Foster Wheeler Ltd. Q1 2008 Earnings Call Transcript

May. 7.08 | About: Amec Foster (AMFW)

Foster Wheeler Ltd. (FWLT) Q1 FY08 Earnings Call May 7, 2008 11:00 AM ET

Executives

Scott W. Lamb - VP of IR

Raymond J. Milchovich - Chairman and CEO

David J. Parham - VP of Sales and Marketing

Franco Baseotto - EVP, CFO and Treasurer

Analysts

Andrew Kaplowitz - Lehman Brothers

Barry Bannister - Stifel Nicolaus

John Rogers - D. A. Davidson

Brian Chin - Citigroup

Operator

Good morning my name is Rich, and I'll be a conference facilitator today. At this time, I would like to welcome everyone to the Foster Wheeler First Quarter 2008 Earnings 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 it over to Scott Lamb, VP of Investor Relations. Sir you may begin your conference.

Scott W. Lamb - Vice President of Investor Relations

Good day, everyone and thank you for joining us. Our news release announcing first quarter results was issued this morning and has been posted to our website at fwc.com. The presentation that we'll use this morning has been posted in the Investor Relations section of our website.

Before turning to the discussion, I need to remind you that any comments made today about future operating results or other future events our 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 SEC. The company's Form 10-Q will be filed with the SEC today.

Joining us on the call today; Ray Milchovich, Chairman and CEO; Umberto della Sala President and Chief Operating Officer; Franco Baseotto, who is Executive VP, CFO and Treasurer. Also here with us today Peter Ganz, Executive VP and General Counsel; Lisa Wood, VP and Controller; Gary Nedelka who is President and CEO of Foster Wheeler North America and Dave Parham who is VP of Sales and Marketing for our Power business.

After our prepared remarks, we'll have time to take your questions, and I'll turn it over to Ray.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you, Scott. Good morning everyone and thank you for joining us. I'm going to walk us through the prepared materials that we've got for the call and as Scott mentioned, we'll be happy to deal with your questions at that point in time.

Let me ask you to turn to page number 3 of our prepared presentation and let me briefly cover what I believe they are the high points of the quarter. Q1 of '08 was another record quarter for Foster Wheeler. We set new records in five keys areas during the quarter. Number one, net income for the quarter was $131.1 million, EBITDA of $195.3 million, scope backlog of $3.6 billion, 14.2 million man hours of backlog behind our Global E&C business and finally total cash and cash equivalents on the balance sheet of approximately $1.2 billion, highlight the five areas in which we set new quarterly marks during the quarter.

These results were driven by continued operational and commercial excellence in our Global E&C Group and a very sharp improvement in performance in our Global Power Group. The Q1 '08 results are well above the average quarter of 2007 in all key areas. Now let me just spend a minute on this point. As we managed our way through 2007, spoke with all of you during the year, we try to stress along the way that although 2007 for us was a simply outstanding year, there will be quarter-to-quarter variability based on the way our business operates. What we've tried to do to aid in the review of that in this release and in this presentation, is show you the average periods of 2007 to which we'll compare the Q1 results to.

Let me ask you to turn to page 4, what you see here is a graphic display of our record net income for the quarter, once again it was an all time record for quarterly net income. Our Q1 2008 adjusted net income was up 28% versus the average quarter of 2007. However we think the better way of looking net income is if you look at the foot notes below, the footnotes would suggest to you that we should adjust for as best as gains and losses and we would suggest that we should also normalize for the $30 million reserve that we took in Q2 of '07 for the one legacy power project that we've been discussing over time. And if one does that then the average quarter of '07 was $105 million, not $97 million and when we compare the $124 million in Q1 against the $105 million, our Q1 of '08 is up 18% versus the average quarter of 2007. Now to put that in perspective, 2007 net income was up 97% from that which we achieved in 2006.

Turning now to page 5. In terms of consolidated new orders measured in Foster Wheeler Scope, we had a very robust booking quarter in both business groups, the E&C Group as well as the Global Power Group. First, turning into our Global E&C Group, at $613 million of scope booking in Q1, that's up 14% from the average quarter we enjoyed in 2007. And the significance of that is that we actually booked $613 million of scope revenue with no mega project included in the quarter.

