Fluor Corp (FLR) 2006 Q2 法說會逐字稿

Good morning. Welcome to Fluor Corporation's 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 1 PM Eastern time, accessible on Fluor's website at www.fluor.com.

A telephone replay will also be available running through midnight Eastern time on August 13th, 2006, at the following telephone number. 888-203-1112. The access code of 734-8322 will be required.

At this time for opening remarks I would like to turn the call over to Ken Lockwood, Vice President of Corporate Finance and Investor Relations. Please go ahead, Mr. Lockwood.

Thank you, Operator. With us today are Alan Boeckmann, Fluor's Chairman and CEO, and Mike Steuert, Fluor's Chief Financial Officer.

Our earnings announcement and Form 10-Q were released yesterday after the market close. Before getting started with the call I'd 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, tax matters 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 could arise from any number of factors. Information concerning these factors that could cause actual results to differ materially from the information that we will give you is available on our Form 10-K filed on March 1st of 2006 and Form 10-Q filed on May 9th of 2006 - both of which are 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 obligation to update publicly any forward-looking statements whether as a result of new information, future events or for any other reason.

With that, I will turn it over to Alan Boeckmann, Fluor's Chairman and CEO.

Thank you very much, Ken, and let me thank everybody for joining us on the call today.

This morning I would like to review our second quarter and give you an update on our current business outlook. We'll also discuss our guidance for the full year of 2006.

There is no other way to put it but in terms of our new awards Fluor had a phenomenal second quarter with a Company record $5.8 billion in new awards which drove backlog up to $18 billion. We continued to see substantial new project opportunities in most business groups with our clients continuing to announce robust capital spending plans.

The Company is extremely well-positioned to capitalize on these trends, specifically in Oil and Gas, and Power, as well as other markets.

Our revenues for the second quarter increased 18% to $3.5 billion, up from 2.9 billion in the second quarter of 2005. Net earnings increased to 66.6 million or $74 -- or $0.74 per share, compared to a loss of 16.4 million or $0.19 per share for the same period last year. Our operating profits rose to 161.5 million with increases coming from all segments except Power which was flat year-to-year as expected.

Operating margins rose to 4.7% up from 1.1% a year ago with strong improvements in Oil and Gas, Industrial Infrastructure and Global Services.

Our operating profit for Oil and Gas was very strong at 76.5 million. That was up 54% from last year with operating margins improving to 5.9%, up from 4.1% last year. This margin improvement was driven in part by recognition of profits on completed projects. New awards were especially robust, driving backlog up 40% over the same quarter last year and up 23% sequentially over the first quarter of '06.

As we look at Global Services, we see that growth came from strength in operations and maintenance, also equipment services and temporary staffing. Improved operating profits and margins were primarily a result of hurricane relief support work.

For the quarter, the Power segment reported a profit of 2.6 million and that compares with a profit of 3.1 million in the second quarter of '05. This unit continues to position for new coal-fired power generation opportunities as well as programs to retrofit existing coal plants with scrubbers that are intended to meet current and future environmental standards.

As you know, in the first quarter Texas Utilities - or TXU - announced the selection of Fluor as one of their preferred partners to build additional coal-fired capacity in the state of Texas. Fluor has now been awarded limited stoke work for two 800 MW coal-fired units at Oak Grove.

We expect the full notice to proceed on this EPC contract to be awarded sometime late this year or in the first quarter of '07. We continue to work with TXU as well as other power generation customers to identify opportunities that will leverage our coal plant building experience, both within Texas and other areas around the United States.

In the Government segment, operating profits increased by 27% to 24.7 million with operating margins level with a year ago at 3%. Positive impact of FEMA work which began in late 2005 was unfortunately largely offset by additional loss provisions of 21 million on two fixed-price embassy projects and 8 million on a fixed-price project for a branch of the U.S. military in Afghanistan.

Mike will provide additional information on these projects in just a few minutes.

We expect revenues and profits in the government (technical difficulties) considerably lower in the second half of the year as Fernald, FEMA, and the Iraq contracts are completed.

Finally operating profits in Industrial and Infrastructure were 17.8 million compared with $63.8 million on a loss a year ago. That was primarily the result of an unfavorable verdict on a hotel resort in the Caribbean. Operating margins improved to 2.4%, compared to 1.8% last quarter driven by solid project progress and performance across the portfolio.

Now with that let me turn the call over to Mike Steuert to review additional details of our operating performance, including new awards and other financial information. Mike?

Thank you, Alan, and good morning, everyone.

By now, you have received our business results from yesterday's press release so I will focus mainly on providing additional information on new awards and backlog for each operating segment; and on corporate financial (technical difficulties) our total backlog now stands at $18 billion. A percentage of fixed-price work and backlog declined slightly at 29% and our outside work -- our work outside the United States was at 64%.

