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Executives

Chris Sammons – VP IR

Jim Bernhard – President & CEO

Brian Ferraioli – Executive VP & CFO

Analysts

Jamie Cook – Credit Suisse

Barry Bannister – Stifel Nicolaus

Andrew Obin – Merrill Lynch

Andrew Kaplowitz – Lehman Brothers

Martin Malloy – Johnson Rice & Co.

Scott Levine – JP Morgan

David Yuschak – SMH Capital

Steven Fisher – UBS

Joe Gibney – Capital One Southcoast

Mark Thomas – Simons & Company

The Shaw Group Inc. (SGR) Q3 2008 Earnings Call July 9, 2008 5:00 PM ET

Operator

Welcome to The Shaw Group Inc. third quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Chris Sammons, Vice President of Investor Relations; please proceed sir.

Chris Sammons

Good afternoon everyone and thank you for joining us today. First off I’d like to remind everyone we have posted a slide presentation to our website to accompany this call. To get the presentation please go www.shawgrp.com and then to the Investor Relations page; center of the page is the link to the presentation. You may follow along by opening the presentation or printing it and following with the slides. We’ll reference the slides by number as we proceed.

Leading the call today are Mr. Jim Bernhard, Chairman, President and Chief Executive of Shaw and Brian Ferraioli, Executive Vice President and Chief Financial Officer.

Before we begin our remarks, I’d like to refer everyone to slide two which is information regarding forward-looking statements and Regulation G reconciliations. Please consider this information with respect to the call, the press release and the slides.

Now I’ll refer you to slide three and turn the call over to our Chairman, Mr. Bernhard.

Jim Bernhard

Thank you. Good afternoon. We enjoyed a record quarter of revenue, of net income and EBITDA. Our revenue was $1.8 billion and excluding Westinghouse, EBITDA was $117 million. Net income was $59 million with EPS of $0.70 a share. The awards were approximately $4 billion and Brian will have more detail later.

If we turn to slide four, we maintain our five operating segments as shown on the slide. If you turn to slide five here, our fossil and nuclear business had a record EBITDA and the beginning of a long trend in that market based on their backlog, we were able to get Dominion Virginia City, a major reward. We have received its final air approval after the quarter ended and we see many opportunities today in gas fired power plants. The number of gas fired power plants are currently being proposed by our company. We were awarded on in North Carolina which is our first major EPC gas plant since we finished the project in New York.

As we know that the Southern Company and SCANA which both projects are not in backlog today, our first four reactors that we were awarded on an APC basis. That business looks very robust. It continues to look better and better every quarter and we should be booking soon a couple more reactors in the next two or three months and I think that next fiscal year we should book a minimum of two to six, two to eight reactors again. We signed a Letter of Intent with Progress as we announced and we were also rewarded a major development contract with RW which will lead to four coal power plants.

If we turn to the next slide, page six, our maintenance part of our business continues to perform well. Our major award this period was a renewal award after four operating years with the Albermarle US manufacturing plants has chosen us for an extended period of time once again. We were also awarded $50 million on a contract to refurbish and upgrade some emission reduction equipment for AEP. As you notice the EBITDA kind of goes up and down, but based on our outage work that we do for nuclear power plants, the spring and fall, the first and third quarters will always be the most robust in that particular business.

On page seven, the energy and chemicals enjoyed a good quarter and that business really continues to develop in the technology part of the business. Their margins continue to increase and we look forward to increased continue higher margins then we’ve enjoyed in the previous quarters and Brian will have more detail as well as we go forward. Hyundai Engineering led a consortium in which we participate for a major refinery in South Korea which is a couple of hundred million dollars for the procurement of equipment and professional service for us. We were able to be selected to provide engineering services and license for Cat Crack and technology in the Middle Eastern refinery expansion and our technology continues to be high demand and the margins continue to looking forward to [inaudible] and I believe they will continue to increase certainly next year. So that market continues to develop somewhat better then expected.

On our fabrication and manufacturing on slide eight, certainly that market continues to be robust. We have—the plant has begun operation in Mexico. We are now shipping from the plant so we have begun operations there and have actually started shipping finished product from the plant. If we turn to page nine, these are operating facilities [inaudible] beginning to be online. We expect the increased overall pipe fabrication capacity about 25% over the next 12 to 18 months. In addition to being the leading pipe fabricator in North America expansion to Mexico increases our tonnage on steel fabrication to 34 tons. We believe that the facilities coupled with others will become significant for us in the structural fabrication components in North America.

