BWX Technologies Inc (BWXT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Babcock & Wilcox Company's Second Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the Company's prepared remarks, we will conduct a question-and-answer session and instructions will be given at that time.

I would now like to turn the call over to our host, Mr. Michael Dickerson, B&W's Vice President and Investment Relations Officer. Please go ahead.

Thank you, Shanelle, and good morning, everyone. Welcome to the Babcock & Wilcox Company's Second Quarter 2010 Earnings Conference Call. I'm Mike Dickerson, Vice President and Investor Relations Officer at B&W.

Joining me this morning are Brandon Bethards, B&W's President and Chief Executive Officer; Mary Pat Salomone, Chief Operating Officer; Mike Taff, Chief Financial Officer; and James Canafax, our General Counsel.

Many of you have already seen a copy of our press release from last night. For those of you that have not, it is available on first call and at our website at babcock.com.

I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of our press release. The Safe Harbor provision identifies risk factors that may cause the actual results to differ materially from the content of our forward-looking statements.

Our current Form 10 report and other periodic filings on file with the SEC provide further detail about the risk factors related to our business.

The format for today's call will, first, be some discussion by Brandon about our reported business segments and the current business environment. Second, Mike will provide financial details about the quarter. Finally, Brandon will conclude with some comments about the strategic focus of the Company, followed by a question-and-answer period.

Before we get started, I want to describe to you the basis of presentation of our results for the second quarter. As you may know, as of June 30, 2010, B&W was a wholly owned subsidiary of McDermott International Inc. with no public float of stock.

That changed during the third quarter, specifically on July 30, 2010, when shareholders of McDermott received one share of B&W for every two shares of McDermott they owned. Our [result] to report it on a basis consistent with that presented in the Form 10 filed with the SEC, which became effective July 8, 2010. That is, for the second quarter of 2010, we are reporting the Babcock & Wilcox operations of McDermott International.

This represents a combined reporting entity comprised of the assets and liabilities and managing and operating the Power Generation Systems and Government Operations segments of McDermott International.

Certain corporate and general and administrative expenses, including those related to executive management, tax, accounting, legal and treasury and certain employee benefits have been allocated based on the level of effort calculation.

For those wishing to do your own analysis of earnings per share, the number of shares issued on July 30, 2010, was approximately 116,225,000. With that, I will now turn the call over to Brandon.

Thank you, Mike, and good morning, everyone. First, let me begin by expressing how proud I am of the B&W and McDermott team for getting us through this transition period over the last eight months. It was just last week that Babcock & Wilcox began trading on the New York Stock Exchange under the symbol BWC. Today, we are trading with a market capitalization of approximately $2.7 billion.

To give you some perspective of the scale of our existing business, we have reported approximately $2.7 billion of trailing 12 months revenues and $243 million of operating income. Our backlog stood at approximately $4.4 billion at the end of the second quarter, and we employ roughly 13,000 people worldwide with an additional 10,000 at our consolidated joint venture operations.

I have been in this business with B&W for more than 36 years, first starting as a field service engineer in the 1970s and most recently as president and chief operating officer of the B&W Power Generation Group and then as CEO of the B&W entity that was consolidated under the MII organization and now as the CEO and member of the Board of Directors of the Babcock & Wilcox Company.

I would like to thank the Board for having the confidence in me and my team to manage this great business. The team I have assembled to take on responsibility of executing B&W strategy on behalf of our new shareholders is, I believe, second to none. You will get to meet many of them over time, and I am sure you will be as impressed with them as I am today.

I would like to introduce a few of those executives today; first, our Chief Operating Officer, Mary Pat Salomone. Mary Pat was formerly President of Marine Mechanical Corporation, which B&W acquired in 2007.

Over her last 28 years in the industry, Mary Pat has been involved in the manufacturer, precision, parts and support of the government's nuclear power programs as well as holding various strategic development and project management positions throughout her career in both nuclear and fossil power businesses. Mary Pat is a key member of our management team, and I am very pleased to have her serving our Company as COO.

Second is Mike Taff, our Chief Financial Officer, which many of you may know as the former CFO of McDermott International for the last several years. The challenges of the spend largely fell on Mike's plate over the last eight months.

During that period, he also found time to staff a new finance team and negotiate a new [capital] on lending agreement to put B&W on the right path to success coming right out of the gate. I'm very pleased that Mike has joined the B&W management team.

Finally, in the room with us this morning is James Canafax, our General Counsel who comes to us after serving at McDermott International for the last 10 years, most recently as Assistant General Counsel. James has a wealth of experience in our business as well as a background in international trade and finance.

Along with Mike Taff, James was instrumental in getting the B&W spend accomplished on schedule and on budget. He is a great asset to the team.

Now let me spend a few minutes describing B&W's current business. There are two primary lines of business that the Company operates and reports. These business segments are Power Generation Systems, which I will frequently refer to simply as Power, and Government Operations that I often simply refer to as Government.

Each business holds safety as the top priority. Our vision is to finish each and every day injury- and incident-free. The degree and precision our employees are required to maintain are stringent. Our employees must execute in conditions where there is no margin for error.

Many of our manufacturing processes can span a considerable length of time, some measured in years. In some cases, due to the complexities and the cost of our products, employees operate in an environment where any scrap rate above zero is unacceptable.

The level of precision achieved by our employees in their day-to-day operations in many of our manufacturing processes is unmatched in commercial applications. The materials in certain business lines are extraordinarily expensive.

