Babcock & Wilcox. Moderator: Leslie Kass August 5, :36 a.m. ET

Transcription

1 Page 1 Babcock & Wilcox August 5, :36 a.m. ET This is call # Good morning. My name is Shannon and I will be your conference operator today. At this time I would like to welcome everyone to the Babcock & Wilcox Q earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press the pound key. Thank you. I would now turn the call over to Ms. Leslie Kass. Ms. Kass, you may begin your conference. Leslie Kass: Thank you, Shannon. And good morning everyone. Welcome to Babcock & Wilcox Enterprise s second quarter 2015 earnings conference call. I m Leslie Kass, Vice president Investor Relations and Communications at B&W. Joining me this morning are Jim Ferland, B&W S Chairman and Chief Executive Officer, and Jenny Apker, Senior Vice President and Chief Financial Officer, to talk about our second-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 Web site at Babcock.com.

2 Page 2 During this call certain statements will be made 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 release. The Safe Harbor Provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our information statement on Form 10 and our Form 10-Q for the second quarter 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 statements 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 in 2015 outlook to supplement the results provided in accordance with GAAP. This information 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 ongoing operations. A reconciliation of these non-gaap measures can be found on our second-quarter earnings release issued late yesterday and in our company overview presentation posted on the Investor Relations section of our Web site at babcock.com. Due to the number of participants on today s call, I would ask that you limit yourself to one question and perhaps one follow-up. You re of course welcome to get back in the queue. With that I will now turn the call over to Jim. Thanks, Leslie. Good morning, everyone. This morning marks our first earnings call as an independent publicly traded company since we were successfully spun off from BWX Technologies on June 30. As reflected in the combined stock price of the stocks for B&W and BWXT since the announcement, the spin has created shareholder value

3 Page 3 already but we believe there's more to come. With 148 years of history we re excited to run this new company and see potential for growth and additional upside over time. We appreciate your efforts to follow our story and thank you for joining us today. On today's call we ll discuss our second-quarter earnings and provide an update on the progress of our strategy and plans for the rest of the year. Let's start with a review of the quarter. Our second-quarter results were slightly ahead of our internal targets and considerably improved over last year. Consolidated revenues for the quarter were $437 million, an increase of 33% compared to the prior year second-quarter, and adjusted earnings per share were $0.27 versus $0.14 in the second quarter of Non-GAAP operating income for the period was $21.4 million which is a 71% increase compared to the second quarter Our backlog as of June 30 stands at $2.4 billion, 10% higher than the same period last year. This includes a substantial increase from global power due to new international boiler awards and our bid pipeline remains strong at $2.6 billion despite the big winds in the first quarter which speaks to the strength of our new business development efforts. As a reminder, we will report earnings in three segments: global power, global services and industrial environmental. Global power provides new boilers that can use a variety of fuels, including renewables, and environmental equipment for power plants. Our global power division is our primary organic growth engine as we seek to expand our presence worldwide. This segment had a solid quarter with increase revenues as expected as awards from the fourth quarter of 2014 and the first quarter this year are ramping up. We would expect one or two more contract awards for this division this year and feel good about the revenue outlook given the visibility of the backlog in this business through The global services segment includes the strong base of aftermarket work for both utility and industrial boilers and associated environmental equipment. This division provides parts and technical services,

4 Page 4 service projects, operations and maintenance, and construction services for existing B&W boilers as well as other equipment manufacturers. Global services delivered a solid quarter in line with our expectations as we continue to focus on maximizing our efficiency and segment margin. Finally, industrial environmental segment includes all of our non-boiler environmental projects and engineered equipment. Formed by our acquisition of MEGTEC last year, this segment diversifies B&W beyond power and serves a wide variety of industries in a steadily growing global market. As we finish up the first year of ownership of this business we continue to be pleased with our acquisition as we have met or slightly exceeded the targets we set out in the pro forma for the acquisition. I d also like to touch briefly on the administration s Monday announcement of the EPA's new clean power plant rule. This rule is in line with our expectations and B&W s existing US coal strategy. We submitted comments and have participated in the dialogue on the draft rule along with our customers. The current language of the rule requires each state to establish a plan by 2018 to reduce CO2 emissions. The final rule is less aggressive than originally proposed and extends initial compliance to 2022 which will help ease the impact on our customers and their ratepayers alike. Our customers have been actively working to reduce their reliance on coal for years and this announcement does not alter our plans to continue to deliver for our customers, reduce our cost base to drive margin, and utilize the cash our coal business generates to further diversify our company. Now let me turn it over to Jenny who will discuss the segment results and other financial matters after which I ll provide an update on 2015 guidance and our strategic priorities. Jenny Apker: Thanks, Jim. The global power segment posted strong second quarter 2015 revenues of $157.4 million which is 43.5% higher than the $109.7 million revenues in the prior year period due to an increase in new build steam generation projects. The global power gross profit improved by $7.2 million to $26.7 million,