On page 10 our environmental infrastructure continues to stabilize from quarter to quarter with $12 million EBITDA and enjoyed first significant awards in appreciable period of time. We signed a $2 billion construction contract for the modification for the Department of Energy MOX facility. We were also awarded a $700 million design and construction of the Inner Harbor Navigation Canal Hurricane Protection system. This is the largest project design, engineering and construction ever awarded by the US Army Corp of Engineers and we appreciate their confidence in us. We were awarded some maintenance, some other remedial action contracts; most of these were renewals of old existing contracts that had expired. So based on the performance we were awarded these contracts and it speaks for good things to come. So I think that the business has stabilized. We look forward to having an improving fourth quarter and certainly and improving 2009.

If you take a look at our backlog, if you turn to slide 11, we have a record backlog of $16.4 billion which is the largest that we’ve had in the history of the company and as important if you notice on the pie chart on the right side of the slide, over the next 12 months over 40%, $6.5 billion should convert to sales. So it’s very, very encouraging. The margins are increasing in our backlog which should convert to sales next year and the year after.

We put a new slide in on page 12. There had been some confusion of what’s in our backlog, what’s not in our backlog. So we thought we’d try to illustrate it this way. Current backlog is $16.4 billion. We have signed contracts with SCANA and Southern and Letters of Intent with RWE and Progress. We haven’t—until we get the Public Service Commission and different states’ approval which all should happen over the next 12 months, and certainly next calendar year for all four of these projects and that’s when they’ll go to backlog over the next calendar year, should their schedules and anticipatory approvals fall in line with the current schedule.

To just give you a snapshot of what the backlog would be, these projects we’re working on and as if they were in backlog so we have a tremendous amount of business in front of us and now I think you can start to visualize the excitement and the opportunity that the company has to moving forward on this tremendous amount of work especially in the nuclear field.

Let me turn it over to Brian for the financial overview.

Brian Ferraioli

Thank you Jim. I’m going to touch on the financial highlights and we’ll get into a little bit of the segment analysis and then a summary of the quarter before we go to the Q&A.

Looking at slide 14 we had record revenues, up 14% over the previous year. You see gross profit also up significant, 31% year-on-year and EBITDA again, a significant increase 59% year-on-year. We had another charge due to the foreign exchange on the Yen denominated debt and we show that in the middle of the column for Westinghouse $4.8 million. But excluding the Westinghouse we had record net income $58.7 million, again up significantly 22% from the prior year and as Jim mentioned significant new awards.

Our operating cash flow was positive $48 million for the quarter. That was down somewhat from what we’ve been running but it was anticipated and has exclusively to do with the timing on certain projects. As you know we’re still quite cash positive for the year. We have a record cash balance I’ll talk about a little bit later on.

Over to slide 15 the fossil and nuclear group continued to perform very, very well, record revenues up 57% from the prior year. You see the gross profit up significantly 64% from the previous year and the gross profit percentage continues to rise. The fossil and nuclear results were negatively impacted by an impairment we have for our EDS or our transmission and distribution business which is in process of being sold, as well as a loss on an international project. So that business did extremely well even with these two items that I just mentioned.

Looking at E&C, their revenues are up significantly as well from the prior year and I’d remind everyone that the revenues we show here are excluding the flow through costs and the margins are up very significantly from the prior year. A little clarification on the margins, we had closed out in our joint venture company several projects that had contingency for potential liabilities that are no longer required. It is a joint venture company that we consolidate so the gross profit line, there’s $13 million of both revenues and gross profit associated with these projects that we were closing out. Our portion after our partner receives his pro rata share would be $8.5 million. So again, just trying to make this clear that the gross profit number here is showing 100% of the joint venture and that’s including the $13 million but $8.5 million is really the net benefit to us on a pre-tax basis.

Maintenance is improving as well on its margins, they had more construction-related projects which tend to have higher margins then some of the outage work. E&I also had a relatively improved quarter from what they’ve been having as of late, but relatively flat from the prior year. An item positively impacting EBITDA, not necessarily in the gross profit but in the EBITDA for the E&I group was a $3.5 million gain associated with one of the sales of the military privatization ventures.

