Foster Wheeler Ltd. Q2 2008 Earnings Call Transcript

Aug. 6.08 | About: Amec Foster (AMFW)

Foster Wheeler Ltd. (FWLT) Q2 FY08 Earnings Call August 6, 2008 8:30 AM ET

Executives

Scott W. Lamb - VP of IR

Raymond J. Milchovich - Chairman and CEO

Umberto Della Sala - President and COO

Gary Nedelka - President and CEO, Foster Wheeler North America

Franco Baseotto - EVP, CFO and Treasurer

Analysts

Andrew Kaplowitz - Lehman Brothers

Chris Hussey - Goldman Sachs

Michael Dudas - Jefferies & Company, Inc.

Barry Bannister - Stifel Nicolaus

Brian Chin - Citigroup

Kent Green - Boston American

John Rogers - D. A. Davidson & Co.

Operator

Good morning my name is Rich, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Foster Wheeler Second Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. [Operator Instructions]. Thank you.

It is now my pleasure to turn the floor over to Scott Lamb, VP of Investor Relations. Sir you may begin your conference.

Scott W. Lamb - Vice President of Investor Relations

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

Before turning for the discussion, I need to remind you that any comments made today about future operating results or other future events are forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ substantially from such forward-looking statements. A discussion of factors that could cause actual results to vary is contained in Foster Wheeler's Annual Report filed with SEC.

The company's Form 10-Q will be filed with the SEC later this morning. Joining us on the call today are Ray Milchovich, Chairman and CEO; Umberto Della Sala, President and Chief Operating Officer and Franco Baseotto, Executive VP, CFO and Treasurer.

Also here in the room with us today, Peter Ganz, Executive VP and General Counsel; Lisa Wood, VP and Controller; Gary Nedelka who is President and CEO of Foster Wheeler North America. Gary manages our Global Power operating units in North America and Asia -- excuse me, and we also have Tony Scerbo who is CFO of our Global Power Business.

After our prepared remarks, we'll have time to take your questions. Now I'll turn the call over to Ray.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you, Scott. Good morning everyone and thank you for joining us. I'll walk us through the prepared materials and ask my colleagues to participate with me along the way and then as Scott mentioned, when we're through with the prepared remarks, we'll be very happy to take all of yours questions.

Let me start with slide three, Q2 '08 highlights. As can be seen Foster Wheeler enjoyed a very strong quarter in Q2. We had new all time quarterly records set in net income with a $160.8 million of net income in the period, $142.5 million on an adjusted basis. That was delivered by delivering $220.4 million of EBITDA and $202.2 million of EBITDA on an adjusted basis, during the period, and we finished the period with $1.3 billion of total cash and cash equivalents. Driving those results, first turning to our Global E&C business, we've got very strong demand and continued commercial and operational excellence being demonstrated inside that business group.

In our Global Power Group, we're benefiting from what has been robust market activity and the systemic improvements in both commercial and operational practices that we spoke to you about during 2006 and 2007.

In terms of new order trends measured in Foster Wheeler Scope, in E&C our average quarter so far in 2008 has been 7% above our average quarter in 2007 and in July the number of man hours booked in E&C was more than 70% higher than the average month of the first-half of 2008. The significance of this is that as we look at our prospect flow in E&C, we are expecting a very strong second-half bookings in E&C and our July experience would suggest we're off to a very good start to accomplish that.

In GPG, our Q2 bookings reflected delays on projects in North America. In July of 2008, however, the contract value of bookings was more than double the average month of first half of 2008 due to the strength of international bookings that are being turned to mitigate the delays that were experiencing in North America.

Moving to slide four. Q2 second consecutive quarter of record net income which is shown on the slide to the right; on an adjusted basis, our net income is 47% above the average quarter of 2007. Our average quarter of 2008 on adjusted net income basis is 37% above the average quarter of 2007 and this is due primarily to the very, very strong business performance in both business groups.

Turning to slide five. Now going by business group. In our Global E&C Group we had record EBITDA in Q2, 24% above the average quarter of 2007. Our Q2 EBITDA margin in E&C on Foster Wheeler Scope revenue was 30.2% versus 23.6% as the average quarter of 2007.

Our average quarter 2008 EBITDA, so far is running 15% above our average quarter of 2007. Our average quarter `08 EBITDA margin measured on Foster Wheeler Scope revenue is 27.3% versus 23.6% for the average quarter of 2007 and obviously running ahead of the general level of guidance that we provided a year ago. This is being delivered from outstanding execution with what we would refer to as base line performance or said in other way, as we look through the performance of the period, this is not margin and/or earnings generated by one time events or specific project incentives, this is just excellent performance across a broad portfolio of contracts. And finally our Q2 '08 included an incremental 6.7 million of earnings for reimbursement of emission rights at our partially owned Italian Power project.

