First-Quarter 2004 Conference Call Script
May 5, 2004
Operator:
Ladies and gentlemen, welcome to the Foster Wheeler Ltd. first-quarter earnings conference call.
(Operator instructions to participants.)
I would now like to turn the call over to Richard Tauberman, who leads the company's communications team. Please begin, sir.
Richard Tauberman:
Thank you, operator.
Good morning everyone, and thank you for joining us today. Our news release announcing our first-quarter 2004 results was issued this morning. We hope that you have had an opportunity to see it. The news release has also been posted to our Web site atwww.fwc.com.
Before turning to the discussion of our financial results, let me 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 and quarterly reports filed with the SEC.
As you are probably aware, Foster Wheeler has filed documents with the Securities and Exchange Commission related to the company's proposed debt exchanges and we continue to be in a "quiet period." On the advice of counsel, we will not be opening up the call to questions. We intend to resume our regular Q&A sessions at the appropriate time. We're hoping that is as early as next quarter.
I'd like to introduce Ray Milchovich, Chairman, President and CEO of the company and John La Duc, Executive Vice President and CFO, who will provide commentary on the quarter.
Ray Milchovich:
Thank you, Richard, good morning everyone and thank you for joining us.
First off I want to say that I appreciate your continued understanding that due to our ongoing quiet period and the advice of counsel, our conference call again this quarter will not have the normal question and answer session. We have attempted in our prepared remarks to answer some of the questions that you might have asked.
Our top priority right now is to complete our equity for debt exchange. We have announced the structure of our proposed offer and we expect to begin soliciting security holders in the next two weeks. Assuming completion of the exchange, our debt would be reduced by nearly $500 million and interest expense would decline by approximately $30 million per year. The debt reduction, together with the sale of new notes to retire our funded bank debt, would eliminate all material scheduled corporate debt maturities until 2011. Our financial position would be significantly improved and we would have enhanced financial flexibility—allowing us to better support our global operating companies. Our goal is to complete the exchange by mid-June.
With the exception of one contract being managed by our European power unit, I am very pleased by the performance and EBITDA delivered by our operating companies in the first quarter, which generally met our expectations and our business plan. This contract is one of the last in our portfolio that was not subject to the rigorous proposal review and corporate wide risk management process that we instituted in early 2002.
A top priority for this year is to increase our backlog with bookings of high quality business. We are seeing increased activity in the E&C marketplace and during the quarter, orders for our current E&C businesses were the highest they have been in the last two years and all E&C businesses experienced year-over-year improvement in bookings. The power group has achieved a high level of success in closing projects that they bid, but the market remains depressed with a low level of activity. After a period of explosive growth in the European power business, orders have slowed. Our business has distinguished itself as a leader in the markets we serve and we continue to be well positioned.
I believe the successful completion of our recapitalization will enhance client confidence and allow us to take advantage of additional opportunities and increase our level of bookings across all of our businesses.
Some notable orders booked during the quarter:
Our domestic liquidity, defined as cash and unused credit line availability, strengthened in the quarter, and is forecast to remain sufficient throughout 2004.
Foster Wheeler has a long history of delivering exceptional quality, service and technology to a sophisticated client base worldwide. The technical excellence for which Foster Wheeler has been known for years combined with focused, lean, and knowledgeable project operations capability that we are developing, enable us to actively compete for worldwide business in the markets we serve. We believe we have built the foundation for successful future performance with the operational initiatives we have launched, combined with a significantly improved balance sheet that we are hopeful will soon be in place with the successful completion of our equity for debt exchange.
I'd now like to introduce John La Duc, our new CFO. We are very fortunate to have the benefit of John's experience and knowledge on our Foster Wheeler team. John.
John La Duc:
Thank you, Ray. This is my first earnings call with Foster Wheeler and I am very pleased to be here. Foster Wheeler has many opportunities to grow profitably and I'm looking forward to the completion of the restructuring and working with the management team to move the company forward and taking advantage of the many opportunities available to us.
Looking at second quarter results, new orders booked during the quarter were $630 million, compared with $476 million in the first quarter of last year.
On a segment basis, in our Engineering & Construction Group, new orders booked during the quarter were $474 million up substantially from $263 million last year. This was due to a broad range of oil and gas and pharmaceutical orders across the geographic markets we serve led the business booked in the quarter. As a result of higher expectations for world economic growth, in particular in the U.S. and Asia, and the resulting general boost in confidence of oil, gas and chemical companies, we are seeing some of the highest activity levels in the E&C market for some time.
In our Energy Group, new orders booked during the first quarter were $156 million down from $210 million of last year. Business remains challenging in this regard, but we continue to book orders of strategic significance.