Our fabrication and manufacturing group continues to perform extremely well. You see the revenues are up, their gross profit is up and their gross profit percentage remains very, very strong. In the quarter they were ramping up their Mexican facility as Jim mentioned earlier. That facility cam online late in the quarter so they had some costs associated with that facility and didn’t really have much in the way of revenues given the fact that it started up late in the quarter.

Turning to page 16, again looking at the investment in Westinghouse and to make sure it’s clear on the charge that we take from Westinghouse, what we show here is when we made the investment in Westinghouse in 2006 the Yen/dollar exchange rate was approximately $119 at that time. The Yen denominated debt was equivalent to $1,080 billion and at the same time we have a put option that at that time was—if we were to put the shares back to Toshiba, the Yen that we would receive would translate into the dollar equivalent of $1,044 billion. So the gap between the two was $36 million. You see as of the end of our third quarter with the exchange rate change the Yen denominated bonds are now worth $1.2 billion, the put option is the $1,182 billion, so net net [plus] our exposure has only increased about $5 million even though there’s been some significant change in the exchange rate.

The difference being though, the Yen denominated bonds are mark-to-market every quarter and since the investments we have had $143 million in charges go through our P&L, non-cash charges. The economic hedge to that is the put option but for GAAP purposes that is not going through the P&L, that is not mark-to-market. So hence the economic impact to us is relatively minor but the P&L impact is showing a significant volatility and the exchange loss for that for this quarter is $8 million.

Over the page to page 17, looking at cash, our cash balance continues to rise. We had a record $690 million of cash at the end of the quarter. The debt excluding the limited recourse Westinghouse debt was only $13 million so it continues to grow well and you see the trailing 12 month operating cash flow in excess of $500 million.

On slide 18, other financial events during the quarter, we were upgraded by Moody’s, S&P put us on the positive outlook and we were added to the S&P MidCap 400 Index.

In summary on page 19, operations continued to be strong. The markets we serve are robust and our strategic position in the nuclear power market as well as our traditional businesses are forecasted to continue to drive our revenue growth and earnings growth into 2009 and beyond. We had excellent operating performance on our major coal projects, our petrochemical and the operations at our fabrication and manufacturing group.

We had record revenues, record net income, record EBITDA, record new awards and record cash balance. Our backlog is up to $16.4 billion, again a record $2.2 billion increase from the prior quarter and as Jim mentioned earlier, that’s without any significant amount from the domestic nuclear power projects that we have previously reported. Again we were upgraded by Moody’s and added to the S&P 400 Index Fund and finally our guidance remains unchanged. We approximate $2.30 excluding Westinghouse.

With that, that concludes the formal part of our presentation and we’ll go to the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jamie Cook – Credit Suisse

Jamie Cook – Credit Suisse

My first question, can you just talk about on the fab side, how quickly you think we can get the facility in Mexico up and running and fully utilized and how we should think that impacts the margins on a longer term basis?

Jim Bernhard

Certainly we encourage—it has begun operation and it’s going to take 12, 15 months to be fully—to have the facility at full volume. So while we’re hopeful the margins increase we haven’t put it in any of our forecasts. We want to make sure that our productivity etc. is what we anticipate it to be and we haven’t given any numbers on that.

Jamie Cook – Credit Suisse

You talked a lot about the nuclear opportunities on the domestic front and you talked about the coal plant in the UK, can you just give us an update on what type of nuclear opportunities we could potentially see, whether it’s in South Africa or India and what the timeframe would be associated with that?

Jim Bernhard

Okay, we’ve gotten four reactors so far. Last year about this time we told you we’d have two to eight so we’ve got four reactors. We have a Letter of Intent for two more reactors in the United States and that’s with Progress and that should go to—hopefully go to an EPC contract in the next two, three, four months. In addition to that in the United States we feel comfortable that we will again be awarded two to eight reactors over the next calendar year in the US in calendar of 2009. South Africa it’s pretty publically known that the project is between three and 18 reactors with our competition being Areva and that’s about the only comment I have on that.

The UK market continues to develop quicker then we thought and that market should follow very closely with the US market. India we are still hopeful that during the calendar year that the treaty with the current Bush administration will be signed and I think that there’s some movement on India due to the political parties having a—I think the government has come to some type of understanding with the minority party that that may have promise for the rest of the year as well. We continue to—those are the major markets with the exception of China, the other markets throughout the world are mostly smaller, a couple of reactors in different countries. But the global market is developing and continues to develop faster and faster with the search for long-term economical sources of energy.

