BWX Technologies Inc (BWXT) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Babcock & Wilcox Company first-quarter 2015 earnings conference call.

(Operator Instructions)

I would like to now turn the call over to our host, Ms. Jenny Apker, B&W's Vice President, Treasurer and Investor Relations. Please go ahead.

Thank you, Mark, and good morning, everyone. Welcome to the Babcock & Wilcox Company's first-quarter 2015 earnings conference call. I'm Jenny Apker, Vice President, Treasurer, and Investor Relations at B&W. Joining me this morning are Jim Ferland, B&W's President and Chief Executive Officer, and Tony Colatrella, our Senior Vice President and Chief Financial Officer, who will talk about our first-quarter earnings.

Many of you have already seen a copy of our press release issued late yesterday. For those of you who have not, it is available on First Call and on our website at www.Babcock.com. During this call, certain statements we make will be forward-looking. 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 releases.

The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our annual report on Form 10-K and quarterly reports on Form 10-Q on file with the SEC provide further detail about the risk factors related to our business. Additionally, I want to remind you that, except as required by law, B&W undertakes no obligation to update any forward-looking statement to reflect events or circumstances that may arise after the date of this call.

Also on today's call, the Company may provide non-GAAP information regarding certain of its historical results and 2015 outlook to supplement the results provided in accordance with GAAP. It should not be considered superior to, or as a substitute for, the comparable GAAP measures. B&W believes the non-GAAP measures provide meaningful insight into the Company's operational performance, and provides these measures to investors to help facilitate comparisons of operating results with prior periods and to assist them in understanding B&W's undergoing operations.

A reconciliation of these non-GAAP measures can be found in our first-quarter earnings release, which we issued last night, and in our Company overview presentation, which is posted on the Investor Relations section of our website, again at www.Babcock.com.

(Caller Instructions)

With that, I will now turn the call over to Jim.

Thanks, Jenny. Good morning, everyone. This morning, we will discuss our first-quarter earnings and provide an update on the progress of the planned tax-free spin of our Power Generation business to our shareholders. Starting with the quarter, our first-quarter results represent a strong start to 2015, particularly in our two core business segments, Power Generation and Nuclear Operations. Consolidated revenues for the quarter were $730.6 million, an increase of 10.4% compared to the prior-year first quarter. Adjusted earnings per share were $0.47 versus $0.42 in the first quarter of 2014.

Non-GAAP operating income totaled $78.4 million for the period, which is a 39% increase over the first quarter of 2014. Our backlog stands at $5.7 billion, 13.5% higher than March of last year. This represents a consistently strong backlog in Nuclear Operations, with substantial increases in Power Generation, due to new international boiler awards, and in Nuclear Energy, with the additional Canadian refurbishment and service work.

Our Nuclear Operations segment again delivered strong revenue and operating income. Our component manufacturing enabled nuclear fuel fabrication subsegments, including nuclear fuel services, were on or ahead of target for the quarter. Consistent execution across the entire business and a commitment to quality and continuous improvement allow us to deliver value for our customers and consistent solid returns for our shareholders.

The Nuclear Energy segment faced some challenges in the quarter, in part due to the timing of utility outages in Canada and the US operations. Our overall strategy for the business segment remains unchanged. Restructuring is progressing on plan and we continue to expect full-year margins to be in the low single-digits, while we look to achieve 10% margins in the 2016 time frame.

The Technical Services Group is operating at our new expected run rate given our current contract mix. Although operating income for the quarter was below our full-year run rate, TSG remains on target to deliver $15 million to $20 million of operating income for the year. This quarter was particularly impacted by increased business development expenses. The pipeline for this business is strong and we are bidding on several promising opportunities that we believe will contribute to solid growth of this segment in 2016.

The Power Generation Group produced a particularly strong first quarter, with both revenue and operating income up significantly compared to Q1 last year. This is due to the addition of MEGTEC, increased service projects volume in the US, solid project execution, and the benefits of our cost reduction programs. We continue to be pleased with the MEGTEC acquisition, as the Management team is delivering value through strong operations and capitalizing on secular growth in MEGTEC's worldwide markets.

