Shaw Group Executive Insights: Gross Profit Margins, Cost Overrun

On Tuesday, Shaw Group Inc (NYSE:SHAW) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Gross Profit Margins

Marty Malloy – Johnson Rice & Co.: When we look at the margins in the Power segment, even when you back out the GenOn settlement and the charge on the co-plant is about to be completed. The gross profit margins are down around 3%. Can you talk about what is pressuring those margins and why you’re so confident that they are going to improve in the future?

Brian K. Ferraioli – EVP and CFO: Marty, as we said before, the nuclear projects continue to ramp up and the margins on those jobs are higher than the comparable projects that we have in backlog on the fossil side. We are also at near the very end of the coal plants, so you’re not getting a whole lot of percent complete coming off of those projects at this point in time. So, you’re really in a gap as you are transitioning between the fossil projects running down and the nuclear projects ramping up. The nuclear projects are still less than 20% complete (indiscernible)

Marty Malloy – Johnson Rice & Co.: Then on the E&I expansion in the oil and gas market, can you talk more about what exactly you are looking to do that is it site preparation, is it owning frac equipment, water filtration, and do you have to make an acquisition there?

J. M. Bernhard Jr. – Chairman, President and CEO: No, we are not doing that, so we are doing support service setting it upside, doing a lot of miscellaneous work, a lot of that stuff, we are modularizing and we continue to use that technique rather than doing a lot of onsite services. Like I said, we have about $50 million out of backlog and we hope that that will expand in a rapid fashion.

Cost Overrun

Rob Norfleet – BB&T Capital Markets: Just a quick question, any update on dialogue with Southern on the cost overruns due to the delayed COLs and on that same note I was just wondering if a portion of the cost overrun obviously was due to design changes that had to deal with the shield, would Westinghouse potentially be responsible for any of those costs?

J. M. Bernhard Jr. – Chairman, President and CEO: Yes.

Brian K. Ferraioli – EVP and CFO: Yeah. Rob, this is Brian. What I suggest you do is look at the Q that we filed earlier this morning. We’ve got some disclosure there, the unapproved changed orders, and the answer to the question is, yes, that Westinghouse is responsible should we be unable to recover from our client. However, we still believe that we are entitled to recover from our client and we and Westinghouse are jointly pursuing that.

Rob Norfleet – BB&T Capital Markets: And Jim, just a quick question on the coal industry. Clearly, going through a very difficult time period, we had our first victim in terms of a bankruptcy, and I guess the question is, one, are you seeing kind of an acceleration as it relates to potential coal plant retirements, and can you remind us of kind of the financial impact if you – and that depends on the size of the job, but and let’s just say you get an order to close down a 250 megawatt coal plant doing all the remediation work. I mean, what’s kind of the financial impact to the size of the contract of that nature?

J. M. Bernhard Jr. – Chairman, President and CEO: I guess that would be – I think the important thing to realize on the coal plants is, if they’re shutdown we’re going to do the remediation work. I mean, we have the opportunity to do the remediation work. But, if plant’s shut down, the electricity being produced has to be generated by another source, so we have an opportunity to do that. If the project is cleaned up and the $5 million remediation is done as far as for the air reduction of contaminates, we have an opportunity to do that as well. So, I mean the plant size to convert to natural gas, which is more and more we’re looking at and all of them are about the same except for the new plant. So, there is a lot work happening in our business. We think a lot of it’s going to be released after the election, and kind of people see a way forward of which direction they want to go, but more and more are looking at it as you might expect converting these plants to natural gas.