McDermott International Inc. (NYSE:MDR) Q1 2018 Earnings Conference Call - Preliminary Transcript 2018-04-24T12:30:00+0000 Executives Ty Lawrence - McDermott International, Inc., Stuart Spence - McDermott International, Inc., David Dickson - McDermott International, Inc., Analysts Martin Malloy - Johnson Rice, Jamie Cook - Credit Suisse, Tahira Afzal - KeyBanc, Andrew Kaplowitz - Citigroup, Analyst - , Chad Dillard - Deutsche Bank, Steven Fisher - UBS, Q & A Operator - Ladies and gentlemen, thank you for standing by. And welcome to McDermott International's First Quarter 2018 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 Ty Lawrence, McDermott's Vice President Investor Relations. Please go ahead. Ty Lawrence - McDermott International, Inc. Thank you, and good morning, everyone. I would like to remind you that we are recording this call and a replay will be available on our website where you can also find our first quarter 2018 results press release and the Form 10-K we filed today. We have also posted a presentation of supplemental financial information that is available on the Investor Relations section of our website, www.mcdermott.com. Additionally, our comments today include forward-looking statements and estimates. These forward-looking statements are subject to various risks, contingencies and uncertainties, and reflect management's view as of today, April 24, 2018. Please refer to our filings with the SEC, which are available on our website, including our Form 10-K for the year-ended December 31, 2017, Current Report on Form 8-K and subsequent Quarterly Reports on Form 10-Q which provides a discussion of some of the factors that may cause actual results to differ from management's projections, forecasts, estimates and expectations. Please note that except to the extent required by applicable law, McDermott undertakes no obligation to update any forward-looking statements. I will now turn the call over to David Dickson, McDermott's President and Chief Executive Officer, for opening remarks.Thanks, Ty, and good morning, everyone. I am very pleased with McDermott's strong start to 2018 driven by the One McDermott Way, solid backlog conversion, and disciplined operational execution. However, before I discuss our first quarter results, I'd like to take a few moments - like to take a moment to address yesterday's news. As you may have seen, yesterday our Board of Directors announced that had unanimously projected an unsolicited non-binding proposal from Subsea 7 to acquire McDermott. This highly conditional proposal was subject to amongst other things; determination of our combination with CB&I. McDermott's Board carefully reviewed and considered that proposal in consultation with this outside financial advisors and legal counsel. The Board concluded that the proposal was not in the best interest of the Company or its stockholders as a significantly undervalued McDermott and was not an attractive alternative to our pending combination with CB&I. We remain committed to completing our transaction with CB&I, which is on track to close next month, and we'll discuss the progress we have made toward that goal shortly. We will not be discussing Subsea 7 further on this call and we will not take questions on this topic during Q&A. Now let's turn to our exciting combination with CB&I. We have spent a great deal of time with CB&I since we initiated this effort last summer and are more enthusiastic than ever about the opportunities of this combination will offer to our customers. Together, we can provide certainty, innovation, and added value to energy projects around the world. And together, our complimentary market positions and geographical footprint will create new opportunities for revenue growth, and we will be more competitive and better able to deliver consistent predictable performance through market cycles. As we've gotten to know CB&I better over the last 10 months, we've seen firsthand how this Company values quality, innovation, safety, and its employees. And more importantly, we have witnessed how it fits customers first. That is why coming together makes sense and we are really excited about what's next. Since our fourth quarter call, we have made significant progress toward completing the transaction. We announced plans for the executive leadership team and organizational structure for the combined business, concluded the competition authority reviews, and completed a key milestone for the financing of the combination with the closing of our notes offering. And yesterday, we announced that from the closing of the combination, the combined business intends to retain the name McDermott. CB&I's industry-leading business that provides proprietary process technology licenses, associated engineering services, catalysts and engineered products will use the Lummus brand name. For branding purposes, we plan to host all of the technology initiatives of the combined business, including McDermott's Digital Twin software platform under the umbrella of McDermott technology. We have determined that CB&I's world-renowned storage tank business will keep its current CB&I branding. CB&I has the most extensive global experience of any storage tank construction company in the industry, having built in excess of 46,000 storage structures in more than 100 countries on all seven continents. Additionally, we have confirmed the $250 million in annualized cost synergies with concrete plans to achieve them by the second quarter of 2019 and have identified potential incremental savings of $100 million more, which we expect will come by leveraging our disciplined cost culture on a combined business. As our executive leadership team continues the integration