International bookings were exceptionally strong again this quarter, with two additional renewable waste energy plant awards, which included long-term operations and management contracts, and a large environmental booking in the US. Our backlog in PGG increased by $598 million compared to the first quarter of 2014. This is despite an $86 million reduction in reported backlog value due to a strengthening of the US dollar. We continue to pursue additional international opportunities for new renewable and coal boilers and could see one to two additional bookings later this year.

We remain laser-focused on our margin improvement program in PGG in an effort to lower costs and further variablize our business structure. These efforts will not stop when the current projects complete, as we need to stay ahead of what's going to be a challenging coal market for years to come. By remaining aggressive on this front, we believe we can deliver superior results over time even in a challenging marketplace.

A recent example of the success of this program is our new partnership with Magotteaux that we announced in April. As a part of the manufacturing consolidation effort, we're in the final stages of closing our 1940s era foundry operation in Ohio, where we produced heavy coal pulverizer parts for our customers.

The project started as an effort to reduce our costs and lower our fixed overhead, while maintaining product quality. Our new partnership with Magotteaux not only accomplished these objectives, but also allowed us to combine B&W's pulverizer technology with Magotteaux's advanced wear materials, resulting in new and improved product offerings to our current customers, and access to new markets that were previously not available to us.

In the coming months, we will continue to evaluate the competitiveness of our manufacturing facilities and product lines to find opportunities that enable B&W to better serve our customers, improve our competitiveness, and drive shareholder value. Let me turn it over to Tony, who will discuss the segment results and other financial matters, after which I'll provide an update on the progress to date on our planned spin-off of the Power Generation business.

Thanks, Jim. The Nuclear Operations segment reported strong first-quarter revenues of $284.4 million, very close to the exceptionally strong rate we incurred last year of $286.2 million. Nuclear Operations segment operating income in the quarter totaled $68 million, an increase of 14.3% compared to $59.5 million in the prior-year period, primarily due to improvements in our navy, nuclear fuel, and downblending business, as well as benefit from the settlement of a property-related insurance claim.

Backlog in Nuclear Operations at the end of first quarter of 2015 was over $2.8 billion, essentially unchanged from the same period last year. Nuclear Energy segment revenues were $33 million in the first quarter of 2015 compared to revenues of $47.8 million in the corresponding period of 2014. This decrease in revenues in the quarter was primarily due to the timing of maintenance outages, largely in the Canadian nuclear market, and as anticipated, reduced volume in our equipment business. Operating income in the quarter decreased by $4.2 million compared to the first quarter of 2014, primarily the result of lower volume and margin mix.

Despite a challenging quarter for the Nuclear Energy segment, our backlog position has strengthened significantly and there are a number of additional opportunities in the pipeline. Backlog at the end of the first quarter of 2015 was $236.2 million, an increase of $63.4 million, or approximately 37% compared to $172.8 million a year ago. This increase is net of roughly an $18 million reduction in the value of NE's backlog in the quarter due to foreign exchange impacts.

Technical Services operating income decreased $13.2 million to $1.6 million, compared to $14.8 million in the corresponding period of 2014, primarily due to the loss of the Pantex and Y-12 contracts, and increased business development costs related to bid and proposal work, as Jim mentioned earlier. Note that we are no longer reporting mPower as a separate segment due to the size of this program, with an annual spend rate of approximately $15 million per year.

However, the restructuring program we promised has been achieved. In the quarter, mPower's spending was reduced to $5.2 million compared to $26.7 million in the first quarter of 2014, a decrease of $21.5 million year-over-year. We continue to search for investors to accelerate the development of this technology.

Revenues in the Power Generation segment for the first quarter of 2015 were $397.2 million compared to $312.1 million in the first quarter of 2014, an increase of $85.1 million, or 27.3%. This increase includes $41 million from the MEGTEC acquisition and a $37 million increase in revenue from aftermarket, primarily related to service projects.

Power Generation bookings in the first quarter were $730.7 million, an increase of $511.4 million versus Q1 of 2014 reflecting two major renewable waste energy plant bookings, which include multi-year site maintenance and operations contracts and strong aftermarket service and construction bookings for US utility customers. Backlog at the end of the period was roughly $2.6 billion.