Operator

Your next question comes from the line of Barry Bannister – Stifel Nicolaus

Barry Bannister – Stifel Nicolaus

The $5.7 million overseas impairment can you identify that and was it China related?

Jim Bernhard

It was not China related.

Brian Ferraioli

We haven’t identified anything more then that but it is not China related.

Barry Bannister – Stifel Nicolaus

You had said that perhaps as much as $38 billion of potential backlog and at slide 12 I knew that you were at $16 billion now so that’s $22 billion more, and my understanding is that RWE was going to be potentially $12 billion, so the residual is $10 billion. If you divide $10 billion by the three nuclear sites, Progress, SCANA and Southern, is that $3.3 billion a site roughly? I thought it was going to be closer to $4 billion.

Jim Bernhard

I think that the RW is between $9 and $10. I think for future per reactor, our typical scope of work on an EPC basis will be between $2 billion and $2.5 billion. So for example, if you had a typical reactor, a Southern or Progress or two reactors on a site our typical scope of work on an EPC basis would be between $4 billion and $5 billion.

Barry Bannister – Stifel Nicolaus

And I imagine one of the most important jobs at Shaw Group now is human resources; can you talk about how you’re doing on the ramp of [craft] labor and other folks that you’re hiring getting in front of this big power boom?

Jim Bernhard

Well the [craft] labor is certainly a long way off and I don’t anticipate that to be a problem with the training programs that we’re going to have in place. We have been very successful on recruiting people over the—since the announcement of these major nuclear plants. The first major EPC contracts and it really has opened the doors to—have made recruiting somewhat easy. Having said that certainly recruitment is a challenging going forward and one that I believe that we’re up to. On these particular plants, these are construction-oriented projects. The engineering I believe we’re going to have well in hand because we’re going to be working on duplicate units and the construction manager, project manager, plan or schedule the cost control, we have some time to facilitate those teams and we have some internal teams that we’ll be moving from coal plants at the basis to build these new nuclear plants going forward.

Barry Bannister – Stifel Nicolaus

I really don’t have a very good feel for what percent of the total build costs of a twin AP1000 configuration would be represented by just the Toshiba sold reactor units, is there any way to quantify that?

Jim Bernhard

I’m not sure if I understand that question.

Barry Bannister – Stifel Nicolaus

Well if the total cost in the filings per SCANA is $9.8 billion to build their site, then I don’t know what the reactor portion is.

Jim Bernhard

What they file, we don’t pay a lot of attention to. The only thing—what’s important to us is our part is between $2 billion and $2.5 billion per reactor. So if you had Progress, it would typically run $4 billion or $5 billion, a couple of hundred million dollars either way, but that’s kind of looking for a wide range on that.

Barry Bannister – Stifel Nicolaus

Yes but you’ll get 20% of the profits on the sale of the reactor units, I was just trying to quantify what the reactor units would be worth.

Jim Bernhard

I think there’s published numbers out there that somewhere around $3,500 of KW, something in that range plus or minus 20%.

Operator

Your next question comes from the line of Andrew Obin – Merrill Lynch

Andrew Obin – Merrill Lynch

On E&C margin, even if we back out I guess you said $13 million in benefit?

Brian Ferraioli

Its $13 million from the numbers on the sheet, yes.

Andrew Obin – Merrill Lynch

Exactly so if I back out $13 million of revenue and gross profit, I still get margin close to 10% which would be quite a bit better then I guess I was modeling, is it just how we treat pass through costs now or was there underlying improvement in profitability?

Brian Ferraioli

No, the pass through costs are out of both numbers, both this quarter and the prior year quarter. As I think we’ve indicated in the past that the margins on E&C are expected to rise and they have. Part of that is because of market conditions, part of it is because of the types of contracts they have. They’re closing out some of their jobs where they’ve had construction components and are doing more work which is engineering, procurement and license fee and so they’ll have lower volume but the margin should increase on those because they don’t have the construction component which has a lot of volume and tends to have lower margins.