planning, we intend to remain vigilant in identifying additional opportunities for cost synergies. We also note the CB&I reported results for Q1 2018 yesterday. CB&I reported excellent operating performance across this portfolio projects, including the Cameron and Freeport LNG projects and the Calpine combined-cycle natural gas power project. These projects respectively reached 84%, 82%, and 84% completion and in COG no material project charges during the quarter. Today our integration planning process, we have spent considerable time with CB&I reviewing the project portfolio and seem very comfortable with the progress they have made to de-risk the focused three projects and to continue to execute successfully on the broader portfolio. McDermott and CB&I stockholders are Schedule TO vote on May 2. ISS, Glass, Lewis and Egan-Jones free leading independent proxy advisory firms recommended that our stockholders vote in favor of the combination. We encourage our stockholders to follow these recommendations by supporting the combination. Now turning back to McDermott, I'd like to focus on the investment we are making and our engineering capability. Since the beginning of the year, we have increased our global engineering headcount by over 20%. I am also pleased to say that our concept, pre FEED and FEED operating models continue to gain traction with our clients worldwide. By incorporating our unique EPCIs learnings into engineering studies, the engineer, a concept or FEED that is more fit for purpose and practical. Coupled with our worldwide cost database the support allows us to deliver greater projects certainty to customers. Additionally, we continue to develop and invest in state-of-the-art software that provides our customers continuous feedback as the engineering study develops, rather than at the end of the study, all in an integrated manner using our Gemini XD digital project delivery backbone. As for our industry-leading digital project delivery initiative, the program is now ready for deployment on three large projects spanning the globe. The Gemini Digital Twin initiative has been praised by our customers for bringing a new level of collaboration and transparency to the execution of large and small projects, allowing the customers to make more informed decisions and thus lowering both the risk and cost of capital projects. This initiative is now being a standard to Subsea projects and designed to incorporate industry-wide initiatives on equipment and documents standardization. Now to our first quarter results, our strong first quarter results were driven by solid backlog conversion across all areas, settlement of significant change orders and continued execution on cost-saving efforts. In the first quarter, our order intake totaled $321 million resulting in a book-to-bill ratio of 0.5 times. Our strong relationship with relationship with Saudi Aramco led to the award of the 13 Jackets EPCI contract, which is the fourth fast track contract awarded by Saudi Aramco to us in the past two years and as a testament to their confidence in our ability to execute fast track projects on schedule and to the high standards of delivering. In addition to this, we in combination with Baker Hughes, a GE Company where selected for the Shwe EPCI and SPS for BP, for the West African Tortue field with the FEED contract, which has come with reflected and backlog. This award is important because it demonstrates that by combining with Baker Hughes GE on these types of projects. We have an offering that competes well against the other integrated offerings in the market. Additionally, we are excited to be partner again with BP on an efficient and streamlining process towards first gas. Our integrated approach will bring the best total solution to BP that we believe will provide schedule and budget certainty. The agreement contains a mechanism to allow transition of the FEED to a Lump Sum EPCI contract at a later date of which point a substantial EPCI project will be reflected in our backlog. Further testament to our strong collaborative relationship with BP, we were awarded a detailed engineering and long lead procurement contract for the BP Cassia C Compression platform in Trinidad and Tobago. Now let me provide an update for each of the areas. In Americas, Europe and Africa area, the Pemex Abkatun project started with the first of its two offshore campaigns, successfully installing the eight leg jacket, before moving onto the tripods and bridges installation, which is ongoing. The final installation campaign will occur during the summer, allowing an offshore hiccup and commissioning to take place. On the BP Angelin project, final mechanical completion of the deck, along with onshore commissioning is on schedule to be completed early in Q2 at the Altamira yard. Planned load-out remains in Q2 and the offshore installation campaign is expected to commence shortly thereafter in Trinidad. The Maersk Tyra Project continues on schedule with early ramp up of the construction readiness plan at the Batam yard. The execution of the Tyra project reflects our global engineering and fabrication capabilities to our customers and showcases our vertically integrated One McDermott Way approach to project execution and delivery across multi-areas. The Middle East area experienced busy levels of both fabrication activity and utilization of marine assets as the majority of the LTA II platforms unless the Jebel Ali yard to be installed. Likewise of the structures on the four jackets and three observation platforms are now installed and good progress has been made on both Header 9, while the fast-track 13 jackets project for Aramco continues to progress well and the first structure of