Therefore, safety is a common denominator in helping us to execute in this complex manufacturing environment. A safe workplace is an effective, efficient and productive workplace. That philosophy begins with me and the Board and extends throughout the B&W organization.

As of the end of June, 2010, we have reported safety performance under one of our metrics as measured by total recordable incident rate, or TRIR, which is 17% below the prior year. We are running at a rate of nearly one-fourth of the normal US average industrial rate, quite an outstanding safety performance that we intend to continue.

Occupational and industrial safety is not only important for the wellbeing of our employees, but also for the success of our business performance. Equally important in these goals is safety related to the manufacture of transports, storage and security of the country's enriched uranium assets.

Perhaps even more important is the role that our safety performance plays in the area of national and global security, a key part of our government operations.

It is also important to note that in our operational excellence group we train and resource green belts, black belts and a number of other qualified individuals in the relentless pursuit of executional excellence and waste elimination.

We have many Lean Six Sigma projects active throughout the world at any one time. We are targeting hard savings of $15 million or more each year from this program. This is in addition to the millions that we have saved in prior years and passed onto our government customer in the form of oil operating costs of our M&O facilities. We are well on track to accomplishing that or better this year.

For those of you newer to our business, let me describe our segments in a bit more detail. The Power Generation Systems segment includes the design, engineering, manufacturing, supply, construction and maintenance of large utility and industrial Power Generation Systems.

This would include fossil-fired boilers, commercial and nuclear steam generators and MSSS components and environmental equipment and the associated aftermarket parts and services. Much of this business is recurring in nature or expected to grow as a result of more stringent environmental requirements that may be placed on electricity producers in the future.

Today, much of our business is focused in North America. We're depending on specific end-markets. We hold 25% to 50% market share and are generally a number one or number two market position in those markets.

Over the years, B&W has installed approximately 38% of the coal-fired boilers in North America. As you may know, coal-fired boilers produce 32% of electricity generated in the world and about 48% in the United States.

In the future, even with shifts in technology toward lower carbon sources of power, coal is expected to be a meaningful source of electricity according to the International Energy Agency and other industry advisory groups. We share that same expectation.

Our large installed customer base helps us provide a long-term recurring revenue stream as utilities seek to extend the life of their existing capacity, improve their plant availability and capacity factors, upgrade and improve the environmental technology employed at their facilities or simply build new capacity based on reliable proven technology.

It is from this recurring revenue that the Company harvests earnings and cash to re-employ back into the business in the form of research and development in the search of future high-growth revenue streams. We are focusing these investments in markets for clean energy solutions such as carbon capture, modular nuclear systems and renewable energy technology.

With more than 5,200 patents, B&W is a leader in advanced technologies to meet the growing demand for energy, including a portfolio of clean energy sources.

Now I'd like to turn to Government Operations. The Government Operations segment manufactures and supplies highly specialized mission-critical heavy components for US defense systems.

Additionally, B&W provides services, including uranium processing, environmental site restoration management and operations of government-owned facilities such as the Y-12 National Security Complex in Oakridge, Tennessee, the National Nuclear Security Administration's Pantex Plant outside Amarillo, Texas, the Department of Energy's strategic petroleum reserve or any number of science and nuclear energy laboratories, including the Los Alamos National Lab.

B&W has been in the non-stationary nuclear steam supply business for over 50 years. In the 1950s, B&W designed and fabricated components for the USS Nautilus, the world's first nuclear-powered submarine. I think it is fair to say that we have manufactured more nuclear steam supply systems than anyone in the world.

I should point out that backlog in this product line is booked on a rather conservative basis. While a replacement program may theoretically last for a decade or two, we follow the appropriations and budgeting cycle of the US government and only put into backlog the portion of the program that has been specifically appropriated.

For instance, you will notice the backlog in the Government segment is down at the end of the second quarter as expected. For those of you that have been following the business for some time and for those new to the business, this is part of the normal seasonality expected with Government Operations backlog due to the budget cycle of the US government.

Because of this, we would expect to burn through additional backlog during the third quarter and rebuild backlog during the fourth quarter, which would be concurrent with the normal timing of the US government's budget cycle.

While the timing of the Department of Defense Appropriations can occasionally move from one quarter to the next, assuming the current year appropriations and contract negotiations are complete and on schedule, we would expect to end the year at a record backlog level for this segment.

Government Operations also includes a healthy amount of recurring work. In fact, I would argue that despite the conservative nature of our backlog booking practices, most of this business is recurring and has been growing. The program certainly is extending the lives of the nuclear arsenal [or] reductions in warheads in support of nuclear non-proliferation policies are all recurring in nature.

Strong cash flows in this business segment are further aided by limited required investments and working capital and the reliability of payment from the US government.

However, this is not to say that this is an easy business to enter. Our expertise and know-how and our record of execution and achievement in the areas of safety and cost containment all benefiting our US government customer set us apart in this segment.

As you probably have read, the government is in the process of extending the contracts at Y-12 and Pantex facilities for one year plus two additional three-year, three-month extensions if necessary.

B&W is a leading participant in the limited liability joint venture companies operating these facilities, and I am confident that our record will ensure that we maintain an important position in the management of these facilities for a good deal of time into the future.

Now I'd like to discuss the current environment we are facing, which may provide some context for the financials that Mike will talk about in a minute.

Our Government Operations and Defense business continue to provide stability to the Company with revenues up slightly compared to the prior year second quarter. We have maintained a healthy and profitable backlog deferring to some in the first half of this year consistent with the government budgeting cycle, as I mentioned earlier.

