Fluor Corp (FLR) 2005 Q2 法說會逐字稿

Good day everyone and welcome to Fluor Corporation Second Quarter Conference Call. Today's call is being recorded. At this time all participants are in a listen only mode. A question and answer session will follow managements presentation. There will be a replay of today's conference call at 10am pacific time today accessible on Fluor's website at www.fluor.com a telephone replay will also be running through 5pm pacific time on August 15th at the following telephone number, 888-203-1112. The access code of 9974257 will be required. Again that number is 888-203-1112 and the access code of 9974257. At this time for opening remarks, I would like to turn the call over to Lila Churney, Vice President of Investor Relations. Please go ahead.

Thank you and welcome to Fluor's Second Quarter 2005 Conference Call. Our announcement was released yesterday after the market closed. Before starting, I'd like to read the cautionary note regarding forward-looking statements. In discussing certain subjects we will be making forward-looking statements regarding projected earnings, market out-look, new awards, margins, tax matters and other statements regarding the intent, belief or expectations of Fluor and it's 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 can differ materially. These differences could 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 10K filed March 4, 2005, which is available online 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 oblica -- obligations 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 CEO.

Thank you Lila. First of all good morning ladies and gentlemen and thank you for joining us, today. This morning, we'll review our second quarter results and update you on our current business outlook.

As we had previously announced, our second quarter performance was impacted by an unfavorable jury verdict related to a dispute on a he resort hotel project in the Caribbean. I would like to provide some background for those of you who have not seen this news release regarding this issue. This was a fixed price project to build a resort hotel in the Caribbean and during the course of the project, Fluor stopped work upon extra facilities that the client, the developer, added to the project scope without demonstrating the ability of funding to pay for substantial additional work. Fluor continued to perform the original contract base work and in January of 2004, we filed suit to force collection of invoices for work that had been performed for -- by Fluor. Subsequent to the filing of that suit, the developer terminated Fluor. Ensuing from that, the jury's verdict awarded the developer damages in addition to the amounts that they had not paid us. This jury verdict was wholly unexpected, and as we do not believe that it was supported by the facts or applicable law, we are pursuing all possible avenues for reconsideration or appeal. The total impact of this charge was $65 million or $0.77 per share, this included $5 million for the estimated interest expense and attorneys fees and then also had the added impact of substantially increasing the effective tax rate for the quarter.

During this second quarter, we also reported losses in two other areas. First, was a $7 million charge on embassy projects with nearly all of that on one particular troublesome project. In addition, we booked a $9 million reserve on a project dispute in the industrial group. In this case, after reviewing information we received from the client's response in our claim, we made the decision to take a more conservative approach to our position. Including these charges, consolidated operating profit for the quarter was 31.9 million compared with 99.6 million a year ago and while we are obviously disappointed with the impact that the charges had on earnings in the quarter, we are encouraged by the continuing strength in new awards, backlog and cash flow.

Our new project awards in the second quarter were $3.2 billion versus a very strong 3.3 billion a year ago. This is now our sixth consecutive quarter of new awards exceeding $3 billion. These new awards continue to be broad based, with ongoing strength in oil and gas and particularly strong growth in global services and power. Our backlog rose 21% to $15.7 billion compared with 12.9 billion a year ago and 15.4 billion at the end of the first quarter. Given that significant growth in backlog over the past 18 months, our revenues have continued to increase up 32% to 2.9 billion compared with 2.2 billion in the second quarter of last year.

As we look ahead, solid global economic fundamentals continue to drive strong capital spending and the outlook for the majority of Fluor's markets remains positive. Our broad industry and our geographic diversity has positioned the Company to benefit from a number of major markets that are in positive parts of their business cycles. The global oil and gas industry continues to make sizable sustained levels of investment with increased spending on major petrochemical facilities in particular. Our largest award in this quarter was for the engineering and construction management of the utilities in off sites for a major petrochemical complex in Saudi Arabia. This is consistent with the strategy that we have talked about for these large projects. We had originally booked the front-end engineering on this job, followed by program management services and now the EPC for the utilities in off sites.

The outlook for investment in new and existing coal-fired power facilities in the U.S. also continues to progress. Our second largest award in the quarter was for a major project to install three flue gas desulfurization units at a coal-fired power facility in Kentucky. A number of our clients will receive a potential boost over the next few weeks with the congressional passage of both the transportation and energy bills. It will take some time before this impact can be seen, but both should be very positive to the [E&C] industry. While we remain very encouraged by the outlook for significant ongoing client spending and the potential that it represents for future earnings performance, the project charge recorded in the first quarter -- or in this quarter has clearly impacted the full year earnings guidance. Our Fluor's -- our guidance for Fluor for 2005 adjusted for the impact of the $0.77 per share charge otherwise remains essentially uncharged and translates to a revised ranged from $1.55 to $1.75 per share. And with that, let me turn it over it Mike Steuert, Fluor's Chief Financial Officer to review additional details of our operating performance and other financial information. Mike.