steel arriving in Jebel Ali yard in Q2 2018. For Phase 5 and Phase 6, the Safaniya project development are on schedule, the first two platforms on the Phase 5 project expected to be loaded out onto the cargo barge in Q2 2018, while on March 12, 2018 the first steel was cut on Phase 6 with Aramco senior management in attendance. Further, the Bul Hanine EPCI project for Qatar Petroleum is now fully underway in our Kuala Lumpur office, with fabrication work in our Batam facility scheduled to commence in late Q2 2018. Since the signing of our MOU with Saudi Aramco in 2017, we have been working with Saudi Aramco to finalize the lease and related agreements for our new In-Kingdom fabrication yard. In India, the ONGC Vashishta project achieved first gas in late March with McDermott scope completed with the installation of the Subsea jumper spools fabricated by our consortium partner Larson and Toubro and the completion of the offshore commissioning support. The Reliance KGD6 Subsea Engineering, Procurement, Installation and Pre-commissioning project set up is progressing to plan with the first of two offshore campaigns expected to commence in Q4 of 2018. Moving to Australia, on Ichthys, the LV 108 successfully completed the Separable Portion 3 scope, which included fabrication and installation on Subsea jumpers. The Ichthys project is essentially complete, but for the remaining minor scope of fabrication and installation of Subsea Jumpers, Steel Tube and Electrical Flying Leads, currently scheduled for execution in Q1 2019. Also of note, The Greater Western Flank2 project completed double joint welding of heavy and light wall pipe at our purpose-built facility within our Batam fabrication yard in early January 2018, and the offshore campaign commenced in February with the LV 108 conducting a pre-lay survey and early works in advance of the DLV 2000 arriving infield late March. While the Gorgon Phase 2 Subsea manifolds fabrication project, awarded in December 2017 by Baker Hughes is also progressing in line with the plan. Finally in Asia, during the first quarter of 2018, the ASA Area was given a Limited Notice to Proceed by PTSC Offshore Services Joint Stock Company for the transport and installation of the Sau Vang Central Processing Platform and associated facilities and pipelines offshore in Vietnam. Safety is a part of McDermott's DNA, and I am proud to announce that McDermott recently achieved greater than 84 million man-hours Lost-Time Incident free as a company with MEA achieving more than 82 million man-hours LTI free. Now turning to our revenue opportunity pipeline and the improving market outlook. Our revenue pipeline at $25 billion is at the highest level it has been in the last five quarters with high activity expected across all of our geographies albeit activities increase in the Middle East are the main driver of growth during the period. Since year-end, we have continued to see high levels of bidding activity which is clearly evidenced by our bids and change orders outstanding category increasing by 70% over the quarter to $7.5 billion with submitted bids in Asia and our Middle East businesses driving this significant increase. We believe that the combination of the strength of our revenue pipeline with consistently high levels of engineering study activity that we are seeing, and the positive conversation we are having with our customers indicating that recovery of our end markets is gaining attraction. With that, I would like to turn the call over to Stuart Spence, our Executive Vice President and Chief Financial Officer, for a review of our financials. Stuart Spence - McDermott International, Inc. Thanks, David, and good morning, everyone. Turning now to our more detailed financial results, we would like to remind you that in addition to our GAAP reporting, we're also reporting certain adjusted financial information, net of what we believe to be one-time items, as we believe these provide a helpful understanding of the underlying performance and drivers of our business. First quarter 2018 earnings attributable to McDermott's stockholders computed in accordance with GAAP, were $35 million or $0.12 per fully diluted share, compared to $22 million or $0.08 per fully diluted share for the prior year first quarter. Starting with our topline. We reported first quarter 2018 revenues of $608 million, an increase of $88 million, compared to revenues of $519 million for the prior year first quarter. The key projects driving revenue for the first quarter 2018 with Saudi Aramco LTA II Lump Sum, Saudi Aramco Safaniya Phase 5, INPEX Ichthys, and Pemex Abkatun projects. The increase from the prior year first quarter was primarily due to an increase in the Middle East activity, partially offset by a decrease in activity on the INPEX Ichthys project which is now substantially complete. For the first quarter, we reported net income of $35 million, or $0.12 per fully diluted share, compared to $22 million, or $0.08 per fully diluted share for the prior year first quarter. We generated first quarter 2018 adjusted net income of $49 million, or $0.17 per adjusted fully diluted share, excluding transaction, integration, and restructuring costs of $14 million. For the prior year first quarter, there were no adjustments from GAAP. Our operating income and operating margin for the first quarter of 2018 were $68 million and 11.3%, an increase as compared to $56 million and 10.8% for the first quarter of 2017. Our adjusted operating income and adjusted operating margin for the first quarter of 2018 were $82 million and 13.6%, excluding the transaction, integration, and restructuring costs mentioned above. For the prior year first quarter, there were no