Operating income in the Power Generation segment was $23 million in the quarter compared to $10.5 million for the first quarter of 2014, primarily due to higher volume and favorable contract performance. MEGTEC's contribution to operating income was $0.6 million in the quarter, net of $3.7 million of amortization expense related to intangibles, which are typically front-end loaded in the first year post-acquisition, as required by US GAAP.

For the first quarter of 2015, the Company's effective tax rate was approximately 32.7% as compared to 24.5% for last year's first quarter. In 2014, we benefited from a favorable ruling that allowed us to amend prior year tax returns to exclude distributions from certain joint ventures from domestic taxable income.

The company's cash and investment position net of restricted cash as of March 31, 2015 was $293.1 million, a decrease of $32.3 million compared to $325.4 point million at the end of 2014. We have focused considerable attention on improving cash flow, and are very pleased that operating cash flow was positive for the first quarter. Historically, we have reported a large operating cash usage in the first quarter due to seasonal cash requirements.

First-quarter cash flow reflected a net increase of cash from operating activities of $5 million versus a net usage of $114 million in the prior-year quarter, primarily due to stronger operating earnings, reduced mPower spending, and significantly improved cash flow at PGG, which benefited from advanced payments on new contract awards and timing of costs incurred on newbuild steam generation projects. Now I'll hand the call back over to Jim for an update on our planned spin-off of the Power Generation segment.

Thanks, Tony. Let's talk about the remainder of 2015 before discussing the spin-off. Given the planned separation of the Power Generation business later this year, we provided guidance last quarter for 2015 on a segment rather than a consolidated basis. We are on track to deliver those results in each business.

Our original guidance was for 40% of B&Ws consolidated operating income to come in the first half of 2015, with a strong back-up of the year delivering the remaining 60% of expected earnings. Given the strong first quarter, we now expect approximately 45% of our operating income to be in the first half of the year, with the remaining 55% of our full-year operating income to be in the last half, excluding the one-time spin-off costs. We're not altering expectations for the full year, as timing of some projects helped us in Q1, and it's too early in the year for us to project any upside to full-year results.

We are on track to complete the spin-off of the Power Generation business by mid-summer, in line with our original timeline. We've received confirmation from the Nuclear Regulatory Commission that the spin-off will not require NRC consent. We've responded to two rounds of comments from the SEC on our Form 10 application, filed in February, and we filed two revisions to our Form 10 to address the SEC's questions. We're pleased that this process is progressing smoothly and on plan. From a regulatory perspective, once we clear the SEC review process, we will be ready to go.

With two strong balance sheets, solid backlogs, and seasoned management teams, we're looking forward to introducing you to BWX Technologies and Babcock & Wilcox Enterprises in the coming weeks. Both Companies have clear strategies to drive growth and increase shareholder value, as independent public Companies that are focused on their respective end markets. We look forward to speaking with you in the coming weeks at our investor day in New York, or during one of our non-deal road shows.

Let me wrap up with this: the quarter demonstrates the quality and character of the Babcock & Wilcox Company, and more importantly, of our employees and leadership team. Even as we prepare for the spin-off of the Power Generation segment, which is no small task, we have remained focused on execution in our core operations.

Our businesses are running well, we are delivering for customers, and we're creating value for our shareholders. The spin is the next logical step to give our two Companies the flexibility, agility, focus, and resources to optimize their own strategic plans to create shareholder value. That concludes our prepared remarks. I will now turn the call back over to Mark, who will assist us in taking your [questions].

(Operator Instructions)

Brian Konigsberg, Vertical Research Partners.

Hi. Good morning.

Good morning, Brian.

Maybe starting with the guidance a little bit. I understand your reiterating the full year, but specifically just looking at Power Gen, you're up 27% year-over-year in the first quarter, about 14% ex-MEGTEC. You're guiding the full year at 15% total. When you look at the backlog, I believe the deliverable backlog for 2015 is up over 100% for the remainder of 2015 versus this time last year. I know there were some timing issues in the first quarter, but maybe you could speak to what you are expecting for the rest of the year, as to why that 15% is still valid number?

Sure, Brian. You are right, we are very happy with Power Gen's performance in Q1, both on the revenue side. We got the benefit of MEGTEC in the quarter, but we also generated a lot of revenue growth off our aftermarket service projects business and we're happy with project execution, as well, for the quarter. We indicated before that we expect both volume in terms of revenue and operating income for Power Gen to build during the year.