Now let's go through the highlights for each segment starting with Oil and Gas. New awards were 2.6 billion for the quarter more than doubling the 1.2 billion booked a year ago. The largest award in the quarter was for the engineering procurement and extraction management of the RASGAS project. This [involves] providing infrastructure for six new LNG trains and cutter - the [value] to Fluor exceeding $1 billion.

We also booked a sizable engineering award for the revamp of a refinery for a German customer.

The only other award in the quarter was a value in excess of $100 million, was for the engineering procurement construction of an ash processing unit and sulfur plant for an Oil Sands refinery in Alberta, Canada. There was another 800 million in small- to medium-size awards across the upstream, downstream petrochemicals markets. We continue to receive a steady flow of front end assignments.

Backlog for the Oil and Gas segment increased 8.4 billion, up 23% from the last quarter. We continue to see significant new opportunities throughout the Oil and Gas segment as our clients continue to increase their capital programs to meet our strong global demand for energy.

New awards in our Industrial and Infrastructure segment were 2.3 billion, which is up sharply from 348 million a year ago. New awards in the second quarter were broad-based, including awards in Infrastructure, General Manufacturing, Transportation, Mining and Life Sciences. The largest award in the quarter was for the Engineering expansion of a fill-and-finish portion of a pharmaceutical plant in Puerto Rico.

The quarter also included a previously announced project management contract for the construction of the San Francisco (indiscernible) Bridge in California. Fluor is a 50% JV partner and our share of the work is just over $700 million.

The segment also booked two significant mining projects. One is for the engineering procurement and construction management of [crushing] transportation other processes for a copper mine in Chile. The other is for the engineering procurement in construction management for processing operations for a [merle sands] mine in Madagascar. Backlog for the I&I segment experienced substantial growth to 5.4 billion, up from 3.8 billion at the end of the first quarter.

Next, let's talk about our Government segment. For the quarter the group had new awards of 442 million, up 27% from a year ago. The quarter included approximately 250 million in contract awards from FEMA, for individual assistance relating to providing temporary housing in Louisiana. We also booked a contract value at approximately $13 million relating to emergency planning and response efforts. These awards are a definite delivery and definite quantity contracts or ID/IQ and we continue to make substantial progress on both contracts based on task orders to date. We expect these contracts will have negligible contribution in the second half of 2006.

The unit also booked several operations and maintenance contracts through the (indiscernible) unit; and additional task orders from [continuous] response work in Iraq and Afghanistan under the CETAC-2 contract.

Backlog at the end of the second quarter was $699 million, down from 1.1 billion last quarter - reflecting the work off of our Fernald (indiscernible) contracts which are booked annually in the third quarter of each year.

With the Fernald project completing later this year, 2005 was a final new award booking, so there will be an additional -- not be a significant addition of backlog this year.

In total, or as Alan mentioned, during the quarter the segment took an additional $21 million charge on two fixed-price embassy projects. I think it is important to provide a current status in this portfolio of these projects.

In total we were contracted to build 11 embassy projects. Of those 11, six are fully complete, three are between 65% and 90% complete. One is about 60% complete and the final project that we booked is about 30% complete. Nearly all of the losses experienced to date relate to two projects, which are about 70 and 90% complete. These charges this quarter relate to the same two projects.

The issues that have continued to impact these projects relate to scope changes, material cost, and subcontractor difficulties. We continue to work toward full completion on all MC projects and expect to be substantially complete with all but two other projects by the end of this year. As you know we are no longer bidding embassy work given the clients' change of procurement and execution business model.

Additionally we had an $8 million loss provision for an Air Force project in Afghanistan. In this instance, a subcontractor failed to perform and was removed from the job, forcing a recovery plan that resulted in a projected overrun on this fixed-price contract.

Global Services operations and maintenance unit booked $280 million in new awards in the quarter which was down from 748 million a year ago. New awards in the second quarter of 2005 included a sizable multiyear contract in Asia. Operations in maintenance awards were broadly diversified across Power, Oil and Gas and Industrial markets.

The largest award this quarter was for the renewal of our long-term maintenance, TXU, at various sites across their system. We also booked a renewal of our contract to provide maintenance at various locations for IBM.

The balance of the new awards are primarily from renewals and contract extensions of other long-term contracts. Backlog declined 5% to 2.5 billion, down from 2.7 billion at the end of the last quarter.

Finally as Alan mentioned, the Power group was awarded a limited notice to proceed on the two 800 MW coal-fired units at Oak Grove for TXU in Texas. This award is part of TXU's announced plans to invest billions of dollars in new power generation capacity.

It is unclear what portion of the overall program Fluor will ultimately receive and at what pace TXU will proceed. Backlog for the Power segment remained flat in the prior quarter at 1.1 billion.