adjustments from GAAP. Operating income for the first quarter of 2018 was primarily driven by fabrication and marine activity on the Saudi Aramco LTA II Lump Sum project, marine activity on various other Saudi Aramco projects, and a significant change order on the INPEX Ichthys project which a significant amount of the cost and the portion of the revenues were recognized in prior quarters. In the first quarter of 2018, corporate and other costs were mainly attributable to selling, general, and administrative expenses of $19 million, and unallocated direct operating expenses of $42 million. Additionally, we incurred transaction related cost of $2 million and integration planning cost of $9 million associated with a proposed combination of CB&I, as well as restructuring cost of $3 million associated with our Fit2Grow initiative. Unallocated direct operating expenses were primarily driven by lower utilization of our Batam fabrication yard and certain marine vessels. Net interest expense was approximately $12 million, compared to $18 million in the first quarter of 2017. The decrease was primarily due to the repayment of Term Loan B and the TEU Amortizing Notes during the second quarter of 2017. Cash provided by operating activities in the first quarter of 2018 was $37 million, a decrease compared to the $48 million of cash provided in first quarter of 2017. The decrease was primarily driven by expected working capital build on projects with national oil companies, partially offset by the impact of our improved operating results. Our free cash flow, which includes capital expenditures, was $19 million for the quarter. Moving to our balance sheet, at March 31, 2018, we reported a strong cash and restricted cash balance of $419 million, an increase of a $11 million in a sequential quarter, primarily attributable to our in quarter earnings and disciplined working capital management. Our networking capital, which excludes cash, restricted cash, cash equivalents and the current maturities of long-term debt, was $384 million at the end of the quarter. The working capital build is primarily due to a strategic focus on contracts with national oil companies, such as Pemex and ONGC, which make up approximately 70% of our working capital balance and are typically structured with revenue milestones that are more backend loaded and have extended payment terms. We carefully manage our working capital to a combination of vendor equipment financing, alignment of our supply chain, and disciplined receivables management. Our net debt that you will find broken down on Page 14 of the supplemental presentation was $123 million at quarter end. Capital expenditures for the first quarter were $18 million, which primarily consisted of maintenance and project CapEx and IT program spending, including the Digital Twin platform. As of March 31, 2018, the Company's backlog was $3.4 billion, compared to $3.9 billion at December 31, 2017. Order intake in the first quarter of 2018 totaled $321 million, resulting in a book-to-bill ratio of 0.5, which excludes the potential award of the full scale BP Tortue and Cassia C, EPCI contracts. At March 31, 2018, there were bids and change orders outstanding and identified target projects were approximately $7.5 billion and $14.1 billion respectively. In the revenue opportunity pipeline that we expect will be awarded in the market through June 30, 2019. In total, the revenue opportunity pipeline including the Company's backlog was $25 billion as of March 31, 2018, increasing from $24.5 billion as of December 31, 2017 and $19.6 billion as of March 31, 2017 with the growth many attributable to expected activity in our Middle East and Asia areas. Moving now to guidance, McDermott's full-year 2018 guidance was initially issued on January 24, 2018 and reaffirmed on April 12 and today with an adjustment to our anticipated costs forecast under corporate and other. McDermott's 2018 guidance does not include any transaction integration planning or financing costs associated with the proposed combination with CB&I. Building on our free cash flow in Q1, we still expect to generate significant cash flow over the remainder of the year and expect a working capital build associated with national oil companies such as Pemex and ONGC to unwind. Finally, I would like to discuss our integration planning for our pending combination with CB&I. As David mentioned, we reached the key milestone for the financing of the transaction during the quarter with the closing of our 2024 senior unsecured note. In addition, we have entered into our received commitments from strong financial institutions to provide the remainder of the debt financing. The capital structure as a whole is expected to carry and estimated annualized interest cost on funded indebtedness of approximately $304 million, which compares favorably to the estimated annualized interest costs are approximately $298 million on funded indebtedness previously described in our published pro forma financial statements. We provided breakdown of the new capital structure and anticipated interest costs on Page 25 of our supplemental presentation. Additionally to our integration planning, we have identified potential incremental savings of $100 million in addition to the $250 million in cost synergies previously announced which we expect to achieve across G&A, operations, supply chain, and procurement by leveraging McDermott's cost conscious culture on the combined business. These savings will be executed through similar channels as the original savings are expected to be achieved by the end of 2019. We provided further detail on the identified cost synergies on Page 26 of our supplemental presentation. As a reminder, the