Turning to slide six and focusing that on a Global Power Group. We had record EBITDA in Q2 which almost doubled the average quarter of 2007. Our Q2 EBITDA margin on Foster Wheeler Scope revenue was 15.2% versus 9.8% at the average quarter in 2007. Our average quarter 2008 EBITDA was 91% above our average quarter of 2007. Our average quarter 2008 EBITDA margin on Foster Wheeler Scope at 15.6% versus 9.8% average of 2007, significantly ahead of the general level of guidance that we provided to you in 2007.

This is due to strong performance combined with robust market support for the business and the continuing favorable impact of the commercial and operational improvement initiatives that we spoke to you about that we are implementing in that business in 2006 and 2007.

Finally, Q2 EBITDA in Global Power in the quarter was aided by an incremental 2.3 million of earnings due in part to higher electric tariff rates at a partially owned Chilean Power Project.

Moving to slide 7, and focusing now on new orders and backlog. New orders as measured in Foster Wheeler's Scope, in E&C, our average quarter of 2008 has been 7% above our average quarter 2007. We expect new orders to be very strong in the second half as I mentioned several slides ago. We are off to a good start as is shown by in July, the number of man hours booked was more than 70% higher than the average month in the first half of '08.

Some examples of projects that contributed to that man-hour booking and the significance of strategically of those, I am going to turn to Umberto Della Sala to the outline for you. Umberto?

Umberto Della Sala - President and Chief Operating Officer

Okay Ray. Okay, let me start with the first one which is the EPCm contract for a major international client. It's a grassroots petrochemical complex in South East Asia. These are reimbursable contracts, we are already adding our exact contract to the firm of the FEED for the utilities and the infrastructure and we don't know [indiscernible] full EPCm with foreign degree infrastructure something for the process unit.

The second one is an oil and gas but the FEED for an oil and gas facility expansion is not just what we have done already before the [ph] FEED and really the additional scope which has been worthy for us.

The grassroots defeat [ph] for the grassroots [indiscernible] has been press released [indiscernible]. The refinery expansion in South America, we are already adding our answer -- pre-contract for pre-FEED activities and we rolled over into a full fleet plus early procurement of long deducts [ph]. This again is a reimbursable product.

A new facility for a major international pharma client in Europe, we already added in our ends a contract to complete the basic design and to -- for -- to endorse the basic design, and we competitively bid for the EPCm and we were successful.

Now this is a combination of lumpsum services plus the reimbursable portion.

The refinery upgrade in Europe for a major international company, we had... we just completed the feed and we rolled over into EPCM, again reimbursable contract. Chemical plant revamp in Europe; this is a FEED, it's a lumpsum service and the contract already provides for rollover into full EPCM.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you Umberto. In terms of backlog in Foster Wheeler Scope in E&C, our Q2 was up 26% versus the year ago quarter and as I previously mentioned, we're tracking a number of large perspective bookings in the second half of '08 to support our earnings growth expectation in E&C in 2009.

Turning now to page... or to slide 8, GPG, new orders in backlog. Our new orders as measured in Foster Wheeler Scope, Q2 was below our 2007 average quarter due to delays on some North American prospects. We are aiming to offset such delays by booking additional contracts outside of North America where we have long had a very strong presence and by pursuing other prospects alternatively in North America.

In July, our contract value of new orders booked in GPG was more than double the average monthly contract value during the first six months of the year and some specific examples that benefited us in July I'm going to turn to Gary Nedelka to discuss. Gary?

Gary Nedelka - President and Chief Executive Officer, Foster Wheeler North America

Thank you Ray. As you indicated, the recently released contracts in July include an 84 megawatt thermal CFB in Sweden that will burn a refuse-derived fuel therefore being a waste energy plant.

We also secured and awarded in Korea for Hanwa Engineering and Construction Corporation for two 50 megawatt CFB plants. And finally in Argentina, we've secured an order for two 120 megawatt electric CFBs burning a local coal in that country.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you Gary. In terms of backlog in Foster Wheeler Scope in GPG, Q2 was up 10% versus the year ago level, existing backlog as we enter the second half of the year is expected to support what we expect to be all time record EBITDA generation in GPG.

Moving on to slide 9. In terms of consolidated new orders in Foster Wheeler Scope what you see here in both graphs for both Global Engineering & Construction and Global Power is the data that supports the assertions made on the previous page and what I will remind you of in bold of the bottom is both these business groups had strong bookings in July of '08.

Turning to slide 10. The backlog in terms of Foster Wheeler Scope that those bookings lead us to you see the data below for both Engineering and Construction and Global Power and I will remind you that both those business groups built backlog in July of 2008.

