about getting on the playing field and performing, not just being ready and hoping that the first one is too big. So, I'm optimistic about Mexico, when we talk about the Gulf of Mexico, and the deep water I use... I think both the Mexican sector and the U.S. sector. The difference is that for the U.S. market it's mainly about the deepwater. In Mexico, since they are so far behind us, there is still several years of more traditional work. And so, I think the probabilities of Altamira winning more projects is good and doing that traditional work because there is some of that going on for PEMEX, where as the so called traditional work on the topsides work that would done at Morgan City does have a larger scale and still waiting on the bigger project. So, I think in many ways they have a year and a half or so of really performing and seeing how we're doing and hitting our stride on smaller projects in Altamira. I think it's a positive because again for Morgan City, it's really of the strategy is to keep the yard busy with this nontraditional work fabricating barges, power plant components, components for refineries, but saving our big capacity for the big topsides for offshore.

Joe Gibney - CapitalOne Southcoast

Okay, that’s helpful, thank you. And if you could just update us a little bit on potential timing on some upcoming site management awards, what’s sort of the visibility there and some expectations there on the U.K. side?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

I think we've mentioned that the biggest one that we're after a long... we have a strong competition, of course Sellafield and we believe is probably midsummer decision time in starting in '09. We have a list of every DOE and NNSA site, and we're chasing a number of them. The way we do it, sometimes it... it's maybe pretty discrete but they are always with teams, sometimes with companies that you might think are our competitors, but in other places they are partners. And so, sometimes you'll hear about the activity [inaudible] somebody else chasing something. But we may in fact be part of the team, and so we have a number of those that are still out in front of us. So, the one thing I would say is I think also looking to this longer range, five-year strategic outlook that I alluded to heretofore I think we've been pretty much singularly focused on the DOE. I think we've long felt that our capabilities on the government sector born on the DOE experience can be adapted to particularly the DOD. And so, I think you'll see us beginning to bid and show up in that arena, sometimes by ourselves, may be sometimes with partners. But again what not... you wouldn't see us taken on DOD projects offshore, doing things we've never done before. They would be those where there is a DOD facility or activity, there has maybe a nuclear footprint to it or some specialty needs where our experience is well suited. So, I think over the next several years you will see us expand beyond a singular DOE focus.

Joe Gibney - CapitalOne Southcoast

Okay, I appreciate it, thanks. I'll turn it back.

Operator

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

Stephen Gengaro - Jefferies & Company

Hi. Thanks, good morning gentlemen.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Good morning.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Good morning, Steve.

Stephen Gengaro - Jefferies & Company

Couple of quick things. Just to follow up on... first based on what you said in the... what’s published in the 10-K, I mean, it looks like 35% top line growth at J. Ray is reasonable for '08, but more importantly if you look at '08 versus '07 and I know you can't ever pin point margins on the offshore construction side, but based on asset utilizations, I would think things would look comparable, but my real question is as you get busier, do you think the overhead absorption which certainly works in your favor trumps the potential and efficiencies of being so busy, I mean how should we think about that?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Yeah, it's clearly a factor in the equation. To the extent that you are over absorbing the facilities, there is clearly a bottom line effect so you could in pure theory, if you are supposed to be operating at a 1.0 efficiency is as bad you would like to be in the 0.95 range and always improve margin, but conversely if it's a 1.05, but you've completely absorbed all of the fixed cost by the third quarter and there is more to go then it does come back to you in that as well. So and you should never be cavalier about it, but it is true that in some places the hourly labor cost is rather modest and so if there is some inefficiency while over absorbing, it works about as well as being perfect or beating the efficiency in a higher labor cost market.

Stephen Gengaro - Jefferies & Company

Okay. Okay. Now that makes sense.

Michael S. Taff - Senior Vice President and Chief Financial Officer

The other thing is to keep in mind, Stephen is, as these projects as Bruce alluded to and the new awards and what we will see some in '08 as these projects get larger and larger, we have more and more procurement involved in those projects. That affects margins as well.

Stephen Gengaro - Jefferies & Company

Exactly. Okay. And any updates on what's going on in Mexico with your operations on it?

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Well, just that I think we’ve won our first award here couple of months ago with PEMEX, we bid several others. We have been close on them haven't won another one, but we do or expecting to win some more. We think that Yard is going to be a great facility and longer-term we think that it will be an implementer for the Gulf of Mexico strategy for McDermott both in the U.S. and the Mexican sector. In other words, starting out we are doing some things in only in Morgan City and some things only in Altamira. We will see how that goes, but over time I think we view both those facilities as appropriate implementers of the Gulf of Mexico whether it is in the... in other words, I don't view it as a uniquely Mexican yard for a uniquely Mexican opportunity or and likewise, I don't see Morgan City as always being in the U.S. sector. So we see them both as implementers of the larger Gulf of Mexico strategy.

Stephen Gengaro - Jefferies & Company

Okay, great. Thanks for the help.

Bruce W. Wilkinson - Chairman of the Board and Chief Executive Officer

Thank you.

Michael S. Taff - Senior Vice President and Chief Financial Officer

Thank you.

Operator

There are no further questions at this time. I would now like to turn the call back over to Mr. Jay Roueche for closing remarks.

Jay Roueche - Vice President, Investor Relations and Corporate Communications

Thank you, Pat and thank you all again for joining us today. Just a quick remainder that the call included some forward-looking statements and for more information on these I would encourage you to see our SEC filings. Please call Robby or me if you have any follow-up questions or need any clarification. We look forward to seeing many of you next week at Citi's Conference and in the coming months on a couple of our planned road trips and this concludes our call Pat. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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