5 Page 5 primarily due to the increased revenue. Backlog in the segment at the end of Q2 was 1.2 billion which is up 36% compared to second-quarter Global services revenues were $236.7 million in the second quarter of 2015 compared to revenues of $214.1 million in the corresponding period of This $22.6 million increase in revenues was primarily attributable to an increase in activity in service projects and construction services. Gross profit in the current quarter decreased by $2 million to $46.3 million versus $48.4 million in the three months ended June 30, 2014 primarily as a result of operations and maintenance activities that were unusually favorable in As of June 30, 2015 the backlog in global services was a solid $1.2 billion, about half of which is related to long-term operations and maintenance contracts. Note that even with this backlog a significant portion of the work in the segment remains book-and-bill. June 20 marks the first anniversary of our acquisition of MEGTEC which serves as the foundation for the industrial environmental segment. Revenues in the industrial environmental segment for the second quarter of 2015 were $43.4 million compared to $3.6 million in the second quarter of 2014 primarily reflecting the timing of the acquisition. Similarly, gross profit was $8.9 million in the current quarter compared to $1.2 million for the short period of ownership in the second quarter of The backlog in this segment at June 30, 2015 was $96 million, up 16% compared to the backlog at June 30 of MEGTEC s backlog tends to run at about 40% to 50% of full-year revenue due to the generally short sale cycle and project duration in this business. At the B&W level, SG&A increased $6.7 million in the quarter compared to the prior year primarily due to incremental overhead from the addition of MEGTEC as well as higher business development and proposal costs which were offset partially by lower costs arising from our driving margins program. We have recognized $16.5 million of one-time non-gaap charges this quarter, notably more than $14 million of the total adjustments for non-cash. $9 million of impairment charges primarily related to equipment for used carbon capture and storage research and development for which we no longer

6 Page 6 see a clear path to deployment and therefore to value creation. Restructuring charges of $5.3 million were primarily accelerated depreciation related to facility closures of the old B&W foundry and the Canadian manufacturing facility. We reported two areas of costs related to the spin. The first, a $1.3 million charge related to overhead allocations from BWC related to the nuclear energy business we are regarding as discontinued operations. Under GAAP we are not permitted to include allocated expenses in the subtraction of discontinued operations from the ongoing business. This quarter we also incurred $900,000 in direct spin-related costs. Over the next 12 months we expect to recognize another $5 million to $6 million in spin-related costs primarily related to employee retention programs. The second quarter 2015 effective tax rate for the company was approximately 18.2% which reflected the impact of the non-gaap adjustments this quarter, most of which were domestic. The effective tax rate on adjusted income for the quarter was 32%. We continue to anticipate that our full-year effective tax rate will be in the 32% to 34% range. The Company's cash and investments position net of restricted cash as of June 30, 2015 was $307.6 million including $175.7 million in non-us cash. Second quarter cash flow reflected a 30 a $3.2 million of net cash from operating activities versus a net usage of $16.7 million of cash in the prior year quarter primarily related to better operating results, stronger working capital and lower pension contributions. Now I ll hand the call back over to Jim for an update on 2015 guidance and progress on our strategy. Thanks, Jenny. Let's talk about the remainder of We provided guidance at our investor presentation on June 17 for 2015 revenue of approximately $1.7 billion and for full-year adjusted EPS between $1.10 and $1.30. We re on track to deliver those results. Also consistent with our previous comments, we anticipate the