We still expect that to be the case. Given the strength of Q1, perhaps Q2 might look a little bit more like Q1 but we expect Q3 and Q4 to be quite a bit stronger, both on the revenue line and on the operating income line. All that said, it is early in the year, and for now we're going to hold guidance and we're going to continue to pursue new opportunities and look for ways to drive the bottom line.

Just to add one other point, Jim, at the back of the last year, we start to see a turn in the business and so the comps against prior-year will be a little more challenging as we get later in the year. But that said, we feel very confident that, that 15% growth rate is achievable for the business.

Great. Secondly, on Nuclear Operations, very strong quarter, even when you back out the benefit from the insurance settlement in the quarter, still looking around maybe 23% or so. You've guided to the high teens. Execution in that business remains still very, very strong. Maybe just give us an update on how you see that progressing through the remainder of the year? Do see that grinding lower for one reason or another or do you think that you have the opportunity to sustain that level of profitability? Thanks.

NOG did have a very strong quarter in terms of execution, and we're going to endeavor to do the same as we conclude the last three quarters of the year and into the future. That said, the run rate for Q1 was a little higher than we would expect to see for the rest of the year. We think it would trend down slightly over time, so we are continuing to guide to the high teens, and if performance can create some opportunity for us, we will try to take advantage of that.

Thank you very much.

Bob Labick, CJS Securities.

Good morning. This is Robert [Magic] filling in for Bob Labick. Given the strong book-to-bill in PGG, can you discuss the project lifecycle, and in particular, margins in early projects versus at the end?

Sure. We are happy with the backlog, obviously, primarily driven by, at least in Q1, a couple of large waste energy plants, renewable plants in the UK. Those projects, we book them in Q1. Obviously, there's no revenue for those projects in Q1. We'd expect it to slowly ramp up as we approach the end of the year for those new projects and then build as we move into 2016.

The reality is margin does much the same. The margin on the initial revenue out of those projects will be relatively low. As we move through the project, and assuming that we are successful, as the projects move toward the end, it gives us an opportunity to claim some of the contingency money that we have built into the project expense side of the equation, and we'd expect margins to perhaps rise. So we start out slow, and revenue builds, and potentially margin builds, over what's roughly an 18 -- a 1.5- to 2.5-year time horizon.

That's great. Can you discuss the traction on cross-selling with MEGTEC?

We are making some progress on that front. We like MEGTEC's standalone performance. We are beginning to see some of our technology move from Power Generation Group into MEGTEC. Probably the best example of that is some of the bag house technology. It's a particular clean-up technology and that's a technology that we have, we are very, very good at putting those rather large installations on coal plants.

It's a piece of technology that was not in the portfolio for MEGTEC and that's one we're transitioning into MEGTEC now and we believe that actually we have a handful of projects online to bid in the coming couple of quarters leveraging that PGG technology into the MEGTEC industrial environmental workplace. So we're looking for more opportunities, but I'd say we are on track to slightly ahead in our revenue synergy projections.

Thank you.

Tahira Afzal, KeyBanc.

Hey, Jim. Congratulations on the great quarter.

Thanks, Tahira.

First question, Jim, your utilities [guides] well. You probably started to see a lot of the utilities this earnings season [from uptick over] retirement plans, and really this year, in terms of retirement, seems to be shaping up to maybe around 11 gigawatts, so what's -- [it seems to fade away] into the next few years. So would love to get your comments -- your apprehension to really raise guidance, is it partly baked on maybe more of a fall out on the coal retirement side, on the maintenance side, or do you think the step-down we saw last year really bakes a lot of that in?

Thanks, Tahira. For sure, we, like everybody else, can see the challenge that's coming on the coal front in North America. One of our three strategic pillars as we move forward in PGG is recognizing the challenge that exists in the North American coal market and being proactive in taking out costs and reducing our fixed overhead so we stay ahead of a challenge.

That said, we had a really solid Q1 in aftermarket service projects. So a little bit of what we're seeing is an awful lot of units that are going to come offline tend to be the older units, they haven't run as much. The reality is that a lot of utilities could see this coming and they step down spending on some of those older units over the last couple of years, and we could certainly see that in our own numbers in 2013 and 2014.