Moving onto corporate items G&A for the quarter was 54.3 [billion], which compares with G&A of 27.7 million a year ago. The second quarter included 8.8 million of costs relating to the relocation of our corporate headquarters from California to Texas. We expect incur approximately 7 million of additional costs to complete this move, mainly impacting the third quarter of this year.

Second quarter also included 3.4 million due to the adoption of FAS 123R, 3.3 million related to increased competition cost, and a 3.6 million investment impairment charge. The year ago period included 4.2 million gain on a real estate transaction. Our full year EPS guidance for 2006 assumes G&A will be in the range of $190 to $200 million.

We had net interest expense of $721,000 for the quarter, compared with 1.1 million of net income a year ago. Effective tax rate for the quarter was 37.5% compared with 37.8% last quarter.

Let's shift to the balance sheet and discuss cash and other financial items. Consolidated cash balance end of the quarter was 585 million which is down from 654 million last year. Operations used 86 million in cash in the quarter. The primary driver of this cash usage was a buildup of additional working capital in our Government segment, primarily related to work for FEMA.

Again at the end of the quarter, we had a substantial outstanding account receivable balance relating to the FEMA contracts. In large part all accounts are current and payments are being regularly received. In fact, we have received payments in excess of $200 million from FEMA since the end of the third quarter. While we had $100 million vested in commercial [pay put] into the quarter and tell you that recent large cash receipts are commercial payment commercial paper balances are back to zero and our cash balance to date is in excess of $650 million.

Our debt to total capital ratio for the June quarter was 24%, up slightly from 22% a quarter ago.

You'll note that the 24% - that's a capital ratio - includes about 94 million of non [repurchased] financing associated with the UK highways agency project that was booked last year. This is up from 72 million last quarter and will continue to increase over the project life.

Capital expenditures for the six months ended June 30 were 111 million which is up from 86 million a year ago. Expenditures to date included about 25, 29 million related to our new headquarters building.

We also continue to invest in construction and equipment to support our growth in the U.S., Canada and Mexico. We expect the capital expenditures will total about 200 million for the year. Depreciation in the quarter was 28 million.

Finally I'd like to spend a few moments talking about our outlook for the second half of the year. First two quarters were clearly strong, bolstered by substantial contributions from the government groups' contingency response work for FEMA, reconstruction work in Iraq and a nearly complete Fernald project.

As we have said, the contribution from these government programs is likely to be materially lower in the second half of 2006.

The rest of the portfolio is performing well and is projecting growth as expected, given the strength in their respective markets. Overall, we remain confident that our guidance for the calendar year 2006 is appropriate at the range of $2.90 to $2.20 per share.

With that, Alan and I will be happy to respond to questions.

(OPERATOR INSTRUCTIONS). Michael Dudas with Bear Stearns.

Good morning. Alan, wanted -- hopefully you can shed a little bit further visibility on the Embassy situation. And are there any other business units or lines within Fluor that you feel may have some issues relative to execution other than the normal things that come up for Fluor so we can properly model a more normal rate for the Company going forward, given the strong bookings you have been bringing on?

I am certainly glad to do that. The Embassy program as you well know from our previous discussions is a market that we have now really retracted from; but as you are aware also, we took some substantial loss provisions on these projects in '05.

We did not have any additional charges in the first quarter but now here at Q2 we had to take another $21 million. I'd like to reiterate that almost all of these charges relate to two projects - the Kazykstan and Jamaican embassies which are responsible for the bulk of the loss provisions. These two projects have probably the worse environment in terms of scope, the technical complexity and the labor workforce environment.

They continue to plague us. We are - as you heard Mike say - we are 74% and 93% complete with these two projects; and it's been disappointing certainly to us to have to take this additional loss provision when we thought we had it corralled but we continue to see the situation there continue to cause additional losses. Now I guess the good news is that we are getting to a point of substantial completion. We have put significant resources around these. We have a contractual commitment to complete these projects and that is exactly what we are doing.

But I would say, Mike, with respect to your question this is the real challenge for us has been these -- this Embassy program. If you look across the rest of the Company we're having an extremely strong performance in areas where markets are strong for us. Oil and Gas has been performing exemplary in the infrastructure arena with the exception of the highway project that we have had. That company or that group has had outstanding performance; and our Industrial group has swung back into a very strong performance mode.

So as I look across the Company it is in fact this legacy issue of embassies that has continue to plague us and we are putting a significant amount of tension on those. And basically we are just going to run them through completion and complete our contractual commitment to the client on that.

But I do think it is unfortunate because they are the situation with respect to all of our markets - the earnings trends in each of the units where the strong markets are - are extremely positive and I think that's the real message we want to get across today is, we are going to complete these embassies. But we are really focused on larger markets also that afford us the great opportunities as we go forward.

