Executives
Michael W. Collier – Vice President Investor Relations
Robert R. Harl – President, Chief Executive Officer & Director
Van A. Welch – Chief Financial Officer & Senior Vice President
John K. Allcorn – Executive Vice President
Analysts
Robin Shoemaker – Bear Stearns
Jamie Cook – Credit Suisse
John Rogers – D.A. Davidson & Co.
Martin Malloy – Johnson Rice & Company
Joseph Gibney – Capital One Southcoast, Inc.
Philip Dodge – Stanford Group Company
Josh Adam – Private Investor
Steven Fisher – UBS
Karen David-Green – Oppenheimer & Co.
Mark Caruso – Millennium Partners
Roger Read – Natixis Bleichroeder
Sunil Jagwani – Catapult
Willbros Group, Inc. (WG) Q1 2008 Earnings Call May 8, 2008 9:00 AM ET
Operator
Welcome to the Willbros Group, Inc. first quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mike Collier.
Michael W. Collier
Welcome to the Willbros Group conference call. Today’s Willbros management participants are Randy Harl, President & Chief Executive Officer, Van Welch, Chief Financial Officer, John Allcorn, Executive Vice President and myself Mike Collier. This conference call is being broadcast live over the internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website www.Willbros.com and will be accessible for 12 months. A replay will also be available through the phone number provided through the company in yesterday’s press release.
Information reported on this call speaks only as of today, May 8, 2008 and therefore you are advised that time sensitive information may no longer be accurate at the time of any replay. Comments today contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
All statements other than statements of historical facts which address activities, events or developments the company expects or anticipate will or may occur in the future are forward-looking statements. A number of risks and uncertainties could cause actual results to differ materially from these statements. These risks factors are described in the company’s documents and reports filed with the SEC.
The company assumes no obligation to update publically such forward-looking statements whether as a result of new information, future events or otherwise. This presentation contains non-GAAP numbers, reconciliations and related information are in our press release of May 7, 2008 and on our website.
Now, I’d like to turn the conference over to Randy Harl, President and Chief Executive Officer.
Robert R. Harl
Our first quarter 2008 results are vastly improved over 2007. We are seeing the benefits of the resolution of many issues that affected the company’s performance last year. We have changed a number of the systems and processes used to manage the business that have helped us achieve these results. Our sales process has allowed us to focus on and win the very best opportunities. Our contracting strategy has helped us to better balance risk and return. Improved business process and procedures have been infused throughout the organization down to the project level and consistent project execution has resulted in more predictable performance. Our stated plan was to grow the size, scope and profitability of the Willbros business model while maintaining the best risk adjusted returns and we believe the first quarter results indicated that we are making meaningful progress towards these goals.
Revenue grew 138% with a vastly improved risk profile. Operating income grew to $34.9 million compared to a loss of $2 million in the same period in 2007. EBITDA of $45.2 million for the first quarter is more than four times the EBITDA from continuing operations for all of 2007.
Now, I’d like to give you an update on the two acquisitions we made in 2007. First, we are very pleased with the contribution from our pipeline construction acquisition in Canada. While we expect some downtime in the second quarter associated with the spring breakup, we are preparing for more mainline pipeline construction activity beginning in the third quarter. We see the contract terms and conditions improving for our mainline construction business moving toward what we have seen in the United States. The integration of the InServ downstream business in to the Willbros organization is progressing smoothly as we had planned. We anticipated the market for new storage tanks, fire heater, specialty fabrication and turnarounds will continue to grow. We are highly confident that InServ’s performance will meet our objectives for 2008 and beyond.
As we have previously discussed, we are committed to growing our international presence. As you know, we have a successful operation in Oman where we have been active for over 40 years. In order to increase our presence in the Middle East and North Africa, we relocated the international operations president Tom Crumb to Oman at the beginning of the year. Tom has had a successful international career and will relieve the effort to expand our Omani business model to other markets including Saudi Arabia the UAE and North Africa.
Market demand for our services continues to be robust and we believe our improved business model will provide us the ability to continue to generate cash flows to support our growth. We see that the investments in new energy supply in the Rocky Mountains and the numerous shale plays in North America as well as the enormous activity in the Canadian Oil Sands will continue to drive new opportunities for us. Even though today there are questions regarding US LNG regasification terminal utilization, we anticipate demand for natural gas imports will eventually drive increased expansion of the terminals and therefore increased expansion in the pipelines that serve these facilities. We believe the future of Willbros is a positive one with much lower risk and attractive growth opportunities. We now have the management team, systems, focus and financial stability to deliver growth performance on a much more consistent basis.
Now, Van will discuss our first quarter 2008 financial results.
Van A. Welch
Yesterday we reported that we continue our turnaround by posting record quarterly earnings and revenues. For continuing operations we reported net income for $19.1 million or $0.46 per diluted share compared to a loss of $3.3 million or $0.13 per share in the first quarter of last year and net income of $6 million or $0.16 per diluted share in the fourth quarter of last year. Including discontinued operations we reported net income of $21.7 million or $0.52 per diluted share for the 2008 first quarter. This compares favorably to a net loss of $11.8 million or $0.46 per share in the first quarter of last year.
Before I discuss our financial results I would like to remind you of our new business segments. Beginning with the fourth quarter of last year we altered our reporting structure to focus more on our end markets rather than the services we provide. We now report financial results for both Upstream Oil & Gas which includes our owned shore pipeline and facilities construction including Canada and Oman, downstream owning gas which is primarily InServ and engineering. Our EPC projects are conducted as a service offering by each of our segments. Each EPC project is managed and reported by the segment and business unit best qualified to provide the intended scope of work.