When we turn to our Global Power Group, as you recall they enjoyed a very strong booking year in 2007. And even behind that, they posted $533 million of scope bookings in Q1, which is up 7% from their average quarter in 2007.

Turning to page 6. What those bookings delivered for us is a record level of consolidated scope backlog at the end of Q1 of '08. E&C was up 13% in Q1 versus the year ago quarter, and GPG is up 55% versus the year ago quarter. So that in aggregate total scope backlog at the end of Q1 is up 30% from where it was in the year ago period.

Turning to page 7. Taking a step back and looking at the EBITDA performance of our E&C Group, they posted another very strong quarter, which has been sustained strong performance for them for some period of time. Their EBITDA was 7% above their average quarter in 2007. Their Q1 2008 EBITDA margin on scope revenue was 24.6%, which was up 4% from their average year margin of 23.6% in 2007. And when we put this in perspective, I'll remind you that in terms of capacity additions in E&C, capacity measured by the number of people who liquidate the contracts, E&C grew 47% in terms of capacity in '06, they grew 21% in terms of capacity in '07. They haven't grown by double-digit amounts over the last three quarters as they are really consolidating their support infrastructure for the growth that they have already enjoyed. We think this is a good move for this business and we also believe that this is positioning this business for accelerated growth in the later quarters of '08.

Turning to page 8, as we spoke about a number of times in late '06 and throughout '07 as I am sure you all recall, we have made major investments of time and energy in our Global Power Group. What I would like to believe we have been able to enjoy from that is what is just an outstanding quarterly performance and a very, very good start to 2008 from this business group. Their Q1 '08 EBITDA is up 83% from their average quarter of 2007, and their Q1 EBITDA margin on scope revenue is up to 16% versus 9.8% for full year 2007.

However we think there is a more representative way of looking at both or those. What we would suggest you do is do the comparisons for GPG after normalizing for the $30 million reserve that was taken in Q2 of '07 for the one legacy project. If one does this, EBITDA is up 52% from the average quarter of '07 and EBITDA margins are up to 16% versus 12% normalized for '07, which is a 33% margin improvement. This Q1 '08 EBITDA for GPG was driven by the effects of the commercial and operational initiatives that we've been driving in this business since second half of '06 and all of '07. However the quarter also enjoyed $7.5 million commitment fee that came from a contract that we did not win, but an obligation that we insisted on with the client with whom we were bidding and we also enjoyed $4.9 million of higher equity earnings, largely due to higher electricity rates at a power plant in Chile.

Turning to page 9; what you see displayed here is a new record cash position of $1.196 billion on the balance sheet at the end of the quarter. This is up 95% versus the year ago quarter, and is up 12% from Q4 of '07.

Turning to page 10; to summarize the quarter, we had record level of quarterly performance in the areas we mentioned. This just reinforces the fact that we expect both business groups to have a very good year. In terms of our Global E&C Group, we expect full year '08 margins to be sustainable at the approximate level that we achieved in '07. As we stated in previous quarters, all markets we serve in this business continued to be very robust. Refining and petrochemical areas are very strong, and as we mentioned before, the LNG demand continues to grow very strongly. We expect meaningful revenue and capacity growth in the E&C Group in 2008.

Turning to Global Power Group, our results were driven largely by our commercial and operational improvement initiatives. We expect full year 2008 margins to be materially above those that were achieved in 2007. In the overall markets served remain robust, however we began to see some instances of delays in the North America markets for solid fuel boilers.

With that, we're ready to take questions.

Question And Answer

Operator

[Operator Instructions] your first question is come from Andrew Kaplowitz of Lehman Brothers.

Andrew Kaplowitz - Lehman Brothers

Good morning guys. Nice quarter.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thanks, Andy.

Andrew Kaplowitz - Lehman Brothers

So the first question that comes to mind Ray, is this what you would consider an average quarter for 2008? On the E&C side especially, obviously the scope margins were much improved from last quarter and so I guess what I am just trying to figure out is how did that happen? Is there anything, whether there more incentive fees this quarter, would you consider this average now for the rest of the year?