supplemental slide deck available on our website provides additional financial information, including reconciliations of our non-GAAP measures to comparable GAAP financial measures. Now, I would like to turn the call back over to David. David Dickson - McDermott International, Inc. Thanks, Stuart. To reiterate, I am very pleased with our strong start to 2018 and our team's execution on our key strategic initiatives. We continue to excel operationally, and with our recent awards, strong backlog attributed to order intake and continued execution on cost saving efforts, we are confident we will meet our expectations for 2018. To close, our strong performance underpinned by the One McDermott Way and our continued strategic efforts will position the Company well in the short and long-term as evidenced by our recent selection along with Baker Hughes GE for the SURF EPCI and SPS for the BP Tortue Field with the FEED contract. Referring to our revenue pipeline, we are confident in our end markets and their continued recovery. Looking to the future, we are enthusiastic about the excellent progress we have made on the CB&I transaction and the support we have received from ISS and Glass Lewis. We have strong positive momentum going into the shareholder vote on May 2, and we look forward to being able to realize the benefits of this combination. With that, we will open up the line for questions. Operator - Thank you. (Operator Instructions) Our first question comes from the line of Martin Malloy of Johnson Rice. Your line is open. Martin Malloy - Johnson Rice Congratulation on the strong start to 2018. David Dickson - McDermott International, Inc. Thank you. Martin Malloy - Johnson Rice My first question was related to the increase that you've had in the bids outstanding, and I was wondering if you could maybe talk a little bit more about geographically where those are occurring, and also the timing of some of the larger bidding opportunities in offshore Saudi Arabia and Qatar and Asia? David Dickson - McDermott International, Inc. Martin, this is David. Yes, so as we look at the revenue pipeline and as you know that spends over the next five quarters is that we clearly see an increase in the Middle East, in particular in Saudi with the large incremental projects that we're being talking about probably now for about a year. And now we are starting to see those bids come through in different forms whether it's in pre-qualification are in some cases now starting to receive the actual ITT. So it is looking strong. In addition to Saudi and Middle East, we will see an increase in activity. And Qatar, and again, we've been talking about Qatar for sometime and now starting to see some of those prospects turn into actual tender, so seen a really good momentum in the Middle East. We also as you are seeing good momentum and\/or in our AEA area in terms of activity with regards to Mexico and Trinidad, Gulf of Mexico still remains fairly quiet and fairly flat. We also have our eye on and where we expect to see the prospect this year for deepwater preserve where we can compete with our Amazon asset, which will be used for that taught to development, so those start to see good activity in Brazil. In Asia, things are slightly slow where we still have a number of bids outstanding in Asia today, whether it's East Coast deepwater India or for offshore facility project and places such as Vietnam and Thailand. So seen a lot of good activity, I think resulting from what has been a long period of understand across the whole sector. But I would again emphasize that from quarter-to-quarter obviously, there is a lot of volatility and timing of awards is something very difficult to predict as our customers still remain very cautious from a cost perspective. With that we obviously seen increase in oil price and particularly in brand, we are obviously working international market, brand has traded up quite a bit over the last couple of months. So all I would say, indicators are moving or pointing in the right direction, although timing is still remains volatile and our customers remain cautious. Martin Malloy - Johnson Rice Okay. And then my second question I'm not sure what you can tell us on this, but the Freeport LNG project and the issues that are occurring related to Harvey and potential delays? How do you think that all gets resolved? Is there are an agreement that gets reached at some point similar to what happened with Sempra and Cameron LNG and what would be the potential timing there? David Dickson - McDermott International, Inc. Yes, so I think obviously there was a concern last week when there was a note came out on the delayed on Freeport, that the delay as a result of the impact of hurricane Harvey and now we can talk to the details of that because obviously we haven't - we're not close yet. That was all known as were include the due diligence and there is all subject to insurance that is a force mature situation and CB&I working with the customers getting through that, but all-in-all I would again emphasis in our view Freeport is a good project. Martin Malloy - Johnson Rice Great, thank you. Operator - Thank you. Our next question is from Jamie Cook of Credit Suisse. Your line is open. Jamie Cook - Credit Suisse Hi, good morning. David Dickson - McDermott International, Inc. Good morning. Jamie Cook - Credit Suisse I guess a couple of questions. David just at a high level when you think about the next couple years, how would you characterize the growth prospects in onshore, energy or CBI's traditional business versus on the offshore side like which one are you more bullish on? My second question is TO within the offshore sector, do you think there needs to be greater