Thank you Alan, and good morning. Since our business results are covered in detail in our press release, I will focus on providing additional background in new awards and backlog for each operating segment and on a few corporate financial items. Starting with oil and gas, new awards for 1.22 billion, about level with the 1.29 billion in the second quarter of last year. New awards, were [booked] in chemicals, as well as both the upstream and downstream areas. As Alan mentioned, the largest award in the quarter was for the utilities in off sites for a major petrochemical project in Saudi Arabia. We also booked project management services for a second new facility Saudi petrochemical facility and additional scope on an existing project in Saudi.

In upstream oil and gas, we booked an award for construction on the [Cosgon] project in [Kalgestan], we also booked additional engineering for [inaudible] and construction scope on the [Soclan] One Project and an award for continuing engineering services on the Bo Hi Bay Project in off-shore China. Downstream awards included one U.S. refinery expansion project and two [diesel] clean fuels projects located in various refineries in both the United States and in Canada. Backlog for the oil and gas segment increased 13% from six billion from $5.3 billion a year ago.

New awards in our Industrial infrastructure segment were $348 million, down considerably from a very strong $1.4 billion last year, which included a $700 million plus mining project. New awards were relatively broad based, including three life sciences projects, two infrastructure jobs, two mining projects, two general manufacturing facilities, and additional scope on our ongoing tele-communications projects for the London Underground. Backlog for the industrial infrastructure segment increased modestly to 4.5 billion compared with 4.4 billion in the second quarter of last year.

In our government segment, quarterly awards were $350 million up 46% from $239 million a year ago. New awards included approximately $190 million in past quarters for a joint venture with AMEC in Iraq, as well as approximately $85 million in additional work under our existing Sea-Tac 2 contracts. The balance is primar -- primarily military based operations and maintenance awards for [Delagen] and addition work for FEMA. Backlog increased 27% to 1.2 billion from $950 million last year.

Global services had another very strong quarter of new awards posting a three fold increase to $748 million from $247 million at second quarter a year ago. New awards in global services were for a variety of operations and maintenance contracts, both for new sites and new clients as well as some renewals. Awards were also geographically diverse, including not only several in the United States, but also projects in Africa, Europe and Indo -- Indonesia. As a result of the strong new awards, backlog increased 64% to 3.1billion, up from nine -- 1.9 billion in the second quarter of last year.

Power also continued to post an encouraging trend in new awards, up dramatically to $564 million compared to $85 million a year ago. The primary contract booked during the quarter, as Alan mentioned, was for a major desulfurization project. Additionally we received a second extension on under our limited notice to proceed for a planned coal-fired power plant in Nevada. Backlog for power more than doubled to 934 million.

Moving onto corporate items. G&A for the quarter was $27.7million, which included a pre-tax gain of 4.2 million from the sale of real estate. This compares to $33 million in the second quarter of last year. We had net interest income of 1.4 million in the quarter, with $649,000 a year ago, primarily due to a larger average cash balance.

Let me comment on our tax rate. As a result of the hotel related charge in the quarter, which was a foreign loss for tax purposes, the Company's ability to absorb foreign taxes with an off-setting tax credit was significantly diminished. This, combined with the international embassy project for contract provisions in the first quarter of the year, reduced our effect -- or increased our our effective tax rate for the six months ended June 30, just 64.1% compared to 35 -- 33.5%, for the same period in 2004. The effective tax rate for the full year is now projected to be between 40 and 45%.

Let me now shift to the balance sheet, cash and a few other financial items. Cash flow from operations was very positive. Generating approximately $140 million in the quarter and $180 million year-to date. The majority of this improvement resulted from improved operating performance and reductions in working capital levels. As a result, Fluor's financial position further strengthened with cash and securities rising to $689 million up from $643 million at the end of the first quarter. No shares were sold during the quarter under the equity distribution agreement that we entered into in March of this year.

Outstanding commercial paper was at $100 million, declining somewhat from the 120 million last quarter and reducing our debt to total capital ratio to 24% at the end of the second quarter. Deferred cost on [inaudible] at the end of the second quarter, were $266 million. Capital expenditures for the quarter were 53 million while depreciation was $25.5 million. Capital expenditures were higher in the quarter than our normal run rate reflecting increased spending by our equipment operations to support growth in international oil and gas projects as well as our activities in Iraq.

Over all, Fluor's financial condition continues to strengthen and remains a top priority. With that, Alan and I will be happy to respond to questions.

[OPERATOR INSTRUCTIONS] Richard Rossi, Morgan Joseph.

Good morning, everybody. A couple of things, first, on the embassy job and the industrial jobs that you had [further cost over-runs], how far are those jobs from completion?

The -- excuse me Rich, the embassy job is -- is well along and will be completed in this year, the other project has already been completed.

All right, so the industrial job are finished up?

That's correct.

And on this jury award that you are pursuing, if you win your case in pursuit, do you also get reimbursed for your interest expense and attorney fees?

To the extent, yes, Rich let's -- if you take the scenario that we -- first of all get the verdict overturned or win an appeal and that appeal then goes in our favor, we would, in fact, reverse the charges of the monies that we were payed at the -- the defendant and also then we would get the monies that we had originally filed more and -- and attorneys fees and interest.