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Turning to backlog, consolidated backlog was $2.1 billion at the end of the quarter, compared with $3.5 billion at the end of the first quarter of 2003, and down slightly from backlog of $2.3 billion at year-end 2003 but essentially flat with the year end 2003 number. The E&C Group's backlog was $1.3 billion, down from $2.2 billion at the end of last year's first quarter and flat with year-end backlog. The Energy Group's backlog was $813 million, compared with $1.3 billion at the end of last year's first quarter and down slightly from year-end. Our backlog is not as high as we have seen in recent years, reflecting challenging market conditions we face and the high levels of operating revenues in 2003, but we are still gaining quality business. However, we are not yet reaching the level of bookings that we would like to see.
In order for our backlog to increase, we need our order levels to consistently exceed our revenues. First quarter we booked 88 percent of the revenue that we consumed during the quarter, still below the level needed to grow the backlog but this was our best quarter in the last six in this respect. After the equity for debt exchange is successfully completed, increasing the level of quality bookings and rebuilding our backlog is our number one priority for the year and we are encouraged by the opportunity we have to do so.
We recognize that the only way to win business in this competitive marketplace is to deliver service and equipment that add value to our clients at cost-competitive prices. In addition, our cost-reduction efforts and more disciplined project execution have resulted in better financial performance on most of our current contracts. We expect the cost reductions to increase margins as we move forward. We also expect the enhancements to our project execution capabilities and to our financial systems will allow us to pursue more of the largest component of our E&C target market, namely, lump-sum, turnkey projects. We expect that the completion of the equity for debt exchange, and the resulting improvement in our financial position, will provide better support for our operating companies as they compete for orders in their markets.
Turning to revenues, for the first quarter of 2004, we reported consolidated revenues of $702 million compared with $811 million last year. Consolidated EBITDA for the quarter was $43 million compared with $19 million last year. As many of you may have noted, there are a number of items worth noting this quarter. Included in the quarter was a non-cash asbestos gain of $11.7 million, a charge of $24.6 million for the re-evaluation of the profit estimate of one contract, and charges of $9.7 million for professional service expenses and severance benefits driven by our balance sheet and operational restructuring process. Assuming the successful closing of the equity for debt exchange offer, we would expect balance sheet and operational restructuring expenses to decline significantly in the second half of the year. Also included in the first quarter's results was a gain of $10.5 million on the sale of certain power project development rights in Italy. While the sale of the power project development rights is recorded as a one-time gain, the business in Italy has historically included development and sales of such project rights, and is continuing to actively develop other project rights that are expected to be offered for sale in the future.
On a segment basis, E&C Group revenues for the quarter were $420 million compared with $483 million in the first quarter of 2003. EBITDA for the Group was $33 million for the quarter, up substantially compared with $12 million last year. Last year's EBITDA included the $15.3 million gain on the sale of the assets of the environmental business, severance costs of $2.8 million and charges of $21.1 million for revisions to the estimates on the environmental contracts that were retained. Included in this quarter's EBITDA was the pre-tax gain of $10.5 million on the sale of the development rights on a project in Italy.
Turning to the Energy segment, Energy Group revenues for the first quarter were $270 million, compared with $326 million in 2004. EBITDA for the group in the first quarter was $17 million, compared with $31 million last year. Included in EBITDA for the quarter was the charge of $24.6 million for the re-evaluation of the profit estimate on a fixed price power contract in Europe. The impact of lower revenues was essentially offset by the favorable impact of cost reductions and better execution on projects in North America.
Coming back to asbestos, we recorded an asbestos gain of $11.7 million. During the quarter, we settled with additional asbestos insurance carriers resulting in the reversal of $11.7 million of a $68.1 million non-cash charge recorded in the fourth quarter of 2003. The company expects to settle with an additional insurance carrier during the second quarter, bringing the total amount of the 2003 charge to be reversed to $15 million, as expected.
During the quarter, we received 3,900 new asbestos claims and we resolved 3,280 claims. At the end of the quarter, we had approximately 171,480 claims pending, and that included 24,500 claims that have been placed on inactive dockets established for claimants who have alleged minimal or no impairment. Although the 24,500 claims are inactive, they are included in the projected liability on our balance sheet. During the quarter, asbestos indemnity and defense costs were approximately $23.9 million in the first quarter, all of which were covered by insurance proceeds.
We currently project that the company will not be required to fund any asbestos liabilities from its cash flow for at least six years. And we are continuing our strategy of settling with insurance carriers by monetizing policies or arranging
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coverage in place agreements. This strategy is designed to reduce future cash payments from the company to cover future asbestos liabilities.
Now I'd like to turn the call back to Ray for concluding remarks.
Ray Milchovich:
Thank you, John. Let me just quickly summarize the key messages for the quarter.
Richard Tauberman:
Thank you for your attention. We appreciate your participation today. As we mentioned at the beginning of the call, we will not be conducting our normal Q&A session and we appreciate your understanding. We look forward to speaking with you over the coming months. Thank you, and good-bye.
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