consolidation and given some of the investments that you've made? Do you think you can still grow in markets historically that you want well positioned in like Brazil or the North Sea? And then my third question I'll try to ask, I don't know if your answer it. But to what degree does yesterday's news force you or give you incremental flexibility to renegotiate with CBI? David Dickson - McDermott International, Inc. Lot of question's Jamie. I'll start with the first one. So we talked about the strategic rational of the combination with CB&I. If I would get both companies is that for both onshore and offshore that are indications that both markets are encouraging for in the future. So mainly talking about onshore, refining typically we remain flat, but I think the big opportunities that we see in the onshore really is a next wave of LNG projects and a wave of petrochemical projects, which maybe more international than the U.S. So we see a lot of activity in that area and we see that whether it is an early dialog that CB&I is having the customers are generally the number of LNG projects that are out to turn that today. So if you look at their end markets that looks very positive, and I'd say that's why we obviously want to do this deal with CB&I and we find the timing is good. And part as you can see from our revenue pipeline, we see obviously a good growth in the offshore market. As I said earlier that the under spend has occurred over the last - where we say 3.5 years, which will soon become 4 years towards the end of 2018 is now starting to catch up when we see that a number of customers, no need to play catch up in terms of their capital spend. So as we move into this combination, we are excited by both markets. Now on the markets where we haven't been present before in a big way is obviously in a ultra-deepwater space, and that's a driver for developing the Amazon deepwater pipelay asset, and with the award of the BP Tortue and hopefully that will be converted into EPCI contract at some point as that gives us a kick start to move into the ultra-deepwater. So we know we have the technical capability. We know have the know-how, but up to this point, we've been watching that deepwater asset. By moving ahead with the Amazon, it has opened up some new markets whether it's [indiscernible] where Exxon and ASA are being developed and now for some time and there will be second and third phase coming from bid, and again that is ultra-deepwater and as you mentioned Brazil. So again, we'll have the opportunity to start bidding in Brazil in ultra-deepwater, again all areas that we couldn't previously without the asset. On your last question on consolidation, I would say there's been a lot of activity, and I don't feel that - at this stage that we can really make any comments around consolidation. But with all that we are confident on what we have done, and obviously, our combination with CB&I in terms of offering growth for both companies. Jamie Cook - Credit Suisse But you didn't really answer the question to what degree does yesterday's news force you to either - or provide flexibility or force you to renegotiate with CBI? David Dickson - McDermott International, Inc. So Jamie, obviously yesterday in terms of what happened with regards to Subsea 7, obviously came - obviously a very short notice. It was unsolicited and non-binding. Obviously that created some activity in the marketplace yesterday. But our view is that we are in a good position with CB&I today. We're very confident of the combination and we're going to continue in the same path. Jamie Cook - Credit Suisse Okay. Thank you. Operator - Thank you. Our next question is from Tahira Afzal of KeyBanc. Your line is open. Tahira Afzal - KeyBanc Hi, folks. David Dickson - McDermott International, Inc. Hi, Tahira. Tahira Afzal - KeyBanc David, oil marched out quite a bit, if I were tracking all the functions including by the way, an official expanded sanction of Gorgon 2. It just seems like activity is picking up maybe at a faster clip and maybe I expected, how do you think that's going to impact the timing of the typical push out we've seen? Are you feeling a little more comfortable on timing or other political or geopolitical issue that after making you cautious? David Dickson - McDermott International, Inc. I think answer to it. I think that as we're seeing the uptick in activity whether it's on early engineering contracts or just three or four bidding activity is that, obviously it has given us more confidence on and they look ahead. But we have to look into it, so firstly and I think we mentioned this before is that across the sector obviously, our peers have suffered from reduction in the backlog. So I think there would be a big focus as companies start to regain the backlog levels that they had in previous years before we'll start to see some movement in terms of margins and we said now for a few quarters that margin that will remain compressed. So I think there is two parts to that. And as Fed activities moving forward, I think customers are a lot more cautious and I think that as we move forward as that we're seeing that from procurement models from our customer. So the BP Tortue for example that is a great project, more obviously very happy to be selected by BP along with Baker Hughes GE, and then some of our SURF plus SPS offering to the marketplace. But you have seen the BP is going through our procurement process where they selected us, but only to this date given is that go ahead for the FEED with the conversion into EPCI at a later date. So this is a new model, a new procurement model. And I think we're seeing more of that as we move forward. And again, that's just reflective of