My follow-up question, Alan, is relative to the strong bookings in the second quarter and the first half. Can you characterize the mix relative to incentive, fixed-price and the tone of the final estimated profit that you'd anticipate on these projects? Are clients certainly recognizing the tight market and trying to better allocate their capital to contractors they can deliver and perform? And is that showing up in the new business and will we -- do you anticipate it to continue as we move over the next couple of years?

Mike, certainly the quarter was characterized by a very strong across-the-board performance in all of our units. In the mix of work the San Francisco Bay Bridge, as you know, was a lump sum project. But substantially almost all of the rest of the work was in fact reimbursable costs. This market is as you know characterized by significant demand on resources.

That is one of the advantages that Fluor has is that we have a global network with significant capacity to deliver. Our $18 billion backlog - while it takes careful planning and consideration - that is what we do for living. I think it has allowed us to have what I would call an inside track in terms of execution and the confidence of our client.

We don't disclose the gross margin in our backlog of awards any longer as you all know, since we were the only contractor that do that. But I would tell you that our margins and our bookings are trending up as we go -- book through with this whole cycle and that is going to result in stronger bottom-line earnings, as we run out this backlog.

Thank you.

Mike, just a little more help on some of those awards. Year-to-date 82% of our new awards have been reimbursable cost.

I appreciate that Mike. Thanks.

Barry Bannister at Stifel Nicolaus.

How are you? Notwithstanding the drop-off in FEMA, Iraq, and Ferald in the second half, would you say that a he portion of your somewhat cautious guidance and the difference between the high and low end of guidance is whether you expect additional embassy cost overruns?

Let me state as we have gone through every quarter - this has been one of the disappointments is that we, every quarter, attempt to our absolute best to capture the total cost to complete these projects. We just continue to see degradation in the overall environment in each of those arenas.

So as I go forward on the outlook, we hope we've got everything captured in terms of the current outlook to complete those projects. Our guidance is reflective of what I would call the overall drop-off in government earnings, based on the completion of Fernald. Based on the wrap-up of the (technical difficulty) housing for FEMA and on the significant run down on our work in Iraq. That is really the major difference between -- .

So you think you have captured much of the embassy overruns with this charge?

That's correct.

When you look at some of these enormous projects in Power and Petroleum that are coming, one of the characteristics of the strong cycles - which have now caused Power, Petroleum, and Chemicals in total to be more than half of your work as well as more than half of Shaw Group, Foster Wheeler or Jacobs work - is that they feature fast rising costs that have to be priced through. How cautious and careful are you as you embark on this Texas Utilities in correctly pricing what is going to be a much higher cost environment for all (technical difficulties).

That's a very good question because you are correct. There is upward pressure on most of the elements of pricing on capital projects in today's environment.

But as we go through particularly the development of these projects the TXU arrangement is for a developed lump sum. So we go through and work hand-in-hand with the client on getting commitments for the major equipment and pricing out all of the things that we believe are the escalators that would call increased prices. So at the time we entered into a lump sum contract we have got tremendous confidence in the number, because of the ability to develop and put those costs into the equation once we have fixed firm prices from our subcontractors and suppliers.

Then lastly and I will get off. You are talking about the cash in the business rising. But you had some share creep in the quarter and I'm wondering about the willingness of the Company to buy back stock or are you holding out for M&A?

I would say, while we look at the opportunity to buy back stock it has not been our priority. Our priority has been to keep a good capital balance simply because of the nature of the business and the requirement for additional working capital; and we also are continuing to look at opportunities for M&A.

So I would say that's pretty much the order of our priorities. I would not rule out the stock purchases to offset the share creep though. That is also something we will be looking at.

Thanks. Appreciate it.

Richard Rossi. Ferris, Baker Watts.

Good morning, everybody. You mentioned in your press release and remarks that the margins in oil and gas were helped by the benefits of completing several large projects. Can you give us some sense of magnitude there? Would Oil and Gas margins have been over 5% without those completions?

I'm going to let Mike handle that. He's got -- I'm in a different location and he's got the financial information in front of him. Go ahead, Mike.

There are a lot of contributions to that increased margin in the quarter. The completed contracts were probably the biggest; but it was overall a small portion of the margin increase. That's a high -- the margin we reported for the quarter is a high level Oil and Gas. It's probably top -- top of the range we expect. But it would have been close to that without the completed projects.

I would say that we are going to see a pretty consistent output in my opinion from Oil and Gas as we go forward in terms of margin.

So from a modeling standpoint maid to upper 5% is not a bad number to be using going forward?

I think that's pretty fair.

