Fluor Corp (FLR) 2003 Q2 法說會逐字稿

Good day, welcome to the Fluor Corporation second quarter conference call. This call is being recorded At this time, all participants are in a listen-only mode. A question-and-answer session will follow management's presentation. There will be a replay of today's conference call at 9:00 a.m. Pacific time today, accessible on Fluor's website at www.Fluor.com.

A telephone replay will also be available running through 5:00 p.m. Pacific time on Wednesday, August 6, at the following telephone number: 888-203-1112; an access code of 568249 will be required. Once again, that telephone number is 888-203-1112 and the access code is 568249. At this time for opening remarks, I would like to turn the call to Ms. Lila Churney, Vice President of Investor Relations. Please go ahead, ma'em.

Thank you. Welcome to Fluor's second quarter 2003 conference call. Our earnings announcement was released yesterday after the market closed.

Before getting started, I would like to read our cautionary note regarding forward-looking statements. In discussing certain subjects, we will be making forward-looking statements regarding projected earnings, market outlook, new awards, margins, the effect of strategic initiatives and other statements regarding the intent, belief, or expectations of Fluor and its management. These forward-looking statements reflect our current analysis of existing trends and information, and there is an inherent risk that actual results and experience could differ materially.

These differences arise from any number of factors. Information concerning factors that could cause actual results to differ materially from the information that we will give you is available in our form 10-K, filed March 31, 2003, which is available on line or upon request. The information in this conference call related to projections or other forward-looking statements may be relied upon subject to this cautionary note as of the date of this call.

The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or for any other reason. Now, I would like to turn it over to Alan Boeckmann, Fluor's Chairman and Chief Executive Officer.

Thank you, Lila. Good morning, ladies and gentlemen, thank you for joining us today. This morning, we will review results for our second quarter, which ended June 30, and then move to comment on the current outlook of our business.

Summarizing overall performance, earnings from continuing operations were $43 million or 54 cents per share, which was level from one year ago. Revenues from continuing operations were $2.2 billion compared with $2.5 billion one year ago, and up sequentially from $2.1 billion in the first quarter of this year. We continue to benefit from a broad market diversity, which helps mitigate the cyclicality which is inherent in certain of our markets. We're also pleased that operating profit improvement in our nonpower businesses more than offset the anticipated decline from our power services market.

New project awards in the second quarter increased 13% to $2.3 billion compared with $2.0 billion last year. We also had good quarterly performance on new awards across all of our segments, with the exception of power, which we anticipated would be down. Estimated gross margin on second quarter awards was a bit below our normal average. This was influenced by the two largest awards, which were included in the quarter. This included a program and a construction management award that had significant procurement content on which we received lower fees than we do on pure engineering services.

The second largest project was a construction management award, or a gaming facility in the Catskills of New York. In both places, these types of projects tend to have higher revenue pass-through and lower margin, but they also carry lower risks and provide an attractive return on both assets and resources. Looking at consolidated backlog, we note that it increased sequentially to $10.5 billion. Estimated gross margin in that backlog was $625 million, or 6.0%, which was about level with the first quarter.

We have maintained backlog gross margin at about the 6% or better level, which reflects our continuing emphasis on selectivity. Consolidated operating profits was $97.1 million, and our quarterly operating margin improved to 4.3%, up from 3.8% last year. Before turning it over to Mike to review the operating segments and other financial data, let me make a few comments on our market outlook. Fluor's geographic and industry diversity positions us extremely well for long-term earning growth and the creation of shareholder value.

This positive outlook is supported by continued strength across a number of our diversified markets, including Life Sciences, transportation, government, and commercial facilities. Expansion in these areas over the balance of this year is expected to continue to offset the decline of power earnings that we have fully anticipated. Prospects in our oil and gas business are continuing to move forward, although the pace of project implementation by our major clients is difficult to predict. Give then transition in our business mix, our earnings outlook for this year has been narrowed to a range of $2.15 to $2.25 per share. As I look ahead to 2004, the outlook for the majority of our markets is favorable.

And while it's still too early for specific earnings guidance, we anticipate continued growth in our industrial and infrastructure business segment, supported by improving global economic facilities. We also expect continued growth in our government and O&M businesses. These are both areas where we made recent niche acquisitions, and have a strategic focus to expand our market share and capitalize on the growth opportunities in these relatively stable, long-term markets. The outlook is also positive for large international oil and gas projects, where Fluor is a global market leader.

The economic, political, and strategic factors that are driving upstream development of major new oil and gas resources continues to support a favorable long-term market outlook. The degree to which these projects will impact our performance next year is certainly dependent on the timing of contract awards, as well as the pace of project execution. Our clients, the major international oil companies, continue to diversify geographically, and are closely watching both long-term demand and changes in global supply.

Also, there have been some recent developments regarding such programs as the Saudi gas initiative, and as we had speculated, while the massive core venture programs appear to be off the table, at least in their original form, we're starting to see pieces go forward as discreet projects. Gas-to-liquid projects also remain a good match for our skill set and are driven by the desire of countries with low-cost gas, primarily in the middle east, to monetize these resources. If I move to downstream, I see that we're already starting to have the early stages of work-related diesel clean fuels in the United States, and we also continue to see clean fuels work in Western Europe.