All right, just a couple of other things and I'll move on. In the oil and gas area margins were 4.1%. That's down a bit, which I -- I thought was a bit surprising, could you give us a little more on why the margins slipped a bit, there?

Well the -- I'll point to one thing that I think is the the biggest component of that. As we've grown in backlog in that area we come on with rather large awards which tend to, by their very nature, be a little bit lower in margin. I think our margin performance, though, in terms of both capture and performance is actually quite good. But it is down from -- from previous numbers simply because, I think, of the size of the backlog we're working on.

Okay, given that that mix of large -- .

In the timing of where we are at in the -- in the cycle of those projects, Rich, is another factor.

Right, so that -- that over time, will help you, but given that the mix, going forward, will probably be more dominated by these larger jobs, is it more appropriate for us to be looking in the low 4% as a margin goal for this group through '05 and '06?

Rich, it -- it's going to be LUMPY from quarter-to-quarter. It will probably be in the 4% to 4.5% range. But it's -- you can't look at a quarter or two and figure out a trend.

No, I realize that. And just one final thing and I'll pas it along. And that is, what percentage of your backlog is fixed cost, right now?

It's about -- in terms of just pure fixed price, it's just right at 20%. Then we have a very small percentage in guaranteed [inaudible].

Alright and of that, how much is not government work?

Good question. I don't have that information directly available. Rich.

Okay, I'll get back to you on that, thank you.

Jamie Cook , First Boston.

Hi, good morning. Just getting back to the embassy project, you said the -- well the infrastructure project I guess that's completed. In terms of the embassy, how comfortable do you feel that sort of the -- the -- that problem project goes away or should we expect to see some more -- some impact in the second half of the year?

Jamie, I would not expect to see it impact on the second year. We -- we are very disappointed we had this additional impact on this particular project. But it is a project that has significant challenges in terms of it's location, and it's execution, and it's labor. But I think we have now appropriately addressed it and as I said it is a project that would be completed here soon.

Okay, and then next on the SG&A line, even if you adjust for the -- the asset sale, SG&A looks light relative to what I thought. I guess, is this a good run -- a good run rate, going forward?

If -- if you add that back, Jamie, yes it is. We had it particularly heavy SG&A the first quarter and the run rate has -- has improved.

So, we can use more like a $32 million range in the second half of the year?

32 to 35.

32 to 35? And then can we expect any more asset sales going toward? Should we -- ?

Well we -- we do, [periodly] -- I know of the analyst like to [eschew them from our numbers], but we -- we -- we are in the real estate business in terms of -- . And we -- we [did] have it from time to time and it's certain likely we will have some additional ones this year.

Okay, and then my last question relates to within the industrial and infrastructure business, if you look through the 10K, it suggests you had a project cancellation in the first quarter in lifesciences for about 202 -- 282 million and then the second quarter, we had another one of 80 million. Can you provide any color on that? Was that related to one customer? Should we read into this or do -- or do you expect any more cancellations going toward forward?

The cancellations that we had in the second quarter was a bio tech job. It was just -- it was part of the partial scope cancellation on that particular project, which is probably not unusual, we get fluctuations in -- in -- in -- in projects as they go forward and get approved. So no, I don't think it's -- I don't think it's anything that would be particularly indicative of a trend.

And okay, and did the first and second quarter cancellation -- is there any relationship between the two?

No.

Okay, great, thank you very much.

Sanjay Shrestha, First Albany.

Great, good morning guys. A couple of quick questions. First again, staying with the margin, on the global services side of the business, you guys didn't mention in your queue that it had to do with materials, why the margins were lower here for this quarter. But this is not the trend that we should expect going into the second half of the year. And within that segment the margin should tend back to that 8% - 9% level again, right?

That's very true.

Okay. Okay and what -- what exactly happened here in the second quarter that led us to sort of have that 6.1% kind of the margin?

We had a fairly [heavy component plant furnished material] in that quarter -- in this quarter.

Okay. Okay. Okay. Now looking into 2006, you guys did mention about incremental costs, the relocation of your headquarters, I mean, is that going to eat up on some of the inherent earnings power that everyone I think is sort of expecting Fluor going to '06 and beyond. Or how -- how -- how is that going to hit the P&L during 2006, can you guys give us a little more color on that?

Alright well let's do that in two parts, Sanjay. It's a very good question, but the answer is, no, we don't see it materially affecting our results at all. In fact we think this going to have a very positive effect on the Corporation as we go forward. But the costs, we -- we actually put the estimated costs in -- in our documents. So Mike, you may want to talk about that.

Sanjay, they -- they'll probably be spread over the first half of 2006, with some probably trailing into the third and fourth quarter as -- as we go through the [move] process. But, as -- as we go through this process, as well, we expect some -- some increased operation efficiencies from corporate and expect to be reducing corporate expense and be able to off set a [inaudible] portion of these costs. So the net effect, we don't expect it to be a material impact on 2006.