In addition, with the primary production lines back up and running at NFS. We no longer have the inefficiency cost to carry. However, I do not think that most people understand the size and the scale of our Government Operations business segment, mostly because a significant portion of it runs through the equity income line.

Let me give you a few statistics. In addition to providing mission-critical components for several of the government's important defense programs, which are recorded in revenue, B&W in partnership with others secures, operates and manages many of the government's strategic nuclear research and manufacturing facilities that provide fuel enrichment and classified defense components.

Today, we are managing nearly 5,000 government-owned buildings, 2,600 square miles of land, 8,500 employees, 450 miles of transmission and distribution lines and 18 waste water treatment facilities. Additionally, we are managing nearly 500 projects with capital expenditures in 2010 of more than $1.5 billion. If we were to equate the scale of these M&O operations into revenues, it would show a company with a much larger top line.

I would also like to make a few comments about the Power markets. As many of you know, the power utility markets are not quite as robust today as they were in 2007.

The severe decline in electricity usage brought on by a tremendous reduction in industrial manufacturing in the US during the 2008 and 2009 recession led to steep declines in capital spending by the electric utilities for power generation, transmission and distribution products and services.

While GDP has begun to improve, we remain in an excess Power Generation capacity environment. Combined with reluctance for regulators to provide rate increases to an unemployed or underemployed constituency, utilities continue to sit on the sidelines with regard to maintenance of their existing power generation complex.

Also, lack of clarity about air emissions from power plants has had a negative impact on this market. We have expected and continue to expect that clarity around clean air rules would begin to unleash capital and overtime. That is still our belief.

With the new clean air transport rules not becoming effective until mid next year along with a rather slow economic recovery, I expect, in the short term, utilities will continue to take a wait-and-see attitude. Assuming that these rules are not further delayed or litigated, we would expect to begin to see an improving order book for environmental equipment by late next year with increased bidding activity to proceed bookings by three to nine months.

(inaudible) interesting link due to a change in the rule that will greatly limit the use of interstate emissions credits, areas like Ohio, Pennsylvania and Georgia may require a much larger investment in environmental equipment that otherwise would have been the case. This may also have the negative effect of increasing the number of facilities that will be shut down rather than retrofitted.

This is a complex issue and one that we cannot write a simple algorithm for you to model potential revenues and earnings and the timing as such. It is, however, an area that is right in our sweet spot of capabilities.

Despite the state challenges in the power markets, there are many positives developing in this market at this time. While the traditional fossil power markets remain under pressure, we have seen continued interest and activity from the renewable market, as noted in our May announcement, that we will build a waste energy power plant in Norway through our B&W [Roland] operations.

In June, we announced that B&W would be replacing a coal-fired boiler on the University of Missouri campus with a biomass boiler that would generate steam and electricity from clean biomass fuel.

Also, just last week, B&W was selected as part of a team to build the world's first full scale 200 megawatt oxy coal-fired power plant that includes permanent carbon dioxide capture and storage. This is an important step towards the commercialization of a clean coal technology that has been developed by B&W over the last few years.

The Company also continues to see strength and renewed interest in nuclear power components and services. As you know, we have remained in the nuclear steam generator plant construction parts and service business over the last few decades in all aspects of the Canadian market and with a focus on replacement steam generator market in the US.

With our experience in Canada, we are now actively participating in the renewed interest in nuclear services in the United States and most recently manufactured a 70-ton nuclear reactor vessel head for Diablo Canyon. This experience and our long history of participation in this market has allowed us to develop a commercial [small modular] nuclear reactor we call B&W mPower I will discuss this in more detail later.

So to summarize the power market in a sentence, we view 2010 as a near-term bottoming period for the Power Generation market and expect our Power business will trend in to trail the economy due to a slight cyclical nature while scrubber and SCR activity is likely to be a late 2011 backlog bill.

I will now turn the call over to Mike who will provide details on our financial performance for the quarter. Mike?

Thanks, Brandon. Revenues for the second quarter were $688.5 million, a decrease of 6% from the second quarter of 2009 and a sequential increase of 3.9% from the first quarter of 2010.

Consolidated operating income of $85.7 million was up $44.6 million, or 115%, from the first of 2010 and down a modest $7.2 million, or 8%, from the second quarter of 2009. This resulted in operating income margins of 12.1%.

Revenues in the Power Generation Systems segment were $422.4 million, a sequential increase of $12.6 million, or 3.1%, compared to the first quarter of 2010 and down approximately 10.3% from the $471 million reported in the second quarter of 2009.

Operating income in the Power Generation Systems segment, including the equity income from B&W's global joint ventures was $39.8 million, or more than four times that reported in the first quarter of 2010 and down $4 million, or 9.1%, from the second quarter of 2009.

This sequential increase in operating income in the second quarter is principally due to strong project execution and cost savings in our construction and fossil power operations.

Revenues in the Government Operations segment were $267.2 million in the second quarter of 2010, an increase of 5.5%, and 2.2% compared to the first quarter of 2010 and the second quarter of 2009 respectively.

Operating incomes for the segment were $50.5 million, an increase of 40.5% from the first quarter of 2010 and down 12.1% compared to the prior year. Backlog in this segment has declined from the end of the first quarter, and we would expect it to decline again in the third quarter due to the normal seasonal patterns of the government budgetary appropriation cycle. Exiting 2010, we expect backlogs in this segment to be above previous all-time highs.

