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Executives

Scott Lamb – Vice President, Investor Relations

Kent Masters – Chief Executive Officer

Umberto della Sala – Chief Operating Officer and CEO, Global E&C Group

Franco Baseotto – Executive VP, CFO and Treasurer

Gary Nedelka – CEO, Global Power Group

Analysts

Joe Ritchie – Goldman Sachs

Michael Dudas – Sterne Agee

Andrew Buscaglia – Credit Suisse

Will Gabrielski – Lazard Capital Markets

Alan Fleming – Barclays Capital

Mark Tucker – KeyBanc Capital Markets

Scott Levine – JPMorgan

John Rogers – D. A. Davidson

Steven Fisher – UBS

Robert Connors – Stifel Nicolaus

Foster Wheeler AG (FWLT) Q2 2012 Results Earnings Call July 31, 2012 10:00 AM ET

Operator

Good morning. My name is Matthew, and I will be your conference facilitator today. At this time, I’d like to welcome everyone to the Foster Wheeler Second Quarter 2012 Investor 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, Vice President of Investor Relations.

Scott Lamb

Thanks. Good day, everyone, and thank you for joining us. Our news release announcing financial results for the second quarter was issued this morning and has been posted to our website at fwc.com. The presentation we'll use has also been posted to the website.

Before turning to our discussion, I need to remind you that any comments made 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 defer 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. The company's Form 10-Q is being filed today with the SEC.

We are hosting the call today from our office in Zug, Switzerland. Joining me here are Kent Masters, our Chief Executive Officer; Umberto della Sala, our Chief Operating Officer and CEO of the Global E&C Group; Franco Baseotto, who is our Executive VP, CFO and Treasurer; and Gary Nedelka, CEO of our Global Power Group. After our prepared remarks, we’ll have time to take your questions.

And on that note, I will turn it over to Kent.

Kent Masters

Thanks, Scott, and good day, everyone. Thank you for joining us on the call. After my introductory comments, I’ll ask Franco to summarize the consolidated and business group financial results and the company’s cash position. Umberto and Gary will talk about their respective businesses and then I will comment on guidance.

So let’s start with slide number two, where you can see the highlights for the quarter. Clearly we were disappointed in the Q2 results. The company’s net income was below the average quarter of 2011, even though scope revenues were higher in both business groups, our EBITDA declined due to higher sales pursuit costs mainly proposal costs, as well as unfavorable utilization rates and other items that Franco will describe to you in a moment.

Our Q2 results are certainly not indicative from the quarterly run rate and we continue to expect that 2012 earnings per share will be materially higher than 2011.

As you’ll hear from Umberto and Gary in a few minutes, we are even more optimistic about potential contract wins over the coming months. In particular, selected prospects in the Global E&C Group are gaining momentum, we say that based on client feedback and in some cases letters of award that we have received.

In a similar vein, our Global Power Group had also received a fair number of award letters for projects that are expected to move forward once the client finalized their closing requirements.

As you can see on the second slide, we are adjusting our 2012 guidance for the two business groups. I’ll cover this in more detail at the end of the presentation.

As I said, we continue to expect that our earnings per share in 2012 will be materially higher than they were in 2011.

And now, I’ll turn the presentation over to Franco to cover the second quarter financials.

Franco Baseotto

Thank you, Kent. If you now turn to slide three, you will see the detail results for the quarter. Our adjusted net income for the quarter was $34.1 million or $0.32 per diluted share, as compared to $43.1 million or $0.36 per share in the average quarter of 2011.

The decline was due to lower EBITDA in both business groups. As Kent mentioned, highest sales pursuit costs mainly proposal costs, as well as unfavorable utilization rates contributed to the reduction in EBITDA. However, I’d like to mention three additional items that contributed to the decline in EBITDA and in turn to the declining adjusted net income for the second quarter.

The first item is a charge that relate to the penalty component of an adverse tax court decision. The tax authorities had a judicial appeal of an earlier decision that had been issued in our favor and the most recent decision went against us.

We are now appealing this most recent decision. However, in the second quarter we increased our tax provision for the second quarter by $1.4 million and we increased our penalties and increased on our recognized tax benefit by $2.8 million.

The second item on the list is foreign exchange transaction loss of $3.2 million. This is largely an offset of the transaction gain we are realized in the first quarter of this year and we wanted to mention the Q2 number because in combination with the tax penalty, I just mentioned, it has explained the increase in other deduction on the income statement. Separately, with respect to segment EBITDA, this $3.2 million is roughly spilt between our Engineering, Construction and Global Power Group’s.

The third item on the list is one quarter delay in the profit recognition on a recently signed license agreement in the Global Power Group. We mentioned this one because it is a discrete event with the known profit accrue that simply slipped and this contributed to the lower than expected margin performance in the Power Group in Q2, but we will speak up that up in Q3.

As Kent already mentioned, our results for the second quarter were disappointing, but bear in mind that the combined impact of just these three items, the three items you’ll see here on slide three was about $0.10 per share in the second quarter.

Consolidated scope revenue was $692 million in the second quarter of 2012, compared to $656 million in the average quarter of 2011. The increase was due to higher volumes in the Power Group and mixed in the Engineering and Construction Group.

One slide four, you’ll see the summary of the financial results for our Global Engineering and Construction Group. EBITDA in the second quarter 2012 was $39.9 million and scope revenues of $417 million.

EBITDA in the second quarter of 2012 was below the average quarter of 2011, primarily due to higher sales pursuit costs again mainly proposal costs, as well as an unfavorable utilization rate absence of profit enhancement opportunities and the impact of the penalty component of the adverse tax court decision.

The increase in scope revenues in the second quarter of 2012 was due, as I just said, largely to the mix of work executed. EBITDA margin on scope revenues in the second quarter of 2012 was 9.6%, due to the combination of the factors I had mentioned.