Andrew Obin – Merrill Lynch

On fabrication and manufacturing, I guess the revenue growth there was quite a bit lower then we had thought does it have to do with when capacity is coming online or were there some sort of [inaudible] during the quarter?

Jim Bernhard

It was a delay on the Mexican facility and the capacity should begin to ramp up as that facility begins to have projects booked and executed in the facility.

Andrew Obin – Merrill Lynch

You had a pretty good quarter, margins were quite a bit—you beat on margin, why did you keep the guidance as opposed to raise it, what worries you?

Jim Bernhard

I don’t have any worries. We think that’s a reasonable expectation going forward and we didn’t think that we needed to change it. We were comfortable with the guidance going forward and---

Brian Ferraioli

We expected to have a good quarter, we did, and when we gave the $2.30 we’re not changing our view.

Operator

Your next question comes from the line of Andrew Kaplowitz – Lehman Brothers

Andrew Kaplowitz – Lehman Brothers

Is there any way that you can tell us what the start-up costs, how they affected the margins in the quarter, approximately?

Brian Ferraioli

It didn’t have a significant impact; we’re talking in the single-digits, $1 million, $1.5 million something like that.

Andrew Kaplowitz – Lehman Brothers

So is there any reason why the margins sequentially went down or is that just the lumpiness of the business?

Brian Ferraioli

A little bit of lumpiness, the second quarter was a very good quarter for them, they liked the other aspect of the business that has some projects that are higher margin then others and there’s no underlying trend there if that’s what you’re driving toward, we don’t see any significant change for their business. They’re very business, their capacity remains quite high and we think the business is performing exceptionally well.

Andrew Kaplowitz – Lehman Brothers

And you have been able to pass through your steel costs and what have you, so you’re not seeing any impact from that are you?

Jim Bernhard

All our projects in the fabrication is subject to pricing effect at time of shipment.

Brian Ferraioli

And we probably should add the major projects we have in the E&C and fossil and nuclear also have some sort of re-opener or tied to an index so or are completely bought out where we don’t have any significant risk there.

Jim Bernhard

Steel escalation is a significant, over the last 30 to 60 days have really encountered significant price increase unlike we’ve ever seen before.

Andrew Kaplowitz – Lehman Brothers

That you’ve raised prices or can you repeat that last comment?

Jim Bernhard

Our projects are subject to escalation; however we have seen a lot of that take place.

Andrew Kaplowitz – Lehman Brothers

Obviously you have a ton of potential out there, the $22 billion, what I’m wondering is how do you feel about these projects in terms of the risk of delay? I guess your feeling on; do you think that they’re going to be booked in some realm next year, what are the chances that they really go forward, what are the customers telling you in this environment?

Jim Bernhard

The need for new energy sources is paramount. The need for new energy is paramount. We see customers rushing to get in the queue so to speak for nuclear. We don’t see, while there may be some governmental delay that we can’t foresee, the [coals], we’ve extended those to the end of the [coals] in our projections etc. and currently those things are running relatively smoothly from our understanding. While there may be delays that we can’t see, we see the opposite. We see companies rushing to get in line especially on the nuclear power because of the length it takes to build a plant, the market is, and I’ve said this for four consecutive quarters, and its more active then it was last quarter.

Andrew Kaplowitz – Lehman Brothers

Do you think its fair to say that the increase in steel costs that we’ve seen are not affecting nuclear at all, maybe they’re affecting some other power products or not at all across the board in power in terms of projects coming out?

Jim Bernhard

Steel increase may be $100 million on a nuclear power plant, if you start to look at the effect of the cost of electricity over 40 years on a $7 billion to $10 billion plant, its inconsequential.

Andrew Kaplowitz – Lehman Brothers

Can you give us, you put in the press release some thoughts about 2009 that 2009 will be a good year for Shaw Group, and so I’m just wondering if there’s any more color you can add—we’re getting there for you, one more quarter to go, and so should we continue to see a big margin jump in 2009 versus 2008 in the majority of your businesses?

Brian Ferraioli

We haven’t given any forward guidance yet on 2009. We’ll do that on the next call. As we mentioned, what we have said in the past and there’s really no change E&C margins we expected to increase and they have and the markets remain strong. So that’s our objective, is to continue to drive earnings but we’re looking for more guidance to be provided in the next call.

Operator

Your next question comes from the line of Martin Malloy – Johnson Rice & Co.

