Fluor Corp (FLR) 2006 Q4 法說會逐字稿

Good morning and welcome to the Fluor Corporation's fourth-quarter conference call. This call is being recorded and 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 beginning at 1 o'clock p.m. Eastern Time today accessible on Fluor's website at www.Fluor.com. A telephone replay will also be available through 11:59 PM Eastern Time on March 8, 2007, by calling 888-203-1112. The access code of 5184392 will be required.

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

Thank you, operator. Welcome, everyone, to Fluor's fourth-quarter and 2006 year-end conference call. With us today are Alan Boeckmann, Fluor's Chairman and CEO, and Mike Steuert, Fluor's Chief Financial Officer. Our earnings announcement and our Form 10-K were released yesterday after the market closed.

Before getting started, I would like to read our cautionary note regarding forward-looking statements. In discussing certain subjects, we will be making forward-looking statements regarding projected earnings, market outlook, new awards, margins, tax matters, and other statements regarding the intent, (indiscernible) 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 result and experience could 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 (technical difficulty) 10-K filed March 1, 2007, 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 obligation to update publicly any forward-looking statements whether as a result of new information, future events, or for any other reason. Now it is my pleasure to turn the call over to Alan Boeckmann, Fluor's Chairman and CEO.

Thank you, Ken. Good morning, ladies and gentlemen. Let me thank you for joining us on this call today. We're going to review our full-year results for 2006 including our fourth quarter, and also then give you an update on our current business outlook, and we'll discuss our guidance for 2007.

But first let me cover the highlights from the fourth quarter. Our net earnings for that quarter were $81 million or $0.90 per share on a diluted basis. That compares with $65 million or $0.74 per diluted share in 2005. This represents an improvement over the high end of the guidance range that we provided for you back in November.

In general let me comment that all of our operations, with the exception of Power, performed above our expectations during that quarter. In addition, we enjoyed a fourth-quarter tax rate was only 32% versus our assumption of a run rate that was to be 38%.

Our operating profits for that quarter increased by 57% from a year ago, up to $164 million from $105 million. Strong growth in Oil & Gas, also in Industrial & Infrastructure, and also Global Services was partly offset by lower profits in the Government segment.

Overall revenues for the fourth quarter declined about 8% to $3.6 billion, which reflected reductions in the volume of work that was performed in the Government and also in the Industrial & Infrastructure segments.

But now let's shift gears. Let's talk about the full results. I am very pleased with our overall performance in 2006. We continue to win a significant number of new projects which have taken our backlog to an unprecedented level. Our earnings, new awards, and backlog have all risen to the highest levels in Fluor's history, and it has been driven by strong results across our business lines. These results, outstanding as they are, reflect the significant global demand for the quality of engineering and construction expertise that we provide to our diverse customer base.

As I look at the full-year numbers, net earnings rose 16% to a record $264 million or $2.95 per diluted share. That compares with $227 million or $2.62 per diluted share in 2005.

These strong results reflect substantial growth in the Oil & Gas, but also in the Industrial & Infrastructure and in the Global Service businesses. That again, as I said, was partly offset by cost overruns on fixed-price projects in the Government segment.

Consolidated operating profits for the year were $557 million, up 28% from $436 million a year ago. Operating margins increased to 4%, up from 3.3% in 2005. That reflected improvements in Oil & Gas and Industrial & Infrastructure.

Revenues rose 7% over those in 2005, up to $14.1 billion due to growth in work performed in every segment except Industrial & Infrastructure.

Our full-year new awards of $19.3 billion -- let me repeat that, $19.3 billion -- eclipsed the previous Company record of $13 billion set in 2004. New awards rose 54% over 2005 levels driven by significant growth in Oil & Gas and Industrial & Infrastructure bookings. Strong fourth-quarter awards of $4.9 billion drove our backlog to a record high of $21.9 billion, up 47% from the end of last year and up 11% over the prior quarter's end.