And the other is, again, these FEMA, Iraq, Fernald jobs in terms of both revenue contribution and whether the margins on those - that work right now, that's already been looked in the quarter - whether they were average or were they above the average you're showing for the sectors or below the average? Just to give us again some magnitude of importance to the results?

I think the important results was just the sheer magnitude of volume that those represented. Now I think the good news is we are in a significant position at the Company to be able to respond in what we call these north of contingency operations and while you can't predict the future, certainly can't include the potential new volume into your outlooks, I can tell you that we clearly are - because of our performance and because of our resources - going to be in a situation to get new work through our contingency operations and our total capability there.

So we haven't been able to put any of that into our outlook but I would be willing to bet you that whatever the situation that occurs over the next couple of quarters, we will be in the mix on contingency operations. While I really would not like to put a fix on the margin on that though, Rich, because it is as you know a fairly -- divulge that information and I hate to get that specific.

One final thing again. You mentioned that the embassy cost overruns to a great degree, offset the benefits from these -- again, are we talking about, are you indicating that the benefits were equal to the cost overruns?

Approximately. Same ballpark.

Okay. Just wanted to clarify that. Thanks very much.

[Hasan Dosa] at Luminous.

Good morning. I just wanted to get a better color as to your outlook in the Power generation segment, in terms of new orders and backlogs for the remainder of the year and possibly into '07?

I think there is a real good news story here in that as you look at how strong our awards were in this quarter you know, candidly, it didn't have a significant amount of power in it. The awards we got in Power while very significant strategically were all kind of front end type activities.

We have limited notice to proceed as you know on the Oak Grove project and we've gotten some other front end work. So the real benefit of Power is going to be in succeeding quarters and as they then book on book that larger work we will then start to sate much stronger bottom-line performance.

But I'm extremely positive about the Power market and our position in it. I think it's going to be a significant contributor to our forward accumulation of backlog and then as that rolls out, to our bottom-line performance.

In terms of Oil and Gas, obviously, you have seen very strong growth but how sustainable do you think this growth in new orders and backlog is? What I mean is, do you see more projects in the size of the RAS gas project that you did? Projects of the size continue to come online for you to bid on?

The answer is absolutely yes. I think again that is another part of the mix that we have to describe in general because we don't divulge individual awards; but we are seeing a very -- this $5.8 billion was made up of a significant amount of work that is front end work.

As we move into the third quarter, as we go through the third quarter we are still -- we're seeing other awards that are all front end-oriented that really will manifest in total EPC new award revenue in '07.

I see this current market continuing absolutely through '06, and probably through all of '07. Beyond that it gets hard to say, but I think we are in a very very strong part of the market; and we haven't hit the peak yet in terms of Oil and Gas.

My final question obviously right now your backlog is 18 [million]. If you look to the end of '06 and going into '07 what kind of backlog would you be comfortable with toward the end of this year? Should we expect you to go through 20 [million]? What is your outlook for total backlog growth by the end of this year?

I wouldn't want to characterize it by an exact number but I do anticipate our backlog to grow during the year. Because of the lumpiness quarter to quarter it will be hard for me to speculate because just timing as awards go across that boundary of Q3 to Q4 and in '07. I can just tell you in general I expect our backlog to continue to increase. Certainly I think this quarter has been an outstanding quarter at $5.8 billion we beat the previous high from the Company's record by right at $2 billion.

So extremely strong but I do expect we will have strong quarters going forward as well.

Jamie Cook at Credit Suisse.

Good morning. Alan, I guess my question is directed to you. You look at your performance in Oil and Gas and Global Services and it was really phenomenal. I guess to what extent did this catch you by surprise because I'm just amazed that you are able to beat numbers even though you had about $0.30 charges in the quarter.

So can you sort of help me with to (indiscernible) the charges or what caught you by surprise here?

I absolute can tell you without a doubt, Jamie, I was -- we were surprised. To the extent that we don't -- had the additional charges in the quarter on government. We have a monthly review process of all of these projects; and we just as we entered into the months of May and June we started to see significant changes in the trends although they were not good trends to begin with in those two embassy projects. And those two embassy projects - I don't want to get into a lot of detail here on this call but they are tremendously complex.

They are projects we never should have gotten into. We have revised our whole risk process to where that will no longer occur; but they have just been tough to wrestle to the ground. In fact we have made some organizational changes even as of the results of the latest numbers that we have had to post.

So we are going to get these things done. We are going to get them complete and get them behind us. We don't have any other situations like this in the Company and it's been a challenge that we have had just these two embassies that have continued to cause us these problems.

But what about the performance on the upside? Was there anything to Oil and Gas or Global Services surprise you because that gets back to -- if you didn't expect it than your guidance for the quarter and for the year are pretty conservative.

The things you don't expect, it is hard to say, quarter to quarter, are on the contingency operations. So we had again pretty strong results that offset the embassies out of our Government group. I tell you, you just can't predict those because of the short-term nature of the task awards there.