So I'm not expecting large drop as some of those older units come offline. That said, we absolutely recognize the longer-term challenge that exists in the North American coal market, and I think we're doing a good job to date, at least, of staying in front of that. We are dedicated to the market. We think that we can be a great provider for our customer for many years to come.

But we also have to recognize that the size of that market could decrease of the time and we need to reduce our cost base so we stay in front of that, and we need to take advantage of all these other growth opportunities we have around the world to further diversify and balance our portfolio. I think were in a pretty good place so far.

Got it. Okay, Jim. And then really on that last comment of yours, Japan seems to be now commencing with construction of nine coal power plants, and it seems they have 31 more that are proposed. I know internationally, maybe the scope of work is a little different for yourselves, but is that an opportunity for yourselves, or as you look outside of the US, is it more biomass, et cetera, still going forward?

We see a little bit of opportunity in both. We've obviously had a lot of success on renewable biomass waste to energy in Europe and we are looking to experience that model outside Europe over time. I think we will get some traction on that front. In regard to new coal, we did book a couple over the last year or so, which is great, one in the Dominican Republic, one in Vietnam.

I would say we continue to see opportunities worldwide on that front, but they're going to tend to be smaller for us. We're looking for niche opportunities where we can provide true value to our customer. We're unlikely to be successful in a large open market bid, where we're competing against a whole bunch of international competitors.

So you've seen us as -- the two projects we were successful on, were more sole-source targeted opportunities for us. In regard to the opportunities, for example, in Japan, honestly probably a relatively tough market for us to penetrate. There are an awful lot -- there's a lot of indigenous technology and supply in Japan, and unless a unique situation comes up, that probably wouldn't be a place we would spend a lot of time and effort.

Got it, Jim. Thanks. That is helpful and congrats again.

Thanks.

Jamie Cook, Credit Suisse.

Hi. Good morning. Can you hear me?

Hey, Jamie. Sure.

Hey. Congratulations on an nice quarter. A couple of questions. The bookings in PGG have been fairly impressive. Can you talk about the competitive dynamics and how the margins or the profitability of the orders that you've booked impact margin longer-term and are the international wins, the margins there, are they comparable to what would be in US?

My second question relates to TSG. I know there's some awards, Idaho, Savannah River, or Chalk River, prospects out there. Can you talk about the timing of those projects and your ability to get one of those? And then just my last question, the first quarter was a little better than you thought. You talked about timing of projects. Just how much -- can you talk about on an EPS basis, or how much better the first quarter was relative to your expectations? I'm just trying to get a sense of the degree of conservatism in your numbers?

Sure. Thanks, Jamie. Let's start off with a discussion around international projects, and in particular, margins. We have been successful in targeted market, particularly the renewables side. In regard to margins, we find that although the margin will slow at the beginning of the project, we would expect by the end of the project to have margins roughly in line with the margin percentages that we've targeted as we get into 2016.

Those should be high single-digits, potential for double-digit margins in those projects, if we wrap them up cleanly and execute the way we should. History would say that, that's true and when we look at our performance to date on those projects, we continue to feel pretty good about them from a margin perspective.

In regard to TSG, yes, we do have an awful lot of bidding going on, which is a good thing for that business. It bodes well for that business as we move into 2016 and 2017. In the near term, Chalk River in Canada is the biggest project. It's in bid stage right now. We've submitted our bid. We'd hope to hear something in the next few months, perhaps in 2015, and we continue to feel really good about that project. That project is large enough, it has the potential to turn TSG and put it back on the upward path, so that's one to keep our eyes on as we move through the next few months.

Idaho is out for bid. We bid Kansas. Those are two others to watch for in the coming year or so. And in the longer run, we still see opportunities like Savannah River when we look out two to three years in the future. So there's a lot more upside than downside in TSG, and I know that the new BWX Management team brings an awful lot of expertise in this area. That will be one of the areas that they focus on as they look to growth post-spin.

Third question, timing of Q1, I did mention that we're happy with Q1. It was a really good Q1 for us. A little bit of it was due to timing and that's one of the reasons we are hesitant to say too much about full-year earnings. I'd say it was a driver, it wasn't the only driver in the good quarter. It might've been worth a couple of cents to us, but even without the timing, it was a good quarter across the board in our two big businesses, NOG and PPG.