Have it it, have it. And also when we look at your backlog trend, obviously, it has remained strong and with the kind of end market exposure, it probably continues that trend for some time, here. But more from the -- I know you guys don't disclose this, that the gross margin of the level of profit and your backlog and I understand it will be lumpy depending on the state of the project. But when we look at your existing backlog right now, versus your backlog let's say 12 months ago, what is an inherent increase or the dynamics in play related to the level of profitability and how we should think about the -- the earnings that is going to flow here going into '06, '07 and beyond time frame?

Well Sanjay, I think, first of all, we -- we stopped reporting the -- the gross margin or backlog, quite frank -- quite frank -- quite frankly because when we started doing it, we thought others would follow suit, and nobody did. So we found ourselves, because of our segmentation, we provide more segmentation in our report than anybody.

You certainly do. [inaudible]

We found -- we found -- we found ourselves being at a competitive disadvantage with that disclosure. And since it wasn't a required disclosure, we made that decision, for that purpose, to back away from it. It was not, as someone suggested, because we were going to go down in our gross margin. In fact this -- this last quarter we reported was one of our best in a long per -- a long time. Very, very positive gross margin in this quarter. But, the backlog as it comes in, quarter-to-quarter, is lumpy, as is the whole business in terms of how it's made-up. When you get a much larger project it tends to to be at a little bit of a lower gross margin. Front end activities tend to -- tend to collect a higher gross margin and as you get the opportunity for lump sum and/or with significant incentives, you get that opportunity [inaudible].

So, I think we are actually very pleased, we maintain a very strict focus on gross margin. We have a fairly strict pursuit approval mechanism within our Company for that. And it's -- it's -- it's something that we track on a pretty consistent basis, internally.

Have it. So -- so then -- but is -- is it fair to summarize then that it's -- there is some more leverage there with the performance incentives and stuff like that above and beyond just the top line growth that should flow all the way to the bottom line leaving us to continue earnings growth into '06 and '07.

Yes. That's correct.

Okay. One last question, guys. Any update on the Peabody power plant. Is that still more like the Q4 kind of a potential booking or has that shifted more into 2006?

I think it probably -- probably maybe moving over that demarkation point,into a Q1. But, it's close, it's going to be tough to say. It's -- it's front end effort, doing a lot of definition, we are doing -- there is a lot of questions still being answered on the environmental side. So, I think it -- it -- it maybe Q4 but it's more likely now going to be a Q1 event.

Have it, that's great, thanks a lot, guys.

[OPERATOR INSTRUCTIONS] Lorraine Maikis, Merrill Lynch.

Thanks. Good morning, just a follow-up on Rich Rossi's question a little bit, it seems like the proportion of fixed price contracts in your backlog is going down, but the number and magnitude of charges that you are taking has increased. Have you changed the way that you are recognizing these types of over runs or -- ? I guess we are -- we're trying to get comfortable for -- with -- with the profitability of what's in your backlog right now, and it just seems like we're seeing every quarter charge after charge. So can you just talk about if anything has changed there in your accounting and what else we can do to -- to gain some comfort in the -- the next few years that -- that we won't see recurrence of this first half trend.

Lorraine, I understand your -- your -- your question and your concern, let me address that. No, there is nothing that has changed in our accounting. And while yes, we do have a lower percentage today of lump sum projects in terms of percent of revenue, we do -- they have actually become smaller. If you recall, we have had, in the days of power a lot of our lump sums were $500 million, [AMOCA] starting at an $800 million lump sum. So we have a smaller percentages revenue, but we still have a significant number of projects that are there. But I would say that if you think about the entire portfolio of Fluor Corporation, we have the largest portfolio of projects among all of [publicly traded] competition. And I -- and I come back to the comment I made to Sanjay is, is that we do, I believe, provide the most visible and [transparent] reporting.

So as a result, in this business, you have projects that will be -- projects that -- that will lose money from time to time, and, so, I wouldn't anticipate in future quarters we'll -- we'll have -- we will have, I should say, something that we will report on. The fact of the matter is though, that we work hard to eliminate those and we don't report on positive ones. We have a fairly significant portfolio and positive results in this [arena]. I don't -- I don't believe that we have a significant challenge here. We do have a number of them that happened in this particular quarter, but, I believe we are addressing those and I think we have now put them behind us. So, I think that the real proof is in the fact that we can deliver earnings going forward and I think the positive indications on our cash flow is also a positive indication of the underlying strength of the Corporation.

Okay and then just looking at your revised guidance, the low end of the range implies single digit growth in the second half of the year. I guess after five quarters of 20 plus percent year-over-year growth in backlog, we would expect a little bitter better on the gross side and I think just following up on what you were talking about with Sanjay, maybe the margins are -- are what's really holding you back, there. I guess just looking into 2006, can you give us a feel for what we should be looking for in terms of revenue growth and if your profits will match that revenue growth?

Well as you know, we don't -- we haven't given guidance yet for '06, which will be something we will do here within the next quarter. So it's going to be hard to talk about that specifically, but I do anticipate both revenue and profit growth in '06 and I think it will commencerate with the backlog growth. This current quarter obviously with the impact of the Ritz Carlton really kind of made it difficult to -- to make direct comparisons, but I think our -- our margin performance in this quarter, really, was a result of just the type of cycle we are in with these projects. We didn't have, across the entire portfolio, any significant completions of projects that would have that effect that we normally get at the close the projects. So I think it -- it's [reported] what the margins were down. I don't think that's continuing trend.