Going now to slide five, you see that our Global Power Group reported EBITDA of $43.9 million for the second quarter of 2012 on scope revenues of $275 million. Results in our Power Group for Q2 are below the average quarter of 2011 due to the higher sale pursuit cost mainly proposal costs, as well as an unfavorable utilization rate, slippage in bookings contributed to both of these items.

Scope revenues in the Power Group in the second quarter of 2012 were above the average quarter of 2011, due to the increase volume of boiler project work.

EBITDA margin on scope revenue for the Power Group was 15.9% for the second quarter of 2012, which is below the average quarter of 2011 because of the factor I just mentioned. Also contributing to the margin decline was the previously mentioned slippage of profit recognition on the license agreement.

If you now turn to slide six, we will see that our cash position increase on a sequential quarter basis and remained quite strong at more than $800 million. The sequential quarter increase was expected and resulted from cash generated by operation.

We did not repurchase shares in the second quarter and most of you know that we have $500 million authorized under the share repurchase program and I think most of you also know that the company has invested more than $1 billion on share repurchases since 2008, basically buying about 28% of the shares that have been outstanding at the beginning of 2008.

The company continually evaluate share repurchase opportunity in light of a variety of factors, including as a potential uses of cash, share price and legal requirement, and just to be clear, share price did not play a role in our Q2 decision. Nothing has changed about our capital allocation progress or about the way we think about share repurchases.

We intend to be opportunistic in our repurchases from quarter-to-quarter taking into account a various factors that I just mentioned.

And I will now turn the presentation over to Umberto to talk about the Engineering and Construction Group.

Umberto della Sala

Okay. Thank you, Franco. Now go to the slide seven and you see that our new orders during the second quarter of 2012 were modestly above the average quarter of 2011 and the level of orders during the second quarter reflect a steady pace of small to medium size contract awards.

Moving now on to slide eight, we have listed some of our more meaningful awards during the second quarter. As the first bullet here, you see that we have booked to the main release on the contract here for the Cameron LNG liquefaction facility in Louisiana.

Next, we have an example of yet another win for our delayed coking technology. In this specific instance we have sold both, the delayed coking license and process design package, as well as the delayed coker heaters to our client for an oil refinery in Asia.

The next project on the list represents the other angle of the spectrum, in terms of the way in which we executed delayed coking projects. This is an existing multi-year project therefore which we are acting as EPCm contractor for the entire coker facility. Because the client has been satisfied with our performance of the job we have picked up an incremental piece of work involving additional construction services.

The next two awards are in Latin America, where as I think you know, there is substantial amount of refinery work that is currently underway, and there is world of later projects that are still in early development. We have a very good position in this part of the world and we expect that this will continue to be an important region for us.

Moving down the list, you will see that we have number of other attractive new orders that we won because of our global footprint, technical expertise and the strong client relationships. And you see particular incremental work on our gas compression facility and in our separate pharmaceutical facility in Europe.

These are two different projects for which we had previously executed EPCm services. You also see refining work in Russia and Europe, and you see FEED work on grassroots chemical facility in Asia.

And of course, I’m happy to remind you that we in fact finally signed the EPCm contract for El Palito refinery a great in July and that will be reflected in our third quarter bookings.

And as such the impact of the El Palito award our bookings in just the month were nearly what we booked in the entire second quarter. So this is the clear indication that third quarter offer for EPCm should be strong.

Turning now to slide nine, you see the scope backlog for the E&C Group and important message here is that we expect year end 2012 backlog to show meaningful versus year end 2011.

On slide 10, we summarized overview of the market. While it is true that the market remains competitive and it is also true that we have still seen the slippage in some expected awards, the key message is that selected opportunities are emerging and the gaining momentum across all of our served markets.

At the bottom of the slide we had tried to give you an overview of just a few of the proposals that we have developed meaningful projects that we expected to win during the second half of this year.

Now I don’t want to give you too detail of these proposals for obvious reasons, but all of them appear to be moving forward and all of them represent very attractive opportunities for us.

And on that note, I will turn it over to Gary to discuss the Power Group.

Gary Nedelka

Thanks, Umberto. Looking at slide 11, you would see that reported a fairly modest level of new order for the second quarter of 2012, consisting primarily of service and aftermarket work.

On slide 12, you see the Q2 bookings also included some orders for equipment supply. Few of them are notable one that listed here, while these an uptick ticket items, their service remind us that we do in fact participate in the important end markets of concentrated solar, combined cycle heat recovery steam generators and Low NOx burners.

At the bottom of the page you see a list of committed key prospects. These are projects for which we have a formal letter of award from the client and in some cases we also have a paid limited notice to proceed, such award letters specify that the client has selected our product or technology for their project.

We expect this 10 award letters to turn into booking once the respective finalize their closing requirements and then enter to contract with us. The gaining factors here for the clients can involve such things as, environmental permitting, financing activities or certain uptick agreements.

Based on our track record of recent years we are highly confident that this award letters will in fact eventually become solid bookings. The open question is when? We may see some of them get booked in the second half of this year and of course, in addition to these jobs we have numerous other prospects that are not yet covered by award letters.

Turning to slide 13, you can see our backlog trend line. Our current expectation is that year end backlog is likely to remain comparable to the level you see here for Q2.

On slide 14, I summarized our view of the market, you’ve heard me say this in recent quarters, power generation markets globally are relatively weak. Natural gas continue to be the fuel of in the U.S. and Europe, and elsewhere the recovery in demand for solid fuel boilers will probably not occur until we see sustain recovery in global or regional GDP growth.

More stringent emissions standards could lead to in increasing retrofit opportunities over the next several years, but we now expect to see a significant ramp up in this kind of client investment until 2013.