The Company's total cash and investments position was $332.2 million at the end of the second quarter of 2010, a decrease of $226.1 million from the end of the fourth quarter of 2009. This decrease is principally due to $100 million [chance] distribution to McDermott International Inc. in June, 2010.

This pre-spend payment made to MII to maintain appropriate working capital and liquidity levels at MII was based on a determination by the MII Board of Directors after a review of expected working capital and liquidity requirements for B&W and MII post-spend as two independent public companies.

Also, during the first half of 2010, the Company made approximately $62.3 million of investments in acquired businesses and capital expenditures. Our outstanding debt at the end of the second quarter was approximately $8 million.

In addition to net cash, the Company maintained a $700 million revolving credit agreement with approximately $435 million of availability as of the end of the second quarter. The Company continues to maintain adequate liquidity to fund operations, which could include increased working capital requirements, internal growth, research and development programs as well as additional products and geographic expansion opportunities.

Our effective tax rate for the year is expected to be approximately 36% to 38%. Keep in mind that our current mix of business is predominantly in the United States. Therefore, we will generally have a tax rate close to the US statutory rate.

On a personal note, I'd like to thank Brandon and the Board of Directors for their support and leadership over the last several years at McDermott as well as through the spend process. I'm looking forward to helping Brandon lead B&W into what appears to be a bright future.

With those comments, I'll turn the call back over to Brandon for some final remarks.

Thanks, Mike. What I'd like to do now is spend just a few minutes with you all on strategy and where I am positioning the Company.

There are five key strategies that I will talk about. We talked earlier about safety and operational excellence as driven by our Lean Six Sigma program. Those are key components in helping us achieve our first strategic objective that is to enhance or competitiveness.

First is a relentless pursuit of operational excellence, which we believe is key to sustainability and profitable growth in good times and helps us remain competitive and profitable in challenging periods.

The second strategic objective is to diversify our geographic mix. We intend to leverage our US management and operations expertise as well as fossil and nuclear technology to expand into emerging markets and build on our positions in Europe and Asia.

As you may know, we are very successful in China right now and have recently created a joint venture company in India to pursue the utility power market in India. Over the next two decades, we expect the overwhelming majority of coal-fired power boiler demand in the world will come from these two countries.

Third, we plan to diversify our product mix. By harvesting earnings and cash from more mature markets and product lines, we are investing in new technology for carbon capture, biomass, energy from waste, solar, environmental and nuclear, including our mPower development. All of these areas have high-potential growth.

Fourth, we are building a strong culture of growth by more closely integrating the B&W marketing product management effort as well as incentivizing employees around behaviors with the greatest overall business impact.

Lastly, we are maintaining our focus on customer service and our value-added solutions that we bring to bear on their operating activities. A great example of product diversification efforts underway at B&W is the development of small modular nuclear reactors, or SMR technologies, or, as we have trademarked, B&W mPower.

Recently, the Company achieved another milestone in the development of its SMR program. Last week, we announced the Company received a grant from the Virginia Tobacco Indemnification and Community Revitalization Commission to help build and operate its B&W mPower Integrated System Test, or IST, facility in Bedford County, Virginia.

The IST facility will include a scaled phototype of the B&W mPower reactor that will undergo extensive testing. This facility will play an important role as we move forward with testing and licensing of the B&W mPower reactor technology and should be operational in 2011.

This comes on the heels of our alliance with Bechtel, known as Generation mPower, announced a couple of weeks ago. In alliance with Bechtel, Generation mPower brings together two recognized and established energy industry leaders in engineering, manufacturing and construction.

The formation of this alliance by our companies and the substantial investment that we tend to make demonstrates a serious significant and long-term commitment to the B&W mPower SMR technology.

However, this commitment extends beyond just B&W and Bechtel. Earlier this year, we announced the formation of an mPower industry consortium, which is dedicated to the early deployment of this technology, including members such as the Tennessee Valley Authority and FirstEnergy. Just recently, 12 additional utilities committed to join our consortium.

Before mPower, small utilities was a public, private or state-owned, had no practical means to own the proven, clean and dispatchable power that nuclear energy offers.

With a marketplace increasingly demanding of cost and schedule certainly for nuclear construction projects, Generation mPower will be devoted to creating an EPC offering for its customers that provides the project and financing certainty required by the market at a total cost of ownership that will be competitive with other competing sources of new power generation.

We believe our alliance has the experience, expertise and capabilities necessary to manage the challenge of deploying the next generation nuclear plant, i.e. the mPower B&W SMR technology, as early as 2020.

This is a long road, and there are a number of major hurdles to overcome. The most significant milestone over the next 12 months or so will be the completion and operation of the IST facility, the identification and approval of a leading customer site while at the same time continuing through the NRC licensing process.

To summarize, overall, we are managing our business well on a tough market. New coal-fired boiler systems have been in decline for a few years. Continued uncertain surrounding clean air regulation is keeping utilities on the sidelines in the short term.

Revenues during the quarter modestly improved on a sequential basis, but are down from the second quarter of last year. This is consistent with the bottoming process we see occurring this year as our Power Generation segment will likely trail the US economy anywhere by six to 18 months.

It will take some time for the increases in electric generation to offset the declines experienced in the US over the last couple of years. We are encouraged, however, by the improvements that are taking place in the economy. A steady improvement in GDP and increases in electrical consumption should result in the need for additional power generation and, ultimately, lead to a new capital expenditure cycle by the US utility.