Turning to slide 11; the results in terms of cash with regard to our second quarter performance, we had all time record cash position. Our cash increased 10% from our Q1 of '08 period and 23% from Q4 of 2007.

If I turn to slide 12, Q2 2008 key put takeaways. First, Foster Wheeler is on track for record setting income in 2008 with record level of performance in each business group.

In our global E&C group, demand and serve markets continues to be very robust. We expect to have very strong bookings in the second half of 2008. We expect EBITDA and scope margins for full year 2008 to be in the range of 25% to 27%. Capacity growth will continue in the business, and we intend to build a base for earnings growth in that group in 2009.

Turning to our GPG group; they are currently benefiting from what has been strong global demand and we expect to generate record EBITDA for GPG in 2008. We expect EBITDA scope margins for full year 2008 to be materially above those that we enjoyed in 2007.

As has been previously mentioned, we are aiming to offset delays in North American prospects that so far had been primarily regulatory driven by continuing to book contracts in other parts of the world and by pursuing alternative opportunities in North America. The fuel flexibility of the CFB continues to provide a significant competitor advantage especially for customers using biomass and other opportunity fuels.

Our EBITDA growth in 2009 in GPG will depend on how the North American market develops, and our continued success on booking contracts outside North America.

Turning to slide 13; no doubt a number of you who have seen an additional press release that we issued this morning announcing my notification to the Board of Directors that I am planning to retire. I would like to set the context for and explain further that press release and the actions planned at the Company.

First of all this is a normal retirement. This is something that I have been contemplating personally for some period of time. It's something that I've been discussing with my Board and it's something that we have been planning for me personally and for the benefit of the business. The Board has been very active with me and other members of senior leadership in the development of a succession plan so that we can keep the best interest of the company and the management team sound as we go through this transition.

I am under contract until August of '09, but I have stressed to the Board and to the management team that I've got complete flexibility to work with the Board and my successor to complete a robust succession.

The CEO practice leader at Heidrick & Struggles in New York is leading the external search. They are prepared to go to the market actively today and are fully prepared to do so and we're very, very hopeful that this search period can be very quick and that my successor can be named in a relatively short period of time.

As we go through this transition, I'll just remind everyone that we have an exceptionally strong President and COO in Umberto Della Sala who earlier this year signed an employment agreement that has him under contract with Foster Wheeler through the year 2011.

Umberto has indicated to the Board that his intention is to remain in that position and I will remind everyone that all operations of the company report directly to Umberto.

I'll also remind you that Foster Wheeler has in place an exceptionally strong management team, all key commercial and operational management in the subsidiaries are long-term Foster Wheeler employees.

The fundamentals are unchanged. We have a strong Board of Directors, we've added a number of very strong people to our Board over the last 18 months, and I believe that our Board is functioning today at its highest level. We have a strong and experienced management team in place as I've mentioned, we have strong business conditions and we expect very strong performance out of our businesses in '08 and are building for continued earnings growth in '09. And finally, it's going to be business as usual here at Foster Wheeler post this announcement, and I expect to continue leading this company in the same focused, intense and high performing manner that we've done over the last number of years until my successor is named and until a very robust transition takes place.

At this point, we will be happy to entertain any questions.

Question And Answer

Operator

[Operator Instructions]. Your first question is coming from Andy Kaplowitz of Lehman Brothers.

Andrew Kaplowitz - Lehman Brothers

Good morning guys, nice quarter.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Good morning Andy.

Andrew Kaplowitz - Lehman Brothers

Just looking at your E&C guidance the Scope Margin of 25 to 27%, Ray you said in the past and then you said it today that there wasn't really anything unusual on these numbers in the E&C in terms of incentives payments. But in the second half of the year we've got a couple of major projects ramping up and maybe there is the potential for more sort of one incentive payment.

And was that a big project sort of ramping down to. And so when I look at the 27% margin approximately that you booked in the first half of this year, it seems like the guidance you're giving us is relatively conservative. Is that true, is there anything else that we should think about?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Andy, I would turn to Franco Baseotto to speak to that question.

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

Andy, I think the guidance takes into consideration the fact that with particular reference to the incentives, our earnings have in fact having really based on the probability of assessments that is... that does not allow us to make leaner accrues [ph] of those incentives. And it is through some of those projects are going to ramp up in the second half of the year but they are going now well into execution in `09. So I think our guidance is centered in that we have taken a reasonable look at our portfolio, expected performance in terms of execution and we think we can sustain this high margin in the second half of the year.