Even with these challenging conditions our position as the market leader in solid fuel flexibility continues to give us the competitive advantage in parts of the world the value need this kind of power generation.

Today for the most part, that means Asia, where we have a long established position. In the coming years, the Middle East could also approve to be an increasingly attractive market for our combusting technology.

Now on that note, I will turn it back over to Kent.

Kent Masters

Okay. Thanks, Gary. Now if you turn to slide 15; you’ll see our updated guidance for 2012. Let’s start with E&C where we are lowering our margin guidance but maintaining scope revenue guidance. Specifically, we now expect the full year EBITDA margin on scope revenue to be within the range of 11% to 13%. As the scope revenue expectations there is no change. We continue to expect the 2012 scope revenues in E&C will be above the level of 2011.

In our Global Power Group, we are raising our guidance on margins but lowering it on scope revenue. The full year EBITDA margin on scope revenue in GPG is now expected to be within a range of 17% to 19%. However, we now expect scope revenues in 2012 to be essentially flat as compared to last year.

Net of all of these changes to the various elements of our guidance, we continued to expect that our earnings per share in 2012 will be materially higher than they were in 2011, due to a reduced share count and higher earnings.

Now, just to be clear, the revised guidance for the two business groups will likely dampen the percentage increase in earnings per share from 2011 to 2012, compared to what we previously expected. But nevertheless, we still expect that increase to be material.

Umberto della Sala

All right. Thanks, Kent. Operator, we are ready to go to the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from one of Joe Ritchie with Goldman Sachs. Your line is open.

Joe Ritchie – Goldman Sachs

Hi. Good morning, everyone.

Umberto della Sala

Good morning.

Joe Ritchie – Goldman Sachs

So, on E&C business, you highlighted, Umberto – you highlighted some very attractive opportunities. Can you maybe provide a little bit more details in terms of timing the type of scope of work, the EPCm type work that you would be doing and then perhaps maybe some of the geographic areas?

Umberto della Sala

Well, it’s Umberto. I’ll answer it. Now, I don’t believe we can give too many more details about these projects. But if you go to the slides on the market environment, now, one is where we mentioned large FEED for our grassroots petchem facility in South America.

And I would prefer not to give the earnings specific on which country in South America. But certainly it’s a very sizeable FEED that is very important from a technology point of view. Petchem facility in the Middle East is still, we know that we are working already on our Petchem facility and maybe this could be an addition to that.

Gas field expansion, this is an offshore upstream project for which we have continued the FEED. By the way, we already started some volumes related activities. I cannot really tell you when we are going to book the entire product. The final investment decision is very close. They may decide to release the product in phases, but I don’t have any question that we are going to do everything if the investment is approved as we believe.

In terms of timing, this could be an August, September booking. The first one I mentioned could be again an August or September booking. The SAGD project in North America, this could be – we could book this project anytime. We have been discussing final contract details these days and there should be no other issues, so we can book the previous one.

The EPCm for the chemical plant expansion in North America, I think this is only a matter of probably weeks, but it can be, again an August, September bookings depending on how the client intends to release the product. It can be that we are going to be released in phases and we only book royalties that are released by the client.

The FEED for our refinery upgrade project in Europe, this again, this should be third quarter bookings. We are already working on the basic design and therefore, I think it is very, very likely that we will move it to the FEED or the indication side of it. The investment decision is going to be made soon.

So these are the major runs. We have – as you probably know, we have actively building a number of other projects, which are not used to the – anywhere we’d be leaving it with good opportunities. So bottom line would be that the proposal activities has picked up. We actually are spending more proposal money. I believe we are spending this money wisely. We have not changed the way we approach the proposal spending. We will shoot to whatever it needs. We really try to be selective, but that’s a good indication of the market – our market addressable market is speeding up.

One comment I’d like to make and maybe Kent and Franco can comment. Yes, we are spending multiples of money wherever the – whenever the client decision is delayed. If our clients take longer to grow through the bid evaluation and to encounter negotiation, we are going to spend more money than expected. But we do that when we believe we have opportunities to win.

Joe Ritchie – Goldman Sachs

Okay. Thank you. That was helpful additional color. I guess maybe switching topics a little bit onto the margins. You’ve noted a different few reasons why the margins were lower than we anticipated for the quarter, particularly on the E&C business where you noted utilization rates, increased proposal costs and then you had a few items on slide three.

I guess my question is what’s your confidence in getting back up to at 11%, 12%, 13% range in the E&C and this are the lowest margins we’ve seen in quite sometime. And then, what do you think – how should we be thinking about the trajectory as we move into 2013 and beyond?

Franco Baseotto

Maybe, I will take that call and then my colleague can add additional flavor. As we said, a compelling and we are talking now of the Engineering and Construction Group. I think the story in Global Power is a lot easier. We have mentioned items that are also of a timing nature. We’ve actually raised full year guidance and that’s I think it’s consistent with the fact that most of the Q2 would decline in margin in Global Power really of a timing nature.

In Engineering Construction Group, however, we have little margin in Q2 and we have lowered the guidance. So that’s why there was lower margin in Q2, which place us below the guidance and why we are confident now of our business sector guidance.

As we said, if we compare to Q2 through the average quarter of 2011, I think the factors that have dampen margins and as we have mentioned on the slide, the increased proposal costs, Umberto has refer to what is the business reason why those proposal costs have increased, the impact on the margin is roughly 1%.

We had some discrete items that we have mentioned in the slides that have contributed as well as we have seen low profit enhancement opportunities. So this is really, if you like the key drivers for the reduction in margin compared to the average quarter of 2011.

Now, with respect – going now to the full year guidance, with respect to our expectation, both our underutilization and proposal costs in Q2 were a bit higher than what we had expected. Underutilization was really high due to imbalance workload among operating units.