7 Page 7 last two quarters of 2015 will be sequentially stronger as we round out the year. Turning to strategic priorities, we have three strategic objectives that generally align with each of the three operating segments. The first is to optimize the business which is focused on improving margins primarily in the global services segment. We ve said this program will yield 200 to 300 basis points of margin improvement in the business over the next two years. We anticipate that for 2015 using the traditional way of calculating operating income at the business unit level B&W will deliver between 7.5 and 8% operating margin on a consolidated segment basis, closer to the high side if you add back the MEGTEC amortization. We expect to improve this operating margin by a percentage point in each of 2016 and 2017, getting us to nearly 10% or perhaps higher at the close of the program. The margin improvement program has resulted in tangible changes to the business that are yielding results. This quarter we transitioned out of two facilities and construction continued to progress at our more efficient operation in Monterrey, Mexico, where we have nearly completed the core building expansion. Our second strategy is to increase our rate of international growth. As demonstrated by project wins in the fourth-quarter 2014 and the first-quarter this year, our business development team is gaining traction. We continue to add sales personnel in our target countries and work to build on our recent success. Developing relationships to win large projects takes time and the size of the projects make -- makes bookings lumpy quarter-to-quarter, but as evidenced by continued strength of our bid pipeline, despite the recent wins, our new sales approach is having a positive impact. Our third strategy is to continue a disciplined acquisition program. We exited the spin with a strong balance sheet that will allow us to grow through acquisition. We re currently targeting the industrial environmental segment among other complementary sectors. As the spin neared closing, our corporate

8 Page 8 development team was freed up to resume this effort and now they have the active participation and support from our MEGTEC management team that has deep knowledge of the industrial environmental sector which is helpful in their evaluation of targets. Finally, as we announced in our earnings release, we have authorization from our board for a share repurchase program of up to $100 million over the next two years giving us the ability to make opportunistic share repurchases. While this is a lower capital allocation priority than quality acquisitions, it is a tool that we can deploy over time. I ll wrap up by saying that we had a solid quarter, slightly ahead of our expectations. We believe in our plan and are focused on execution and strategic implementation. We were able to deliver in Q2 despite the activity associated with closing the spin and we expect to continue to do so moving forward. We are excited to be an independent company and we re in good position to generate growth as we slowly diversify the business to reduce our dependence on US coal and leverage our core competencies and strong balance sheet to expand our presence in the growing renewables and industrial environmental segments. That concludes our prepared remarks. I will now turn the call back over to Shannon who will assist us in taking your questions. At this time I would like to remind our participants that if they have a question they may press star then the number one on their telephone keypad. Your first question comes from the line of (Brian Konigsberg) from Vertical Research. Your line is open. Please go ahead. (Brian Konigsberg): Yes, hi. Good morning. Hey, good morning, (Brian). (Brian Konigsberg): Hey. Maybe just starting on maybe the -- within the strategic objectives in the margin expansion objectives you've laid out, just can you talk about what

9 Page 9 volume is -- is assumed in those -- in that progression and maybe also talk about the bid pipeline, how big is it today versus the last couple of quarters? So, I'll start with the bid pipeline and, Jenny, maybe you can take the margin question in just a second. So the bid pipeline, (Brian) has held relatively steady for us actually, you know, in the range of $2.5 billion. That s a pretty good sign in that we booked an awful lot of large projects in the last nine months give or take even though we didn't book any in Q2 which was not a surprise to us. The new business development teams that we have in place working with our with our operations folks continue to source good opportunities for us both on the renewable side, you know, as we as we look to, you know, maybe continue our success in the -- in the UK and begin to expand our renewables business worldwide. And we re also seeing some opportunities in the coal sector around the world. Again we re focused when we think about coal opportunities only on a few opportunities where we really think we can add value to the customer as opposed to looking at the breadth of opportunities that are out there where we face an awful lot of competition and we probably find it hard to make money. So we feel very good about the bid pipeline. It's solid and I d even say the quality of the opportunities that we see is at least as good if not better than we've seen in the last couple of years. Jenny Apker: And if we want to talk about the margin improvement strategic opportunities that we see, as we look forward we are anticipating additional cost cost to take out opportunities in the neighborhood of $30 million over the next couple of years. We said $30 million to $50 million and we've accomplished some of that already. So if you look at a baseline of about $30 million to come out of the next couple of years off of the baseline businesses for global services and global power, which is where the cost take-out efforts are really under are really being focused, that gets you a minimum of 100 basis points a year off of that baseline revenue.