Andrew Kaplowitz - Lehman Brothers

Great. Ray this feels a lot like last year at this time in the sense that you had a couple of big prospects last year that came to fruition. How confident are you in these big projects? It looks like you have got a couple of them in July already. It's hard to tell exactly the size of the ones that you listed. But in general there are a bunch of big ones out there. So I guess, what does the landscape look like, have you seen any slippage in these prospects at all in terms of... maybe you expected them in July and maybe they are coming four months later. What does the landscape look like?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Let's... let me take the question Andy separately by business group, because I think the story is different, business group to business group. As has been the case now for a couple of years E&C is benefiting from a very, very robust market and quite frankly, our growth has been and continues to be constrained by how rapidly we can assimilate the contracts into the existing production system that we've got and meet or exceed client expectations.

So E&C... the E&C markets continue to be very, very strong. We had a very strong July as was mentioned. I would not necessarily call most of those awards large awards. I will say this but that those awards were strategically important for the various reasons that Umberto mentioned. But I wouldn't think of those as on the larger types of projects.

Now in terms of how confident are we that we're going to book the second half, we never want to take that process for granted but I think we believe there's a very high profitability, we have a very strong second half in E&C which sets a stage for continued earnings growth in E&C in '09.

Turning to GPG. We've... our first half has not been as strong as we had hoped it would be and it's primarily due to delays in North America and I'll repeat, delays not cancellations. And delays primarily because of regulatory issues that clients believe they will work through and eventually get the prospects released. Now, so this becomes a timing issue not a market demand issue. And what Gary and the others have been attempting to do is to pursue alternative prospects to fill the gap so that this does not become an issue for us in terms of the earnings of the business.

Now they have been able to that successfully in July. The degree to which the team is able to continue to do that will determine the base we had in place for '09 and specifically the degree to which GPG can affect earnings growth in '09 versus '08. So the situation in two businesses is I would say materially different but as much as we never want to take the business winning process for granted, I think we feel better about it today than we ever have.

Andrew Kaplowitz - Lehman Brothers

Okay Ray, one more question if I could Ray on acquisitions.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Yes.

Andrew Kaplowitz - Lehman Brothers

I mean you've talk about acquisitions, potential acquisitions for a while now, you are sitting on a nice chunk of cash. What's out there, I mean it seems like maybe valuations are coming down a little bit so maybe there's more interesting things to go after and at what point do you say, well it's too difficult that the targets want too much money, I would like to do some share repurchases or something else?

Raymond J. Milchovich - Chairman and Chief Executive Officer

We're very active, but I am not satisfied that we've been as effective here as I would like us to be. But I'll repeat we are not going to overpay, we are not going to make an acquisition that is... that we can't see the bright line to appreciate the earnings on. And we're not going to get deal fever, that's just not the way we are.

Now at some point obviously as cash builds, we got to consider alternatives for that cash. We've obviously not done that so far, but as we build cash and not use the cash for acquisitions, obviously it's incumbent upon us to consider alternatives. We will do that over the next four quarters or so. But I'm also hopeful that given the level of activity and we're active and we're currently in discussions with a number of potential targets, I'm also very hopeful that we're going to be able to come to terms on targets and close what could be very strategically appealing acquisitions as well. So I think over the next four quarters we'll see how that materializes.

Andrew Kaplowitz - Lehman Brothers

Great, thank you very much. I'll get back in queue.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thanks Andy.

Operator

Thank you. Your next question is coming from Chris Hussey of Goldman Sachs.

Chris Hussey - Goldman Sachs

Hi, good morning guys

Raymond J. Milchovich - Chairman and Chief Executive Officer

Morning, Chris.

Chris Hussey - Goldman Sachs

Ray, congratulations on starting the next step of your life.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you. I appreciate that.

Chris Hussey - Goldman Sachs

A couple of questions, I'll just start real quickly on the M&A question. Given the transition you guys are through from the management standpoint, would you buy off of a large transaction before you found somebody to take your place?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Absolutely. I discussed this with my Board, I discussed this with my management team and I am committed to them that we will miss a beat to the transition. I'll repeat what I said, when I announced this, I am not going anywhere.

I am going to retire. I am going to... I mean I've been living right here in New Jersey. I've got nothing more important to do business-wise than support this team and this Board through the transition and quite frankly if an opportunity came about Chris that was company changing and was good for this company, we'll figure out a way to get that done.

I am not going to have this team or this company or this Board be disadvantaged because we're in a leadership transition. My objective is to make this transparent. I'll remind everybody on the call that I still hold a very significant amount of equity in this company. I am very, very motivated to see this company move forward.

Chris Hussey - Goldman Sachs

Okay that started off great. Other question around LNG, there's been a lot of interpretation in the market over the last four, five days around the natural gas market with natural gas prices dropping; so particularly in the United States, what're you guys hearing from your customers in the LNG side on the other side of the road?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Quite frankly this... our clients could not be more bullish. Our issue in LNG is having enough capacity bandwidth to meet the demand. We're very active in the market and frankly have prospects in our flow that would cause our backlog in LNG liquefaction, Chris, to be much higher than it is currently.