Actually, if we measure the total volume of work in the Engineering Construction Group in the second quarter in terms of total man-hour liquidation, that volume of work has increased which is not a material increase but has increased and likewise, our technical headcount has increased as well.

But that increase was not widespread and evenly distributed among all the operating units, we had operating unit with some imbalance work and again, this resulted in a bit more underutilization that what we had expected. Likewise, some of the delays in prospects awards have increased our proposal activities, so higher utilization and underutilization and higher proposal costs is one factor that has contributed to lower the guidance.

The items we have mentioned in Q2 was another factor and lastly, looking at our revenue forecast, which is that there is a bit of a mix impact on revenues with some revenues that are associated to material and third-party services on which we do have a profit and therefore are recording the scope. But that profit margin is lower than our engineering services. They are contributing a bit of a dampening of a margin.

So there is not one single driver, but the three factors that I mentioned and again, we will look at our spending for proposal costs there, which we expect to drill down a bit compared to the run rate of the first two quarters. We’ll look at that project in backlog and the profit opportunities that we have.

We already said, at the end of Q1, we expect those profit investment opportunities to be a bit more back ended and all-in-all, we believe that current range guidance is our center view of profitability for the full year 2012.

Franco Baseotto

And I would probably just add to that, when we talk a lot – we are talking a lot about proposal costs being up. We see that as a positive thing. It’s an increasing activity and as Umberto had said, we are not changing the projects that we go after. We are using the same criteria, so it’s an increasing activity and we see it really as investment we expect to win a number of those projects. We probably won’t win them all, but that activity we see as a good thing, negative in the quarter but it’s an indicator of the activity that we are being on.

Joe Ritchie – Goldman Sachs

I guess and just a follow-up to that explanation. I mean, is it your belief then as we kind of exit the year and get into ’13 and that you should continue to see margins in this business improve back into the low to mid teens, or is that too aggressive from where you stand today?

Franco Baseotto

So you are asking about money risk?

Joe Ritchie – Goldman Sachs

I’m not asking for specific guidance on 2013, but I guess I’m just trying to understand with all the different factors that are affecting your margins today and there seem to be some one-time issues that it really affected the E&C business this quarter. Just wondering, how confident you feel that we get back to low double-digits to mid teens on the E&C business as we exit 2012 and into ’13?

Franco Baseotto

Let me maybe repeat what we said about actual margin first, and then we should talk a bit more in context, a view on 2013. However, we are not in a position now, as you can imagine to provide any guidance on margin because we have not gone through our planning process.

With respect to actual margin for Engineering Construction, what we said before and I don’t think anything material is changing that respect, is that margin has stabilized in 2011. We have seen improvement in 2012, but those were improvement in selected parts of our served market. And on average, we are now expecting material changes to actual margin in 2012.

I don’t think this has really materially changed, which still means that a lot of the potential margin improvement, enter in 2013 is really still likely to be more of volume driven rather than margin driven. But we definitely see opportunities for margin improvement, which are going to result from a higher topline generation and proposal costs as I said and underutlization, which should get better once the volume starts to flow a bit more evenly through all the operating units.

Joe Ritchie – Goldman Sachs

Okay. Thanks a lot for taking my questions.

Operator

Your next question comes from the line of Michael Dudas with Sterne Agee. Your line is open.

Michael Dudas – Sterne Agee

Good afternoon, everybody. With regard to proposal costs relative to the budget from that you put forth, say, in January to where we are today and the year end, how much typical delta is there throughout the year and would we anticipate a similar level of proposal costs if the markets improving, especially as you kind of indicate for volume and project opportunities in 2013?

Franco Baseotto

I don’t think there is any specific rule regarding the volatility of our cost component. As we said, there have been a combination of increased bidding activity as well as increased proposal costs that were really associated to delays in some of the prospect that we have been chasing and this is true for both groups actually.

In the second half of the year, we expect the proposal costs to be as I said below the run rate that we had experienced in Q1 and Q2, also because as Umberto mentioned some of the prospect in Engineering & Construction Group in particular are coming to fruition. But with respect to it, we are still expecting the [SGOH] rate, primarily driven by proposal costs for 2012 to be above 2011.

Michael Dudas – Sterne Agee

My second question is – I guess I’ll address it to Kent, your observations relative to potential acquisition or additive opportunities at Foster Wheeler in light of the pretty sizeable acquisition that we all witnessed yesterday.

Kent Masters

Okay. We talk a lot about that space – we are looking in for acquisitions. We continued to look there, but we are waiting to get the right opportunity and we will continue to play that out. So smaller and bigger acquisitions, you will see us doing acquisitions in the space and probably more regular smaller ones. But we looked at the bigger ones that give us the strategic impact that we want. I can’t comment specifically on anything, but we continue to be in the space and look for that.

Michael Dudas – Sterne Agee

Would that be in Power as well?

Kent Masters

In the Power business for GPG, we continued to look for acquisitions but that’s probably less of a step out. They are bolt-on acquisitions, things like the Graf-Wulff acquisition that we did that helped us in the environmental space and adds on to our offer that we have in Power as oppose to a big step out more than we are looking at in E&C. It will get us into different segments in a bigger way.

Michael Dudas – Sterne Agee

Terrific. Thank you, gentlemen.

Operator

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

Andrew Buscaglia – Credit Suisse

Hi. This is Andrew Buscaglia on for Jamie Cook. I just had a question on share rebuild. I know your, it looks like your 2012 guidance implies some additional repurchases. But we, noticed in the quarter, you didn’t give that – you haven’t done any so far. So, I’m just wondering in terms of – in terms of where you stock is if you – what your plans are in terms of share repurchases going forward in 2012 and beyond?

Kent Masters

Okay. Question didn’t come through perfectly, but I think I got – just of a bit of a misread just come back. So we didn’t buy in the quarter. Various factors, Franco mentioned that is to, while we didn’t buy but we continue to look at the share repurchase program. We have a $500 million authorization and nothing has changed in the way that we look at that.