10 Page 10 (Brian Konigsberg): Is the baseline revenue soon to be growing meaningfully or is it -- within the plan that -- that you ve you ve got one? Jim Yes, so, just rough math, you know, Jenny s math would base the traditional power revenue at $1.5 billion, that s 1% margin is $15 million so it adds up to 2% margin over the next couple of years. You are correct, we do -- we do expect to expand that revenue line and we d expect that margin improvement, you know, to continue, you know, even at a higher rate of revenue (both) because we might find additional cost to take out and we also have more revenue over which to spread our SG&A. (Brian Konigsberg): Got it. I ll pass it along. Thank you. Steven Fisher: Steven Fisher: Jim Your next question comes from the line of Steven Fisher from UBS. Your line is open, please go ahead. Great, thanks. Good morning. Morning. Wondering if you could just give us an update on those next couple of key prospects that you have in the power side of things. What still has to happen to get those into your backlog? I m just wondering what the risk around those getting pushed out is, is it kind of permitting, is it just contract associations? What what you know, is there macroeconomic concerns? Yes, sure. Well, so there s always all of those actually when we look to sign these larger projects. You know, as we let we say we re willing to step forward and say we have one or two before the end of the year. You know, we do have a couple projects we have our eyes on that are a little bit further along. You know, nothing s a done deal until it s signed. These are complicated projects. We very much take our time not only on the pricing but on the -- on the legal terms and conditions which can really matter. So without giving away everything we have in line, you know, we continue to believe that one or

11 Page 11 two is a reasonable expectation and we have one or two that, you know, we think are relatively high probability. Steven Fisher: OK. And then just give us a sense of how you re thinking about the timing of -- of the buyback and the commitment to completing it, you know, in the next year or two given some of the cautionary language in press release around -- around the buyback discussion, you know, kind of pulling it at any time? Fair enough. So to us we ve been pretty clear about capital allocation priorities. You know, our number one priority to leverage what s a pretty strong balance sheet today is to find quality acquisitions. We have an awful lot of very talented folks that are focused on that, we have business units that are actively engaged, and that s where we would like to put our money so long as we can find a quality acquisition. Secondary to that would be buyback. For a couple reasons we decided that we would ask the board for an authorization. One, we want to clearly send the message that says, you know, we recognize that we need to do something. We d like to do acquisitions, but if we can t find a quality acquisition in the next 12 to 18 months we recognize that -- that sitting with a balance sheet with $300 million or more of cash doesn't make a lot of sense, so the backup plan to acquisitions would be a share buyback. So this allows us to demonstrate to our investors that we re serious about that. It also provides us an opportunity where if we think for some reason the stock is displaced in the market that we could opportunistically enter the market. Again, the priority is acquisition first, buyback second, but given the right opportunity and the right stock price, right, we still have the ability to -- to do a buyback in the short-term. Steven Fisher: Jamie Cook: OK, thank you. Your next question comes from the line of Jamie Cook from Credit Suisse. Your line is open. Good morning.

12 Page 12 Jamie Cook: Please go ahead. Just a couple questions. One, Jim, sorry back on the two prospects that you re looking for this year, could you give color in terms of the size or where they re located geographically, and then (beneath) that is the timing and whether you need those awards to contribute to to earnings for this year and would that imply the high-end? So, second question, sorry. Back on the acquisition, acquisition again. Can you just talk about what the pipeline is for acquisition and the size and the (multiple) that the acquisition targets that you re seeing? Thanks. Sure, Jamie. So, let s start off with the one to two opportunities we would hope to book this year. In regard to whether they would have a material impact on 2015, probably not is the answer. They ll help us out in 16 and 17 obviously, but even if we booked a project in the next couple of months we d be unlikely to see more than just a few million dollars in this year. So no, we don't need either of these two for the 2015 numbers. Jamie Cook: In regard to M&A. Sorry, go ahead. Sorry, just the size of those one or two more than where they are geographically, and I think it sounds more like it s a more of a Q4 or just I was trying to get a feel for the size. Yes, so, I would say it could be Q3, Q4, could be either one from a timing perspective. Size would be in line with what we've announced in Q4 and Q1. These are, you know, just normal projects, not not abnormally large but -- but not smaller either. From a global standpoint, right, we continue to pursue renewable projects primarily in Europe and we continue to pursue new coal opportunities primarily in Asia. Jamie Cook: OK, that s helpful.