For the first quarter of 2008, we reported revenues from continuing operation of $491.6 million, up 138% compared to the first quarter of 2007 and 46% compared to the fourth quarter of last year. The revenue growth is primarily due to high utilization of our large diameter pipeline construction capacity in the US, successful completion of our first major Canadian pipeline construction project since our acquisition of that business last year and from the addition of the downstream services unit InServ which was acquired in late November last year. Operating income from continuing operations for the first quarter of 2008 was $34.9 million which was more than double that reported in the fourth quarter of 2007. In the first quarter 2007 we reported an operating loss of $2 million.
Net income from discontinued operations in the first quarter 2008 was $2.6 million which resulted primarily from two insurance claim recoveries totaling $3 million. These recoveries were events of loss we suffered prior to the sale of the Nigerian operations and were offset by $400,000 loss associated with services provided to the buyer of those operations. This gain compares favorably to an $8.5 million loss in the first quarter of last year and net income of $80,000 during the fourth quarter 2007.
Now, I will discuss results from continuing operations from each of our operating segments starting with Upstream. In our Upstream Oil & Gas segment we reported operating income of $23.2 million on revenue of $344 million for the first quarter of 2008. This compares to an operating loss of $6.5 million on revenue of $171.6 million for the first quarter of last year and operating income of $15.6 million on revenue of $262.2 million for the fourth quarter of 2007. The improvement in operating income during the first quarter is attributable to the high utilization of US pipeline construction capacity, a strong quarter from Canada pipeline construction and the lower exposure to project cost escalation due to the high percentage of cost reimbursable contracts.
While our fee was protected by favorable cost plus fixed fee contract terms on our large SESH project, harsher than normal weather and the associated productivity impacts caused our contract margin as a percent of revenue to be less than predicted for this project. However, our ability to meet earnings objectives is protected by the much more favorable contract turns and conditions relative to the work executed in the first quarter of 2007. Looking forward, remember we had approximately $80 million of revenue associated with a large Canadian pipeline project that was completed in the first quarter of 2008. This revenue will not recur in the second quarter due to the normal downturn in the Canadian pipeline construction business associated with the annual spring breakup and the protection of wildlife nesting areas. We do expect to return to more normal levels of operation in our Canadian pipeline business beginning the end of the third quarter.
Our Downstream segment reported $2.9 million of operating income from $80.6 million of revenue. The seasonal nature of our Downstream operations generally causes lower first quarter results as compared to the quarters in the remainder of the year. Additionally, this segment newly acquired late 2007 is bearing the amortization charges associated with customer relationships and backlog intangibles. Amortization expense for the first quarter was $2.7 million. We anticipate these charges will be approximately $7.8 million for the remainder of 2008 and will decline significantly after the second quarter 2009. Our Downstream segment is on track to generate increased revenue and operating income for the remainder of 2008.
First quarter 2008 results from our engineering segment continue to be strong with operating income of $8.8 million from revenue of $66.6 million. During the first quarter we also recognized $1.6 million of revenue on claims associated with the Cheniere project. As we discussed in our last call, the 2007 fourth quarter engineering segment operating loss of $1.2 million included $4.9 million of charges for the delays in completion of this project. We expected engineering to continue to sustain strong operating margins for the remainder of the year.
G&A costs were $28.4 million or 5.8% of revenue in the first quarter of 2008 compared to $11.8 million or 5.7% of revenue in the first quarter 2007 and $25.8 million or 7.6% of revenue in the fourth quarter of last year. While we spend on continuing improvements to our business processes, systems and resources we will continue to manage G&A in the range of 5% to 7% of revenue for the remainder of 2008.
Now moving to liquidity; during the first quarter of this year, we generated cash of $22.7 million which resulted primarily from the following. $34.4 million was generated by our operating activities primarily in the construction operation. This is a significant increase over the $7.3 million of cash used for operations during the third quarter of 2007 and the $3.2 million of cash generated during the fourth quarter of last year. $7.4 million was used by financing activities, primarily for payments of our capital leases and $3.6 million was invested in new capital equipment primarily for our Upstream Oil & Gas segment.
As we discussed in our last call, our cost reimbursable projects and projects with better payment terms began contributing cash in the fourth quarter of last year. This trend continued in to the first quarter of this year and we expect positive cash flow from operations to continue throughout 2008. We expect our cash on hand together with our expected future cash flows from our continuing operations to be sufficient to finance future working capital and capital expenditures for our operations. During 2008 we acquired $21.4 million of capital equipment, mostly critical construction equipment. We financed these purchases primarily through capital leases with favorable credit terms to maintain flexibility with respect to the use of our current cash balance. Our approved capital budget for 2008 is approximately $63 million for additional equipment to support our existing backlog and to increase our mainline construction capacity.
Now, turning to backlog; backlog from continuing operations at March 31, 2008 was $1.2 billion, almost double the amount at March 31, 2007 and relatively flat with the $1.3 billion of backlog at the end of last year. We continue to have over 90% of our backlog in North America with 76% of it cost reimbursable. We remain highly confident that our backlog will grow in this robust environment.
Now, I will discuss the annual guidance for 2008. We are raising our revenue guidance for 2008 to be in the range of $1.8 to $2 billion from $1.6 to $1.8 billion previously. Some of this increase relates to the cost in revenue escalation we have experienced on certain cost reimbursable projects. We expect G&A to be in the range of 5% to 7% of revenue from the previous guidance of 6% to 7% of revenue. We are also raising our annual earnings per share guidance from a range of $1.65 to $1.90 to a range of $1.70 to $1.95 per fully diluted share based on the average share count of 46 million shares. We continue to expect that our effective tax rate will be approximately 42% for reporting purposes for the remainder of the year.
Now, we will take your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Robin Shoemaker – Bear Stearns.