But you shouldn’t do is assume that, what we did in the second quarter is an indicator of what will happened in third and fourth and even going forward. We see a debt at the rate to allocate cash. We look at again various uses of cash and all of the other requirements that we make those decisions quarter to quarter. We see we would be opportunistic. We didn’t make that purchase in the second quarter but I wouldn’t use that as an indicator that we’ve changed direction.

Andrew Buscaglia – Credit Suisse

Okay. Thanks. And then my other question just on, can you quantify – in terms of, you implied new projects to be awarded potentially in the back half to meet your guidance. So, can you give us any more numbers around that? I know you talked about some profit enhancement opportunities leading to (inaudible). Could you give us some better sense of when you expect these to hit? That would be great.

Kent Masters

Now, coming through quarters, can you just state the question one more time?

Andrew Buscaglia – Credit Suisse

Yeah. Sorry about that. I was just curious about your profit enhancement opportunities, when you expect those to begin to roll through, if you can quantify or determine which -- better determine which quarter they’ll hit and then specifically also what, if you could quantify a new project award number to meet your back half guidance?

Umberto della Sala

Okay. So Franco, if you could take profit enhancement?

Franco Baseotto

Maybe I will. I will get short on your expectation because I don’t think they are going to quantify the profit enhancement opportunities in terms of dollar or margin. What I can tell you particularly this is engineering and construction group where they are more relevant.

And in terms of profit enhancement opportunities, I think we said before we were starting to see them a bit more backhanded. This is still the case which means if I look forward at Q3, for instance, I still see another quiet quarter potentially for profit enhancement opportunities in Engineering and Construction and again, we are looking at some of these opportunities in Q4.

With respect to booking, I think Umberto has already mentioned that we have booked one of the prospect, El Palito, that’s the booking prospect for Q3, looks particularly good there. And I think that’s as far as we’re going to go ahead in terms of timing while we are booking for the second half.

Andrew Buscaglia – Credit Suisse

All right. Thanks guys.

Franco Baseotto

Thank you.

Operator

Your next question comes from the line of Will Gabrielski with Lazard Capital Markets. Your line is open.

Will Gabrielski – Lazard Capital Markets

Thanks very much. Good afternoon.

Umberto della Sala

Good afternoon.

Will Gabrielski – Lazard Capital Markets

Franco, can you hear me clearly? Can you maybe quantify and if I miss this, I’m sorry, but more clearly, what the E&C margins, scope E&C margin would've looked like in the quarter, excluding some of the one-time items? And then quantify in more detail, what the elevated bidding costs were sequentially and proposal costs were? So we can get a sense of where the business is running at?

Franco Baseotto

Okay. I’ll take that question again. So let me just repeat, what we gave you is the -- if you like a bridge of the key items that explain the margin reduction in the second quarter compared to the average quarter of 2011.

And again those items so just to repeat that the increase proposal costs was at approximately 1%. And then we had the discrete items that we mentioned in the absence of profit enhancement opportunities that’s contributed for the balance. This again, second quarter 2012 compared to average quarter of 2011.

On a sequential quarter basis that’s your second question. The proposal and underutilization really were not a major factor in explaining, the margin reduction on a sequential basis that was really more absence of profit enhancement opportunities and the items that we mentioned which impacted unfavorably Q2 compared to Q1 particular as we mentioned that a foreign exchange transaction loss that was really an offset that I’ll gain in Q1.

So quarter-on-quarter on a sequential basis, that has amplified the volumes in margin. The other comment I would make which is pretty obvious. We are operating at low level of earnings and you can imagine that the impact of specific item on the margin is a lot more material on each quarter than of course with a different level of profitability.

Will Gabrielski – Lazard Capital Markets

Okay. And then if you would have stepped back and walk through the guidance from a different way, I guess, you had reiterated the material increase in earnings this year. I mean, it’s August almost. And I was just wondering if you could maybe quantify how you view the word material in some sort of percentage terms?

Franco Baseotto

No. I don’t think we are going to give any quantitative condition of guidance with -- beyond what we have already and Kent has already articulated.

Will Gabrielski – Lazard Capital Markets

Can you share then embedded in the guidance what percentage of your increase you’re expecting will come from share repurchases versus maybe a ramp in the second half of the year on revenue or improved utilization?

Franco Baseotto

That would actually give you an additional quantitative guidance. Let me tell you that we just wanted to make sure with the statement that almost seems obvious because we said earnings explain, EPS increased but a component of that increase is actually coming from higher EBITDA from our operation and is not purely driven by the activity and total share purchase that we completed last year.

Will Gabrielski – Lazard Capital Markets

Okay. Because you are running down year-on-year obviously in earnings from last year, so that implies a pretty significant ramp-up then in revenue but you lower the power revenue number today. So I’m just trying to get more color around what’s driving that operationally then?

Franco Baseotto

I think again if the combination we had, it’s true that we had lower the revenue guidance in Global Power. We had raised the margin guidance. And so I would have necessarily conclude on a net-net anything from those two. And I think it’s just important the message, we wanted to convey is that there is operating EBITDA, that is increasing year-on-year. It’s not just share repurchase. It’s completely last year that explains a material increase in EPS. And again that’s thus far as we want to go and we appreciate that…

Will Gabrielski – Lazard Capital Markets

Okay.

Franco Baseotto

20 basis of EPS, which kind of be funding out to allow you to better calculate our EPS guidance for the year.

Will Gabrielski – Lazard Capital Markets

Okay. Thank you. And then lastly, based on what you’re looking at right now on the bid you submitted and what you have in hands, how you feel about E&C utilization in 2013 versus the capacity you’re holding onto today maybe for some of the bid you have outstanding?