13 Page 13 On the M&A on the M&A front, you know, again the pipeline is -- of opportunities is pretty large. We re rapidly filtering that down to a number we can chase. You know, the ideal size for us I would say would be somewhere in the range of $50 to $200 million would be a good place to start. If we could find a great opportunity larger than that we d look at it. If it s much smaller than $50 million, folks would have to a lot of convincing of me to to ensure that that s worth our time to chase. So I'd say $50 million to $200 million is a good number. Jamie Cook: I guess I mean, the balance sheet is pretty strong (inaudible) with $5 in cash. You announced the share repurchase. Is there anything, I mean, are there any deals you re close enough where you see you have the obviously you could do both, right, because your balance sheet is strong. You have the capacity to do both. Are there any deals that you feel like you could close by the end of the year? Are you close enough or or or or not? Jamie Cook: Bob Labick: So, I would agree. We certainly have a balance sheet to support both buyback and and M&A or maybe even a couple of the size I just outlined. You know, given we haven't announced anything we d probably be hard-pressed to close a transaction between now and the end of the year, but it's not completely out of the question. All right. Perfect, thanks. I ll get back in queue. Your next question comes from the line of Bob Labick from CJS Securities. Your line is open. Please go ahead. Good morning and congratulations on the spin and a good start. Thanks. Bob Labick: Just want to go back to the the cost savings first. You mentioned the $30 million in savings and you mentioned Monterrey as a, you know, one of the areas where the savings will come from. Can you kind of, you know, broadly

14 talk about how much of the savings comes from that manufacturing Page 14 consolidation opportunity and then how much of the rest is, you know, hand or you still have to figure out what you re going to do but you have, you know, a sense or, you know? Just walk us more towards that 30 and the conviction kind of place. Sure, will do. So in regard to the $30 million over the next couple of years of cost take out that Jenny mentioned, I d tell you that we have very specific projects with very specific timelines. Accountability, we know who is running them and we know how much money they're supposed to save and it adds up to at least $30 million. We continue to look for more, by the way, we like to find opportunities to reduce some of that increased overhead we re picking up as a standalone company and we actually think there are additional opportunities to take cost out elsewhere in the business. But as for the $30 million, we have specific projects, we have specific people and it and it very much adds up to that number. So we feel pretty good about it. In regard to the question about Monterrey, Monterrey is a portion of that $30 million but, you know, off the top of my head I d say it s, you know, in the range of a quarter or less. It s not a significant portion. Bob Labick: OK, great. And have you I guess publically identified some of the other opportunities or we re learn about them as you roll them out. Yes, I think you ll learn about them as we roll them out. Bob Labick. Ok, fair enough. And then just last question if I could, Jim I believe you mentioned at the analyst day the opportunities for some future tax planning. I wanted to see if you could give us any update on that and if that, you know, might be 2016 or is that, you know, should we be thinking, you know, well beyond that 2017, 18, 19? Jenny Apker: Well, Bob, we re about 30 days past the investor day and our -- for the most part our finance teams have been focused on completing the spin and closing the second quarter. We are making progress with the use of some third-party

15 Page 15 assistance in evaluating opportunities for tax planning but that s a slow ship to turn so I don't think you should expect to see significant change in tax rates in the short. Bob Labick: Tahira Afzal: Tahira Afzal: Jenny Apker: What I will add, I still think there is significant opportunity there and that wouldn t be the first time that Jenny has heard that question the last few days because she might've heard it from me as well. You know, it continues to be a priority opportunity for us. OK, thanks very much. Your next question comes from the line of Tahira Afzal from KeyBanc Capital Markets. Your line is open, please go ahead. Thanks, folks. Good morning and congratulations on the strong quarter. Thanks, Tahira. I guess my first question is, you know, do you (plan) for providing some sort of color around the backlog (burn) and how that plays out in this year, next year? And I guess, you know, global services and industrial environment (inaudible), if I back into that $1.7 billion in revenue guidance you have and take out total (power), is industrial environmental essentially holding still at the $200 million, and if so would that, you know, does that back into global services in the second half being slightly lighter than first half? I I don t know that I I m not doing the math as fast as you were doing the math. I think we -- we've been -- we've talked about let me back into that math. So Let me I can do a little bit of it for you. So, just here starting with MEGTEC. Yes, I think, you know, MEGTEC in the ballpark of $200 million makes some sense and that would be a pretty good mid to upper-level, you know, single digit growth rate for them year-over-year which is about what we d expect out of MEGTEC. So, that s in line.