Moving to the industrial markets, we continue to anticipate generally improving conditions. This outlook appears to be supported by positive second quarter profit reports from a number of major manufacturing firms. Consumer demand is holding up, and we see improvement in the financial markets. Selected targets of opportunity are primarily focused on new products versus capacity. We are, in fact, seeing more of this in our consumer products area.

Also, we see continued indications of renewed investment plans in microelectronic facilities, primarily concentrated in the Far East. Certainly Life Sciences continues to be a very strong market for us. We have a leading market share and have an excellent reputation for delivering quality projects at or below cost and on schedule. We have had several projects recently where the client has stepped in and asked us to take over from the existing contractor. In transportation, budget constraints at the state and federal levels are continuing to foster increased willingness to consider more innovative solutions, such as privatization projects. This is an area of particular strength for us.

We continue to believe that economic recovery will drive an upturn in chemicals beginning during this next year, and we believe that we're well-positioned to take advantage of the market when it comes to fruition. Overall, we're encouraged by this positive outlook and the continued strength across the number of our diversified markets. And with that, let me turn things to Mike Steuert, Fluor's Chief Financial Officer, to review in more detail our operating results and other financial information. Mike.

Thank you, Alan. Good morning to everyone. Consistent with last quarter's conference call, I will not review the segment profit and revenues, since this information has already been covered in the press release, but I will try to add background on new awards and backlog of our business segment. Starting with oil and gas, new awards for oil and gas in the second quarter were $1.1 billion, moving backlog up to $3.5 billion at the end of the quarter.

As Alan mentioned, our largest project in the quarter was a program and construction management services contract for a major oil processing facility in gas-free injection facility. We also booked additional gasoline, clean fuels work, a five-year program management services contract in front-end scope for a second major development program in Kazakhstan. For industrial and infrastructure, new awards in the quarter were $776 million, increasing backlog to $4.3 billion. The largest award for the segment was a construction management contract that Alan mentioned for a gaming facility.

The quarter included a number of new awards for Life Sciences projects, as well as SR-125 total of projects in San Diego that we announced in early June. Although modest in total dollar value, we also vote some additional work in the chemicals market, including a couple of small projects along with consulting studies. The result of our increased focus on this re-emerging market. Moving to power, new awards were quite modest as expected. With the continued work-off and completed projects in the second quarter, backlog declined to $595 million. During the quarter, we announced that we would be winding down our joint venture in the power market with Duke.

We will work with Duke to execute the remaining projects and backlog, and will develop a plan to -- for the orderly writedown of the partnership over the next two years. The Duke-for-Daniel partnership has been extremely successful and has more than accomplished our strategic objective to become a dominant factor in the power market. While near-term opportunities are limited in this market, Fluor will continue to pursue power opportunities on a stand-alone basis and meet our selectivity and risk profile in a very cost-efficient manner. Global services new awards were $218 million, leaving backlog relatively unchanged from the first quarter at $1.6 billion. Quarterly awards included annual extensions on long-term maintenance contracts, as well as quarterly bookings for a new P2S subsidiary.

We continue to focus on our objective, to grow our share of the [INAUDIBLE]market within targeting industries and geographic markets that leverage our existing presence and our existing client base. New awards for the government group were $144 million in the quarter. This included additional scope on the midcourse missile defense project in Alaska, a confidential task order in the area of homeland security, and a new task order related to our air force capabilities readiness management support contract, and multiple bookings related to our new Del-Jen [PHONETIC] acquisition.

Back log at the end of the quarter and government was $492 million; while this is down from the first quarter, this is due to the fact that we booked an annual funding for our two major DOE contracts in the third quarter this. The pattern will be somewhat moderated as we continue to build a broader base of work in the federal marketing place. Moving to corporate G&A, our corporate G&A for the quarter was $31.4 million, compared to $31.6 million a year ago. We had modest interest expense or interest income, excuse me, of $374,000. The tax rate for the quarter from continuing operations was 35%.

This is somewhat higher than our normal tax rate of 32 1/2%, and is primarily due to the impact of the equity impairment provision that we took during the quarter on the Australia magnesium project. This project had no tax benefit. Absence this item, our continuing tax forecast for the remainder of the year remains at 32 1/2%. Let me now to shift the balance sheet and make a few comments on cash and other financial items. Cash and securities increased sequentially by $54 million in the quarter to $584 million.

This was despite the continued workoff from client advances on power and certain oil and gas projects. As we have said consistently, maintaining Fluor's strong financial condition remains a top priority for the company and continues to represent a valuable competitive advantage. Cash provided from operating activities for the quarter was $18 million. Year-to-date, capital expenditures for continuing operations were $28 million, primarily for Amico, was $11.6 million, which was reported in the second quarter.