Franco Baseotto

Well, certainly utilization in 2013 is likely to improve. Actually utilization is likely to improve towards the second half of the year.

Now, the impact on the P&L on the second half of the year would very much be a function of how quickly we can mobilize our workforce on some of the prospect that we have or we will be booking in 2013 barring unexpected changes in terms of market opportunities. So utilization will improve in E&C and again it’s a bit early for us to drive a line between these improvement and a revise guidance for 2013 at this stage.

Will Gabrielski – Lazard Capital Markets

Okay. Thank you very much.

Operator

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

Alan Fleming – Barclays Capital

Hi guys. Good afternoon. It’s Alan standing in for Andy today. Thanks for taking my questions. Just want to take a step back with my first question and ask you about your outlook. It seems like it’s pretty much the same as it was last quarter. I know you tweak the margin guidance for both businesses but would you agree that not much has change in your outlook or would you characterize it as a bit more optimistic in last quarter?

Kent Masters

I think we would say not a lot has changed. I think from the booking standpoint, we’re probably a bit more optimistic and we’re closer to those prospects. We’re getting closer to those and we have a bit more confidence in them. The overall outlook, I think, were down in the quarter but we think overall for the year we still feel the same.

Franco Baseotto

Just to be clear and in terms of outlook, it’s absolute correct as Kent mentioned in his remarks with respect to the EPS growth we have said, however, that the combined impact of the adjusted guidance is to dampen the increase in EPS year-on-year compared to our previous expectation, just a bit clear and that’s…

Alan Fleming – Barclays Capital

But you haven’t seen -- you haven’t seen any changes in customer behavior over the last couple of months and you’re not seeing any further increase in timing delays on large projects?

Umberto della Sala

No. I would say that no. I haven't really seen any major change in the client base. Still company pressure remains in some regions and on some speedy projects. But as you say, we still do see delays that were not -- that's happening but El Palito which was delayed for a long time has come through and others seem to be moving through the funnel as well. But I wouldn’t say that will change because we still see delays, we still see people hesitating but a lot of the projects has been following that need to be getting much closer. Yeah.

Alan Fleming – Barclays Capital

Okay. And if I could just follow-up with a question about your revenue outlook for power, forgive me, if you talked about this. But are you seeing projects with more to the right in that business or are you seeing a slightly slower ramp up in projects already in backlog. What’s driving the slight revision to your revenue outlook there?

Umberto della Sala

More of that Alan is the projects are slipping to the right. Depending on what region we speak of, the market activity in North America and in Western Europe or the whole EU zone has pretty much ground to a haul. And as we’ve said we’ve got a lot of award letters for projects in Asia and they are just -- they are just pushing out a little bit. They are not falling off the cliff and being canceled. So we look at that as a positive thing in the market. While (inaudible) but that’s how it works on.

Alan Fleming – Barclays Capital

Okay. Thanks guys. I appreciate it.

Umberto della Sala

Thank you.

Operator

Your next question comes from the line of Mark Tucker with KeyBanc Capital Markets. Your line is open.

Mark Tucker – KeyBanc Capital Markets

Hi, gentlemen. Good afternoon. You seem to have more confidence or visibility on some of these projects that have come in delayed and moving forward now, may be, more so on the E&C side where you mentioned several that could be awarded this quarter. I’m wondering if there are comments throughout that you’re seeing or change in market fundamentals that is making you more confident in the timing of these projects?

Umberto della Sala

Okay. I’ll answer. Many of the -- probably some of these prospects for a while, El Palito is an example. What is positive is that in some regions we really see pick up in prospects and client position to proceed. And I mentioned that Latin America where we have seen not only the decision we made but it’s an example. The FEED work from another refining project in Latin America is another example.

So there is momentum building up, certainly in Latin America. And these were change with respect to last quarters. I did mention in the past about Asia. Asia is still active. So not really fundamental changes in the market but in some regions we see fundamental picking up that’s overall review.

Mark Tucker – KeyBanc Capital Markets

Okay. Thank you. And with respect for the lack of profit enhancement opportunities that impacted the sequential margin comparison on the E&C side. Could you talk a little bit about why that was the case or was it more execution or was it more timing and was that expected internally heading into the quarter?

Franco Baseotto

Okay. I mean, maybe I’ll take the call and just to be clear, just want to remind, what we report and what we usually call as profit enhancement opportunities is really the net impact of net changes in constant profit but only for individual projects that are above a given threshold which is $1 million during any important period. So it’s not the total pool of contract and actually if you look at that larger pool, Q2 was actually flat rather than slightly negative.

Now, I want to make sure that if we think about this number for Q2, there were no execution issues. These are not losing profit -- losing project. These were cost forecast adjustment in profitable project. And again, if we look at near-to-date, so Q1 and Q2, that metric was positive $5 million and it’s roughly similar to 2011.

So I just want to make sure, no execution issue. It was very, very quiet quarter in terms of number of opportunities. It added a lot of volatility quarter-to-quarter but you should not read anything more than just this.

Mark Tucker – KeyBanc Capital Markets

Thanks. And just one last follow-up on the E&C margins, can you talk a little bit about pricing, how the pricing and backlog contributing today compares to the contracts that you’ve been working off. And it sounds like you spend margins relatively stable but are there any regions or end markets in a particular or surprising, improving or eroding a little bit?

Franco Baseotto

Well, I think at this stage, since we are not ready to provide guidance for 2013, we’ll just leave you with the comments we made, which is yes we’ll probably have improved outlook particularly on some of the prospects that we are working on and we have been working on.

However, in terms of margin, we have not seen a widespread uniform improvement in margin and actual margin in 2012 compared to 2011, which means once again that as we sit today, probably 2013 is still going to be a bit more of volume story and operating leverage than driven by better actual margin in ‘12, which again for the time being, we have not seen yet as widespread as in other moments of the cycle.