Raymond J. Milchovich - Chairman and Chief Executive Officer

This will come as no surprise; I am not going to be that specific. Let me just say that I think it was a very solid quarter, it was a very clean quarter in that when we look at the special cause variation. In the quarter there were really not much at all. And specifically, there weren't many incentive opportunities available to us in the quarter, which was similar to the fourth quarter, which actually makes the quarter that much stronger because it didn't benefit by much special cause variation. What it does for me Andy, is it makes us very comfortable that what we have said about '08 is we are off to that kind of start. It was the kind of start that we expected to be off to when we announced the fourth quarter and kept stressing the strength that we saw in 2008. So I mean, it was a very good quarter but it was a clean quarter in that there really weren't many sources of special cause variation that we benefited from in the quarter.

Andrew Kaplowitz - Lehman Brothers

Ray, is it fair to say that that the sources of special cause variation could actually be more in the second half of the year than the first half of the year?

Raymond J. Milchovich - Chairman and Chief Executive Officer

It's possible, it's always possible. Very possible, based on the way the contracts go up.

Andrew Kaplowitz - Lehman Brothers

Okay. And then I would be remiss if I didn't ask you about what you put in the press release and what you just said about the power markets, may be if you could expand on that a little bit. Is their something you're seeing recently …

Raymond J. Milchovich - Chairman and Chief Executive Officer

Yes.

Andrew Kaplowitz - Lehman Brothers

…that makes you say this?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Yes. And that's the reason we noted in the release and that's the reason I referred to in the summary slide. The only change we see from what we been stressing and disclosing over the last, let's say three quarters, is that we've seen some, I'll call them delays in the North American market. And I'll let Dave Parham, who is much closer to the pulse of the market add to my comments, but that's the only change that we've seen. Now let's be clear. That business went into the year very, very well booked. As I've already mentioned they had a very strong first quarter booking performance as well. This is more of an '09 issue for us in terms of concern, than it is an '08 issue at this point, because I think we feelwe indicated earlier that we felt very good about '08. As I mentioned, these guys nailed the first quarter and they had an outstanding first quarter. And a good booking quarter, so this is more of an '09 issue for us in my view than it is an '08 issue and is way too early the call an '09 issue yet. It's just the trend and I feel that we'd be remised if we didn't at least bring notice to it, given what we've been saying about the market for the last three quarters. However, let me turn to my colleague, Dave Parham, who is closer to pulse and let Dave just give you a little flavor of what he is seeing in the market which is different perhaps from what we saw maybe a quarter or two quarters ago. Dave?

David J. Parham - Vice President of Sales and Marketing

Okay, thanks Ray. Yes, the overall global power market remains very strong with a lot of solid fuel projects globally. What we're seeing is delays in the North American solid fuel projects due to environmental and project cost concerns along with the softening U.S. economy. But what we do see is that the long-term fundamentals remain unchanged. And we still see a strong demand for electricity growth in all markets we serve including the North American market.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Yes and let me just add to that Andy, what I would say to set context for this remark, we continue to suggest that we don't see a long-term baseload solution without solid fuel being a major part of that. We’ve stressed that before and we continue to see that. However it's hard for us to tell of the factors Dave mentioned, which is really the driving factor here. I mean is it the meltdown that we've seen in financial services in North America, is it all the negative thinking that's taking place as a result of that, is it really the environmental resistance, but we are seeing some delaying that really wasn't there let's say, mid year last year.

Andrew Kaplowitz - Lehman Brothers

Ray, when you say '09 issue, did you mean a bookings issue or an earning issue?

Raymond J. Milchovich - Chairman and Chief Executive Officer

No, it's going to be one and the same. Basically we went in, in GPG went into '08 very well booked, good first quarter in terms of bookings. So our year is very, very well positioned in terms of backlog to support the operation. What we're doing now is we are setting up '09. So realistically, if this continues to slow, will this be an '09 bookings for '09 issue and therefore an '09 earning issue, it very well could be. It's way too early to call that, but my purpose for saying that is, it's not an '08 issue.

Andrew Kaplowitz - Lehman Brothers

Got you. Can you still grow the business in '08 you think given the issue that has come up?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Grow the GPG business?

Andrew Kaplowitz - Lehman Brothers

Yes, in terms of bookings? Okay.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Listen, I said going in, our expectations are that GPG is going to have a very, very good '08. They've got one quarter in the bag and that would suggest that they’re positioned to do that.

Andrew Kaplowitz - Lehman Brothers

Right. In terms of booking Ray, I am saying in terms of bookings.