Year-to-date depreciation from continuing operations was $40.5 million, including $2.3 million for the facilities that were capitalized in January. Depreciation expense in the second quarter was $19.7 million. Two comments on discontinued operations. During the quarter, we did complete the sale of the final equipment dealership, and we're pleased that we have now completed the disposal of all of its continued operations that we initiated in September of 2001. With that, Alan and I will be happy to respond to questions.

Thank you. Our question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, it's star 1 to ask a question. And we'll go first to Michael Dudas of Bear Stearns.

Good morning, everyone.

Morning, Michael.

Morning, Mike.

One question and a follow-up.

First, Alan, relative to your staffing levels, given maybe a slower project pace and booking to, you know, tighten up the range a bit, um, are you properly staffed? Are you still -- are you looking to add more people through acquisition? Are you shipping people around to different offices? Can you comment on your utilization rates, your offices globally?

Our utilization rate, Mike, remains good. We have come down in terms of the total number of people over quarter-to-quarter, based again on the lag in the oil and gas kicking off into EPC programs, but we have an adequate staff. I think we have resources that are available for the upturn that we see coming and we don't believe that that's a significant situation for us.

The follow-up, Alan, is could you comment a little bit on some of the opportunities and where Fluor stands in relative to some of the project letting out of Iraq?

Iraq, I'll be able to comment to the extent that they're public knowledge. We're competing, as we stated, for the core of engineers program that is out for the recompete of the oil and gas rehabilitation work in Iraq. That proposal is under preparation and will be submitted shortly, and we will be, obviously considered with the other participants in that. We have a very strong team competing for that in a joint venture with AMEC out of the UK. The corp of engineers announced there will be a two, two areas, two geographic areas, if you will, that will be awarded for that, and we're hopeful we will get one of those. But that announcement I don't believe will come until early September.

And just one final follow-up. How is the competitive environment out in the marketplace, you know, you appear to be relatively upbeat about the project opportunities and mostly in the markets. How's the competition behaving?

The -- well, as always, you know, the engineering construction market is a tough competitive market. We expect that, but I think our focus is being the leading market player with the best value proposition in the markets that we address, and I think we clearly have that when you get into the large complex programs and oil and gas.

We have that via our delivery platform in markets like Life Sciences, where we have a strong certainty of delivery around both costs and schedule, same thing in our commercial and institutional, and technology situation in oil and gas and chemicals, and I would also mention that in our transportation business, our leverage of our project and program management skills there gives us a significant opportunity to lead the pack in competition. So it's always a challenging market, but we look strategically to each market and try to figure out what our advantage is and leverage that in the marketplace.

Thank you, Alan.

You bet.

Our next question comes from Sanjay Shrestha of First Albany.

Great, thanks a lot. Good morning, guys. A couple of quick questions. First, your G&L line, a nice drop here sequentially. Can you comment on where would that go for the second half of the year?

We're still sticking to our estimate of roughly $150 million for the year.

Okay.

If you look at last year's G&A trends, they're very similar to this year. We're -- we saw a draft in the second quarter and we saw a progressive increase in the second half of the year. Reflecting people's spending of their budgets as we enter the second half of the year as expected.

Okay. Okay. So there was nothing sort of like the one-time event that really allowed you to have the lower G&A this time, right?

No. There was nothing unusual in G&A this quarter.

Okay, and can you guys also give us an update on your Amico project, where it is in the arbitration and things of that nature?

Yes.That will be delineated in our 10-Q, as it was last quarter. There won't be a significant change quarter-to-quarter. That is in arbitration. Arguments have been held on the first two issues of soils and acto-convenio, which is the labor agreement, and we expect a decision in the arbitration ruling in the third quarter on those issues.

Okay. Now, if the ruling were to be against you guys, what would potentially be the impact on your earnings, or is that still a little too early to kind of talk about?

I think it is too early to talk about. The arbitration has been proceeding. We believe we have a very strong position in that.

Okay.

And we have, as a result of the conservative approach to our financial position, we have not taken up profits on the -- on the unlocker project during this year.

Fair enough. If I may, one more. Alan, for you guys to really see the growth in the earnings going into into 2004, right, I mean the bookings were, quite frankly, better than I expected in the second quarter, but what sort of the bookings are you really going to need to see and maybe if you can elaborate a little more from your end-market exposure, what kind of bookings do we really need to see as well as the gross margin attached to the bookings, for us to see the earnings growth going into 2004.

Well, you know, unfortunately, we don't forecast bookings.

I understand that, if you could talk more from a macroperspective, that would be helpful.

Well, I think we continue to see strength in our markets like Life Sciences. We see strength in our government business, and in our global services business, particularly operations and maintenance.

Okay.

We continue to see good project opportunities based on our positioning in the commercial business, commercial institutional buildings, and also in transportation, and interestingly enough, in our mining business segment, even though that market is flat. We have some good opportunities there.

So, it -- I think our position and our financial strength tend to show us in particular markets that we have an upward trend that we're going continue to try to drive towards in bookings as we go through the year.

Okay. Fair enough. One last question and I'll get back in the queue. What would dictated being 213 EPS 2003 versus 225 EPS 2003?

I'm sorry, would you repeat the question.