I think I speak for all 13,000 of our employees as well as our 10,000 joint venture employees when I say that we are proud of our rich B&W tradition and history and look forward to writing the next chapter in our future.

That concludes our prepared remarks. I will now turn the call back over to the operator who will assist us in taking your questions.

Thank you. (Operator Instructions). Your first question comes from the line of Andrew Kaplowitz of Barclays Capital. Please proceed.

Good morning, everyone.

Good morning.

Good morning.

Brandon, can you talk about your power parts and service business a little bit more. Between 1Q and 2Q, we saw a nice uptick in margins.

So what I'm wondering is what are the major differences maybe between the two quarters. Did you see a lot more high-margin parts and service work happen in the quarter? What do you expect for the rest of the year?

Thank you, Andy. Power parts and services is an area that is certainly more predictable and more repetitive than a number of our major projects businesses.

I think the variances that you see in performance is not related so much to the power parts and services business, but to the timing on certain milestones with regard to major projects and the closeout of those projects and the ability upon completion of good execution to harvest certain upsides in the major projects business.

So, Brandon, with parts and service, it was relatively stable between the quarters? Is that fair?

That's correct.

As part of McDermott, you gave the 7% to 10% sort of longer-term guidance around power margins. Is that still a fair range to think about for this year? How should we think about it?

Well, I think we mentioned on the last call, Andy, that that is certainly the goal that we believe is achievable in normal market conditions.

Given the current pressures in the utility market, we think we will trend toward the lower end of that range. I would also point out that we have the averaging impact from the first quarter that will have some bearing with regard to the full-year outcome.

Andy, its Mike. I think our future kind of holds consistent with what we said last quarter, was that with 2% margin in the first quarter, we probably won't get to a consolidated 7% to 10% for the year. But in the future quarters, that range is still achievable as we achieved this quarter.

That's helpful, thanks. Shifting gears for a second, you mentioned some scrubber new awards picking up next year. Since the (inaudible) rules came out a month ago, have we seen any movement from utilities in terms of, hey, we now know what the rules kind of look like; let's talk to you guys more about future work?

Andy, there's certainly some dialogue that is starting to take place between our product lines and the end-market. But the utilities are still in a very aggressive cash flow control mode. Until there's further clarity on that, they're likely to take a wait-and-see attitude.

We expect maybe a smaller number of projects to release early to get out ahead of the bulge, if you will. But this will - is certainly going to be somewhat dampened by the current economic environment.

That's helpful, Brandon. Then maybe one more from Mike, if I could; if you look at cash flow for the year so far, it looks like it's being pressured a bit by a drop in advanced billings. Is that just sort of the leg of bookings environment? Can we see that reverse over time?

Then maybe if you could comment, Mike, on pension contribution. It's been high so far. I know you get a lot of that back from the government. Maybe if you could just tell us sort of what we should expect there.

Yes, thanks, Andy. On cash flow, yes, I mean, I don't think you'll continue to see the runoff in the advanced billing as what we had in the first six months of the year. That was something we did expect.

We had some large projects where we were significantly ahead of the customer. So we were actually internally forecasting that. So I think you'll see some normalization of that going forward into the future years as we get into '11 and '12 and all.

As Brandon mentioned in his prepared comments, with the minimal amount of capital that this business requires, probably maintenance capital in that $40 million to $50 million range, we generate a fair amount of EBITDA with very strong cash flows. I think you'll see that going out in the future.

As it relates to pension contribution, I think for the year I would expect kind of pension contributions probably in that $75 million to $100 million range. Our pension expense will be pretty steady as what you saw for the first six months of the year, which was in the mid-60 range. We'll see that in the second half of the year as well.

Great. Thanks, guys. I'll get back in queue.

Thanks, Andy.

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

Hi, good morning.

Good morning.

Good morning.

It doesn't sound like you've seen power maintenance spending pick up yet. With power demand now starting to improve, I'm just wondering what you think it will take to see some growth in maintenance spending by the utilities.

Steven, I think the best indicator, that will be a continued recovery of the economy and a continued growth in the GDP. There's a very definite relationship between GDP performance and the consumption of electricity in the United States that's referred to as the intensity factor. It's about a 0.35% to 0.38%. In other words, for every 1% growth we see in GDP, we see a growth in electrical generation by about 0.35% to 0.38%.

With regard to maintenance, it's simply in the coal market and, to a certain degree, in the nuclear fleet, strictly a function of how hard they run this equipment and how many megawatts they generate.

There has been a tendency to put off certain capital maintenance programs and even defer some of the preventative maintenance. When we eventually reach that bake over point, there will be a small surge on some of that catch-up maintenance. Then it'll tend to level back off. But it is simply a function of the economy and the demand for electricity.

Okay, that's fair. Then can you explain the lower warranty expense in the quarter. I'm just wondering. How lumpy is that? What was the actual expense, if you could give that detail?

Yes, overall, Steve, I mean, it is somewhat lumpy because it's geared to the amount of revenue we have in the quarter and things of that nature. But from an overall warranty expense, I mean, there's been no drastic change in our accounting policy for that.

So I think it's more just a function of the type of projects that we have in a given quarter related to how much expense is booked and as well as how much expense we may kind of harvest over time.

As projects they're in their warranty period, and we've got reserves booked. We harvest that warranty reserve similar to the way we harvest contingency when we finish a project. So I'd say nothing severely unusual there. It's just more of a function of the type of revenue that's booked during the given quarter and certainly the volume of revenue.