Robin Shoemaker – Bear Stearns
It sounded like from what Van said you were a little disappointed that the Canadian project in the first quarter on the margin. Can you kind of give us a sense of that? Obviously, it was profitable but how did it impact your overall margin for the pipeline construction business?
Van A. Welch
Let me clarify, we had a cost reimbursable project in Q1 that had increased costs. It was not in Canada, it was in the US that deteriorated our margins associated with that. However, it did not deteriorate our earnings stream associated with that project. Obviously, if you look back last year, as you recall, last year when we were in a fixed price environment, we got hurt by those same type of weather cost escalations and this year by the favorable contract turns and the cost reimbursable nature of this contract we were not. Now, it did increase our revenue as well as that cost which did deteriorate the margins associated with it.
Robin Shoemaker – Bear Stearns
So the $80 million Canadian project, what did generate satisfactory or margins as expected?
Van A. Welch
It did. We were very, very happy with our first major trunk line, pipeline project. With the acquisition of Midwest, if you recall, we acquired that last summer. We were very, very pleased with the execution and performance on that project.
Robin Shoemaker – Bear Stearns
And it sounded like from your comments about Canada that your expect – moving in the direction of the US, I guess that means you’re finding customers receptive to the cost reimbursable framework going forward or on new bids?
Robert R. Harl
I think Robin that the way to think about that is that it’s a continuum among the owners. That has traditionally been, like the US was a couple of years ago, strictly a lump sum kind of environment and I wouldn’t say that it has moved 100% to cost reimbursable but it has moved in the direction of having hybrid types of contracts where there are some protections for certain costs that are difficult to predict, as well as some cost reimbursable. That’s where the comment comes from that we’re moving in the direction of more favorable terms and conditions.
Robin Shoemaker – Bear Stearns
Lastly, what strategies or possibilities do you have to lower your corporate tax rate, the 42% rate? Can you comment on that? And, since 90% of your business is US and a little overseas, but what options do you have there?
Van A. Welch
As you know, us being a Panamanian company, we have to allocate a great deal of our corporate overhead and some other items to Panama which we get no tax benefit from. We are looking at and we are currently discussing with the IRS about the possibility of moving our domicile from Panama back to the US. I can’t predict when that’s going to happen but, we’re certainly encouraged that we’re making progress on that front and again, our guidance is 42% effective tax rate. That’s assuming that we’re going to be Panamanian domicile for the remainder of the year.
Operator
Your next question is from Jamie Cook – Credit Suisse.
Jamie Cook – Credit Suisse
My questions on the quarter are being answered but can you just, I mean, you mentioned on the call ramping up overseas in Oman and Saudi, etc. Can you just talk about, when does that business I guess become material for you? Should we think about that as more of an 09 story? And, what do you need to do to ramp up there? And, how should we think about the risk of taking on work in that project? Will you do it only cost plus? How should we think about the profitability of that business versus the others given you’re introducing more risk in to the business model?
Robert R. Harl
What we’re doing is trying to grow the model that we’ve demonstrated that we can operate in Oman. Oman is a place that’s changing in terms of the number of participants that are coming there to be in the oil and gas business so we see growth opportunities inside of Oman itself. And, we see many of the same customers that we’ve worked with here in the US as well as Oman starting to make bigger and bigger investments in the UAE. And, we see Saudi Arabia beginning or continuing to ramp up its production which will lead to a number of infrastructure kinds of projects that we can participate in, in that country as well. With regard to the risk of course, we are very sensitive to maintaining the model that we have created here and we’ll seek ways to limit the amount of risk that we take. It’s a top priority for us. We’ve gotten the business derisked back here in America but for growth it’s very important for us to figure out how to maintain that risk profile while growing in to some of these other markets.
The markets that are robust enough we believe and we’ve had a lot of discussions with customers there, that we believe we can limit that risk to something that’s sensible so that we don’t change the fundamentals of what we worked hard to create. From a timing standpoint, we’re finding a lot of interest in seeing us in those markets. I believe that by the time we get in to the third quarter and in to the fourth quarter that we could possibly book some meaningful business and that could have an impact on 2009’s results.
Jamie Cook – Credit Suisse
Can you just talk about the size of the projects that you’d be looking at over there? So, when I think about the bookings in Q3 and Q4?
Robert R. Harl
Well, I mean it’s a variety of things Jamie. I mean, we’re not just going to go over there and jump on a real large project to begin with. What we’re trying to do is look at things that are more on the manage and maintain side of the business, supporting our customers from a construction management, engineering and technical standpoint. So what we’re thinking about is things on the $5 to $10 million in annual revenue size things rather than some very gigantic project. However, I’ve got to say that there are a couple of things that we think are fairly low risk that could be a lot larger. We’ll just have to see as it develops.
Jamie Cook – Credit Suisse
Then can you also – you spoke a little bit in your prepared remarks about LNG, there’s a lot of concerns about push out and projects related to capacity as well as material or labor costs. Can you just give a little more color specifically on what you’re seeing and how you think that impacts your business in 08 and 09?
Robert R. Harl
The good news is I don’t think it’s going to impact our business in 08 and 09. We’ve talked about LNG and because of the location of the projects and the large takeaway lines that are associated with those, being very good business for us. What we’re seeing now is the process for LNG in the world and the positioning of the United States relative to the source of that LNG have made it difficult for many places to land the cargos that they thought they were going to get. I think all it does is maybe change the timing. It doesn’t change the fact that the growth of the consumption of natural gas is still there. The sources for natural gas are changing, the Canadian gas, the supply of that is going down, the Gulf of Mexico is going down, as we mentioned in our remarks. All of these shale plays in the US are going up, the Rocky Mountains, and all of that bodes well for us and I think LNG imports over the long term.