Okay.

And Jamie, just that couple of other quick points -- Jamie, real quick, I'd say the quarter itself was very strong, but we are early in the year and it's just a little bit too early for us to feel that it's time to declare any upside and we will see how the next quarter goes. The other point, just to clarify is the book margins on those international projects are very much in line with what we have experienced historically.

Okay. Congrats. Thanks.

Thanks, Jamie.

Steven Fisher, UBS.

Thanks. This is Cleve Rueckert on for Steve. Most of the key questions have been touched on, but there's been some discussion recently about growth in the diesel electric market for submarines. I'm just wondering if that impacts your business at all and how you would strategically react to maybe a pick-up in a diesel submarine construction?

I've read many of the same articles you have on that front. The reality is I don't see any impact on our business from that market picking up. We know who our customer is on our side and that's our only customer, and that is who we are focused on. As other countries around the world perhaps ramp up their diesel electric fleets over time, could that perhaps cause the US government to consider its posture in regard to the number submarines or carriers it might want? It could, it could, and it would probably result in some upside, but in the near term, no, I don't really see any impact on our business from the diesel electric pickup around the world.

Okay, thanks. And then just as a follow-up, Nuclear Energy, how do you see that business progressing over the next year or two? What needs to happen for you to hear your guidance for this year and for 2016?

I was not pleased with the results in NE for Q1 for sure. We need some additional costs we need to take out. We did have some timing work against us in NE, where we had some projects, particularly in Canada, push out into Q2, Q3. We've taken a hard look at the business and continue to believe that full-year, NE will be low single-digits.

Tony mentioned in his discussion that backlog is up in NE, so there's a lot more upside to come in the business, and I think 10% is a realistic target for them as they move into 2016. But Q1 was not exemplary for us and I think we will do better, the back half of the year.

Okay. Thanks very much.

Anna Kaminskaya, Bank of America Merrill Lynch.

Hi, guys. Great quarter. Most of my questions have been answered, but maybe just wanted to touch quick on the aftermarket business in Power Gen. It sounded more cautious than February or early March on the business, so what do you think drove the upside and is that, when you talk about timing of projects, is that what got pushed from the second half into the first half of the year?

Yes, Anna. For the most part yes. It's the aftermarket business that the timing moves around a little bit and some of those projects that we saw for Q2, Q3, Q4, did move back into Q1. For us, it's a little bit hard to predict the timing on the aftermarket business. Sometimes those projects are bid and we plan for them; other times, some utilities have put off some large maintenance work.

As a result, they end up calling us pretty quickly for us to come in and do some work for them on the repair side. Again, the business is a little bit hard to predict quarter-to-quarter. Over a longer period of time, it's a very stable business for us, so long as we stay ahead on the cost side.

And so how's it trending for the second quarter? What should I expect for the growth? At least, what is baked into your guidance for the second quarter in aftermarket?

Over the balance of the year, we'd expect aftermarket to remain relatively steady. Again, difficult to predict exactly. It's a big component of our business going forward between the aftermarket service projects and part. That's the backbone of the business and we are looking to maintain revenue as much as we can in a tough market and drive margins. Q1 demonstrates we're doing a pretty good job of that so far.

And then just on the difference in margin between your new equipment and aftermarket, you're probably the only Company I know that reports similar margins between those two businesses, is it something structural or what can you do to enhance aftermarket margins over time? Thank you.

I would agree with your observation and when I look at that I see opportunity. I think that the new equipment business margins will probably remain stable and maybe we can drive them up a little bit. Aftermarket, it's a fair question. We should be able to do better over time and that's what we're looking to do by driving down our costs where we can, minimizing our fixed-price footprint, and looking for ways to keep quality up and drive cost down.

The Magotteaux alliance is a great example that. Shutting down a 1940s era foundry, which was not very competitive. We are going to end up with a lower-priced product and a higher-quality product, and perhaps access to more customers. And over time, to your question, that should help us improve margins in that business.

Okay. Thank you very much.

Adam Thalhimer, BB&T Capital Markets

Good morning. Congrats on a nice quarter.