Okay, and then just lastly, I'm just wondering. When do you get fully ramped up on the two Virginia class subs per year? Then, do you expect productivity and margin improvements to continue like you've seen this quarter throughout that ramp-up period?

Virtually, from our participation in that program, Steve, we're well into that ramp-up period. Obviously, as I mentioned in the prepared remarks, we started and implemented a dedicated operational essence program whose sole purpose is to continue to drive these efficiency improvements and the elimination of waste in our manufacturing procurement and SG&A functions.

So even though we have shown great results from that program, as I mentioned, we still believe that we can target approximately $15 million a year in efficiency and waste elimination savings and the underlying enterprise operations. So we expect that to continue.

Steve, from a revenue standpoint, you'll see some growth in that business. As you've seen in the first six months, you'll see that continue through the year. We should have a modest growth in total revenues related to government sector as we end the year out this fiscal year.

Okay, thanks a lot.

Your next question comes from the line of Graham Mattison from Lazard Capital Markets.

Hi. Good morning, guys.

Good morning.

Good morning.

Just a follow-up on one of your answers to Andy; you mentioned that tons of people want to try and get ahead of the bulge of environmental awards. Is this bulge, is that what you're seeing going to be the sort of mid part of 2011 into the later part?

Gram, actually, if you think about the way that business operates, the bidding process usually precedes the booking process by about anywhere from three to nine months. In certain circumstances, it can extend out to a year, year and a half.

But most of these compliance projects that will be executed to meet the CAGR rules are large capital expenditures. They'll ramp up like a typical EPC contract.

That is, they'll start out slow in the beginning with the engineering, then the raw material procurement and then picks up pace starting in the ninth and 12th months of the project. The total projects are likely to run anywhere from 24 to 30 months with the peek in revenue recognition on a POC basis near the middle of that cycle.

So when the orders come, it will slowly ramp up to be reflected in revenue recognition. We would expect to see an increase in bookings, as we mentioned, in the latter half of next year with regard to that market.

Okay, so sort of the bullish starts later half of next year and into 2012.

That is correct.

Okay. Then just following the comments that you expect the backlog to be an all-time high on the government side, what's in your assumptions on that? Is that just for additional M&O awards or just the ramp-up of the existing programs that you have?

Yes and yes. We would expect the continued two-a-year program with regard to the Virginia class subs. The one slightly offsetting factor there is the stretch-out with regard to the carrier program from a four-year build to a five-year build on that side.

But we have also seen continued release of recovery funds, the stimulus funding, if you will, into a number of the DOE facilities for much needed maintenance and modernization.

We're seeing some of that translate through into increased -- fee earnings doesn't really hit the backlog, but does impact the bottom line in a positive way. Then the rest of it is just the fully positioning of the work flow on the heavy nuclear components part of the business.

Got you. Okay, great. It's very helpful. I'll jump back in queue. Thank you.

Your next question comes from the line of Chase Jacobson of Sterne Agee.

Hi, how are you?

Good morning.

Good, Chase, how are you doing?

Good. I guess first on the potential for the scrubber market, back at the analyst day, you talked about 20,000 to 40,000 megawatts of opportunity there.

I know you said it's hard to quantify, but we've seen some industry publications that have pegged that at a lower amount. Can you provide any comment on that? Or do you still think your 20,000 to 40,000 will hold true?

Well, the short answer to that question is we expect it to fall within the 20,000 to 40,000 megawatt, or 40 gigawatt, range, tending probably to the slightly higher side of that range. It's a combination of a number of interdependent variables that are going on in that market. But we believe that when it's all said and done that you're going to see a market there north of 30 gigawatts and be reasonably healthy.

That's for scrubbers, right? Scrubbers only?

Well, you have a number of -- not only is there removal of sulfur dioxide, but there is also regulations coming with regard to nitrous oxide. Then, of course, mercury reduction will be driven by the utility [mat].

Then we also have in play at this time the industrial mat that's going through public comment period right now, which will have an impact in the industrial power market. Albeit a smaller market, it's one that we're well-positioned to serve.

Okay, that's good. Then in terms of international expansion, I know the JV's in India and in China. But in addition to that, can you just give us a little bit more color on what your strategy would be and maybe if you have any targets for what you want and for how much international exposure you want, let's say, over the next five or seven year?

I think the best way to think of that, Chase, is to, first of all, look at in the OEM market as otherwise in the new build. As I mentioned in the prepared remarks, I believe that anywhere from, depending on any given year in the future, 70% to 90% of the new coal-fired market is going to be found in the Asian market, predominantly in China and India.

We've been in China now; I think this is going to be our 24th year of operation there. We are taking a sort of a modified business model and deploying that into India. We think India is approximately 15 to 18 years behind the China market with regard to growth. Then you have the balance of Asia.

So our concept is to take our best energy technology services into that area and recognize that growth. Another part of the world strategy is that when you look outside the United States as far as environmental impact of the existing fleet, there's good opportunity there for continued global pressure, if you will, to clean up existing plants.

That is almost on a country-by-country basis as to which business model we would employ to harvest those opportunities.

Okay, thanks.

Your next question comes from the line of John Rodgers of Davidson.

Hi, good morning.

Good morning, John.

A couple of things; first of all, in terms of the power side of the business, the work that you're doing right now, how much of it was booked two years ago, or a year ago? I mean, are you recognizing the revenue on work that was in the current pricing environment?

John, I think a lot of what we are currently rolling out of backlog was booked back in the '07 to first part of '09 type timeframe.