probably the cautiousness that exists with our customers. Tahira Afzal - KeyBanc Got it David. That's very helpful. And I guess, I mean obviously backlog is lumpy, but would you have confidence in general given where we are in the cycle at we have reached a point where backlog is sustainably inflecting and so maybe from an 18 months standpoint instead of the usual sort of end of the year standpoint. And given you're pretty confident on the recovery. It's always good to see you guys are constantly reviewing your cost, but why F2G at this point when the cycle in recovering? David Dickson - McDermott International, Inc. I think if you look at the F2G that if you saw we disclosed previous. Fit2Grow is less than our headcount reduction and more improvement in terms of efficiency. And as we have progress, there are various programs whether it's our MPI or ALR is the post all that we set back and we took a look at the heavy operate as overall as a company. So a lot of the Fit2Grow initiatives are all about operational efficiency rather than about headcount reduction. So it's all about how can we do things better. We're a little better that we would use external services rather than do things internally. So it's kind of typical examples. So that was what Fit2Grow was more about. And Fit2Grow is all about being ready for the uptake. So again, less about headcount reduction and more about operational efficiency. Tahira Afzal - KeyBanc Got it and backlog David? David Dickson - McDermott International, Inc. Yes. Backlog is going to continue to be lumpy. You look at through the prepared remarks, you got a situation where maybe in previous times both the Tortue and Cassia C could have been awarded through EPCI, but obviously that's going to happen in later date. I mean in that instance, obviously we've to be looking over the completely different book-to-bill for the quarter. So we would anticipate and expect that moving forward we still see this lumpiness from quarter-to-quarter, but overall we would expect our backlog to continue to trend in the same way our Start2Grow. Tahira Afzal - KeyBanc Thanks a lot David. Operator - Thank you. Our next question is from Andrew Kaplowitz of Citigroup. Your line is open. Andrew Kaplowitz - Citigroup Hey, guys. Good morning. It's Alan Fleming on for Andy. David Dickson - McDermott International, Inc. Good morning, Alan. Analyst - Good morning, David. David maybe you can talk about or give us an update on the conversations that you had with CBI's customers. I mean many of them are the same customers that you have. We know that CBI is big in LNG and Petrochemical we are starting to see. Those markets start to come back. Do you see these customers kind of opening the spigot here and awarding the combined company projects when the deal closes? Or do you worry about maybe a filling out process before you can book significant work, maybe just kind of what you are hearing here from those customers? David Dickson - McDermott International, Inc. Yes. Good question Alan. In anticipation the closing is that we moved early to talk to CB&I customers, and unfortunately I have a relationship with a lot of those customers from my previous career. So I've been able to make some good traction, obviously some of the customers had a lot of concerns around financial stability, some concerns around some of the operational performance. Overall, I would say the dialog with CB&I customers has been good, has been very positive, and very - mainly the customers have been very positive in this combination, and they see a lot of opportunities of bringing the two capabilities together. An example would be modularization for LNG projects where McDermott has participated in both [indiscernible]. We see some other opportunities of taking modularization into other projects in Petrochemical. When we talked to the likes of Saudi Aramco, they like the idea of bringing together the technology offering from the Lummus brand all the way through FEED and the potential into EPC, Petrochemical complex within Saudi. So there are many, many examples and overall let say it's been an extremely positive reaction from the customers. Analyst - David, have you been able to kind of digging in and review or be a part of any of the bids that CBI does have outstanding right now? David Dickson - McDermott International, Inc. So obviously where we are today, we can influence, we can suggest. However we can see a shadow, so obviously we get to see some of the things that happen. But obviously recognize and there is only certain things we can do from a legal perspective. What I would add to that point now is we do not see any major bids there could be awarded to CB&I before closing, which we expect to happen in many times. So again very close to that point. We know that bids that are ongoing, so we are very confident that none of these bids would be submitted to post closure and allow us an opportunity to get into the detail little bit more. Analyst - All right, I appreciate. I'll leave with that. Good luck guys. David Dickson - McDermott International, Inc. Thank you. Operator - Thank you. (Operator Instructions) Our next question is from Chad Dillard of Deutsche Bank. Your line is open. Chad Dillard - Deutsche Bank Hi, good morning, everyone. David Dickson - McDermott International, Inc. Good morning. Chad Dillard - Deutsche Bank So just wanted to circle back to your engagement with Saudi Aramco on the offshore projects side, just to ahead of the merger I mean I just want to get a better sense for how the reception has been and how you are thinking about when those incremental opportunities to cross-sell well materialize? David Dickson - McDermott International, Inc. Yes, so firstly