Yeah, sure. The range for the 2003 EPS is between 215 to 225. What would sort of dictate it being a 225 instead of 215?

You know, it -- interestingly enough, as we go through the next two quarters, um, it's very difficult to differentiate between those. I think it's a performance issue and speed of development of the on going work on the projects.

Okay. Okay. Fair enough. Thanks a lot, guys.

You bet.

Our next question is from John McGinty from Credit Suisse First Boston.

Good morning.

Good morning, John.

Michael, you talked about giving us a contract; could you put numbers around, at least ballpark, the side -- in other words, in the 1.1 million of oil and gas, how big magnitude was the large project management, construction management ,with a lot of procurement for a major oil and gas reinjection, and geographically, what region of the world was it in?

We really haven't discussed that, John, but it was --

500 million? 700 million?

North of 500, John.

The majority --

Not all of it. It's not all of it, and it's in the Asia region. We have to be careful in that there's -- can't be specific on projects without a -- an announcement going out with respect to our client.

No, I understand that. But I mean, ex that, the orders remain pretty lackluster or are, in fact, kind of lackluster in oil and gas, assuming that is north of 500. That means what is left is south of 600. Um, can you put any parameters around the gaming facility?

That one would be very difficult to put a number on. It's a -- .

Is it north?

It was our second largest award, probably as big as we'll be able to do.

All right, fair enough. Um, Mike, this is my fault for not doing this before, but let me just ask you very, very specifically. You're at 150 on your moving G&A target. Um, that implies 41 million per quarter in the third and fourth quarter. Is that what we should be looking for? What I'm trying to find out is whether -- I mean, that number just magically moves around a little too much for my comfort, so should we see that at about 41 million per quarter plus or minus 3 or four in the third and fourth quarter?

That's a reasonable estimate, John. Last year we had 43 in the third quarter and 52 in the fourth quarter.

Okay, but in other words, if it -- okay. We should -- okay. Fine. The -- the government services, which was 8.6 million in the first quarter and was 12 million in the second quarter and the major difference at least alluded to in the text was the acquisition that. The question we have is, is the 12 million a new -- is that the new run rate for this business or is there something that is unusual in the government services?

I would say there's nothing unusual there. We did have higher profitability in the quarter on some of our DOE work. We also had some additional activity on missile defense and sort of our capability readiness programs and our acquisition. Acquisition is not the only reason for the [INAUDIBLE]. It was broad-based performance improvement for the government. That will jump around quarter-to-quarter, John. It won't be totally flat throughout the year.

I mean, is the a 40 million -- is this a 20 million in the first half? This now -- is this now a 40 million dollar business or is it in fact a 48 million business? This is one where it's difficult for us, since there are so many pieces that are so small, we have no history with it to understand how big it is.

We're not going to forecast each segment, but I, you know, you will see that as the year plays out.

It's been our intention to grow the government business, John, as we said, strategically and the acquisition of Del-Jen is one of the steps toward that. Things like the award of the missile defense program is another step towards growing that business. So it's our strategic intent to grow that business.

Okay. I guess -- but what I'm saying is with the -- since we don't have a handle on what the acquisition added, and whether or not that's sustainable, you're not saying that this is a $48 million business? In other words, 4 times 12 as the run rate?

I wouldn't take the simple -- that calculation as the -- as a straight line calculation.

You would not do that?

No.

Fair enough. And I guess the other situation with regard to global services where that is a little bit more stable. The first and second quarter look a little bit like the acquisition. Is this more a run rate kind of business there?

Yes, yes it is, John.

Okay. And then the -- Alan, the question I have is, at a dinner in New York attended by a number of analysts and at other meetings, it was strongly implied, if not actually said, that there would be a Scotland Island order in the second quarter. The second quarter has come, the second quarter reporting has come. I may have missed it.

Can you -- I mean what happened? Are we looking at a disappointment? I mean are we -- I'm not talking about the lowering of this year, I'm talking about, should we begin to revise expectations for next year?

I -- I wouldn't signal disappointment there, John. I just can't comment on specific client names without a public announcement going out joined by our client.

Except you commented on a major oil initiative. You commented on --

I can tell you that our bookings do include a major oil initiative.

Okay. All right. I see what you're saying. Fair enough. And what about '04? You're not forecasting bookings.

That's a fair comment, but at what point, you had said earlier that you expected I believe -- and I think you said one or two elephants in the fourth quarter of, you know, the ones that you laid out on the [INAUDIBLE] map of the world, 22, where are we on your comfort level, I don't care about the fourth quarter versus the first quarter.

John, we said we expected two bookings in the year with the first being the TCO, second-generation project, which we did book in the first quarter.

Yup.

Originally, we were forecasting a fourth quarter award that now, and I think I did say the look like that was going to move forward and actually come forward in the year, which would -- you'll just have to wait and see an announcement on that. So I think we do -- we are pretty much there for '04 -- for '03, I should say.

What about '04?

'04 to me, as I look at the major upstream prospects in oil and gas, clearly those will start to come -- they have already started in '03. I see a strong continuation in that in '04, really on through '06 and '07, based on how that market is stacking up.