Okay, so I'm just trying to understand. When we see the full impact of the weaker market conditions, are we in that now? Or is that more next year?

I think you see appropriately blended into the results as they're produced today, John. The other thing that I would mention is that in-and-out business that we see, the in-and-out recurring business that we see on a given quarter seems to be holding about the same.

I think we've mentioned in the past that that's more or less $100 million a quarter in the Power segment that doesn't really, if you will, hit backlog at a quarter-end period. Those margins are consistent and holding up.

I don't have the exact numbers in front of me. But an answer to that question is to look at the bookings trends of the major projects over the years that you mentioned and recognize that a lot of the major projects run anywhere from a 2.5 to four-year timeline to execute.

Okay.

Another way I'd answer that question, John, is that one of the things we do is just look at margins in backlog overall on a quarter basis. I'd say just that our blended margin in backlog today is not significantly different than the blended backlog that we saw in the '07, '08 timeframe.

Oh, okay. All right. That's very helpful.

The second question is just in terms on the government side of the business, there was an uptick in the -- well, two things -- in the equity income. I was just wondering. What projects is that associated with, if you can say?

Then, secondly, what are the big programs that you're focusing on over the next 12, 18 months that you'll be either competing for or re-competing?

The uptick in the equity income, I think, is somewhat reflected by the continuous improved performance to the operation of the two principle sites, Y-12 and Pantex. It is also indicative of the fact that the stimulus funds are being deployed through those sites that allows for additional fee earning on those project flows.

With regard to the specific programs that we are going to be pursuing in the coming months, I think that can best be monitored by looking at the request for proposals out of the DOE site. It's a matter of competitive protocols. We tend not to discuss those in public.

Okay, fair enough. Thank you very much and congratulations on being public.

Thank you.

Thanks, John.

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

Good morning.

Good morning.

Good morning, Martin.

Could you talk a little bit about your expansion of possibilities in the commercial nuclear side, ability to participate in [break] projects, and if you see any change in terms of the utility behavior in their approach to spending on upgrading their nuclear facilities?

Sure, with regard to commercial nuclear, there have been a number of independent and industry studies put forth over the last few years. I think it is fully recognized that the most economical growth that the asset owners or the asset sponsors can find in their nuclear fleet is to debottleneck and upgrade the existing fleet.

So that market is starting to build, and we are doing a fairly comprehensive analysis of finding the proper business relationship with that opportunity that we expect to be forthcoming. But it could be significant in nature, and it could run for a period of 10 years.

The amount that you can sell under an upgrade project for existing nuclear plants, $250 million to $500 million roughly, how much equipment or services could you sell under that?

It's a project and site-specific application. It depends on what pieces of equipment and what processes in that plant are actually the bottleneck with regard to enhanced power generation. It could be anywhere from maybe 5% up to 35%.

Yes, I mean, just in general, you're thinking, Marty, that a replacement [seam] generator project, we book those anywhere from, say, $25 million to $50 million up to several hundred million. It throws just a number of seam generators in that facility and the (inaudible).

Okay, and then one last question; the Department of Energy, the Small Modular Reactor program and the funding that they have for the next fiscal year, any update there?

It's nothing other than what we've talked about in previous meetings. We think it's adequate. There's good support both at the political level and at the appropriations level.

We are working with our team to try and secure additional funding for that. But we feel quite comfortable that there's adequate support and commitment behind that process.

Thank you.

Your next question comes from the line of Tahira Afzal of KeyBanc.

Good morning, gentlemen.

Good morning.

Good morning, Tahira. How are you?

Fine, thank you. Just to start off with, I wanted to question you on how you're approaching the US domestic coal power plants market and how it impacts, even your after-services and retrofit business as we go through, let's say, the next two to three years?

We've started hearing about some aging coal power plants being retired and potentially being replaced with renewables and more so natural gas. I would love to get a sense of what you're hearing from clients and how we should be looking at that headwind, what is, obviously, the positives of environmental retrofitting activity, which should be a positive.

Okay, that's a very comprehensive question, Tahira.

Sorry about that.

Let me say that there's a number of factors in play here. First of all, you have to consider what the final form of the rates will look like. We expect that we're zeroing in on that based on the preliminary requirements. Then you have the interplay between, or the competition of fuel-on-fuel pricing, if you would.

Extremely low gas, natural gas, pricing continue to defer some of the retrofit capabilities and could possibly accelerate some retirement of old coal plants, particularly the small older ones in the East. Then, of course, you have the underlying fundamental of the general economy. So all of that tends to play into that question that you just asked.

But, fundamentally, the power generated from the existing coal fleet is - on a variable cost basis falls right in behind hydro and nuclear. And dispatches quite early in the regional dispatching curves.

So we believe, and our customers confirm this in our discussions, that they fully intend to keep the majority of that coal fleet operating well into the future.

While a lot of the new growth is being absorbed by renewables, not all of those renewables -- and I tend to refer to that as the opportunity market like solar and wind. They have to be backed up by some source, and they're not necessarily the best generating sources for base load power. It's in the base load market where nuclear and coal-fired generation is applied.

So we're well-positioned to participate in most of these markets. But we also believe that there will be substantial investment in the existing coal fleet just because of its competitive advantage at the levelized cost of electricity.

All right, okay. That's helpful. The second question I had was sort of related. One of the things I'm hearing from talking to some private players in your space and some of the even smaller nuclear reactor manufacturers out there who are trying to gain the stability as that utilities are lacking in power not only as an alternate nuclear technology, but also as a potential replacement for some of these aging coal power plants.