Okay, thank you.

Tom Ford, Lehman Brothers.

Hey good morning, Alan and Mike. I wanted to go back to something that you had talked about, Alan, about the gross margin. If I heard you right, you were saying that if you guys were reporting the gross margin on the backlog, it really hadn't -- hasn't notably changed from prior years, is that right?

What I said was quarter-to-quarter, it's lumpy, but it hasn't -- it hasn't [inaudible] materially changed, now.

Okay. Because I'm just curious. I mean, I think it's positive that you have seen the -- the fixed price mix come down, but I would think the margin mix has to adjust as well if -- if -- if you're shifting more towards cost plus work. Wouldn't t hat be -- ?

Yes, you are correct. And I -- I wasn't intentionally trying to be misleading there. The mar -- I'm talking about from a relative sense, as back -- as -- as lump sum projects come down and the type of mix, you do get a small decline in your -- your profit margin that you book . So, I'm talking relatively speaking to the back -- to the mix of our -- of our backlog. I'm very pleased with where we are in our gross margin numbers.

Okay, great, and then just one follow-up. If -- and this was looking at [INI], if I back out the 65 and the nine, I'm still getting -- I get a segment margin of about 1.8%. So just wondering if you guys can talk more about what's happening there. I would imagine that that's not trend. But, just wondering about what, in particular, occurred in the second quarter and what kind of thoughts you would have maybe just looking out for the second half?

If it was a quarter that I think is abnormally low in terms of just being a point in time in the cycle, Tom. We -- we obviously are projecting better margins than that in the second half of the year.

Okay, thanks very much.

Leone Young, Citigroup.

My questions have largely been answered, but I was wondering if you could address what you see in the energy bill that you think over the long-term would be particularly beneficial as far as Fluor's businesses are concerned?

I think there is a number of parts of -- of that, particularly, in the power side. I think it's going to -- going to generate additional spending for -- for generations. I think on the production side as well we are going to see increased opportunity for -- for production, particularly, as it relates to north America and, I would say, north slope opportunities. Also, I think if you are going to see significant opportunities now in the gas side driving, I think, more efficient use of gas and maybe even coal from a -- from a [inaudible] standpoint. So I think there is a number of favorable things in there for us. And then on the transportation side as well, the additional funding that's going to be available for capital programs. It just has to have a positive effect on the market.

And I think after the first quarter, you know, the expectation was that probably your -- your full year guidance, you know was certainly conservative in the bottom end and the top end should move up. I guess as a result of what we've seen in trends in this quarter, it looks like we are more -- really more likely to come now within this guidance, would you characterize it that way?

Well, we give the guidance because we expect to come within the guidance.

Well I know but after the first quarter, the expectation was slightly different, I think for margins than it is now for the second half of the year. Would that be fair?

I don't think our expectations have materially changed at all. The guidance certainly implies a stronger second half than the first half. And we are optimistic about the second half. And as you look at the last couple of years, we have kind of been conservative on our guidance.

All right, thanks.

John McGinty, Credit Suisse First Boston.

Good morning, just a clarification, Mike, if we add back or if we ignore for a second the gain, the G&A is 70 million for the first half, 38 and 32 and you said in answer to the question earlier, 32 to 35 would be the run rate for the second half. That gets to you 134 to 140. Last quarter, you told us the run rate was $150 plus or minus five. So why is the -- other than the fact that you needed lower G&A to get the earnings up a little higher, why is the -- why is the G&A now down -- the guidance down 10 million or so from where it was last quarter?

Well, as we have gone through this -- this quarter, first half of the year, John, we are realizing some efficiencies. We -- we're thinking that instead of 150, it -- it could be 140 plus or minus five, instead. As a result of the efficiencies that we've been able to achieve in the -- in the second quarter.

And how much of the -- in other words, one of things that's important is as we look at '06, can we use 140 or does a chunk of that relate to im -- bonuses options or whatever?

No , as you look at '06, in response to an earlier question that came up, we do expect some continued efficiencies flowing into '06 as we stream under our corporate function as we go through this relocation process, but we will, on the other hand, we'll also have some -- some one-time relocation expenses which will continue to drive us the other way. So -- so , right now, for '06, we haven't given guidance, but I would not expect a material change in our Corporate G&A outlook.

Are you -- could you just refresh us on the options? Where are you, in terms of expensing them or not expensing them, will that be a drag in '06? Not a drag but a [inaudible].

We will ab -- we will [adopt] that in the first quarter of '06, as their balance is required.

If you look at our disclosures in the 10K, -- or 10Q, excuse me, I believe the impact of one penny per share per quarter. So it's not [inaudible] drag.

Okay, and then just another clarification, the tax rate, if we exclude the Ritz Carlton impact, would -- you said, I think 40 or 45%, but if we exclude that, what would it be in '05, would it -- it's essentially where -- where it was in low 30's?