I think short term it really doesn’t have an impact. We just wanted to make sure there was a place holder there that we recognize that LNG regasification is going to be important to natural gas supply in the US and to our business out there in the future and we’re going to continue maintaining our relationships in the pursuit of that business as it develops.
Jamie Cook – Credit Suisse
Then I guess just lastly, you guys made nice progress in the first quarter, the projects that we had in the fourth quarter, I guess those are over now. As you look at your book of business out there, as you scrub through your book of business is there anything else that’s there that’s concerning you? Or do you think sort of the first quarter is a step in the right direction, I guess so we don’t have some of the issues that we had in the past?
Robert R. Harl
We don’t think so Jamie. As we look through it, I think we talked on the last call that we still have the Guardian project to execute this summer which is a lump sum EPC. A hybrid kind of contract I might add, where we believe we have the appropriate protections in that contract to be able to execute it and we feel highly confident with it. As Van pointed out, 76% of the revenue that we have in backlog today is on the cost reimbursable side so we feel very confident about that. We don’t see anything that’s keeping us up at night in that book of business and we anticipate going forward that we’re going to be adding to that with projects that have a similar risk profile. The numbers of projects are still robust, the supply, demand end balance that we have seen continues to be there. So, all the indicators are positive for us to continue to build on what we achieved in the first quarter this year.
Operator
Your next question comes from John Rogers – D.A. Davidson & Co.
John Rogers – D.A. Davidson & Co.
Could you talk a little bit more just about the seasonality, especially the Canadian operations and how we should think about that? I mean, it hasn’t quite been here a full year. I assume with the breakup in the second quarter, is that business cut down to half capacity? Or, how should I think about that?
Van A. Welch
Well, it traditionally John has been a first quarter and fourth quarter business. With Q2 being a quarter of maintain and repair and Q3 thinking about getting started in Q4. With the buildup in projects, we’re seeing more work get pushed in to Q3. But, the way to think about that is to think we’ll have very little revenue associated with that mainline construction business in Canada in Q2.
John Rogers – D.A. Davidson & Co.
And how big is that business?
Robert R. Harl
Well, like Van said, we had $80 million about of revenue that we had in the first quarter that came from that business that won’t recur in Q2. Now, we’ve got some balance to that John, also going back to Van’s comments, in that our Downstream Oil & Gas business and the InServ business gets much stronger in Q2 and in Canada, up in the oil sands, we’re coming out of the winter and that business on the maintenance and small capital construction side get’s a lot stronger in Q2 as well. So, there will be a balance effect between those other businesses and what traditionally happens with spring breakup. We just wanted to make sure that you understood that there was going to be some volatility between Q1 and Q2 as a result of completing a very successful project in Canada.
John Rogers – D.A. Davidson & Co.
Then, if you could talk, I guess Randy in the past you’ve talked about the total opportunities that are out there especially as it relates now to some of the Downstream work. Are there large projects that you can chase with that business? Or, is it primarily a small project business? Then, also on the pipeline projects?
Robert R. Harl
Well John, there’s a couple of ways to think about that. Number one, is we’re proud that we are really the only guy that has a good EPC offering in the pipeline business. We see a number of opportunities that are out there where people are going to invest between $1 and $2 billion in these long, large diameter pipeline projects, that we have an opportunity to turn in to an EPC. So, on the pipeline side, we see some of those opportunities. It takes a while for those to develop, and if we’re successful in booking one of those it probably won’t turn in to construction until late 2009, 2010 timeframe. But, the opportunity for a big booking is there.
John Rogers – D.A. Davidson & Co.
This year or would the actual booking be in 2009?
Robert R. Harl
We believe there’s an opportunity to have an actual booking late this year. We’re optimistic that we’re going to be able to accomplish that. As you know, in the refining industry especially, there are number of large projects that are planned out there. InServ has already done two in the $300 million range that were EPC end type projects that were quite successful. We’re pursuing a number of those kinds of opportunities right now. So, in our Downstream business I think we have a legitimate shot at booking another $300 plus million kind of opportunity sometime this year or in to next year. So that exists, but the base business there that is a lot of smaller type projects, is continuing to be very robust.
John Rogers – D.A. Davidson & Co.
The last question if I could, given this mix that you’ve put together and looks great, are there other markets or segments that you’d like to be in either geographically in North America, or in terms of just balancing the portfolio of services?
Robert R. Harl
Well, the one thing that we have talked quite a bit about is the manage and maintain business. We believe that that is going to be something that will happen in the fairly short term this year. The owners that we look for are stretched in terms of their technical as well as construction resources. We think we can fill a niche here to provide a program management integration kind of service in this business. It’s the reason that we created the Kansas City office, and that is growing and doing quite well for us so we see the manage and maintain business as something that can grow quite quickly. I think we’ve said that we would like to add a couple of pieces in terms of capabilities to our portfolio to really be able to address that market. But, we see that as a significant place that we can grow our business.
We have also talked about some of these government services kinds of businesses. We will not get in to anything that dilutes our margins but, there are a number of things that we’re looking at that we could grow on the back of what we already have in that area. And, the margins that we’re generating in that area continue to be quite favorable compared to other things that we’re doing. We see a lot of opportunity there. We’re also very pleased with the progress that we’ve made on the facilities side of the business. We have been able to expand what we’ve been able to do and as you see all of these big pipeline projects happening, the amount of horsepower that’s being added both in compression and pumping is growing just as rapidly as the miles of the pipeline that are being put in the ground. And, we’ve assembled a group of people that are able to address that, make money with it and continue to grow.