Thank you.

The one to two international awards you expect potentially for the remainder of the year, where are those geographically?

Most likely they will be somewhere in Europe waste-to-energy renewable related. We're always looking for the unique one-off opportunity in the coal sector, usually in Southeast Asia, and we will continue to look for those opportunities, but more likely than not, if we can capture one or two before the end of the year, it's going to be waste-to-energy in Europe.

Got it. Then can you give a little more color on the demand environment for MEGTEC. You seemed happy with the performance in the quarter, just maybe flesh out what the opportunities are on that side of the business?

One of the things we like about the MEGTEC industrial environmental as compared to North American coal, for example, is it is a slowly growing business naturally. I'd say mid-single digits would be the natural growth rate worldwide for industrial environmental. The key for us is leveraging our technology in the Power Gen business, moving it into MEGTEC and then expanding MEGTEC worldwide.

We still have a very low market share in what is a very fragmented business. We just see a lot of opportunity in that sector to grow organically and perhaps to grow via acquisition. We feel good about it. It's nice to be in naturally growing market with one of our businesses.

Okay, thank you.

Chase Jacobson, William Blair.

Good morning. Nice quarter.

Thanks. Good morning, Chase.

I had one question on Power. Jim, you mentioned in your prepared comments about potential for more cost savings or product line rationalization. Just wondering if you could give any more color as to what you are referring to there on the Power side of business?

Sure. We don't have any specific numbers or targets on that front for additional cost opportunities looking forward. More the messages and it's more of a cultural change we're driving inside the Company is we know we need to consistently improve and one of the ways to do that is to look to ways to optimize are cost structure, find the right external partnerships to enter into like Magotteaux.

So really the message is when we finish the GCI and then we finish the current driving margins program, it's not the end. We recognize the long-term challenge that exists in the North American coal market and in order for us to be successful and create value for our shareholders and remain a top supplier for our customers, we know we need to stay aggressive on that front and we plan to, is really the message.

Okay. And then on the capital structure ahead of the spin, the balance sheets remained pretty steady over the last few quarters. I assume that you're sticking with the plan that Power Gen will be essentially debt-free. Are there any opportunities to leverage the size of the consolidated BWC, in terms of taking out more debt or just changing the capital structure at ahead of the spin rather than after the spin?

We've looked at that and I don't think we plan on moving down that front. We're pretty close to the spin at this point. We are moving along very smoothly with the SEC. At this point, the sooner we can get the spin done, the better for both sides. We are ready to go. So I wouldn't expect us to do anything else on the balance sheet in regard to debt pre-spin. What each company decides to do post-spin, we will be pretty well prepared to have that discussion when we get to investor day, which could be just a few weeks away.

Okay, thanks a lot.

John Rogers, D.A. Davidson.

Hi, good morning, and congratulations, as well, on the quarter. Just a couple of follow-up things. First of all, in terms of your -- in the Power Generation business, competition for some of these international prospects, has the currency impact changed your positioning there or how competitive you are for this?

Not so much. The reality is, particularly on waste-to-energy in Europe, is we do a pretty good job of matching the cost side to the revenue side. Another way to say that is to say that we tend to do the manufacturing in roughly the same currencies in which we are picking up the revenue in the project. So we haven't really found a competitive advantage or disadvantage in the foreign exchange changes.

The question might become more relevant over time if we can really take advantage of the opportunity to do a lot of the manufacturing and engineering in our new Indian facility. That could play for or against us over time, but right now it hasn't really hurt or helped us.

John, most of the engineering and the manufacturing on these European renewables projects, waste-to-energy projects, is really localized. So we really aren't exposed at all in that regard. So the only exposure at all would be on the margin, very minimal impact just because of the translation of earnings when you have a stronger dollar and a slightly weaker euro, and obviously that can change, too.

Okay. But I appreciate your comments that you're comfortable margins are consistent with what you've seen so far on that work.

We are very comfortable.

Okay, and then just secondly, can you just give us a quick update on where we are in terms of expected restructuring and spin costs over the next couple of quarters or the next 1.5 quarters?

Again, we remain on track from a restructuring perspective, both in the results that we're seeing and the cost to implement that we've given out, so we remain very much within those ranges. Spin costs, I believe we said $45 million to $55 million after tax for spin cost. We are in the range. We might be at the high end of the range, but we are still in that range.