It would be the mid-30's. That's 40-45% is our best estimate at this time. That could change depending on our mix in foreign source verses U.S. source income in the second half. If there is -- there is a lot of variables potentially around that tax rate as we go from quarter-to-quarter, but the new accounting rules and our ability to really off set the tax credits that we weren't able to utilize in our first half of the year.

Okay, and then my -- the question I have it kind of asking the question that Tom Ford was asking in a slightly different manner. If we -- if we add back the -- the -- the charge in industrial and infrastructure and we add back the 9 million, you're still only earning about $10 million, which is half of what you were earning. Forget margins, the percentages and everything, but just you're earning half of what you did in the first quarter. You are earning substantially less than you did a year ago. That -- that looks to me something that's more -- more than just timing, because that in -- industrial infrastructure is not traditionally something where you've had major swings quarter-to-quarter in terms of timing, at least of that order of magnitude. So, is something going on there or does that bounce back in the second half or could you explain why you had such a huge drop on a year -- on a sequential basis?

John, let me address that. We have had a very, very strong run in the industrial side, particularly in lifesciences, where we had large portfolio projects and we've had almost every quarter project completions, which we did not have in this quarter in that area. In addition, we've had good strong performance with completions in infrastructure, which we also did not have this particular quarter. So, it was a unique quarter in terms of just timing or the absence of events that normally occurred in almost every quarter we have in that group.

So as we look at the second half, should we see something that's closer to the first quarter and the fourth quarter and even the third quarter of last year in the 15 to 20-$24 million area getting back to completions or do we stay down in this kind of 10-$11 million kind of area?

I think if we look at Q3 -- as we looked into our forward-look here, I don't think we are going to have a significant number of completions in Q3, either, John. But I think then that will start to change as we move into the -- into Q4.

So Q3 is going to look more like Q2 adjusted and Q4 may show some pick up from that level?

We expect some modest growth, John. Certainly as -- as you look at our guidance for the second half, it reflects some -- some improvement.

Well again,-- but, I mean, the guidance is an overall number Mike.

I know, I know.

But, I think to answer your question, John, I think we'll see some improvement in Q3. Didn't mean to say what he was saying but [inaudible] This was a very unique quarter.

And then final question on the power projects, are there other scrubber projects that you think you can land this year? Those don't just pop up, those are things, obviously that you pursue, you negotiate and so on.

I think that's probably not going to happen.

Okay, thanks, very much

John Rogers, DA Davidson.

Hi, good morning. A lot of this, I know, has been gone over, but looking out over the next couple of years, Alan, you have talked in the past about very strong booking cycles, especially on the oil and gas side. And yet, listening to your comments, maybe I'm miss misinterpreting them. It doesn't look sound like you're -- you're looking at a lot of margin improvement in the [out] coming years. And I'm just wondering is that - there's a lot of things that go into margins. But I would have thought the pricing for a lot of these would have gotten better. Is it just a function of just staying out of the fixed price side of the business?

We really don't pay a lot of the fixed prices in oil and gas. John, but, are you right, there are a couple of factors at work, here if you look at the dynamics of the marketplace in oil and gas in particular. When you get into the really large awards, they just tend to have a lower margin as a total percentage but on -- on a much larger revenue base. But again, it's this segmented on -- and the front end, very, very high and as you complete the projects, when you recognize incentives they tend to be higher.

But, by and large, we -- I do -- [inaudible] part of your question, I do see continued strong market in that arena as we go forward in the next several years. Nothing that I see shows any signs of this slowing down. So we continue to be positioned for it. I think we're going to continue to see backlog growth through this area. I think it's going to continue to play a very, very large part in our overall portfolio.

Do you think as that market picks up that the E&C contractors, in general, will have some pricing power that they will be able to improve margins?

I think there is some of that, today, but there's -- it's not dramatic. Because there still is a significant amount of competition out there. But, I think where we have an advantage, and where we're able to [inaudible] some of that is when we get into the very large projects where we have very limited competition.

Okay, okay, great, thank you.

[OPERATOR INSTRUCTIONS] Alex Rygiel, Friedman, Billings, Ramsey Group, Inc.

Thank you very much. When were the embassy projects bid on and when was the project that was in dispute that cost you $9 million bid on?

The embassy projects occurred over a -- over a period of time, Alex. The particular ones that we are talking about, I think were bit in two thousand and late three -- or [ of early] four, I believe.

Yes, it was -- it was before we completed the acquisition of [JA Johnson].

Correct, correct. The other project in industrial is probably about 24 to 30 months old in terms of its inception of this bid.

Probably late 2002.

Is it safe to assume that the competitive environment 18 to 24 months ago was a little more difficult and therefore, maybe pricing in these bids for these projects might have been pressured a little bit more than potentially projects that you are bidding on today?

I think -- it has always been a tough market out there. I think, yes, you probably could say it was to some extent. I don't believe that these projects were really the results of being dramatically underbid. The projects we are talking about had dramatic and significant change and that [engendered] a -- a basic dispute process in each one of those and that has been -- that's been the main challenge that we have had. If there was a -- if there was an estimate issue on the embassies, it was around labor, and the labor productivity that ensued on -- on the particular projects. But not -- bit I wouldn't say it was an issue of us getting into a pricing war or a competitive pricing situation. It was more as a result of the things I just mentioned.