So, we’ve got good growth opportunities in that upstream business there and in Canada. As I’ve said in the past, the oil sands continue to represent a very significant opportunity for us in a number of ways. I think as we move InServ and those Downstream capabilities in to that Canadian operation, we’re seeing the customer reception to that be very interesting in that people are inviting us in as a participant and some of the things like we’ve never done before like API storage tanks, like fired heaters and as the capacity and the upgraders come on stream people are looking more at the lifecycle extension and the maintenance kind of market and we are really well positioned to go in there and address that. Not to mention, a lot of excitement in those markets that I mentioned in the Middle East and North Africa for those same services. We see a very robust market in terms of us being able to grow this business.
Operator
Your next question comes from Martin Malloy – Johnson Rice & Company.
Martin Malloy – Johnson Rice & Company
In terms of the North American capacity for building large diameter pipe, beyond the getting to three spreads in the third quarter this year, have you thought about further capacity expansion there or investments?
Robert R. Harl
Well Marty, it’s kind of interesting, we have reached that level at this point so we’ve accelerated that a bit. So, I think the way to think about it now is we are at three spreads plus at this point in time. Our man power has grown to more than 2,000 working in the field today so we have been able to reach those objectives that we told you about a bit earlier than we had planned so that’s been a good thing for us. We are in that maintain and monitor mode right now. We’re very pleased with the production and other factors that we measure to monitor the business but, it’s still a market where there is a shortage of man power with the right skills to be able to grow this business very rapidly. We’re in a good position to do it in that we can recruit people in to our business from wherever we can find the right qualifications and we’re continuing to do that. We’re training a lot of people.
But, if you think about trying to continue to grow in a business that’s already experienced very rapid growth, I think that we will look at that in a measured way going forward, get through the projects that we have on the books right now for the balance of this year and really look at that more carefully as we head in to 2009. We certainly have the financial capability of growing in that business, if we choose to do that but we have other options too and we’ll decide as we move forward will we invest more in this business or continue to invest more in the Downstream business, invest in those opportunities that I talked about in Canada or in the Middle East or North Africa. It’s one of our, while our real focus this year was to get that equipment, get the crews, get the business and grow this large diameter pipeline business, we’re now sitting in a position where we have a lot of options on what we can do.
Operator
Your next question is from Joseph Gibney – Capital One Southcoast, Inc.
Joseph Gibney – Capital One Southcoast, Inc.
I just wanted to follow up on the acquisition market, Randy if you can talk a little bit about some of the opportunities out there, any certain deal parameters that you might be looking at and how that’s shaping up as you move in to the back half of this year in and in 2009?
Robert R. Harl
Well Joe, there are lots of things we’d like to do and certainly I think that our track record is very positive but I’ll just get back to what we’ve said all along about what makes an acquisition attractive. First of all, I think if you look at Midwest and InServ, we had a great management team. Companies that weren’t in trouble, companies that had good risk mitigation systems and so forth that we don’t have to fix, and as I said the management teams were very solid. Number two, what does it do for us from a strategic standpoint? We had one of the acquisitions that actually took us in to different services, InServ. We had the other one that took us in to the same kind of services that we do but in a different geography so strategically there was a very good fit. Number three, may be the most difficult one, is to find the right valuation. We want to do things that are going to be accretive to the business.
If you think about what would really help us, I mean growth on the technical side of the business would be real good. If we could find the right engineering kinds of acquisitions that we could make that would either give us a better international capability to support those markets that I’ve talked about, that would be something of interest. Canada continues to be of interest and we would like to expand our service platform there. So, in the Downstream business we think that there’s a real opportunity to grow there a number of things that we don’t do like engineering that we might consider. The opportunities that we see out there are great but when you put them through the lens that I’ve talked about and rack and stack them in regards to those three measured criteria then the list gets a little bit shorter. But, I’ve got to tell you we are actively out there looking for things that really fit those three criteria and if we find something that works for us and for the other side then we will certainly take advantage of the opportunity.
Joseph Gibney – Capital One Southcoast, Inc.
Van, I just wanted to circle back on your top line guidance for this year. Obviously a little bit of a bump up you indicated that some of it obviously related to higher pass through on the cost side. But, I’m curious what the potential uptick is, is it just InServ maybe running a little bit ahead of expectations? Just some additional color there, I’d appreciate it.
Robert R. Harl
Joe, I think if you look across all of our segments, we do have some growth in InServ and the Downstream segment is certainly one of them. So, we are, as I mentioned earlier, and I did in my prepared comments talk about the Downstream and InServ. We expect them to continue to grow from the levels that we’re currently at in Q1 and they’re part of that increase in that revenue guidance.
Operator
Your next question is from Philip Dodge – Stanford Group Company.
Philip Dodge – Stanford Group Company
Let me ask a couple of engineering questions, first when do you expect to complete the engineering work on the Colonial pipeline expansion therefore, when there might be a request for bids for construction and whether that will be an EPC possibility?
Robert R. Harl
Well Philip, that’s going to run through most of this year for that assignment. It’s let out in phases so that’s one that we’ll have to just continue to monitor. I think that it’s one that could be an EPC opportunity, it’s still way too early to really make a prediction on that. That is something that we’ve talked to the customer about but, another nice project.
Philip Dodge – Stanford Group Company
Then also on the long suffering Alaska natural gas pipeline, are you doing any engineering work there at this point?
Robert R. Harl
No, we’re not currently involved in anything. Our view of that is it’s been a little slow to develop as all projects are. And, as you know that is going to be, if not the largest, close to the largest project ever done in North America, if either one of those happen. We’re in a mode of staying close to the customers, staying plugged in both in Alaska and Canada and with the international oil companies and other likely participants of those projects and trying to maintain our position without investing an undue amount of money in maintaining that position. So, we’re very interested but the timing still remains something that is not very predictable.
Operator
Your next question is from Josh Adam a private investor.