So we had probably better-than-expected performance on the FEMA side and in Government; but no I expected Global Services and Government. It's hard to give an exact number on those because we have so many projects and they are all so complex. But I expected them to be in the range of the gross margin that we saw.

And the Oil and Gas didn't catch you by surprise, either?

No. I think Oil and Gas is an extremely strong performing unit. They've got extremely robust risk program of processes and a very, very good handle on their forward performance.

And then I guess -- this gets back to the rest of the guidance for the back half of 2006. If you assume your Oil and Gas margins are in the mid to high 5 and Industrial and Infrastructure stays where it is even if you had a $7 million charge in the second quarter, Global Services stays where it is, we take the high end of your G&A, you assume Power's nothing and Government service is nothing.

I come to the high end of your guidance so I'm just trying to figure out and I would say I would expect you to earn something in Government services. So I'm just trying to figure out the disconnect here.

We are going to see a sharp drop-off in Government services for the reasons that we've mentioned. And it will be rather dramatic, because of the work output from Fernald and FEMA which have accounted for a tremendous amount of volume in that unit.

Then I guess just my last question; when you look at your portfolio of business, I know that you want to diversify your end markets and but at the same time the area that you diversified into continue to cause you problems. I mean, your earnings growth would be much higher if you didn't go into those markets so I guess as you look at these businesses, are there any that you are willing or considering to divest just because they continue to underperform?

I think if you look at Government specifically, the challenge we had has been in the embassies. If you look at even notwithstanding the small project that we had to claim a loss on in Afghanistan. The Iraq and Afghanistan operations have been incredibly positive from an earnings standpoint over the last two years.

The contingency operations response from FEMA has been very positive. These were businesses that we weren't in four years ago. So if you look over the last two or three years, even though the embassies have been negative, the diversification we have had into Government has been very positive for the Corporation.

So I think clearly we have moved back and retracted from the embassies project but we've got a great opportunity as we look forward - probably not in the end of '06 but as we move into probably the second half of '07 around the nuclear remediation business in the UK, in the former Soviet Union.

I think there's no doubt in my mind that we will have continued earnings from the contingency operations because we have become one of the premier companies there. I just can't put that into outlook because it's just too unpredictable.

Thanks.

Just a couple of comments on our outlook and margins. One, you know we are conservative; and that certainly reflects our second half applied to estimates. But also as we look through the rest of this year and next year in Government -- or Oil and Gas, excuse me. I think 5% would be a good topping of the range. I think high 4s to 5, is kind of a good modeling number to use for Oil and Gas as opposed to upper 5s.

But just to be clear didn't we just say in response to Richard Rossi's question it was 5.5 to high 5?

It's really the lower part of that. Say 4.5 to 5.5 is a reasonable range or maybe the midpoint around five.

Thank you.

Richard Paget, Morgan Joseph.

Good morning. My questions have all been answered. Thanks.

(OPERATOR INSTRUCTIONS) Sanjay Shrestha at First Albany.

Good morning. Couple of quick questions here. First on your Power side of the business that is going to start and contribute to the backlog by the end of this year. As you look at the end market right now versus (technical difficulties) when the Power was pretty strong let's say five years ago, that seemed to be the winning market that was strong at that point in time.

And now you've got simultaneous cyclical recovery in a lot of these end markets. So is it then fair to say that the level of profit that you might be able to get from the Power side of the business forward is likely to be higher than even what you were able to book which was a very strong performance for you in the past?

Are you talking about the O1, O2?

Correct.

It's going to be different. I think they are both going to result in very positive bottom-line performance; but the fact is, that we had the GAAP combined cycle projects in the last cycle. Those were faster much faster projects. Those were basically a two-year project where these coal plants can be 3.5 years in duration. So they're larger. I think the market will be just as large but it will be a slower burn off as you go through the project.

The booked both market cycles, though, do have some common characteristics in the fact that fairly limited competition. A lot of sole source awards with developed contract prices so the risk is much less. So I think it is going to be a very positive one.

My guess is that though, quarter to quarter, you'll see a slower work off of that backlog than you did see in the previous cycle.

Then quarter to quarter again to take some of (technical difficulties) but net net the magnitude of this cycle versus what you could potentially earn from this particular cycle which tends to quite frankly be more favorable to you, given the larger scope of this project. Is it fair to say that the chance is you are going (technical difficulty) income standpoint in this particular cycle is higher than what you even did in '01 and of -- you know, 2002 and 2001 timeframe?

I think there could be somewhat higher but, again, that was a very positive cycle for us the time before. So I hate to predict much more than that but it will stretch over a longer period and I think that is also very good. It will be more predictable, I think, by that same nature as we have backlog that we are working off of we can see a longer horizon on it.