Now as I look at each segment's performance for the full year, our Oil & Gas segment reported extremely strong operating profits for the year of $306 million. That is an increase of 26% as you compare with $242 million in 2005. Revenues increased 2% to $5.4 billion versus the year-ago period. That period benefited from a $294 million settlement on a project in Venezuela. Operating profits increased to 5.7%, reflecting the impact of outstanding project performance and an increased level of high-margin front-end work during the year.

New awards increased 135% to $10.4 billion. That included several large projects in the Middle East and a large refinery expansion in the United States. Ending backlog for that unit rose to $12 billion, doubling that of $6 billion dollars just a year ago.

Fluor's Industrial & Infrastructure segment reported operating profits of $76 million. That compared with a loss of $17 million of operating profit last year. Improved results for this unit in 2006 reflect the impact of good project performance, better margin on new projects, and overhead spending reductions. While 2006 results included provisions of $30 million on a road project in California, it is a substantial improvement over 2005, which included provisions of $24 million relating to the road project and $82 million which related to the resolution of various project disputes.

Revenues of $3.2 billion were essentially flat with those in 2005. New awards and backlog rose 90% and 40%, respectively, to $4.5 billion and $5.4 billion, driven by a large number of mining projects, life sciences projects, and infrastructure project awards.

The Government segment posted operating profits of $18 million. That compared with $84 million a year ago. Increased profit contributions from work for the Federal Emergency Management Agency were more than offset by loss provisions totaling $183 million relating primarily to fixed-price embassy projects.

Results for 2005 in Government included an embassy loss provision of about $56 million. Our revenues in Government increased 6% to $2.9 billion, up from $2.7 billion last year, mainly due to disaster relief activities for FEMA and, again, partly offset by lower Iraq construction activity and lower revenues on Department of Energy contracts.

Operating margins declined to 0.6% from 3.1% in 2005 as a result of the loss provisions mentioned above.

I think it would be prudent at this point for me to give you a quick update on embassies. First, I think it is important to note that we took no charges for embassies in Q4. In fact the construction work on the last remaining project for Haiti is going extremely well. At the end of the year we reported that we were approximately 40% complete. As of the end of February, we are approximately 56% complete, with outstanding progress made during the first two months of this year. So that pretty much puts us on a position of closing out and moving forward on the Haiti project, well within the charges that we took in Q3. We are optimistic that will take no further charges on embassies throughout the program. We are pursuing our claims through the dispute resolution process afforded by the U.S. government's contracts.

Now let me shift to operating profits for the Global Services segment, which had an outstanding year in 2006. Their profits grew by 34% to $152 million, up from last year's $114 million. That reflected strong contributions across the segment, including the positive impact of hurricane relief activities. Revenues rose 36% to $2.1 billion, up from $1.6 billion a year ago, mainly driven by growth in operations and maintenance work and the equipment services business line. Operating profit margins held steady at 7.1% versus 7.2% a year ago.

Fluor's Power segment reported $4 million of operating profits, down from $13 million in 2005, primarily due to a $9 million charge associated with the final dispute resolution on the Dearborn project. Unit revenues increased 41% to $542 million. That is due to progress on power generation and plant betterment projects. Operating margins declined to 0.8% from 3.5% a year ago, again due to the impact of the charge that I mentioned before. Power segment backlog increased 15% to $1.3 billion.

So with that, let me now turn the call over to Mike Steuert to review additional details of our operating performance, which will include specific new awards and other financial information. Mike will also discuss our outlook for 2007. Mike?

Thanks, Alan, and good morning. Alan has already covered most of the operating highlights, so my remarks will focus on providing additional detail on fourth-quarter new awards and backlog for each segment, as well as several corporate financial items.

As Alan mentioned, our total backlog climbed to $21.9 billion. We booked a total of $4.9 billion in new awards in the fourth quarter, with about $3 billion of that coming from Oil & Gas. The balance of new awards was distributed fairly evenly across the other four segments. The percentage of fixed-price work in backlog declined to 26%, down from 28% last quarter. With the award of a large U.S. refinery projects in this quarter, the portion of backlog outside the United States dropped to 59%.