One last question with regards to corporate admin. and general expense. Since we are coming close to the fourth quarter, that is the period in which that number usually has a very wide variance relative to expectations. Can you help us to understand how that number will be impacted in the fourth quarter of this year? And then, to follow along with that, in 2006, you have stated that 140 million plus or minus five is probably the figure, can you confirm that does include the incremental eight million -- 18 million associated with the relocation?

Let me clarify that a little bit, the 140 plus or minus five was for -- for this year, not -- not for next -- we haven't given guidance for next year, although, right now, I don't -- I don't see it materially changing. As we get closer and go through our planning process this fall, we'll -- and have more definition on the exact timing of some of our move costs, we'll be able to give better guidance. But right now, 145 plus or minus five is -- is this year. Traditionally, you're correct, we do have higher G&A in the fourth quarter. As you wrap up the year, as we adjust some accruals, as because we make some discretionary spending decisions, my view for this year is, it probably will not be as pronounced as prior years, in terms of higher expense. That's why we are sticking with 140 plus or minus five million.

And just to follow up on your question with -- your answer with regard to 2006, is there anything that would -- given your backlog being up 21% year-over-year, is there anything in there, any shift in mix or what not that would lead us to believe that your Corporate Admin. expense would increase on a year-over-year basis -- excluding the 18 million expense?

No, there is absolutely nothing in the nature of our backlog in terms of the mix serve, how it's structured going forward that would -- that would change our Corporate G&A.

Great, thank you.

Tom Ford, Lehman Brothers.

I just had two quick follow-ups. Number one, Mike, you gave the indication for 2005 for the tax rate, just curious and I know you haven't given guidance, but, would the '06 tax rate be something similar when you talk to John McGinty about backing out this -- this award issue or the jury issue? Something in the mid-30's? Is that okay to still use something like that or is there going to be more of an impact looking out just beyond '05 from the Ritz Carlton situation?

No, it -- it -- the mid-30's should be good at this stage. We took the full impact there was cause in this quarter and basically we're very conservative and assumed no tax benefit whatsoever. So that -- that will not negatively impact our taxes going forward in the future, and if anything, as we received a foreign income in subsequent quarters we should get some benefit from that because of the tax position we took on the Ritz Carlton this quarter.

Okay, and do you -- do you guys have any idea -- I know it's kind of -- I know it was unexpected, but can -- do you have anything that you can give us in terms of this process, the appeals process, or the legal process with respect to this in the timing?

Well, on that particular question, let me back and say that if you follow the history of the project and obviously, we have looked at it in a fair amount of detail, it's hard to know what we would have done differently. The contract, good contract, our people followed the proper change procedures. They did exactly what they should have done. We just had a very surprising result. Now our follow-up from that is to follow the legal process and that first one is basically asking the Court for a stay on the decision. That is -- that is ongoing, as we speak and it's hard to know exactly when we will get an answer on that, but I would expect one, hopefully, within this quarter that we are in. Then, failing that, we will go into the appeals process. That would, if we are granted an appeal, that would then of course require a new trial, so, that would certainly become in '06 event at that point in time.

Alan, would the stay then prevent that. Because I assume -- is the stay to prevent you guys from actually paying anything?

We've already -- we are already in that position where we don't have to pay yet until we -- until we have gone through this process.

Okay.

But the fact is that we have to get -- we have to give [inaudible] stay on it [inaudible] order the appeal. I'm confident we'll get [one or] the other.

The other question I had for you, Alan was, the Seattle monorail project has been in the press a lot as of recent. And you know, I'm not -- I'm not looking at it as gospel, but the press has been -- recently, they have indicated that there has been a change in the project and they're essentially saying that you guys are willing to take on the entire project risk on the project. And so I'm just wondering, one, if you could just discuss it a little bit in more detail? Where are you in -- where are you in where you think the -- the monorail project is? And then two, just give me some idea about your thoughts on risk assumption here and where does the press have this wrong?

Well, first of all, we have not booked anything on that particular project, even though we have been granted the award. And as you correctly state, there has been a significant amount of press surrounding this. In fact a lot of it fairly negative. The -- this is resulted in the resignations of the Board Chairman and the Executive Director. Right now, that Board is reviewing all of their other options to come up with a new financing plan and we are working with them on that. They are looking at re-working the plan and/or the contract scope. They have the option actually of reopening the [inaudible] process. I don't think they will take that, but that is one possibility. Or the other is a new public vote on -- on the project. So, right now, we are working with them. I think they are expected to come forward sometime in September with a decision on what they are going to do. I don't think it will be a rebid. And I think we'll be able to come up with a financial plan, hopefully that keeps that project going.

Just about the press' commentary about a risk -- again that's the most concerning thing to me is, that they had been saying that -- and this is more recent, they had been saying there was a change in terms of the underlying risk assessment and who would assume that. It was implying that you guys were going to be assuming the risk with respect to the -- the ultimate cost coming in line with budget.