So, we don't see. And I am very close to this market, I might have forgotten I am on my way to Australia, Friday night to visit my team at Woodside and I'll be with the Woodside team and the senior management there, next Monday and Tuesday. So we don't see that, we see a very bullish market and quite frankly it's probably the most bullish segment we see right now.

Chris Hussey - Goldman Sachs

No obviously, you guys are seeing no delays. There is that... is that one of the areas where the big prospects in the second half of `08?

Raymond J. Milchovich - Chairman and Chief Executive Officer

It is, yes.

Chris Hussey - Goldman Sachs

And then along those lines, on the energy price. Investors have becomes concerned about as oil prices drop, that we're going through levels at which projects start getting delayed and cancelled, et cetera. What're you guys seeing from that prospect in terms of maybe your delay, choker [ph] market or other prospects, how many projects are you guys building that requires $120 oil, what are the levels of oil you feel that projects would start to get delayed or cancelled?

Raymond J. Milchovich - Chairman and Chief Executive Officer

I mean, oil prices dropping I mean to the $120 level, is almost a joke when it comes to the demand for these prospects. I mean I'll repeat what I've said consistently over the last couple of years. We deal with a very sophisticated group of clients. These projects were never requiring oil prices to be anywhere near 120 or higher to be justified. Our clients are mindful of the slot price of oil, but these prospects are driven by what they think are fundamentals of supply-demand. And we've seen absolutely no impact of the fluctuation in oil prices on the demand for our services or the prospects that we are currently tracking.

Chris Hussey - Goldman Sachs

When you look across that, what do you think is the highest priced oil for marginal product. In other words, is the marginal product that makes sense that's being built right now requires $90 oil or do you think that the highest price is like $80, what would you say?

Raymond J. Milchovich - Chairman and Chief Executive Officer

The answer is I really don't know, but I think it's well under a 100. Well under a100.

Chris Hussey - Goldman Sachs

Thanks very much guys.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you Chris.

Operator

Thank you. Your next question is coming from Michael Dudas of Jeffries.

Michael Dudas - Jefferies & Company, Inc.

Hi. Good morning gentlemen.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Good morning.

Michael Dudas - Jefferies & Company, Inc.

Ray... well two questions, I think one for Gary. How quickly can the sales focus switch from looking at North American CFB opportunities to internationally? And just on a trend line basis over the next five years given the regulatory uncertainty in U.S., is that what you think marginal growth in orders of business will come from in the GPG business?

Raymond J. Milchovich - Chairman and Chief Executive Officer

No, let me first give an overall comment, and then I'm going to ask Garry to be more specific. First of all --

Michael Dudas - Jefferies & Company, Inc.

Thank you.

Raymond J. Milchovich - Chairman and Chief Executive Officer

...There's nothing dramatic we need to do to shift focus from North America to international because we're organized such that we have a global sales marketing group supporting the GPG business and because prospects can delay or accelerate, we all... we always have, if you will, a funnel full of prospects that we're monitoring throughout the world. And then what we do is we do is we do a probabilistic analysis of each of those prospects to try to judge which ones we think will book at certain dates so that we can keep in... keep our production capacity fully booked to support the earnings expectations that we have.

So there's no dramatic thing we have to do to shift focus; it's just really pursuing other prospects elsewhere to get them queued ahead of prospects that we thought we're going to proceed because I'll just remind you we've been capacity constrained in that book... in that business for some time. So we've actually had to hold some clients off while we just didn't have the capacity to serve the demand.

So there's no dramatic thing we have to do to shift focus. We are just... we are trying to pursue others to get them timed such that our production capacity is efficiently used. And Gary let me turn to you specifically and deal with anything that... any specific tactics that you see.

Gary Nedelka - President and Chief Executive Officer, Foster Wheeler North America

Sure. Certainly the... some of the regulatory uncertainties in the United States are well known to everyone. But as we look at the other markets in the world, there's a lot more clear relationship between GDP growth and the demand for our products overseas whether it's in Europe, Asia or in South America.

So those markets don't necessarily suffer from what we've seen in the Unites States over the last few months. Further to that as we look at the different prospects around the world, we've got products and technologies that are a lot more varied than other competitors would have in the space, so that we can take advantage of biomass opportunities, waste coal opportunities very difficult for fuels to burn. And so that's provided us a lot of access and a lot of opportunities in markets that are pretty geographically diverse.

And as Ray said, because we have large operating entities in all the different continents, its allowed us to make this shift without having to be a radical change in our operations or our focus.