Martin Malloy – Johnson Rice & Co.

Can you talk a little bit about gas fired power generation in the US, the potential market opportunity in terms of size and how quickly demand might ramp up?

Jim Bernhard

Demand is ramping up very quickly. The class we’re dealing with it looks like it’s an intermediate stop to them before the nuclear plants are completed and we have one now and I think that we’ll book four, five or six in the next 12 months. So its going to be a nice part of the business, its going to be—but not the driver over the overall power business will be driven by these big coal plants we’re doing and these huge nuclear power plants.

Operator

Your next question comes from the line of Scott Levine – JP Morgan

Scott Levine – JP Morgan

Can you rough out the average revenue opportunity per gas [plant] for you and if you can’t speak specifically to the margins maybe kind of relative to what you see on the coal and the nuke side?

Jim Bernhard

The revenue depending on if the equipment is supplied by the owner etc.—but the full E&C scope might be between $4 million and $700 million, something like that if it was a completed plant but that could change whether the owner with [versa turbine] or the HRSG etc. and I don’t believe that in the past we’ve commented on margins on specific type of projects.

Scott Levine – JP Morgan

Turning back to nuclear then without getting too specific maybe on the contracts, based on what you have signed on EPC to date, could you talk to the areas that you’re maybe most protected and/or conversely most exposed from a risk standpoint with regard to these new builds?

Jim Bernhard

I think we’d be most expected; most protected on labor, field labor. We’d be most protected on field labor and as far where we’re not protected, I don’t think that we’ve taken any extraordinary risks other then the normal course of business then any other part of the plant but we’re certainly most protected on labor.

Scott Levine – JP Morgan

So the risk profile is similar to other types of [inaudible] that you’re involved with?

Jim Bernhard

That’s correct.

Scott Levine – JP Morgan

The tax rate a little bit lower then we were looking for in the quarter, anything driving that and/or is that a good go forward number to use?

Brian Ferraioli

We’re still working on the taxes; we’ll be somewhere in that same zip code, hopefully a little bit lower in Q4 but not a huge change.

Operator

Your next question comes from the line of David Yuschak – SMH Capital

David Yuschak – SMH Capital

You had mentioned in the last call about expecting the gross margin to improve and given this was a really solid gross margin improvement and very early in the what I’d call your expectations, does that suggest that there is a lot of wind in the sails here right now given that this is your first really strong quarter coming out with the gross margin in the E&C space?

Brian Ferraioli

I’m not sure I understand the full extent of the question, clearly we had expected the margins to improve, and they have. If you’re saying is there more—we haven’t quoted again, we haven’t gotten that specific in terms of future guidance on margins. But the market remains strong and the execution was quite good.

David Yuschak – SMH Capital

I was just thinking though that given this is your first really solid quarter coming out of E&C in a while that that would kind of suggest to us out here and looking in that there’s a lot of potential to get that even higher given we’re still very early in the cycle for you coming out of that E&C.

Brian Ferraioli

Well clearly if you’re thinking that our work is done, no that’s not the case. Beyond that I don’t want to comment on margin guidance.

David Yuschak – SMH Capital

Let’s just talk about the nuclear build particularly—and the last nuclear build the biggest problem people got into and companies got into was the cash flows going to those projects, things kind of got out of whack but a lot of excess expectations, particularly in some of the smaller companies back then given the size and the skill for the projects, as you look at this next cycle, what do you think the nuclear owner has learned today to make sure that the issues that kind of put them under the last time, and in addition to the cash flow expectations needed to support that may have changed compared to our last nuclear build.

Jim Bernhard

I think the overriding difference is that a combination operating license is issued before there’s work done, construction work done on the site. This means that once the plant is complete in accordance with the permit that it can go into operation. In the past you had a construction license where you could begin to build the construction of a nuclear power plant and then a new crew from the NRC came in when it was substantially finished and said, you know I need you to change this, that and the other thing and before you get a operating permit which tended to delay two to three years. Excessive changes during the construction process ended up being longer delivery of the operating unit. And if you recall back then, it’s been such a long time, the construction techniques from CAD systems to Intergraph or interfaces are automatically cleared today with, you didn’t know until you actually erected piping systems or structural components so a lot of things have changed. But I think that far and away the biggest change is that once you have a [inaudible] construction operating license that you’re able to go ahead and build the plant and get it to work and so we’re encouraged by that and I think that that we have a good handle on what we’re required to do.