16 Page 16 You know, global power continues to grow and I would say we would probably just have to do the math off-line and get back to you on as you back that into services, where do you end up, you know? We do expect Q3 and Q4 to be quite a bit stronger than Q1 and Q2 at the bottom line but I haven't picked apart the numbers on the revenue side. Tahira Afzal: That s quite OK, Jim. I guess second question is, (so we ve) seen a bit of a push out in the clean air act and I would love to get a sense from you, I mean, obviously in a way it might help on the global services side. On the other hand, would love to get an idea if it has an impact on MEGTEC and the industrial environmental part of the equation which might be negative? So, it s interesting, this clean power plan, right, this there are actually goods and bads in it for us as you indicated. You know, it continues to be an overall, you know, pressure on our coal business which primarily would impact global services. The push out in the timeline from initial compliance was originally to be 2020 and now it's That s helpful probably for us. One of the interesting is -- and I haven't read the whole plan, I ve read pieces of it. In on investor, you know, folks asked us some questions about, you know, how what kind of pressure are we going to see on the coal side in the US and -- and how fast might it decline. And we referenced numbers that said, well, if -- maybe 35%, 37% of the electricity today in the United States comes from coal, we said, you know, most of the projections we ve seen would say 25% still comes from coal in Interestingly as you look inside the EPA's own numbers in this new clean power plan, they re projecting on two different scenarios that 27% of the electricity in this country comes from coal, so very much -- very much in line with our numbers if not a little bit better. And that s a slow rate of decline and one we can very well manage. We don't see any real impact either upside or downside in regard to MEGTEC directly from the plan. The one piece of upside we do see is it looks as though the EPA is going to be supportive (doable) waste to energy plants qualifying as renewable and CO2-free, and that will give the states they put together their

17 Page 17 state implementation another lever, right, to generate reliable baseload power in a renewable fashion. So that could actually prevent -- present opportunities for us on the waste to energy side in the US over the next few years. So that part s pretty good. Tahira Afzal: Got it, OK. OK, great. And I ll hop back in the queue. Thank you and congrats again. Your next question comes from the line of Chase Jacobson from William Blair. Your line is open, please go ahead. Chase Jacobson: Hi, good morning. Jenny Apker: Morning, Chase. Hi, Chase. Chase Jacobson: So, Jim, you know, towards the spin at the investor day you said that one of the things you are most excited about in going to BW was that you could get back out seeing the customers in the utility and power industry. Just curious as to, you know, over the last months what your initial take is on those conversations that you ve been having compared to what you were expecting going in? Yes, you know, it s actually been pretty positive. We re spending, and I m personally spending some time with, you know, our biggest customers and it's interesting if you look back three or four years some of our biggest customers three or four years ago are still our biggest customers today, yet some of our biggest customers going forward are new, right? There are a handful of companies that have acquired up coal plants and they re making the bet that, you know, there s going to be continued life and they re buying the assets at a favorable price and and the see upside. And they re beginning to put together their fleets, and as they put together their fleets of coal plants they have multiple different O&M strategies and multiple different groups of people. It s a big opportunity for us to come in

18 Page 18 and help them right now, think about how to run those coal fleets, how to optimize them, how to best maintain them. So we re seeing additional opportunities with these new customers. So again, you know, there s always going to be a little bit of pressure on the US coal market, we understand that, we have a really good plan to take out cost and drive margin. I still think there s a lot we can do to provide better service to our customers and -- and bring them more products over time. So, so far, so good on that front. Chase Jacobson: OK, great. And then on the free cash flow, you know, for the first half you re well ahead of net income but I think the second quarter was weaker. Are you still -- is the 100% free cash flow conversion the way we should still be thinking of it? And I know you were kind of, you know, going back and forth as to whether it should be 100% or, you know, somewhere close to that range. Any color there would be great. Thanks. Jenny Apker: That's it s an interesting question and it s a topic of continuing debate internally. I think we're still comfortable expecting that free cash flow conversion will be in the range of 75% to 100% for the year. Q1 was strong in large part because of the -- the net (WIP) or the increase in advanced billings from customers that you see on the balance sheet. Over in the second-quarter we worked off a little bit of those (advance) bills. Those in large are milestone payments that we received cash from a customer before we start the next -- next part of a project. You'll continue to see that part of the balance sheet go up and down as we move through the execution phases of some of these larger projects, but we re still feeling pretty good about the 75% to 100% cash flow conversion rate. Chase Jacobson: OK, thanks. At this time I would remind our participants that if they have a question or a follow-up question they may join the queue by pressing star and the number on their telephone keypad.

19 Page 19 Your next question comes from the line Martin Malloy from Johnson & Rice. Your line is open, please go ahead. Martin Malloy: Jenny Apker: My questions have been answered. Thank you. Thanks, Martin. Again, I would remind our participants that if they wish to ask a further question they may do so by pressing star and the number one on their telephone keypad. I hear no further questions in queue. I would now turn the call back to the presenters. Leslie Kass: Thank you. This is Leslie Kass. Thank you for joining us this morning. That concludes our conference call. A replay of this call will be available for a limited time on our Web site later today. Thank you. This concludes today s conference call. END