Michael Dudas - Jefferies & Company, Inc.

I appreciate those answers. Thank you. My follow up question's for Ray. Ray as the Board and you look for your replacement, could you maybe share your thoughts of what potential next leader this company will need to bring to the table. Do you think it needs to be from the inside the industry? Certainly you came from outside it. What do you think at the stage of Foster Wheeler's evolution currently is going to be required for the next CEO?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Well I mean... let's just to give you my view, obviously the... this is an issue for the Board to decide, but I was bought in here in 2001 to turn this company around. This company was on the brink of bankruptcy. Not only did we do that, this management team took a company on the brink of bankruptcy and in my opinion turned it into a company today that can compete with anybody straight up in his face. So I think it speaks to the quality of the management inside the company.

I would also say that the challenges ahead of this company strategically are obviously different than those challenges that were in front of me and this team in 2001 and 2002. So I would say the challenges in front of my successor are the strategic optimization of a very, very good strong company that has a leadership position in a number of the areas in which it serves. I would also say it's a leader that needs to be able to work collaboratively and effectively with what is a very sound, very capable and very confident management team.

The good news is I believe my Board is thoroughly understanding of that, and I think they... I am very highly confident that they will pursue a leader that can do just that.

So, I believe that this is a renewal opportunity for the senior leadership of this company that can take what we've all built on and take the company to the next level.

Michael Dudas - Jefferies & Company, Inc.

Thank you for your thoughts Ray.

Operator

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

Barry Bannister - Stifel Nicolaus

Ray, why don't you handicap the odds of finding a successor CEO from outside the E&C industry versus inside, yourself and so far an execution the CEO at KBR came from outside the industry and done very well. So how restrictive are you on your search inside and outside in foreign and domestic?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Well first of all Barry let me repeat what I said which is... which I think is critical understanding here. This... I can give you my opinion but this... this search will be run by my board. So my board really needs to answer the question. I'm going to give you my view.

My view is I think the company has the good fortune; they have the option to go outside the industry or go inside the industry. The reason is because of the management team inside, the reason is because they've got Umberto Della Sala who is a veteran of this industry, who has all the operations reporting to him and quite frankly as long as the Umberto is running the operations, the trains at Foster Wheeler will run on time.

And so my view is the Board has the capability to go outside the industry is in fact they think a person from outside brings the kinds of skills, the kinds of strategic capability that the company needs to go to the next level. Because in large part I've been able to be very successful here, because of the talent and the knowledge and the experience that I inherited inside the business. But that's my view. The Board has to decide what the value is of staying inside and going outside, but my view is they have a luxury of being able to do both.

Barry Bannister - Stifel Nicolaus

Okay, great. And then when I look back on how the stock paused after a big gain in first quarter '06 and the scope backlog had an interim peak two quarters later. And then the stock paused again in fourth quarter '07 and a quarter later the scope backlog had a pause. But we're only three years into a cycle after a long understanding, so we can overlook cyclical worries. One thing though that I don't have a good handle on is the financing issue. We just don't have a lot of visibility into the national oil companies attempts to finance projects such as Saudi Refining and Petrochemical projects, can you give us some flavor on what you are hearing on financing side irrespective of recent movements in commodity prices, and how they may affect some of your big project pipeline?

Raymond J. Milchovich - Chairman and Chief Executive Officer

First of all Barry, let me deal you parts of the question, because I think it's a very timely question. First of all, we are seeing absolutely no financing constraints for these projects to support the projects moving forward. I can't point to one example and Umberto is sitting here shaking his head, I can't think of one example where financing has been a constraint for any one of these clients in any prospect that we're pursuing, number one. Number two; my single biggest frustration in running this company are these stock priced positives that you referred to just a moment ago. Because I think they are hyper sensitive reactions unsupported by fundamentals and what we have said to all of you consistently is we run this company for the long-term and we'll continue to do that because that's the way we put these guys in environment to deliver the kind of performance that they delivered in '06, '07 and year-to-date in '08.

And I've said consistently, we are willing the backlog required for material earnings growth in this business. What I am not going to do is push these commercial guys, they have a big bookings quarter, I'll never do that because it's a wrong thing to do. So my view is, you look at the numbers we're putting up this year. We're going to affect material earnings growth over what was a fantastic '07 and we're building the position for earnings growth in '09 and my view is these movements in the stock are hypersensitive and they are not based... they are not supported by anything taking place inside the company. All I can hope for is that we continue to deliver the kind of earnings growth that we've put up so far in the first half of '08, we've build the base for '09 and the efficiency of the market recognizes that and rewards the share price as a result of that.