So I think you're going to see continued strength, growing strength in the oil and gas market as these projects become real, and as they are in very complex situations, both geographically and from a commercial standpoint. It really plays into our strength, and we expect to be a major player in those bookings.

Alan, I'm not asking you to forecast bookings by quarter.

I'm trying to understand when we get into '04 on a run-rate basis, should we not be -- I mean if these things start to come, in other words the, you know, your map had 20-plus projects that were out there, as you said, you could take them to different kinds of levels.

Right.

In other words, book them in different manners. I understand fully. But -- as I understand this, you should be booking, have contract awards, north of 2 1/2 billion per quarter. Again, any quarter can vary, they can be big and lumpy. I'm not trying to nail you down. We have to go where we are and another step forward. Are you still comfortable with that kind of a picture?

Yeah, John, I understand the challenge here and I'm not trying to make life difficult for you.

I understand.

I think what I would do is I would look at the trend that we have established in our non-power, non-oil and gas markets.

Okay.

Of bookings. Because I think we will continue that trend.

Yup.

Strategically, that's a major initiative for us.

Yup.

And then look at what I think is going to be a very strong, robust gas and oil market through '04 through probably at least '06, and I extrapolate from there. I think we will be a major player in the bookings because, again, when it gets to these large-size projects, we have limited competition and we have done the front-end on the majority of the large programs that are out there.

Fair enough. Exactly what you mean. Thank you very much. I'll get back in queue.

You bet.

We'll move next to Alex Rygiel of Friedman, Billings, Ramsey & Co..

Thank you very much. I think I understand what your guidance is for the corporate admin line. Can you help us all to better understand what creates the quarterly volatility between first quarter, second quarter, third quarter, and fourth quarter?

There are really a lot of factors. You can't even identify one or two. Throughout my whole career, Alex, I have worked a lot of companies, all of which have very detailed budgeting processes, as we do at Fluor, as well, for our corporate overwrite expense. Part of it is human nature, as we were conservative with our spending as we go through the first half of the year.

A lot of items that we do spend for very justifiable reasons, in terms of meeting our budget requirements as we complete the year. It's just kind of the pattern I have seen, not just in Fluor, but also in -- there's nothing mysterious about it. It's more just the way we spend our corporate overhead as we go through the year.

So are you suggesting that a good fair amount of that is somewhat discretionary and, therefore, if you really wanted to ratchet back on your expenses, you could make a decision to cut back on spending very quickly for, call it second half of '03 if you needed to?

I wouldn't say that, Alex.

I couldn't call it discretionary.

Some has to do with our ability to time it. There are a number of things we have in the budget, things that we have to do, things that we might be able to vary the timing on just a bit. There is not a lot of discretion in a lot of our SG&A. In addition, there are strategic things that we put in there that will help, you know, add to the corporate capability but, I wouldn't call discretionary as we look to our forward strategy.

That's helpful. Secondly, can you comment on your expectations for cash generation and/or burnoff in the second half of the year?

But as you have seen, we burned off a fair amount of cash in the first quarter. We generated about 54 million in the second quarter. We would look for very, very modest burnoff through the rest of the year. Our best estimate is we will probably end up the year at $500 million, plus or minus $50 million of cash at year-end. Our best current estimate.

Great, thank you very much.

Our next question comes from John Rogers of D.A. Davidsson.

Good morning.

Good morning, John.

Um, most of my questions have been answered, but Iess Alan -- if you could talk a little about the margins on some of the reported work, my question is really, at the end of this quarter you indicated that the margins were 5.8%, down from 6.7% a year ago, and yet the mix looks similar to the first quarter. Is that a function of just a higher procurement on some of that oil and gas work?

Yeah, in this business, John, bookings project-to-project and margin project-to-project can vary greatly depending on what is in revenue.

Uh-huh.

The type of project. For example, a construction management scope tends to have a much lower apparent margin because of the significant amount of both procurement and pass-through revenue. On the other hand, it has to be -- it tends to be a high return on assets-type contract.

Sure.

We look at both of those factors when we booked projects. We try to book -- and to contract ourselves in the most advantageous way for Fluor, and meet our clients' needs. But it can vary greatly from project to project, depending on scope and depending on what type of revenue is in that booking.

So, in other words, you're still generally comfortable with pricing in the market and haven't seen any great pressures? One either up or down?

I would say that's true. And, again, we react to that based on what we think our value proposition is, and that enters into our selectivity, you know, decision process as we decide which prospects to go after and bid for them.

Okay. And then in terms of the actual margins that you reported by segment, there was a -- historically, or at least the last couple of quarters, relatively high margin again in the energy and oil and gas business, was there was some incentive fees that you collected there or just execution on a particular, on a couple of projects or --

I think there was, excuse me, there were some incentives in there, but I would say in this particular quarter, I would call them modest. We do have incentives on most all the reimbursable cost works that we used, and that is specific to several business units. The oil and gas does have that characteristic, and we typically are very conservative when we book our backlog around incentives. So it does give us an upside opportunity with respect to that.