Mark Tucker – KeyBanc Capital Markets

Thanks gentlemen. I’ll hop back in the queue.

Operator

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

Scott Levine – JPMorgan

Hi. Good morning guys.

Umberto della Sala

Hi Scott.

Scott Levine – JPMorgan

The question on, so are -- you are clear with regard to the thought process and share buybacks. I’m wondering if you could remind us what amount if any of additional share buyback activity is embedded within your guidance for 2012. And if you could also highlight any other priorities, maybe, that you’re focused on deploying cash for internally or externally, little bit more color regarding the thought process on cash deployment for the year?

Franco Baseotto

I’ll may be give you the answer regarding the guidance for the year and let Kent elaborate on the second question. And the answer is that we have not dialed any assumption for any share repurchases in the guidance we have just provided which again, this purely from a guidance point of view. It does not mean that business worked the expectation for Q3 and Q4 activity in terms of share repurchases.

Kent Masters

And then on the other use of cash which was -- I think you’re talking about use of internal, external. Internally, it’s not going to be dramatic. We don’t have a lot of big investment programs internally.

We are building capability but it’s not going to be use of cash for us. And externally, it’s about acquisition. So it’s about targeting. It’s in the spaces that we’re looking for. Again, they say -- you'd expect to see us over time doing regular acquisitions on a smaller scale, with capability in both businesses but then we’re also looking for those larger acquisitions in the spaces we identified primarily around upstream metal to mining and around technology capabilities in our downstream business as well.

So we always be looking and we expect to build a pipeline of smaller acquisitions that we would execute on a regular basis, be more active than we have in the past and we’re looking for those opportunities that create capability for us but we haven’t been able to execute on those to date.

Scott Levine – JPMorgan

Understood. And maybe tackling the margin question from a slightly different angle on E&C, it sounds like utilization issue here. I don’t remember if that was quantified specifically in terms of impact. If you could quantify it would be good and maybe you can give us some color with regard to the relationship.

We should expect the way traditionally seen between utilization rates within the E&C business and associated margins so we can start to frame some thoughts about 2013 in the absence of guidance on '13, yeah?

Umberto della Sala

I’m afraid. I am going to be materially short to expectation. So we have not quantified the impact of underutilization, simply -- we simply said definitely second quarter to our average '11, we have headwinds on margin of 1% on proposal costs and balance being the item on underutilization.

We said again and which I think it's important, underutilization was not a uniform throughout the operating unit that is actually volume of work and technical headcount has increased in the engineering and construction group. We are talking about the material increase, but has increased, but there are areas where they unbalanced workout has impacted more than in other and that explains the underutilization.

So, we expect underutilization to improve in the second half. We expect underutilization to improve in 2013 seeing the impact in on the P&L of the improved utilization in the second half of 2012. It will be a function of how quickly we can really mobilized resources on the prospect and how the prospects are going to book with respect to timing.

And we’ve dialed of course our best estimate of utilization and we can appreciate this is not as easy it sounds, because it’s not just a function of overall volume. But it’s also function of location, where those volumes are transacted. And we have dialed our expectation in the margin diagnosed in the second half of the year -- for the full year of 2012.

Scott Levine – JPMorgan

Yeah. That’s helpful. Maybe one just follow-on really quickly and also this is that, can you give us some inside in terms El Palito and how that expected to ramp and maybe flow to the P&L specifically and maybe when you reach peak rates on it and how soon, is there any call you can also there?

Umberto della Sala

Well, we will ability is fully mobilized even we goes we never mobilized the peak. And our clients has been very careful may be sure that -- two piece new releases to work invisible to keep the team together. So we can ramp up pretty soon. So, I expected, there will be a positive impact in the second half of 2012 then we have to see how the procurement side is going to work, the rate of procurement work so we provide feed leases for technical commercial ratio.

But the rate of valuation is going to be involved in managing the procurement. So we have to see in a certain point, if we don’t perceive the procurement of costs the project go down, but for together for the balance of the year I expect to you should be able to really ramp up the team and the man-hours pretty quickly. Always according to typical progress curve of an engineering project.

Scott Levine – JPMorgan

Got it. Thank you.

Umberto della Sala

You are welcome.

Operator

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

John Rogers – D. A. Davidson

Hi. Thanks for taking question. Just following up, I guess for -- but on the prospects for 2012. How many of this involved for Foster Wheeler, like the delayed cokers and things that you’ve seen in the past and what are the kind of implication therefore margin years ahead?

Umberto della Sala

Yes. Now, of the project which we initially now as lived, only one in both our delayed coker technology, which is the last not at the least.

John Rogers – D. A. Davidson

Right.

Umberto della Sala

Okay. Whereas these not to least to our delayed coker technology. And we across its coming up we have beat submitted each of these within our technology PC attributes and all, cost of the same packages, FEED work mainly in Latin America, but the major prospect which we listed only one is delayed coker, which is positively negative. Because -- it allow us to really broaden our client base, our experience list.

John Rogers – D. A. Davidson

But does that limit the margin potential of this work compared to what we saw three, four years ago?

Umberto della Sala

Well, potentially yes in some of them. But some of them it could really believe a good margin. As frankly said, there is no clear rule what margin you can get it’s struck from the market, they are produce which we can get better margins. And but there is no clear rule. And by the way, selling only our technology is not what we want, yes, you can get very good margins, but in terms of man-hours to get real legal man-hours.

So you get good margin in this specific project. But then you will be end up your utilization issues. So, how many time we decide out to be -- to try to maximize the group of company, so no fix rule, in terms of margin. We’ll decide to get lower margins to get more volume for instance. If we to feel get one of the operations.

John Rogers – D. A. Davidson

Okay. And I guess one follow-up Gary, in term of the emission controls market, you mentioned Europe as well. What are kind of the key gaining factors now for pushing that forward or getting it to reaccelerated slot here?