I would love to get a sense of what you're hearing from the customers and if that's too early to contemplate right now.

It's certainly not too early to contemplate, and we have had general interest in that subject matter. Again, it's a site-specific question. There are certain power plants that have been built up around to the point where it may not be practical to repower.

But on the other hand, there are a number of those sites that their key value is not so much in the aged generation assets there, but it's their access to the grid and their strategic location to the load demands where it is very logical that a repowering of that particular site with something like our small modular reactors should be considered.

Got it, okay. Then the last question, and then I'll hop back into the queue; I mean, if you go to the defense quadrennial rule that came out earlier this year and really track strategically how the government is looking at warfare going forward, there seems to be less of a stress on submarines.

I just wanted to get a sense from you. As you talk to your government clients, what is the sense of follow-on work with Ohio-class submarines, et cetera, once you are done with the Virginia class?

Well, Tahira, when you go through that report, to me, I think it was pretty clear that the triad defense posture is one that is expected to maintain. To do that, you need to maintain a reliable and adequate submarine fleet. The Ohio replacement class, or what some of you may not recognize, that's really what the old Trident submarines are becoming quite old. They will be in queue for replacement.

Tehara, the other thing to note is that as it relates to the Virginia class, we're in the early phases of that program. So there's still a lot of room to run there as far as completing the build-out of the Virginia class.

Thanks a lot. I'll jump back in the queue.

Thanks, Tahira.

Your next question comes from the line of Will Gabrielski of Gleacher & Company.

Thank you. Good morning, guys.

Good morning, Royal.

Just a couple of follow-ups at this point; I guess in terms of the two JVs that you have in Power in China and India and now with Thermax, what are your expectations on how those will contribute to equity income going forward? How much of a drag are they in the near term?

Well, as you saw in the quarter, we had good performance at the equity income line from Power. That was predominantly the result out of B&W Beijing Company in China.

They have a very strong backlog. Because it is a 50/50 joint venture, you don't see that picked up in our backlog numbers. But they are continuing to have good success with booking new business. We've basically been operating at capacity there for a number of years now and continue to operate at capacity.

What you see is improvement in cost controls and efficiencies and favorable relationships to backlog and raw material pricing. We would expect that to be relatively constant over the next few quarters.

India, on the other hand, is a new joint venture, as you mentioned, with Thermax. We are continuing through the regulatory approvals to stand up that joint venture. We would expect to physically break ground there on the manufacturing facility in later this year or early next year at the latest. That will put us in operation in about two years.

However, as we continue to stand up this joint venture, they will be in the business of soliciting proposal opportunities and taking orders prior to the completion of that factory because we have the ability to collaborate with the existing facilities that our venture partner has as well as supplement imports from our other facilities around the world.

So we think that that will start to show some added improvement in the equity income line in two or three years in India. China remains strong today.

Okay, thanks. There was a DOE announcement related to FutureGen over the past week, and B&W is mentioned there. Can you talk about your role and how you see that playing out at this point with some of the changes that we're talking about?

Yes, I think you're talking about the announcement from last Thursday or Friday. I believe it was August the 5th.

Yes.

The US Department of Energy announced that it plans to award $1 billion in Recovery Act funding for FutureGen 2, too. That was targeted for the world's first full-scale oxy coal-fired power plant. That would be coordinated with, actually, FutureGen 1 for CO2 capture and storage.

What we're talking about there is basically the repowering of an existing unit near Meredosia, Illinois. It's an Ameren asset. Basically, I can't go into too much detail with regard to the technology and the project itself because the proposal for that project has been submitted and the contracting documents are into the National Energy Technology Laboratory, which is part of DOE Fossil Energy.

Basically, when those documents are in there due to a condition of participation, you're not really allowed to go into the details. But it is, as the press release indicated, a consortium or alliance between Ameren Energy Resources, Babcock & Wilcox and North American Liquide. B&W would act as the engineer and EPC contractor for the oxy coal plant.

This is based on technology that we have developed over the last three or four years. We've completed the heavy lifting with regard to that R&D. Some of you may have heard John Fees in the previous calls. McDermott talked about the 30-megawatt thermal test that we ran in 2008 and 2009 where we validated the technology at our CEDF facility in Ohio.

That was privately sponsored by B&W and Air Liquide, and we're into the second generation design of that particular technology. We think it's just a tremendous validation of our technology approach and our R&D with regard to the future intercepting needs of our market.

Okay, that's a very helpful answer. The last question; R&D budgeting going forward, any significant changes in your expectations?

Well, this quarter, again, we were right at about $16 million. I think, similar to what we've said in the past, I think our R&D expense for the rest of the year will kind of be in that $16 million- to $20 million-a-quarter range.

Sounds good. Thanks, guys.

Thanks, Royal.

Shanelle, I think we're going to take one more call.

Sure, your final question comes from the line of Sameer Rathod of Macquarie. Sameer, your line is open. Again, Sameer, if your line is on mute, please unmute it. Your line is open on the phoneline.

Yes, all my questions have been answered. Thank you.

All right, thanks.

Thank you.

Would you like to take one final question or --?

Yes, well, thank you, everybody, for joining us this morning. That concludes today's conference call. We'll be available today to take your calls if there's anybody left in queue.

A replay of this call will be made available on our website later today. Thank you, again, for joining us today. Have a good day.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.