Right. Okay. And then lastly. In terms of the power business with the ending of your joint venture, do you expect to be able, I guess, over the -- if there is ever some projects coming back, to be able to pursue those on your own as Fluor?

The answer is definitely yes, and I -- in fact, I do expect that market will come back. Probably not with the same intensity it was in 2001 and a good part of 2002, but it will come back. It's a market that we intend to be a strong player in.

That's both domestically and internationally?

That is true.

Right.

That's correct.

Okay. Thank you.

From Morgan Joseph, we'll go next much Richard Rossi.

Morning, everybody.

Morning.

On this Fluor Daniel, is there anything -- excuse me, Duke-Fluor Daniel. Is there anything in the power backlog that is not related to the joint venture?

Um, there is some -- yes.

Yes, included in that segment is also the power activity of [INAUDIBLE], the joint venture in Mexico.

Okay. All right. As you wind that down, wanting to still maintain a presence in the industry, but clearly with backlog going to very, very nominal levels, are you able to move some of those people into other areas or are you going to have to eat those costs for awhile?

No, we absolutely will be able to move those into other areas. In fact, one of the things that we do historically and will continue to do is manage our portfolio based on the strength of the markets we're in. We dissolved a chemicals business unit several years ago because of the downturn in that market, and then reconstituted it now with the upturn.

The joint venture with Duke, part of the rationale for taking it, I wish again to manage the portfolio, stay viable in the market, balance resources, and move them to other opportunities. Our resources, we find, by the way we do our work and the processes we use, are very fundable. We have the ability to move them between businesses.

At the hundred and whatever the revenues were, 190-something million, you know, do we have just two or three more quarters of revenues left and is that line going to disappear for awhile because there is hardly any business there?

We will have some project completions through 2004 based on our current backlog, but we also include in that line our power services business. So we have some --

Okay.

Currently that -- that will transition in the future. But right now, we have services business in that line.

All right. You also talked about clean fuels business, and I don't know. Maybe I just didn't catch this, but on the clean diesel fuel, are you talking mostly right now about the front-end work, or have you booked some project work there yet?

No. It's just too early for actual project work, but we have booked front-end study work in that arena, and as typical for the gasoline clean fuels, which was the previous cycle just now finishing, there is a significant amount of study work to be done to help pick the most advantageous and cost-efficient way to come into compliance, and that's an area where we excel and one of the reasons we did so well in the previous cycle and expect to do so here.

Okay. In Western Europe, you talked about having clean fuel businesses. Well, how much of that backlog that you have in oil and gas is Western Europe clean fuels? Is it meaningful? 10%? Or --

I would say it will probably repeat the cycle we saw in gasoline where the European portion was probably around 20, 25% of our total with the U.S. being the balance.

And who are your major competitives over there for that work?

In Europe?

Yes.

It's actually quite a number of companies. Not one I would say that stands out. We probably are -- I would say, have the highest market share of anybody in that market.

Are the project sizes over there similar to the sizes we saw here?

They have actually been smaller because of the scale of the refineries. But that's one of the reasons, maybe, that they are lower than U.S..

Okay. That's about it. You covered everything else. Thanks.

We'll get go next to Tom Ford of Lehman Brothers.

Good morning

Hello, Tom.

Morning, Tom.

Alan, in the past you noted with respect to power, the new project, the major project-related work was going to be done, I guess, and trying to get done in 2Q in time for the summer, and -- and then just also based on what you had said, Mike, about the power-related services.

I was curious as to how much to kind of expect or how to look at it in terms of -- is it something where it sort of declined sequentially in 3Q and then we just sort of trend sideways from there? Is that sort of the trend to expect, and anything you could say with respect to the margin assumption.

Mike's comment was right on target in that we do have an ongoing quarter-to-quarter power services business, Tom, which is basically operations and maintenance. In terms of project completions, that is a typical pattern where we complete these projects, put them on line for the summer peak generations.

Okay. And then, Alan, you noted with respect to the new awards margin, you know, the influence of the two major awards.

Right.

Did you -- do you guys have the data -- what happens if we back those out? What, then, does the new awards -- does the new awards margin then look similar to what has happened in past quarters?

I would say so. Yes.

Yes.

Okay. Okay. And the other question I had was with respect to -- Mike, with respect to the $7 million charge for the equity impairment, the Australia project.

Yes.

I am curious if you could give us a little more color as to why there was an issue there.

Um, that charge related to the declining share value of our equity investment in that project, um, rather unusual for Fluor to take an investment in the mining project. That was a very unique circumstance that occurred quite sometime ago in Australia, and we wrote that down the market-to-market value.

Do we have much left? Do you have much left in terms of the book value that is being carried?

No, it's diminimus.

Okay. And just lastly, Alan, it seems like you still seem, you know, it seems in some ways like your commentary with respect to the oil and gas outlook, you know, is fairly consistent with what you said before, but in the release, it also seemed like you were just indicating there was a bit of a stretching out or what have you in terms of timing.