Gary Nedelka

A lot of it’s going to be come down to adoption and clarity on the IED, the Industrial Emissions Directive in the EU, and how quickly that’s into get push through the various legislative important into practice. Also there is legislative activity related to biomass projects in the U.K. referred to as a Rock program. Poland is looking at redoing its green certificate program, which will also have effect on the emissions standards. So there is no one given things, but it’s a really whole cacophony of different legislative actions there in the…

John Rogers – D. A. Davidson

Those are primarily, sorry, those are primarily 2013 decisions?

Gary Nedelka

I hope so.

John Rogers – D. A. Davidson

Yeah. Okay.

Gary Nedelka

If you are going to better way predictive and government going to actually take from action, if there is a forecaster.

John Rogers – D. A. Davidson

Okay. All right. Thank you.

Operator

Your next question comes from the line Steven Fisher with UBS. Your line is open.

Steven Fisher – UBS

Hi, good afternoon. Just wondering you gave the sampling of key 2012 prospect, I wondering if any of those prospects that you have or are actually going to be bigger than what your books for the El Palito Refinery?

Umberto della Sala

I don’t believe we can -- if some of them can be comparable that we mostly believe to at this stage of event. So, I have the better time we will (inaudible) people works.

Steven Fisher – UBS

Okay. And then maybe over to Gary, a couple of years ago, I think you gave an assessment of how the annual market opportunity for new boilers are change and I think I am not sure, am I remember the correctly, but maybe if that it was no longer by 10 to 15 year, per year boiler market it was more kind of in the single-digit, can you just talking about where that stands now?

Gary Nedelka

I am pretty sure. I most even referring to different in mixed of site of units and locations. And what we are seeing is in some of the markets Korea, Vietnam, we’re seeing a different and different mix, then we would have seen to say six, seven years ago Vietnam are seeing more of a move to large units as they are overall grip size increase into point where they could absorb a large unit. So we’re seeing less numbers of units have larger scale of the units in countries like Vietnam.

We look to see that same sort of trend perhaps over time and company like the Philippines or even parts of the Indonesia. If we get the places with more mature, for mature type of markets perhaps looking at Korea, we see more of a mix of smaller industrial-sized units and some larger units that go in as fuel oil replacements and the like.

Now in terms of the overall market, of course into the overall market, we’re see it’s going to trend after GDP growth. Our GDP growth going down, I think borrowing its staying large should say. We’re not going to see the large scale capacity increases in U.S. or parts of Western Europe that we have seen in the past.

Steven Fisher – UBS

Right. That makes sense. Okay. Thank you.

Operator

Your last question comes from the line of Robert Connors with Stifel Nicolaus. Your line is open.

Robert Connors – Stifel Nicolaus

We now look at the man-hours in backlog, a year ago it stood at about $12.4 million at the end of this quarter about $10.3 million, but that excludes pretty strong bookings in July. My question is when you look at where you stand now a year ago? Do you have materially more, less or flat man-hours booked that are schedule for 2013 executions and you did year ago at this point our schedule for 2012 execution.

Umberto della Sala

Commitment our question, no, I think nearly about the backlog of the -- bench man-hours at the end of 2015 versus…

Robert Connors – Stifel Nicolaus

Yeah. I’m just trying to get a sense of where you the man-hour liquidation now that you have in backlog that schedule for 2013. Is it materially improved versus a year ago when you are looking at the man-hours that you had in backlog that was schedule for execution in 2012?

Gary Nedelka

I don’t think we have that number now and in general I don’t believe we have made any reference to man-hour liquidation that I am still trying.

Umberto della Sala

So, probably the best way to answer frankly is -- we said that, we expect the backlog in term of continue to scope of at the end of 2012 to be backed and the dealing end of 2011. So each process that we learn from 2015 to the backlog to be liquidate to be 2015 and I don’t know, where these answer your question.

Robert Connors – Stifel Nicolaus

Okay. Yeah. That helpful a little bit. And I guess just switching gears has any E&C is potential awards has been delayed by the volatility within the European currency markets since much of your engine gearing capacity is situated in the region. Now, you started to see some of those pressures elevate as more capacity is expanded in North America?

Umberto della Sala

No. Now, we still have prospects in Europe not too many honestly. But the prospects which we are follow very likely they are going to ahead because the economics make sense because of that the companies investing. And but I’ve not seen any real change in Europe so far.

Robert Connors – Stifel Nicolaus

Okay. And I guess just roughly speaking as far as mix of capacity within North America percentage wise. Can you give me any numbers around that?

Umberto della Sala

Capacity in terms of people man-hours.

Robert Connors – Stifel Nicolaus

People?

Umberto della Sala

People, well, I believe I mentioned some numbers who mainly North America, but in mainly Houston because it is -- this is important view of the work that we will come up in North America. But as I said, the real sizable operation, which we seem to be critical mass we need to be credible and we are talking about certain about 1000 people, I mentioned a 59 people that’s the range but since not forget that we normally whenever we’ve been going to see project, we always share, we work with local centers. And so our firing capacity and firing power in any market these much higher than the current resources we are in this specific count.

Robert Connors – Stifel Nicolaus

Okay. Thanks for taking my question.

Umberto della Sala

You’re welcome.

Operator

We have no further questions at this time. I will turn the call back over to Umberto for any closing remarks.

Umberto della Sala

Okay. Thank you. So I’ll just wrap up with a quick comment. So, I guess, you guys interpreted, we are feeling optimistic about the momentum of the various projects we see in particular E&C, but in Power as well. We intend to be opportunistic and our share repurchase program but that’s still focus going forward and we are prepared for deliver on our objective a delivering a material increase in our earnings per share for 2012. Thank you and have a good day.

Operator

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

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