Josh Adam – Private Investor
Firstly, just to clarify, the current guidance doesn’t incorporate performance bonuses on your cost plus contracts, right?
Robert R. Harl
Well, we do have some potential, as we talked about previously to get rewarded on some incentives on these cost reimbursable contracts. We still have the ability to earn some of that and looking forward, we do have a small percent of that included in our guidance.
Josh Adam – Private Investor
In terms of backlog, would you be willing to announce your amount of new contract awards since the end of March? And also, correspondingly could you talk about the summer fill in work? Last quarter you gave us an update that you were seeking some incremental work during the transitional phase. Did you fill that in?
Robert R. Harl
We haven’t announced that work. Let me put it in terms that we’ve talked about in the past, we’re highly confident that we’re filling in that work. We are pretty conservative in terms of when we announce backlog or put it in backlog, we have to have a signed contract. But, with regard to the summer fill in work, we have commitments verbally from customers for that so it’s the kind of thing where the customers really drive when we can announce a particular project and they have different views of what they want to signal to their competition as well as to the markets. But, I think the way to think about that is again, we’re highly confident that is going to be filled in.
Josh Adam – Private Investor
And you wouldn’t be willing to just give the nominal amount of contract awards since the end of March?
Robert R. Harl
Josh, there’s not anything that fits our criteria for an announcement that we’re holding back. We have some stuff that we’re highly confident in, and nobody would like to announce it more than us but we just haven’t reached that criteria of having a signed document that’s a commitment for us to go out for a public announcement and/or we have permission from the customer to be able to go out there and do that.
Josh Adam – Private Investor
Then in the quarter I understand that there is an accretive effect on revenues of higher costs and corresponding suppression of margins as you pass on the higher costs and I understand that there was the weather issue with SESH but was there also a transient depressing effect on margins just for finishing up the Cheniere and R-1, R-2 projects? Were some resources deployed on those two projects that was just sort of zero margin?
Robert R. Harl
Josh, there was a bit on both of those but I don’t think it was what I would consider substantial and I did mention that we did have a claim settlement on the Cheniere job of $1.6 million that was included in Q1.
Josh Adam – Private Investor
Then last question, on InServ, I guess I didn’t full take in to account – I took in to account the seasonality associated with revenues but what I didn’t fully think through I guess was the fixed cost base is decent with the fabrication facility and the operations in Tulsa, etc. so is that part of why margins were depressed there and why margins will look great in Q2 and Q3 for InServ?
Van A. Welch
I think if you look at InServ as we said, the seasonality of the first quarter is not something that will grow going forward in the first quarter. The impact on the margin, that intangible amortization, certainly had a significant impact on that. I think if you were to add back the $2.7 million that that amortization, you would be getting to the operation margins probably more than what you would expect and as we grow the business going forward and increasing top line growth the impact of that amortization will certainly have less of an impact on operating margins.
Robert R. Harl
I think Josh, that if you do what Van says and we wanted to make sure it was out there so you could, you get to an operating margins that is right in line with what we told you when we did the road show to sell the stock to buy InServ.
Josh Adam – Private Investor
Then could you just give us a general update on the facilities work and how much business you are winning, whether you are meeting or exceeding your expectations.
Robert R. Harl
Well, I think thinking about that [inaudible] is like the rest of our backlog, Josh, it is lumpy. It comes in-in big lumps and we work it off and then we tend to get a bunch more when we’ve got capacity. I think as we look at the opportunities for it, we’ve talked about creating a business here that will generate revenues in the $100 to $200 million a year range and we’re still very bullish on being able to do that.
Operator
Your next question is from Steven Fisher – UBS.
Steven Fisher – UBS
You mentioned some mainline activity in Canada beginning in the third quarter, is that based on the bookings that you already have in your backlog? And I guess broadly, what’s the visibility you have on new projects in Canada?
Robert R. Harl
Steven, if you look at the Canadian backlog, the Canadian backlog certainly did go down in the first quarter with the work off of the Trans Canada job that we referred to earlier. We do have a great deal of visibility going forward especially when you get in to the Q3, Q4 area. Just as a reminder, we’re more than just a pipeline contractor. Our business up in Canada includes the traditional oil sands business that we had before. So, the visibility is there and we do expect and we are looking at various prospects to fill that gap as we go in to Q3.
Steven Fisher – UBS
So those are more active discussions for that Q3, Q4 work as opposed to stuff you’ve already booked then.
Steven Fisher – UBS
Then can you just discuss the nature of the 24% of your backlog that’s fixed price? Is there any other of your projects, I guess other than Guardian and I think you have a Trans Canada project that don’t have escalators on wages or materials?
Robert R. Harl
Well, I mean the Trans Canada project that we had, we have completed. That was completed in Q1 so that was very successful and the bulk of what’s in backlog is that Guardian project, it is close to $100 million. So when you look at that, that represents a huge piece of that lump sum piece that’s still there. The other ones are combinations that typically are smaller projects that we do have more favorable terms and conditions on but they are still lump sum projects. We’re very confident that we have good estimates, that we have the right kind of contractual protection that we would always have. Most of those are hybrid types of contracts where while we don’t have complete cost reimbursable terms, we have been able to fix the escalation on the things that are the most risky pieces of the contract. So, we’re very confident in that lump sum work that we have in backlog.
Steven Fisher – UBS
Then lastly, do you have any more claims outstanding on Cheniere or other projects that could be resolved in the next quarter or two?
Robert R. Harl
I don’t think there’s anything of any significance. I mean, when you do as much contracting as we do, you always have a few claims that are out there but I think as you model us it’s not something you should count on having either a positive or negative impact on us as we go in to 2008.