David J. Parham - Vice President of Sales and Marketing

If I could answer that, I think keep in mind that, North America is one market, but we do serve globally in the power market.

Andrew Kaplowitz - Lehman Brothers

Understand.

David J. Parham - Vice President of Sales and Marketing

We also have a very strong and robust service business, which is actually remaining even strong even as the new coal builds are not done. People have to make sure that their existing plans are higher availability and higher reliability. Therefore, we do see that business staying very strong and we see the global market and demand for power, for solid fuel applications, very strong globally and there is other opportunities for us.

Raymond J. Milchovich - Chairman and Chief Executive Officer

So I want to overplay the remark Andy. I just felt it was remiss if we didn't at least take note of it given the remarks I made in the market before.

Andrew Kaplowitz - Lehman Brothers

I understand. So let me just make sure I understand, you can grow the business in terms of backlog growth in '08, what you are worried about is may be in 2009 you'll get some slowing in the North American business on the backlog side and then that would translate into earnings.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Yes. Because what we said before is we are looking for a bigger '08 and assuming the markets continue to stay strong, we are looking for material growth out of GPG in '09 as well. So this is a trajectory of growth for GPG in '09 issue for us, way too early conclude what it is, it's an issue that we're monitoring and managing.

Andrew Kaplowitz - Lehman Brothers

Great, Okay, thank you. I will get back in queue.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Okay.

Operator

Thank you. And next question is coming from Barry Bannister of Stifel Nicolaus.

Barry Bannister - Stifel Nicolaus

Hi, nice quarter.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thanks, Barry.

Barry Bannister - Stifel Nicolaus

Your man hours in E&C actually grew faster than your scope backlog in E&C and man hours are presumably a pretty potently profitable item, so should we think of it as possibly portending good news for the back half of '08, as you utilize those man hours?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Let me defer to Franco himself or Franco Baseotto.

Franco Baseotto - Executive Vice President, Chief Financial Officer and Treasurer

Barry, I think the man hour trend that you have highlighted is consistent with Ray's remark in terms of our expectations of growth in the second part of '08. And again, you know that man hour backlog and revenue backlog are correlated, but not close correlated because it's a function of type of contract and geography of this contract. And you are correct that the increase in our man hour backlog is both a function of our growth potential as well as the fact that we are now in booked and we are executing EPC contracts that by definition they tend to have a lower average life than service type contracts.

Barry Bannister - Stifel Nicolaus

So we should think of the SG&A figure, as well as cost to goods sold, as offering some operating leverage, as the investments you have already made flow into the actual results beyond and above any of the benefits that we are going to get from pricing or contract completion award bonuses?

Franco Baseotto - Executive Vice President, Chief Financial Officer and Treasurer

Yes, more or less SG&A flat in Q1 '08 compared to the average of '07. We would still be enjoying operating leverage going forward, but at an incremental reduced rate compared to what we have enjoyed in '06 and '07.

Barry Bannister - Stifel Nicolaus

And then lastly, are your power clients in North American solid fuels resorting to merchant gas at a very expensive rate or using their own high cost gas capacity as an interim solution? And might those rates be a stimulus for them to go ahead with projects as power cost rise in the coming year?

Raymond J. Milchovich - Chairman and Chief Executive Officer

I'll defer to Dave Parham, Barry.

David J. Parham - Vice President of Sales and Marketing

Yes, we see them with the higher price of gas, we don't see a lot of gas projects going in as well at this time, which is one of the concerns that a lot of the utility customers have for filling the need of the electricity growth. So I think as Ray said in his remarks, coal will have to play a part in the power generation in the U.S. We see that there is some gas of course going in, but not to the magnitude to fill in the void because of the high price of gas.

Barry Bannister - Stifel Nicolaus

And then lastly, you built the first supercritical CFB at Lagisza in Poland. We haven't seen any shyness in the parts of the Europe, Russia, China and investing in coal fired and other solid fuel power, unlike here in the U.S. Therefore are you likely to explore larger units overseas, as a way of booking more business in the coming year and emphasize that in your marketing?

David J. Parham - Vice President of Sales and Marketing

Yes absolutely. In fact you mentioned the first supercritical CFB at Lagisza which goes into operation at the end of this year. We've also sold our second supercritical CFB into the Russian market utility size unit in the first quarter of this year. And we do see opportunities for expanding our reach into the utility market for CFBs globally, not only in ofcourse North America, but Europe, and in parts of Asia as well.