Okay. Great, thank you.

Martin Malloy, Johnson Rice.

Good morning.

Hey, Marty.

I just wanted to ask about the Indian manufacturing facility that's been up and running for a while now. Can you talk about if your pleased with the productivity there and how that's maybe helping you offer competitive bids on some of the international solid fuel opportunities?

Sure. To your point, we are up and running there. We have three projects right now in that facility, two in manufacturing and one we're still accumulating steel and pipe and we are getting ready to move into manufacturing. So far so good. Manufacturing productivity has been on our expectation. We knew we were going to have a couple of challenges just coordinating engineering and sourcing and we've moved through those relatively smoothly.

We're pretty happy with the initial ramp-up of the Indian facility, recognizing that it's all non-Indian work that's in there today. The real test will be as we move forward in the Indian market, if and when we win a couple of large project, that will be the real test for that facility. Ballpark, we probably have that facility running at one-third and no more than one-half capacity today. So we are testing it but we are not really testing it yet. Time will tell. That said, we feel pretty good about it so far.

Okay. And then on the Ohio class replacement program, can you talk about if there's anything new there and maybe what milestones we should look for in the future in terms of potential awards from the government?

Sure. Ohio replacement, really nothing new. We continue to do some long lead work for the government, as we've indicated previously. We feel good about the program. We continue to watch and see how Congress is going to deal with the funding challenge that exists. I'm convinced that they will figure out a way to work their way through the funding challenge on Ohio replacement.

It's a critical platform for the country going forward. It absolutely has to be funded. Exactly what mechanism they choose over the next two or three years will be interesting to see. But we are confident that it will be funded and we will see some more significant work coming in over the next two or three years.

Thank you. Congratulations on the quarter.

Tahira Afzal, KeyBanc.

Hi, folks. A bit of a bizarre follow-up, but I [threw it out there]. Utility analysts seem to be in a buzz about this new Tesla battery. I would love to get any initial thoughts you have on how that could potentially change the power generation dynamics in the US, and if there is a play for you or a potential impact five, six years down the road?

Sure. I would agree there's been a lot of press around Tesla and car batteries turning into home batteries or large-scale storage for electricity. A couple thoughts. One is the ability to efficiently store electricity over time will change the dynamic of the industry. There's no doubt. I'm not sure that the battery from Tesla will have a material impact in the next three, four, five years.

It's an interesting idea. There's a lot yet to come together, both on the cost side, and there's a lot of structural changes that need to be made to the electric side in order for that to be effective. For example, you need time-of-use electricity pricing in order for the whole concept of charging at night and discharging during the day to work. Not very many regions in the United States have that today. So an awful lot of changes need to move into the market.

There are a lot of different technologies. Battery storage could be one. There are a variety of other technologies that folks are taking a look at, and we are looking at them, too, because it could change the market over time. In the end, for our more traditional coal business, we recognize the fundamental challenge that is this. I think we're in front of it and I'm not sure the timing of storage into that market changes that profile for us too much.

Got it, okay. And could this eventually be -- I know you hope to post-spin-off, Jim, grow BWC or rather the Power side of the business, and I'm just wondering are you looking, it seems, at opportunities such as this? Do they play an important part on where you place your M&A dollars?

I would say we look at it. We continue to like the industrial environmental segment. We've had a lot of success with MEGTEC. It's a nice diversity play for so we'll look there. That said, we have a lot of expert in the energy markets. We know the customers very, very well, and we understand the dynamics of the market.

I doubt we're going to build a $5 billion battery plant like Tesla, but I think your point is very valid. We do continue to look at emerging technologies like that. We think that, with our strong technology base, our great R&D teams, and our knowledge of the markets and knowledge of our customers, we could play in that arena over time and we will continue to look for opportunities in front.

Got it. Thank you very much, Jim.

Thanks, Tahira.

Thank you. No further questions. I would now like to turn the call over to Jenny Apker for closing remarks.

Thank you all for joining us this morning. That concludes our conference call. A replay of this call will be available for a limited time on our website beginning later today. Thanks again. Talk to you soon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. All have a good day.