Operator
Your next question is from Karen David-Green – Oppenheimer & Co.
Karen David-Green – Oppenheimer & Co.
I just wanted to touch a little bit more on the Downstream part of your business and InServ and just by looking at the growth in backlog, the amount you generated in Q1, I guess what I’m trying to get at is how much more outside is there? How much more capacity do you have and kind of where from a backlog perspective are you seeing a lot of growth? Is it the turnaround business? The tank? The heater services? Could you just give us a little more color?
Robert R. Harl
I think what we’ve seen in the past year or so we’ve had pretty even growth among those different segments of InServ. The tank business is probably benefitted more than some of the others. Last year, the turnaround business was very, very strong for us and it comes out of the gates real strong again this year Karen so as I look across those businesses and whether it’s the heater business which continues to grow over what we had last year or the fabrication side of that business, all of those are continuing to perform very well. The real upside that we see is really just a couple of them.
Number one is Canada. Our reception there from the customer base has been very strong, especially for the heater business and the API storage tanks so I think we’re going to see a real uplift from those parts of the business. As we grow there bringing the InServ management and technical capabilities in to a base of business which is well established in Canada so we’re going to be able to achieve synergies up there in Canada with InServ that we couldn’t have before. It’s a market that was you need to be there, have a local presence; InServ had not invested in having that local presence.
Now, they have a platform to sell that business on so we see that as a very, very big upside for us. In the US Gulf Coast, InServ started to really put emphasis on penetrating the markets they can serve on the US Gulf Coast a couple of years ago and we’re seeing a lot of success. Both last year and continuing in to this year in growing opportunities in smaller capital construction as well as turnaround and fabrication activities and we see a lot of synergies again, between that facilities construction business that we had associated with our US pipeline business and their pumping station and compression station business with what we’re trying to do here with InServ. That’s in areas like pipe fabrication and all manner of shop kind of facilities oriented things. So the Gulf Coast and Canada represent some pretty significant opportunities for us to grow that business.
Operator
Your next question is from Mark Caruso – Millennium Partners.
Mark Caruso – Millennium Partners
I just wanted to get your thoughts, in the current environment prices are going up, are you guys seeing the benefit in pricing power as far as what the opportunity is on spreads?
Robert R. Harl
I don’t think we’re seeing a great deal of change Mark, we’re seeing some. And, I think the way to think about that is as we head in to 2009 bookings I would expect that to be a bit stronger than what we’ve seen. But, we have already pushed processing up pretty far so I don’t expect a sea of change like we saw between say 2006 and 2007 but, expect it to remain very strong.
Mark Caruso – Millennium Partners
As you look at these bigger projects that are coming out in the $2 to $3 billion range, is it inconceivable that a spread award could be in the couple of hundred million dollar range considering the size and scope of some of these projects? Or, is that not the right sort of range to think about?
Robert R. Harl
Actually, it could. It depends on what it is and where it is. There’s a huge variation in a per mile of pipe cost just associated with the terrain, what kind of pipe it is and other things so that’s not inconceivable.
Mark Caruso – Millennium Partners
Then as far as opportunities go, Enbridge talked about [Kanew] Pipe, can you just kind of remind us of your relationship with them and obviously this Florida Gas Transmission expansion down in Florida as well as gulf stream expansions. And, I think if I remember correctly, you guys have really good relationships with the co-owners of FGT and El Paso and Southern Union as well as the co-owners of Spectra and Williams for gulf stream.
Robert R. Harl
I would say Mark that we have good relationships with all of those customers. The key to which ones of those opportunities end up in our lap is going to be our good performance but also the timing of when it can fit. So, there are a lot of projects that simply don’t fit the construction resource timing that we have. I’ll just remind you again that we are pretty much fully booked well in to the first quarter of 2009. A lot of this work will happen before then so it really won’t be available to us and then after that it will depend, we’re looking at start dates that are somewhere around the first of January, 2009. So, it has to be not only a good customer relationship but a fit with the availability of our resources.
Mark Caruso – Millennium Partners
Just one last question as far as InServ goes, as we ramp up in sort of the maintenance period for the refineries, are you starting to see an uptick in the opportunity for that as well?
Robert R. Harl
We’re not seeing any shortage of opportunities for that business Mark. We’re off to a very, very good start in Q2 with that business and anticipate that we’re going to have an excellent year as I said.
Operator
Your next question comes from Roger Read – Natixis Bleichroeder.
Roger Read – Natixis Bleichroeder
Just really quick back to the discussion you had a little earlier about adding another spread and if you touched on it in the intro that’s fine as well but, I’m trying to understand how you come at it from a returns standpoint. Like I understand the business is fully booked, you’re looking at new projects to start off in 09 but in terms of the cost to get a spread, time to put one together, hire the people, what all sort of goes in to a target return on investment or something like that, that you look at?
Van A. Welch
Roger, we spend a lot of time in terms of valuating the equipment that we’re going to take on as capital. Most of that equipment that we are putting in to our capital budget is what we consider to be critical construction equipment, pieces of equipment that are in short supply. That’s the first thing that we’re looking at when we’re making the decision to buy. Secondly, we certainly look at the work that it’s going to be going on and how long that work opportunity is going to be for. We take that all in to account and calculate that return on capital and it is a nice return namely because of the contracts and the margins that they’re going to be earning but also the contractual terms that we enjoy associated with some of these contracts gives us a better return for owned rather than rented equipment.
Robert R. Harl
I think the other factor that we have to look at is that the main line construction business is quite strong but as I’ve said, the manage and maintain business is also something that is very attractive to us and there are some smaller diameter pipelines that we can build with smaller equipment. When you look at our whole equipment spread today, we’re bigger than three spreads. We have more than that working today but it’s doing some manage and maintain work and some smaller projects. So, we also look at the balance that we have in the business. We’re looking at sustaining the viability of the company over the long term and so there’s more to consider than just can we build another main line spread, get the equipment and people and go do it. We’re trying to balance a number of things as we look at that question.