Raymond J. Milchovich - Chairman and Chief Executive Officer

The only thing that I would add to that Barry, is the largest part of our GPG R&D program this year is in support of upsizing the supercritical CFB as well. It is our view as we upside the capability of that unit, then we gain the potential of increasing the served market for the CFB versus the PC, which is all part of that strategy. So yes.

Barry Bannister - Stifel Nicolaus

Good, it's nice to see the overseas markets making good decision. Thanks a lot.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Yes.

Operator

Thank you and next question is coming from John Rogers of D. A. Davidson.

John Rogers - D. A. Davidson

Hi, good morning.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Good morning, John.

John Rogers - D. A. Davidson

I guess first of all on the global power side, can you give us a sense of what portion of that business is solid fuel boiler work in North America?

David J. Parham - Vice President of Sales and Marketing

I would say the solid fuel new boiler market in North America is probably a little over a third of the total global power business that we do.

John Rogers - D. A. Davidson

Okay. And I assume Dave that in general that's lower margin than retrofit work?

David J. Parham - Vice President of Sales and Marketing

I think that's in general across all industries. There is differences between services, parts and new installations, but I don't think we would comment really on that.

Raymond J. Milchovich - Chairman and Chief Executive Officer

I wouldn't make that assumption John.

John Rogers - D. A. Davidson

Okay

Raymond J. Milchovich - Chairman and Chief Executive Officer

Because we've got portfolio margins in services as well as in new boiler build, across geographies. And I don't think there is any material difference between services margins and new boiler margins in our portfolio.

John Rogers - D. A. Davidson

Okay. And then secondly, your comments about the engineering and construction group accelerating in terms of the growth in '08, is that all internal growth that you are looking at?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Well, I am sorry, a good question John and quite a good clarifying question. What I am talking about is just organic growth.

John Rogers - D. A. Davidson

Okay

Raymond J. Milchovich - Chairman and Chief Executive Officer

This is separate and apart from any growth that we would enjoy through M&A.

John Rogers - D. A. Davidson

Okay.

Raymond J. Milchovich - Chairman and Chief Executive Officer

And thanks for asking that because it gives me an opportunity to clarify. Yes that was just, I meant I should have said just organic growth.

John Rogers - D. A. Davidson

Okay, great. Thank you.

Operator

[Operator Instructions]. Your next question is coming from Brian Chin of Citi.

Brian Chin - Citigroup

Hi. On the North American solid fuel market, sorry to beat this topic to a dead horse here, but is there any risk of regulatory approval delays on solid fuel boilers for projects that are already in the backlog. So for example, if you've got any contracts now and because of environmental concerns or economic growth delays, all of a sudden we have to think about now converting that backlog into revenues at a later date or potentially being cancelled?

David J. Parham - Vice President of Sales and Marketing

I would say that while that risk always exist with any project in the United States, most of our clients have been pretty prudent in terms of trying to cross those hurdles before they would actually release us fully to do work.

Brian Chin - Citigroup

Are there any particular projects like one or two that come to mind when you think about those?

David J. Parham - Vice President of Sales and Marketing

Nothing really... nothing would spring to mind immediately, no.

Brian Chin - Citigroup

Okay. And then if the Warner-Lieberman legislation gets passed that removes some of that environmental uncertainty, is that a factor that could cause some of those environmental delays to be alleviated or environmental concerns to be …

David J. Parham - Vice President of Sales and Marketing

I have to apologize, Brian, I just don't think we are prepared to comment on that.

Brian Chin - Citigroup

Okay great. Thanks.

Operator

Thank you. Ladies and gentlemen, it appears there are no further questions at this time. I will turn the floor back to Ray Milchovich for any closing remarks.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Okay. I would thank you all for joining us today and just repeat our messages. It was a very, very good quarter for us. It supports our expectations for 2008. Our Global E&C business continues to benefit from very, very strong markets. Our Global Power Group is off to a very, very good start and continues to see strong robust demand worldwide. Thank you for your attention and we will talk to you soon. Thank you.

Operator

This concludes today's Foster Wheeler first quarter 2008 earnings conference call. You may now disconnect.

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