I was just wondering -- I mean is there anything in terms of the stretching out, is there anything specific that you saw or -- or, you know in, terms of dealing with your customers in the past month or what have you, and the most recent past that was behind that or is it just more trying to be consistent in terms of saying that things are lumpy and the timing always continues to remain a question mark?

Tom, I think it's both of those. Clearly if you look at my comments over the last year and a half, I think the market has stretched out from what my initial forecast was. I attribute that to both the lumpiness and also, as I said, the complexity of the deals.

These major programs are significantly complex with joint ventures between our clients, with local partners, with production-sharing agreements that have to be negotiated and permits that have to be gained and it just -- just gives them more of an opportunity to be delayed and stretched out than it is to come forward. Our clients, particularly the major oil companies, the international oil companies, are -- continue to be very bullish with significantly increased capital spending programs. And I think the actual investment in the -- moving forward of these projects is inevitable, but difficult to predict.

Okay. All right, great. Thanks very much.

You bet.

Our next question comes from Leone Young of Solomon Smith Barney.

Good morning. Obviously most of my questions have been answered, too. I was curious if you could give us more color on the pattern in the second half. I believe, you know, particularly with the narrowing of the earnings range. I think previously you had been looking for a little step-up, for third and fourth quarter to look quite similar. Is that still the case?

I would say that's still the case, Leone.

Okay. Great, thanks.

We'll go next to Paul McCray of Wellington Management.

Good morning.

Morning, Paul.

Two questions, the others were pretty well answered.

Your largest contracter in the kingdom of Saudi Arabia, what would you hope to do for the -- I think it's the Royal Dutch [INAUDIBLE] Team, on the first of the shrunken gas initiatives?

Well, I -- Paul, the answer that I will give you would be typical for any of the programs that move forward.

And that is to be able to do -- I would say the upfront work around development, definition, preliminary design, engineering, and then also to move into a program management role to help manage the -- because these are going to be quite large projects that require a significant amount of program management and longistics planning.

Okay.

And I think you and I both agree it's inevitable that the Saudis move forward as they become more realistic on the returns allocable to the western oil companies. Clearly, even though this is the first of a shrunken program, I assume you are looking, as one looks down the road a little further, that the economics just compelled the Saudis to move forward with more of these gas initiatives.

They're -- I completely concur.

Yeah.

No doubt about that.

A very similar question then for your proposed work in Kazakhstan. Is that -- [INAUDIBLE]?

Yes, that's one of the programs we're looking at there. We are currently doing the front-end development in the offshore program in the Caspian Sea

[INAUDIBLE]?

Yeah, on that one, because of the contractual nature of it, we probably won't be the program manager but will have the significant opportunity to do the offsites or actual production facilities themselves.

Okay. And are you also working on the northern project, the Kartaganot [PHONETIC]?

We're not directly working on that one, currently.

Thank you.

From Copper Beach Capital, we'll go next to Alan Metroni.

Hi, thank you. I just want to follow up again on this G&A question. I know we're beating it to death, but I'm still not clear. Can you talk about what your biggest components are?

We like to beat the SG&A to death also. No problem.

There are a lot of different components in there. They're -- all of our corporate staff department budgets from HT to HR to finance. There is compensation expense. There are -- it's a broad range of corporate items. There is pension expense. There's severance.

There's insurance costs and, again, those -- that -- the last two years our insurance costs have gone up the latter half of the year as we renew our policies in the third and fourth quarter. That tends to drive the increases in the second half of the year. But just a lot of items in our corporate overhead.

Okay, so just -- just to work on that, that's helpful. The corporate staff and the HR outside of the rest, is that about -- I mean can you ballpark, is that 50, 60% of the G&A?

Again, those, interestingly enough, those things swing so hard or so dramatically that it's hard to give you a consistent ratio quarter-to-quarter.

Okay, was there any changes in pension expenses this quarter? Did you have to fund the pension? Were there any issues with that in.

There are no major changes. We did essentially fully fund our pension at the end of last year, but that's a cash item in terms of our rate of accrual, our service costs and amortization on the past liability, that's flat throughout the year.

Okay, and from a compensation expense, I remember last year you changed the way you allocate -- the way you used to move up and down in the stock price, depending on the number of restricted stock units and pricing. That's changed, right? That should be more of a constant number on a quarterly basis?

You're correct. We have taken a lot of volatility out of that number. We did that in the second quarter of this year.

That's why I'm still a bit confused. I mean, most companies I follow, most companies in the industry, you know, corporate headquarter staff outside of a person added or taken away here or there, it doesn't move that much quarter-to-quarter. I mean, you guys should be able to somewhat, within a few million dollars, 10% predict your quarterly G&A. And yet, I seem like I have this conversation. Everybody seems to have this conversation. The numbers are moving around all over the place.

Well, um, we -- we can predict it internally, we know exactly where it's going internally. We don't forecast it to the outside world on a quarter-to-quarter basis.

We only quoted the annual numbers externally.

Is there a reason why you can't give us better guidance on quarterly G&A? Is it a proprietary issue?

We prefer to give guidance on our annual averages and pretty much leave it at that in terms of giving guidance on elements on our income statement.