David Yuschak – SMH Capital

How much time do you think it will take then to do a conventional nuclear project today given these technologies and the licensing from start to finish?

Jim Bernhard

I think that from a first concrete poured in the field I think that 48 months would be a reasonable expectation.

David Yuschak – SMH Capital

On the cash flows you had a good quarter here again, how do you see cash flows coming in particularly as each ramp up in projects begin to really flow through the income statement, what kind of expectations do you think you’d be getting from owners as well in supporting the construction of your projects that you’ve got in backlog?

Brian Ferraioli

We have a pretty strong focus on cash here and we would expect the cash to continue to grow as we continue to book more work. Obviously if you’re cash flow positive on a job at the end of the job the cash and the earnings have to be the same, but we’ve been pretty successful at getting cash in stages that allows us to stay positive with our vendors that are below us. So we don’t expect to see any significant turnaround on cash. On the contrary we’re quite confident that the cash flows will continue to be strong.

In terms of the earnings, I want to come back to your earlier question on the margin on the E&C just to make sure we’re communicating clearly, the margin for the quarter in large part for E&C had this joint venture $13 million in the gross profit numbers you’re seeing, we’re not suggesting that you’re going to have a duplication of that every quarter. There was a timing of certain of these projects and the phase where we felt that the liabilities were not longer warranted so I want to make sure we’re clear that we’re not saying that the margins that we reported here would be multiplied by four to give you an annual run rate. There is a timing impact depending on the phasing of projects.

David Yuschak – SMH Capital

But if you take that out you still end up with a good gross margin performance.

Brian Ferraioli

Yes that’s correct but I just want to make sure that it wasn’t, you weren’t concluding that it was better then what it would be without this one particular item.

David Yuschak – SMH Capital

On E&I you’re finally starting to see some good work flowing through that business, any thoughts about, because in the past you put some pretty good gross margins out on that business, what might be your expectations there to get back to some of the other previous peak on margins in that segment?

Brian Ferraioli

We do think there are opportunities to improve the margins there that as you see it had very, very good bookings, but they’ve also been going through a process to rationalize their costs, to focus on what they’re good at, some of their core businesses, and we would expect margins to rise there. Keeping in mind that is a primarily reimbursable type business, relatively low risk and therefore the margins are reflective of the risk.

Operator

Your next question comes from the line of Steven Fisher – UBS

Steven Fisher – UBS

Just wanted to clarify the comment about steel, I’m wondering do you expect you’ll be able to pass along the full steel price increases that the producers are charging and would you think there’s going to be any delay in recovering that?

Jim Bernhard

There’s no delay in recovering and we think that we’ll recover at least—we’ll recover all of the increases as part of the contract, its routine in our business.

Steven Fisher – UBS

Okay so the fact that it’s indexed you can still expect to recapture the total dollar amount?

Jim Bernhard

It’s not indexed, its subject to escalation, to price in effect at time of shipment, it’s not subject to a tailored index in the fab business. It’s subject to announced price increases.

Steven Fisher – UBS

And the E&C segment?

Jim Bernhard

In the E&C segment it’s typically subject to price indexes. But that’s not the major part of the steel that we produce through the company.

Steven Fisher – UBS

Last quarter you had some profit adjustments on projects in both E&C and the fossil and nuclear, are those projects completed at this point?

Brian Ferraioli

The E&C one is completed and the fossil and nuclear will be completed in the next several weeks.

Steven Fisher – UBS

And that one is finishing up fine?

Brian Ferraioli

It’s finishing up, I’m not sure I would categorize it as fine.

Jim Bernhard

The appropriate costs have been allocated to finish the job.

Steven Fisher – UBS

And did you say when you expect to take that RWE work into backlog?

Jim Bernhard

Next calendar year.

Steven Fisher – UBS

In calendar 2009?

Brian Ferraioli

That’s correct.

Operator

Your next question comes from the line of Joe Gibney – Capital One Southcoast

Joe Gibney – Capital One Southcoast

What was CapEx in the quarter and could you just refresh us here a little bit on expectations as we run out the year?

Brian Ferraioli

CapEx is $92.5 million cumulative through the end of the third quarter; we would expect that number to continue to rise in Q4 probably another $20 million, $25 million somewhere in that range.