One other thing on the Oil and Gas side of your business, if you guys could you provide the range on the presented margin for the operating profit but what I'm kind of -- one clarification maybe. It seems like a lot of the things that are flowing through right now, there's a mix of front end work as well as some field construction, but do you (indiscernible) bookings are at a point in time? Is it fair to say that maybe there is a lot more front end work that burns through in the second half of this year and maybe in the first half of '07 and hence the percentage margin is higher? But going into the second half of '07 and beyond that, it is absolute profit that is going to go higher and while the percentage margin might start to go down?

Obviously we get a higher margin for front end work because it is just the cap -- for the human capital nature of that and the brain capital we have. As you booked the larger projects you see apparent lower margin but the absolute value of profit goes up dramatically. So I think that I think we're going to see exactly that. We are going to -- the awards we are getting now even though we have got some very large ones in there, we are getting a lot of front end awards that are going to result in EPC awards as we move into '07.

With the size and lengths of these projects, I think it bodes for a very strong financial performance for this corporation for several years out. So that is the beauty of this market. The position we find ourselves in and the timing that we've got on the market.

Got it. And just one (technical difficulties) mentioned in your prepared remarks just want to make sure the San Francisco Bay Bridge is a (technical difficulties) contract. Not the fixed cost, right?

San Francisco Bay is a fixed cost project.

It is a fixed cost contract. Okay. Now and also just want to clarify so out of all the embassy jobs you have, six are done (technical difficulties) 65 to 90 done and the one that is only 30% completed at point in time. I mean is there a chance that you know, obviously, you valued it and you feel comfortable about the promise of that particular project, right?

I'm sorry. You were talking about the other C project? I had a blip on my phone there as you asked a question.

Sure the one -- the final embassy project that is 30% completed at this point in time. Could we see something from the unanticipated loss in that particular project or have you guys evaluated that early initial comfortable about the status of that?

That one is the one that obviously has got the [part] longest to go. We've as I said we've got a monthly review on each of these but because of what we've just seen in the other embassy market or the other two embassies, we have dispatch some fairly high levels teams down to that embassy to give it as a thorough run-through. So, again, the embassies are kind of a chapter in history we would like to forget but we can't forget it. We have got to finish them. We've got to learn from it and move forward; and that is what we've done.

I guess that is the additional consideration on your part on this $27 million tax in your earnings guidance for 2006?

I will admit to being conservative.

Got it. That's great. Thanks a lot, guys.

Brian Chin. Citigroup.

Question for you on the Toshiba and Westinghouse field that has been reported in news reports. Any comment or color there on what you might decide to do?

I will tell you that we have been looking at the overall situation for nuclear new build and as you know we have a resume that would allow us to compete in the construction of those plants. We have been looking at how we will play in the total EPC; and we intend to play in the total EPC. But we don't make any comments - specific comments - with respect to things that have not been published or divulge from Fluor Corporation and so I can't comment on that one except to say that you can't believe everything you read in newsprint.

Sort of along the same lines, does joining one nuclear consortium preclude you from joining a second one? For example we are hearing about Florida - six different types of consortiums - bring different nuclear designs into the US. What are your thoughts on that?

I would say if it doesn't absolutely exclude you it depends on the nature of the agreement that you are in. The geographical boundaries or technology boundaries that are put around those agreements. But you do have to be very careful because you can limit your competitive playing field, by virtue of tying up with one consortium versus another.

So again that is a strategy that we are very actively deeply involved in. But there's just not a lot that we can talk about concretely now because of the confidential nature of the discussions.

One last question on the Oil and Gas side. Anecdotally, some of the oil and gas analysts here at Citi have started noticing companies suggesting that their capital expenditure budgets are not going to be moving from an absolute basis due to cost pressures. They are basically holding the line. But while we are here based on an anecdotal basis can you give us a sense of are you seeing that trend from your side in terms of contract negotiations? Is there a little bit of pushback on creeping cost pressures?

I think the one of the things that this has been very positive about this cycle and our particular role in it is that clients are aware and we are working directly with them on the very transparent basis on the cost pressures and working to contain nose. There have been a couple of projects that I think you've seen in the newsprint that have been canceled because of escalating costs. Those projects have typically been pretty marginal project to begin with.

I see a pretty strong commitment for our clients to spend the capital budgets that they have published. They've got to meet the demands that are on them on a global basis. But this industry is, I think, characterized by some very strong discipline that's been built up over the years and I think that is one of the benefits that we bring to that. We bring a fairly strong process of discipline around capital cost and the forecasts and execution.

So I think I don't see it dampening the market. The total cost, the total size of the market or our role in it. I'm very bullish on what is going to happen in Oil and Gas.