Okay, outside of that, um, can you talk about which area, I know you gave us, I appreciate the overview in terms of end-markets and oil and gas. I know you continually expect that to be dominated by elephant projects the next few years, with timing being uncertain. Can you give us your view sort of in the short term, the next six to twelve months, a couple of the end-markets specifically on industrial and infrastructure, and also some of the global services markets.

For those areas, what are you doing to be able to try to grab some contracts as the economy looks like it's getting better?

I would point to a couple of things. First of all, let me start from a high level.

I think if you look at our results over the last number of quarters, I think we have shown significant growth in our industrial and infrastructure arena, driven heavily by our manufacturing and Life Sciences business and our transportation infrastructure business. We also have seen good growth in our government business, and also in global services, particularly around O&M. And that's been the strategic attempt. I think often that we -- you left the oil and gas potential, as large as it is, overshadow the success we're having in growing our overall portfolio.

I think each of those markets requires a different strategic approach. One, that we're able to leverage our core competencies in the areas where we have strength. I would see continued opportunity to leverage that in the infrastructure arena, particularly in transportation. I think we're going to continue to see growth and strength in our Life Sciences business where we have a very strong execution platform. And I think we'll continue to see good targets of opportunities to add to our business in the mining business, um, and also in the microelectronics business. Those are just a few I can think of that we talked about.

Okay. And just lastly, Granite Construction had come out the other way, they're obviously much more exposed to California and the issues we're going into the California budget, as I'm sure you guys probably know better than me sitting here in New York. You can talk about any -- is there any impact at all to any of the projects you're working on now from a highway construction perspective in the country as it relates to either underfending of states, specifically in California?

No, not at all. In fact, you give me a good opportunity to make a point. They are models in transportation, particularly in highways, roads, and rail. These are very different models that companies like Duran and our other competitors are basically out there bidding for the direct lump-sum contracts in these projects.

Our approach is the development approach and program, project management approach, whereby actually we get to work with the state departments of transportation to come up with business solutions to projects that they can't fund. Um, through their normal budgetary processes. And that gives us a significant advantage over other competitors in this particular marketplace.

Thanks.

We have time for one more question today. We'll go to Fritz Van Gogh of Safe Asset Management.]

Morning.

Morning, Fritz.

I just was hoping to get more color. You said in the press release you said that you're seeing positive evidence your clients are moving forward with the capital investment plans.

You know, obviously enough capital investment in the economy in general has been -- has been sort of on hold for the past couple of years. Um, you know -- oil and gas seems like it has its own sort of trajectory, very stable, tell me if I'm wrong, sort of a stable rollout of these programs over, you know, we have been talking about them for several years now, but maybe chemicals is a more cyclical business or some of the industrial aspects of industrial infrastructure.

Could you talk about what your -- what leads you to think that people are going to step up their capital programs in the economy in general?

Well, it, you know, it stems, first of all, from just looking at the economic trends in those particular markets, but more specifically, it comes from direct discussions and dialogues with our clients.

And, again, one of the advantages we think we have, is that we're relied upon to do some of the up-front and preliminary engineering and design to help establish their budgetary programs and expenditure approvals. That gives us an early look at some of those -- I would say an area that has been flat is certainly chemicals. It's a very cyclical business. It tends to have very long cycles but very sharp increases and declines.

We see a number of the things lining up that are going to drive additional investment there. Heavily in Asia Pacific and heavily in the Mid East, but certainly probably not in Europe or the United States. The consumer products arena, again, has been flat for us.

Uh-huh.

Although we see new product opportunities that are going to require capital investment and that we are in line to participate in. So it's just -- each market is a bit different, Fritz, but, again, we're organized by market and we stay in touch with the clients in each of those arenas.

Now as you said, do you sometimes get an early, sometimes very early look on these things coming up in the consulting sort of role.

If you had -- I mean how would you handicap the timing of these upturns in, let's say, chemicals and consumer products. Is this something like, you know, you're in talks for something that may happen next year or maybe the year after that, or how would you characterize that?

I think we're starting to see chemicals. We did have one award, albeit modest, this quarter in chemicals. I think we'll start so see increasing awards as we move through even this year's quarters, but I think it will pick up steam in '04.

Okay, great. Thank you very much.

You bet.

That does conclude the question-and-answer session today. Mr. Boeckmann, I'll turn the conference back over to you for any closing questions or remarks.

Thank you, operator. Well, ladies and gentlemen, as you can see from the questions -- we had some extremely good questions today -- and I appreciate the interaction and our ability to expand on our remarks through this dialogue -- We do see, on a fairly broad basis, the portfolio of our business, as diverse as it is, significant number of our markets with positive market trends. I think we're even more encouraged by our position in those markets and by our ability to leverage our strengths and core competencies there.

As we go through the year, we anticipate being able to share with you our successes in that arena, and to continue to share with you our -- the realization of our strategic plans. Again, thank you very much for joining us today. We look forward to talking to you in the future. Have a good day. And that does conclude today's conference. Thank you for your participation.