Barry Bannister - Stifel Nicolaus

Thanks Greg, and Franco just last clean up question. Tax rate in '08 at the core obviously the asbestos gain was not a taxable item. So the tax rate was a little higher than the reported rate in 2Q. So what can we look for the total core rate to be excluding one time items for '08?

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

I think Barry, excluding discreet item we should be looking at them in effective tax rate for '08, substantially similar in line with the first half so in the low 20s.

Barry Bannister - Stifel Nicolaus

Okay, so that's an improvement from the mid 20s.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Yes.

Barry Bannister - Stifel Nicolaus

Thank you, very much.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thanks Barry.

Operator

Thank you. Your next question is coming from Brian Chin of Citigroup.

Brian Chin - Citigroup

Actually my questions were asked and answered. Thank you.

Operator

Thank you. Your next question is coming from Kent Green of Boston American.

Kent Green - Boston American

Yes, sure. My question pertains to the Global Power Group, the best take at North American orders. It appears with all of these maybe a size 150 different carbon credit bills and all of that that there are going to be considerable delays in this business. Could you fill us in on flexibility of switching to natural gas with this cheaper natural gas prices and also address the issue of possible LNG export orders, yet the slow price persists?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Okay. I can certainly address the elasticity between natural gas and let's say solid fuel plants and what we're seeing is in solid fuel you are correct. There's a lot of discussions in Washington regarding what form or shape potential carbon legislation would take. But it's our view that whatever legislation would be enacted, would not be a short-term or near-term law that would affect the fundamentals of the business immediately. So we see that that solid fuel being coal based or even parts of the biomass based would continue to play an important part in the US energy mix.

The question will come when does Washington or the local states enact legislation that allow air permit and operating permits to be issued just to the plants that are on the docket. The ability to take natural gas and into the concrete at the levels that will be required to displace the demand that's now playing for coal, at this point unless there's significant amounts of LNG built and significant amount of pipeline built, it's just not going to occur all that quickly. And so until such time as that would occur we still look for solid fuel to play a major part in the US energy future.

Kent Green - Boston American

For the second part of the question it was about exporting natural gas because the Shale play is supposedly are going to have a huge glut of natural gas, so maybe you don't have to import LNG and that's what's causing a lot of consternation in the natural gas markets from a BTU equipment context compared with oil primarily, coal is still cheaper, of course.

So what about exporting LNG and building LNG plants as honoring the planet of one of the biggest natural gas producers has started to look at.

Raymond J. Milchovich - Chairman and Chief Executive Officer

That, I have to apologize. We are just not prepared to respond to that segment of the question, thank you.

Operator

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

John Rogers - D. A. Davidson & Co.

Hi, good morning.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Morning, John.

John Rogers - D. A. Davidson & Co.

And Ray congratulations as well.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thanks John.

John Rogers - D. A. Davidson & Co.

What I was concerned... could you talk a little bit about what you're seeing in terms of the cost side and the specific given your diverse geographic operations if you're looking at investing more in the US versus Europe and how you'd think of that at this kind of stage given your prospect list, relative currency?

Raymond J. Milchovich - Chairman and Chief Executive Officer

The projects cost, any specific product line, John, are just overall.

John Rogers - D. A. Davidson & Co.

I'm doing more on the E&C side, especially I mean you booked some work, lot of work outside of US of late including Russia, Australia, and were you looking at doing that work and your advantage, disadvantage in some of the projects that are coming down the pipeline.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Okay, well let me just say this is John. I mean obviously project costs are up across the Board and I mean we know that, clients know that and clients don't necessarily like that but I think what clients are mindful of, it is that the commodity prices that those projects support are also up. So I mean let's take an example, the cost of building an LNG liquefaction train is clearly up from where it has been. But the commodity pricing enjoyed by the client once the train is on and the benefits that accrue from that are clearly higher and so therefore I think the economic regime supporting the project is clear.

We also see clients continually very interested in the schedule of these projects, which says to me that they are very anxious for the commodity flow, the company's projects to begin coming out of the projects as quickly as possible. So yes costs are up, but so is the economic regime of the project up because of the commodity prices supporting the prospect.

So we... I can't think of an example, Umberto, where we've got a project that has not proceeded because, if you will John, the client gets sticker shock with regard to the cost of the project. I can't think of one.

John Rogers - D. A. Davidson & Co.

And what about on the engineering costs? I mean, I'm getting more specifically... what are you seeing from competitors either coming out of Asia or even North America versus your European engineering centers. Are you advantaged or disadvantaged there?

Raymond J. Milchovich - Chairman and Chief Executive Officer

Well I mean, I think in terms of the cost of our system, I think one should look at the margins. I mean my view is I personally believe that we've got close to or clearly industry leading margin for what we deliver. Assuming we're bidding competitively to win this work and we are, I would say that that speaks volumes about the cost of our delivery system and the efficiency with which these projects are delivered. Because we're competing for these awards, we're wining them, and when you look at the margins, I think the margins speak to the way we approach the cost of the delivery system.