Thanks a lot.

Barry Bannister at Stifel Nicolaus.

If I look at your trailing 12 month revenues in Oil and Gas, they are almost 90% as large as the entire two-year stretch '03, '04. In those two direct years '03, '04, you had a 4.6 margin.

Now, earlier, someone was talking down the margin potential a little bit but I am asking the question why not raise prices? Why not get better margins than mid 4s when you are so busy?

We gave the range, I gave the range from mid 4s and mid5s, so I wasn't really talking it down. It's certainly higher than somewhat what we've seen in history.

So you were just cautioning against people going to the upper 5s or what have you?

Right.

And did you mention where that 35% embassy is located?

We did not.

Is it something you can tell me, Alan, or is it just not known?

It is -- I have no problem. It's in Haiti. It's a difficult labor market area. That is why we put the focus on what we have.

Did you say Haiti? I'm sorry; somebody walked into my office.

That's correct.

Lastly, I'm trying to get my arms around G&A in '07. I know what the one-time items were and I assume that moving to Texas maybe even save some money from Southern California, but do I just take the SG&A base before the move and gross it up for some sort of inflation? And that is normal run rate we can expect in '07 and could you give us a little color on that?

We really haven't forecasted '07 in detail yet but I think you can take the normal (technical difficulty) will all the inflation but there are also accounting changes. (technical difficulty) we will have those additional costs going through the G&A as well.

Yes. I added that; and the mid single digit inflation I'm coming up with SG&A that is down year over year. Anything wayward in my logic?

No. We were expected to be down. Certainly with the onetime cost with the relocation; we are not expecting 2006 to be our normal run rate.

I was thinking with the additional volume there might have been some gross up in the amount of overhead; but it looks like you've got that under control.

Yes.

Scott Geels, Sanford & Co.

Good morning. Alan, just go back to the Oil and Gas segment for just a minute here. I want to make sure I understand the timing going from front end study to EPC contract. If you are to take the Husky Award for the heavy [crew] facility, how long is it going to take (technical difficulties) page?

I am not going to be specific on any -- on a particular project. I think you can typically say on the front end award in Oil and Gas anywhere from six months to a year for it to manifest itself into a full EPC award.

Sticking with Oil and Gas for right now. How many of these other megasized projects do you see up there on your radar screen that could be awarded over the next 12 to 18 months?

Actually it is a fair amount. Without being specific I would say that it's just -- it's the numbers are very large in terms of what they represent in potential total capital cost. I would just throw in the normal caution. Not every project goes forward but we're seeing a fairly strong significant flow of new awards that are front end related.

No broad range as to what that could mean ultimately for the Oil and Gas business as we look into '07, 08 for award potential?

I think the only comment I will make is that it has the absolute potential of maintaining the current pace of awards in Oil and Gas. Without a doubt. So I think again '07 is looking like a very good year for Oil and Gas based on what they are receiving right now.

Thank you.

Ladies and gentlemen, that will conclude the question and answer session. I would like to turn things back over to Alan Boeckmann for any additional or closing remarks.

Thank you, operator, and I would serve elected by Bobby for participating on our call today. Certainly we have some issues in terms of particularly these embassy projects but I would like to just reiterate the comment I've made a couple times. We absolutely provide more transparency in this market than any of our competition. And I don't hesitate to do that. I think, shareholders, you need to understand the total makeup of our market and our performance.

But I would also like to caution you to not let that override the extremely positive situation that our Company finds itself in.

For several years now we've been talking about our belief that this market would be one of the best in history and that Fluor would benefit from it directly because of our expertise, our reputation, our resources and our experience. With the now already booked $5.8 billion for this quarter, I think this is ample evidence that our markets are generated substantial demand for engineering, construction, and maintenance services. It's a very broad-based performance on the part of the corporation on this 5.8 billion of bookings.

Oil and Gas continues to grow at a strong double-digit pace; and that is in both new awards, backlog, revenues and operating profits. Our pipeline of long lead time Infrastructure opportunities is being converted into backlog.

Power market is developing although it is just now ramping up. It offers significant forward potential for Fluor with that outstanding performance and there is no reason why that shouldn't continue in our Global Services arena.

Finally we have three large Government programs that are completing this year so that segment does face some challenges as we look into the second half of '07. But on a very positive note, they have an outstanding reputation for contingency operations and will be a go-to operation for the U.S. government as well as other people that find themselves in that situation.

I would say we feel very positive about the size and breadth of our capital spending trends that we see globally. We're positive about our ability to selectively pursue and win important new projects and to deliver long-term value to our shareholders.

With that, I would like to offer my appreciation for your interest in Fluor and your continued support and confidence in our Company. Have a good day.

Thanks again, everyone, for joining us. That will conclude today's earnings conference call.