Well that's -- that is correct. That was a lump sum bid on that project. The [brouhaha] started, though, with a -- a disclosure in the public press conference that Seattle had, with respect to the ongoing maintenance costs which were really never part of the capital cost of the project, but when they showed that, the press picked up on that and added that to the capital cost and then took off then it just became a feeding frenzy on that total number. Which was unfortunate, but it did, with the politics involved, [inaudible] create quite a problem.

The total number is huge, it was approaching 20 [billion], of which the capital costs were only 10%, the rest is maintenance and financing cost. That's what caused them to really re-evaluate the financing plan.

I'm just curious, I mean, even with respect to that, even if the capital costs was only 10%, I'm just curious about how -- what your guys thoughts are in terms of that risk assessment? I just -- I just -- it just seems like every time there is an urban project somewhere in the United States, it's destined for some element of cost inflation.

Well that's -- I -- I -- I don't know on that one -- on this, we had a very specific bid. We tied it to -- to precondition quotes from -- on all of the materials, and subcontracts. So we were pretty, pretty convinced we had the costs and the risks contained in our bid. But, I guess, as of right now, per your question, we're just waiting to see what the decision is from the City of Seattle.

All right, thanks,.

Richard Rossi, Morgan Joseph.

Just a couple of questions on capacity. You have already said that you had the higher CapEx [inaudible] the project coming up, which is very understandable. I'm just wondering where you are in terms of your available capacity on the engineering side and maybe more importantly, how much project management capacity, especially the first stringers do you have available to bid on some of these large projects referred to as probably coming up over the next couple of years?

Actually, that's a -- that's a question I would really like to answer, because I think that puts us in a tremendous competitive position with visa vie, our competition. Our current backlog is 15.7 billion. It's still not equal to the backlog we had in early 1980's in those days dollars. And, yet today, when you looked at our system and our network, and the way we integrate work , and have a much broader network our ability to [execute on the jury side] is significantly improved over those 25 years. So I don't believe we are anywhere near our capacity on -- on our current backlog and have the ability to move work and integrate the offerings from every one of our locations in a single project. We also have significant relationships with other contractors who we can subcontract to and/or joint venture with. So, I think we have the capacity to continue to grow backlog without having the strain on our engineering capacity. We rightly point out, though that every project team needs to have good first stringers and that's another area that we started focusing on about five years ago, not that we had a bad -- I mean a bad [niche] or -- or -- or resource, but, we also went in to really look at recruiting from other companies and we've had a very, very positive track record in that area. I think, compared to our competition, I'd say to bring it on. Because when we can compare our teams versus the competition, which is a significant decision factor in our clients thinking, I think we really fair extremely well. there

Five minutes remain.

Rich, just to your earlier question too, let me respond on the one on fixed price backlog. Less than 10% of that is government, the vast majority is investor infrastructure and oil and gas.

And one final thing. Just on a trend basis, the cost of bidding, which hardly ever gets talked about, but certainly is a factor. How has that been trending? Is that been up materially, over the last year, year and a half? Are you anticipated that it will be up materially, going forward and when I talk about materially, I'm talking about at least several million dollars?

Not really, I guess the trends in that are fairly specific to the market. A lot of the government pursuits tend to be consummate, but that gets baked into our -- our -- our rates. Lump sum bids tend to be very expensive because the amount of the work you have to do to condition your bid and get definition into it. So as the lump sums come down, it -- it basically, has had the effect of lowering bas -- our per unit cost of bidding. So it is really tied into the market cycle and the type of projects that we pursue.

We watch those costs very carefully. But, certainly in today's environment I -- I -- one way to characterize it is that we have been making an investment [inaudible] cost. We think this is a great environment, so we've -- we've -- we're investing in sales of marketing resources.

Okay, very good, thank you.

Ladies and gentlemen, let's -- I think we have to bring this to a close. I certainly appreciate your questions, today. But let me make a comment, if I can, in closing out this conference. First of all, I made it earlier on and I'd like to just reiterate it. I do believe that we have both the largest portfolio of projects in our industry space and also provide the most visible and transparent reporting. As a result, we -- we do have and we have announced in this quarter, some losses. But I would -- I would tell you that the -- I think the underlying strength of our risk program and the execution of the Company is very sound. But, it hurts when a single item more than consumes the collective profits earned on the rest of our successful projects. I think it's important to look at that underlying strength. Particularly if you look at the market in oil and gas. We -- we continue to be very successful in catching a significant share of this market on a global basis and I believe this market is quite substantial and will be long lived. Importantly, our -- our operations are generating substantial funds in cash flow and if strong financial condition continues to improve and now it includes nearly $700 million in cash on our balance sheet. With the very strong of broad based new awards and a healthy backlog that's approaching 16 billion, I think the upside potential for Fluor has never looked better. So in conclusion, we're going to stay focused, we are going to be very diligent in the execution of our projects and we are going to take advantage of this very favorable market that we are in, to drive growth across the portfolio of our businesses. I thank you very much today for your interest in Fluor and for insight and questions. Have a good day.

That concludes today's teleconference, thank you for joining us.