When you look at the engineering content that we bring out of India and China and blend with a high cost Central European systems, when you look at the module yard that we've mobilized in Thailand to support the Pluto project in Karratha, Australia and the cost advantages enjoyed by the module yard in Thailand to do that, we attempt to be as creative as we can to generate value for the client in the way of cost effectiveness. We... when you look at our power business and the amount of engineering we blended in Shanghai with our North American centre to create value for the client, and when you look at the amount of procurement that we've delivered from China on those projects and the delta that that's created in cost and the benefits that accrue the decline over those, I think we've been mindful of that. I mean Umberto... I mean if you --

Umberto Della Sala - President and Chief Operating Officer

Yes, absolutely I believe that when you are talking about the engineering procession. We have a large operating centers almost in every location of the world and we always try to combine the offices to be able to offer the most competitive solution. And Ray mentioned India, China we have other low cost of super incentives, but what we do is as I said, we try to... we have a capacity and resources in U.S. which enjoys competitive advantage of the weakness of the dollar.

So we always combine the offices to be able to be competitive, and we've been successful so far.

John Rogers - D. A. Davidson & Co.

Okay. Thank you.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you John.

Operator

Thank you. We have a follow up question coming from Andy Kaplowitz of Lehman Brothers

Andrew Kaplowitz - Lehman Brothers

Ray, one thing that I find a little difficult is the visibility in some of the emerging markets outside of let's say China. When I look at you guys you obviously have a number of opportunities in places like Vietnam and South America, Russia and India. So if can you give us some more color on the activity in those areas and maybe how it compares with last year at this time and sort of what you see going forward?

Raymond J. Milchovich - Chairman and Chief Executive Officer

I'll give you just some overview comments, but I think Umberto and Gary are closer to this than I am and I'll ask them to be a little more specific. But Andy I think there's... for Foster Wheeler there is a material amount of activity both in prospect flow as well as awards one in Latin America, India, Russia in addition to China in '08 versus '07 and prior. So I mean we're more active and we see more opportunities in those areas. Now is that because our activity has increased and we're covering them better or is it because of economic activity creating a pick up, I think it's probably a combination of both, but let me ask Umberto and Gary to speak more specifically. Umberto?

Umberto Della Sala - President and Chief Operating Officer

Yes talking about E&C. I agree with you Ray that these are the major changes. And now we start seeing also some activity in North Africa and West Africa which for a while has been very quite. So these are the major changes that we see in engineering and construction. And as far as Europe, and we still see investment but mainly have not major investments, and just upgrading of refineries, the chemical plants, the big ones, the big projects are still in Paris, we believe and Latin America is picking up very well.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Gary?

Gary Nedelka - President and Chief Executive Officer, Foster Wheeler North America

I think on the power side if we look at Europe, we see within Western Europe, a rising demand for the use of biomass and alternative fuels of which fit our product line quite well. And moving over in the Eastern Europe, we're seeing larger blocks of power there as those economies open up and begin to grow. So we've secured major awards in Poland and then starting a super critical CFE into Russia as well.

So I think the growing economy is Eastern Europe have been good for us. If we look at Asia, Asia is certainly shaken off the doldrums from the '97 financial crises. And you mentioned Vietnam, Vietnam is an interesting market for us because of its high... higher reserves of coal and then in particular after-sight coal which is difficult to burn, that fits our product line very well.

As we go into South America, the commodities that come out of South America and that avoids a lot of those economies so that the power growth is following their GDP growth, and again it's an interesting mix of local difficult-to-burn coals which we specialized in and biomass as well.

So those three markets of South East Asia growing just in general economy, South America growing to support the industry and exports from there and Eastern Europe's growth has been good for us.

Raymond J. Milchovich - Chairman and Chief Executive Officer

Thank you Gary. Recognizing that there are no additional questions, let me just summarize our messages.

We've had an excellent quarter in Q2 and we've also enjoyed an excellent first half. I will remind you that we are looking at a very strong second half of '08 and we expect '08 to obviously be an all time recorded year delivering meaningful earnings growth off of the '07 base that... from which we started.

We're currently building a base for '09 earnings growth and as we mentioned on the call, I think we know what we need to do to build that base and we will be reporting to you more about that when we close Q3. And in terms of the leadership transition that we announced this morning, I am committed to my Board and my team that the leadership transition at Foster Wheeler will be seamless, and I'll do whatever it takes to make that happen. And what I would remind you of is until that occurs, its business as usual here at Foster Wheeler.

Thank you very much for joining us.

Operator

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

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