Roger Read – Natixis Bleichroeder
Maybe one other way I can ask the question, given the strength in the market, if you ordered a spread today, had a project that was going to start early 09, let’s call it a very sizeable project, kind of like the larger ones you identified earlier, would that get cash payback on that project or are we looking at a multiyear cash payback in this market?
Van A. Welch
I think Roger it would certainly depend on the size of the project.
Roger Read – Natixis Bleichroeder
Let’s just say one of the larger projects that are out there.
Van A. Welch
I think with the returns that we’re looking at associated with it, it would have substantial, if it was a normal one spread of work type of capacity, it would have a substantial portion of the payback associated with the margin on that equipment.
Robert R. Harl
So, if we can find an opportunity like that, that would certainly attract our attention.
Operator
Your next question is from Sunil Jagwani – Catapult.
Sunil Jagwani – Catapult
I wanted to get back to you on the tax thing, say you are successful in convincing the IRS to let you change your domicile, what does that likely take your tax rate to?
Van A. Welch
I think it would get down to something that is certainly more normal than where our guidance is. I would say it would be in the 38% category.
Sunil Jagwani – Catapult
So about a 7% to 8% bump to your earnings basically?
Van A. Welch
Well, we’re saying 42% that we have as an effective tax rate, we would look at that decreasing down to 38% or something along those lines.
Sunil Jagwani – Catapult
So just doing some math in my head I’m just saying 7% to 8% increase pro forma.
Van A. Welch
Sounds right.
Sunil Jagwani – Catapult
And you talked about potentially getting it done this year, did I hear you correct?
Robert R. Harl
Well, I’m not going to give any – when we’re dealing with the IRS we’re going to go through the proper steps to make sure that we get this thing ironed out and get it ironed out right so that we have no surprises when we get it done. We’re going to dot every I, cross every T before we get that done. I’m hoping it’s going to get done this year but I’m certainly not going to make that prediction.
Sunil Jagwani – Catapult
Then can you give us an update or maybe a few anecdotes on how you see progress, if any, on the big elephants that you might be looking for? I know you kind of hinted at some pipeline projects in Canada but I didn’t know if they were big elephants or just pipeline projects [inaudible].
Robert R. Harl
Well, I mean it’s difficult to say much specific about that. I would just tell you that there are four or five things that our engineering group are pursuing currently that could turn in to one of those elephants, maybe none of them, maybe one or two. So, it’s the kind of thing where our history has been that when we started a project on the engineering management side it would take a fairly long period of time to turn that in to an EPC. And, I think the ones we see out there today are bigger, for sure, then what we’ve seen mostly in the past because the projects in general have just gotten a lot bigger because of the pipe size and the need for longer distances for those. But, the ability to turn it in to an EPC is much the same as it was with the project like Guardian. So while we have a number of them out there, I don’t really want to talk about any of them specifically just because we have confidentiality agreements with the customers that we’re working for and they really control the timing of what’s going on.
Sunil Jagwani – Catapult
My last question is a really simple one again, I just wanted to make sure I understand the numbers correctly. In order to get to your EPS guidance I’m basically getting an EBIT margin close to 10% or 11% including SG&A. If that’s correct, then what does that number most directly compare to in 2007 because last year you obviously were reporting excluding SG&A, I’m getting a number close to 5% which now seems to be going up to 11%. Does that sound roughly correct?
Van A. Welch
I think the guidance that we gave, if you kind of work backwards from the effective tax rate and the EPS and the G&A, I think you can get there in terms of the math. I don’t have that in front of me of what you’re referring to but hopefully we’ve given you enough that you can work through your model.
Operator
Your next question comes from John Rogers – D.A. Davidson & Co.
John Rogers – D.A. Davidson & Co.
Just to follow up on some of the questions relative to capacity, you talked about your own but are you guys seeing others add capacity in this market in any meaningful way? Or, is it still pretty kind of restricted in terms of equipment and crews?
Robert R. Harl
I think John the way to think about that is we see everybody buying a few pieces of equipment so then there is a constrain on the availability on a worldwide basis, so that’s one of the things. Probably the bigger one today is people and so we’re seeing that restrain the growth of the industry so we’re seeing a bit of growth from one contract, from really across the board in the business but not any big changes in terms of the numbers of spreads. I think we told you last year that we had done our best to estimate it, we still think its somewhere in that 30 range in terms of large diameter construction spread capacity and it’s still in that range. Demand, we still are seeing being more than that this year, next year and beyond. So, the same kinds of market conditions is present and we’re not seeing a lot of change.
John, I might say that we are seeing some change in ownerships, some combinations of people that are coming together like this Price & Gregory combination that happened a couple of months ago but that really didn’t add any additional capacity
Operator
There are no further questions registered at this time. I’d like to turn the meeting back to Randy
Harl.
Robert R. Harl
I believe our first quarter results indicate substantial progress in returning our company to a position of prominence in the industry. However, our task is to stay focused and work for continuous improvement. In this robust oil and gas market there are many opportunities to grow our business. In the past, we have told you about the growth opportunities beyond our US pipeline construction market which include increasing our pipeline related facilities presence, growing our pipeline managed and maintained business, expanding our Downstream capabilities in Canada, growing our presence in the Middle East and North Africa, and broadening our government services business. We now have the financial stability to pursue our strategic objectives whether through organic growth or through acquisitions. We will continue to position the company to leverage its strengths and monitor opportunities to determine the best return for our shareholders. Thank you for joining us today and for your continued support.
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