Joe Gibney – Capital One Southcoast

And just a point of clarity on RWE, I thought I heard you mention the opportunity to four coal fired units, but it is five, is that correct?

Jim Bernhard

Yes, excuse me, I misspoke.

Operator

Your next question comes from the line of Mark Thomas – Simons & Company

Mark Thomas – Simons & Company

I was hoping to get your thoughts on the coal fired power plant, last week a Georgia court halted construction based on C02 emissions and a lack of a plan by the backers to limit those emissions, can you just provide some color on the current state of the coal fired power plant and if you think news like what we saw last week would keep coal plants from moving forward?

Jim Bernhard

Our coal plants have moved forward, seen a few months delays for air permit here and there, but on the six we have, we haven’t seen any extraordinary delay more then a two, three, four, five, six months, something like that, but not a cancellation or anything else. All the plants that we have we’ve pretty much, if we had to start field construction we’ve bought all major equipment and the projects are well along. I think that you’ll have isolated spikes going forward where coal plants will be difficult to build. In saying that you’ll have places that will continue to build coal plants in the United States for some period to come, but the need for electricity is one that is not deniable and you can do all the wind and air you want but behind every good wind tower there’s a gas plant to produce electricity when the wind doesn’t blow so nuclear gas plants will be here for the next few years in isolated spots and overwhelming nuclear will be a significant part of whatever mix we have going forward in the promotion of electricity. The more hybrid cars etc. the more the need for electricity increases in the US.

Mark Thomas – Simons & Company

Just for clarification purposes, to make sure I understood you right, the project that’s expected to be completed in a couple of weeks, is that the same project you took a $5.7 million loss on in the fossil group?

Brian Ferraioli

That’s correct, yes.

Operator

Your final question is a follow-up from the line of Barry Bannister – Stifel Nicolaus

Barry Bannister – Stifel Nicolaus

Your scope gross margin in E&C, should we take out the $13 million which is above the line and was it 15.16%?

Brian Ferraioli

When you say should you take it out, I’m not sure how to respond to that. Its earnings of the quarter but again there was a bit of a—due to the timing of some of these projects so I’m not sure you would take it out per say but remember the $13 million is the consolidated number which our component is the $8.5 million but if you’re saying if you wanted to back it out, you should take it out of both revenue and the gross profit.

Barry Bannister – Stifel Nicolaus

Yes that’s probably the way to approach it but even so, your margin was a pretty extraordinary number. It was pushing 19%, backing it out so I need to get with you on that. That was a great number. One other project question, Jim said that your coal plants are really not subject to the same delays as the rest of the industry but last time I checked AEP 600 megawatt [John W. Turk] Power Station was delayed because of an Indian burial ground and some air permit issues, are there any further delay on that project? It’s a fairly technology intensive ultra super critical design as I recall.

Jim Bernhard

I didn’t say we were subject to the same delays as the rest of the industry what I said is none of our coal plants have been cancelled and we expect them to all move forward and that all of our plants that we’re working on, we have purchased all major equipment on these plants or are in the process of procurement. The AEP plant is super critical, we certainly will produce—the less produce—pollutants then any coal plant currently operating in the United States or being built. It’s the first super critical of that size in this area. It has been approved by all Public Service Commissions, I don’t believe there’s an Indian burial ground that’s the problem. I believe it’s a duck hunting lease. But I believe that’s going forward there and the air permit may be a few months later but I anticipate that it’s going forward as well. The rest of them I think are pretty much okay.

Brian Ferraioli

And going back to your previous question, I think if you backed out the $13 million you’re at a 16% margin and like we say when the margins are sometimes down on the quarter and the same when they’re sometimes up, the business as you know is lumpy and you will get some movements up and down on those numbers.

I’d like to thank everyone for joining us on the call today and I’ll just turn it over to Jim for a final comment.

Jim Bernhard

Thanks guys and we’re very excited, this is a huge market that we’re in very, very early stage in the power business especially in nuclear and we’re concentrating on execution, there’s ample amount of work for us to grow the company at a controlled and rapid rate and I think that we have a good opportunity for our shareholders to participate in increasing value of the company going forward. Thank you.

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Source: The Shaw Group Inc. F3Q08 (Qtr End 05/31/08) Earnings Call Transcript
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