Chad I mean just on the offshore I mentioned earlier is that we are moving into the next wave of projects with Saudi Aramco with its incremental projects, which is all of our obviously so the increase in this production. So that well discussed. We have had discussion - several discussion of Saudi Aramco with regards to the combination with CB&I in particular around the crude oil to chemicals project, which CB&I is develop from the technology in partnership with Saudi Aramco. And how that could lead to what would be called an In-Kingdom project. So as the country moves forward obviously is looking to do as much as it can and has through it IKTVA initiative as part of the 23 division. So we've been ask a lot of questions from Saudi Aramco is how could you take - what is a going to be major petrochemicals complex from a joint agreement around technology through to fill EPCI utilizing the capabilities of both companies in a country. But in particular the facility that we are planning on building in Russell here and how could we do a lot of modularize type of construction make this project not only more efficient in terms of is delivery we are also look highly can be more cost effective. So same a lot of dialog ongoing with Aramco is very high level of this because we are not combined with several something that were on post closure. Chad Dillard - Deutsche Bank Okay. And just a follow-up and might be a little bit too early, but how you are thinking about just like the project delivery model over there. I mean thinking about are you comfortable with taking construction was to over there? And then just switchover to offshore side, can you just discuss the outlook for the Subsea part of the market? Are you seeing any signs of that on that market turning? David Dickson - McDermott International, Inc. Yes, so I mean consumption most Saudi Aramco, I don't think it gives us cost or concern. We've done a lot of planning and working obviously we already constructing in Saudi and so we understand the labor side of things we already have a good humble on that. So I would say this stage is not something that we have concern. On a Subsea business there more shallow water areas is also moving further forward. We're seeing an obviously places like Norway and get their wave of new contracts and I mentioned earlier in the call start to see more activity in the deepwater in areas such as West Africa, reserve, East Coast of India you know we could see a wave of offshore deepwater Subsea projects in Australia, which is the second wave of contracts really to support many of these LNG projects. So they won't be these large more LNG complex is but Subsea in these two - there will be more Subsea wells developed as part of the feedstock for this facility. So we are anticipating and increasing bidding activity offshore Australia. Again a customer very cautious and timing of that is probably more through 2018 more likely 2019. Chad Dillard - Deutsche Bank Great. Thank you very much. Operator - Thank you. Our next question is from Steven Fisher of UBS. Your line is open. Steven Fisher - UBS Thanks. Good morning, guys. David Dickson - McDermott International, Inc. Good morning. Steven Fisher - UBS I wonder if you could talk about the price competitive environment, I guess we have - maybe pass the initial phase of project activity coming back. So do you think we have now passed the phase or the pricing competition is the most intense or you still seeing a fairly aggressive price competition environment out there? David Dickson - McDermott International, Inc. It's interesting I would say that end the markets where we feel we have a significant amount of differentiation is that we are seeing pricing level starting to pick up a little bit albeit very slow. And global - I would say deepwater market. I still think that there is a number of projects that need to be awarded to generated backlog across all of the competitors in the deepwater space before start to see margin improvement. I think would be consistent on that message and therefore appear the time. So we wouldn't expect margin grow to start happening until back end of this year until 2019. Steven Fisher - UBS Did you feel that sort of normalize bidding environment or do you see players out there that are being particularly aggressive to bring in sort of bit? David Dickson - McDermott International, Inc. No, I think Steve as we confirm this putting half year cycle also there is been a number or competitors that are some form of administration and also not competing anymore. I would saying that generally the main competitors and you know those companies are the three or four I would say I would mean very disciplined and there bidding. Steven Fisher - UBS Okay. And then not sure what you can say here but how confident are you that you have all the votes you need wind up to get the CB&I deal approved? David Dickson - McDermott International, Inc. So Steve obviously within the voting process and obviously we have weaker or so to go not for comment and obviously very early in the process. Steven Fisher - UBS Okay. Fair enough. Thanks. Operator - Thank you. And that does conclude our Q&A session for today. I would like to turn the call back over to Mr. Ty Lawrence for any further remarks. Ty Lawrence - McDermott International, Inc. Thank you for taking the time this morning to listen to McDermott's first quarter 2018 earnings call. As a reminder, a recording of this earnings call will be available for replay for seven days on our website, www.mcdermott.com. And if you have any questions, please feel free to contact me. Operator, this concludes our call. Operator - Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a great day.