Now let's go through the new award highlights for each segment. Starting with Oil & Gas, the major driver of new award in our backlog growth, new awards were $3 billion for the quarter, about level with the third quarter but double the fourth quarter of 2005.

The largest award in the quarter, at approximately $1.8 billion, was for a cost-plus contract for a major refinery expansion in North America. This work is a direct follow-on to the FEED work we were doing and is another example of where we successfully moved from Front End Engineering & Design to doing the full EPCM on the project.

Other major project awards in the quarter above $100 million in value included a large EPCM contract in Norway to develop a high-grade silicon for solar energy cells. Additionally we were awarded a $300 million project management contract for the Canadian crude upgrade program at BP's Whiting, Indiana, refinery (indiscernible) providing FEED services. Finally, we have been awarded an engineering and procurement contract for a coker modification at a refinery in Northern California.

The majority of Oil & Gas's other fourth-quarter new awards were focused on refinery in North America. Ending backlog rose to $12 billion, double the $6 billion a year ago, and up 19% over the third quarter. Oil & Gas represented about 55% of Fluor's total backlog at year-end.

In spite of variable energy prices over the last several months, project opportunities remain robust for the foreseeable future, as our clients continue to reinvest capital to meet the strong long-term global energy demand.

Now turning to our Industrial & Infrastructure segment, fourth-quarter new awards were $773 million, driving full-year awards to $4.5 billion, which is up 90% over 2005. New awards in the quarter were heavily weighted toward mining and life sciences projects.

The largest award in the quarter was for the engineering, procurement, and construction management of a greenfield copper concentrator in South Australia. The other significant mining award project was for a partial release of an EPCM contract on a major iron ore expansion, also in Australia. I&I booked a life sciences project award for detail engineering for a new biotech facility in the U.S. Backlog at year-end was $5.4 billion, up 40% over 2005, and about $150 million higher than at the end of the third quarter.

Turning to our Government segment, our Government segment recorded new awards of $231 million, which brought full-year new awards to $2.2 billion, down from $2.5 billion a year ago when we booked the final year of the Fernald project.

The largest awards in the fourth quarter were for multiple operations and maintenance contracts in our Del-Jen unit. The quarter included several contingency operations awards, including small amounts for FEMA, Iraq, and the Army Corps of Engineers under our CETAC contract.

Backlog at the end of the fourth quarter was $840 million, down from $928 million last quarter and $1.4 billion a year ago. This reduction from 2005 was mainly due to the effective completion of the Fernald project and the hurricane relief work for FEMA and a lower level of activity for Iraq reconstruction.

Our Global Services operations and maintenance group had a strong quarter as well, with new awards of $526 million. The group won several new O&M contracts with oil, gas, power, and mining customers. The largest award this quarter was for the engineering and small capital projects at a refinery on the Gulf Coast. The unit also won a two-year contract for the maintenance of various power sites in the Southeast for a major utility. Other awards included a new maintenance contract for an oil and gas customer in Russia, and the maintenance of mining facilities in Australia. Backlog held steady with the prior quarter at $2.3 billion, and declined somewhat from the $2.5 billion end of last year.

Turning to our Power group, Power booked new awards of $350 million in the fourth quarter, the bulk of which was for a flue gas desulphurization units on three operating coal-fired units in South Carolina. Other fourth-quarter awards included additional scope on scrubber projects for two different customers.

Full-year new awards were $635 million, down from $1 billion in 2005. This was mainly due to permitting delays on anticipated coal-fired power plant projects. The backlog for the Power segment increased to $1.3 billion, an 11% increase over last quarter and a 15% increase over last year.

We continue to await the go-ahead on TXU's Oak Grove Number 1 and Number 2 coal-fired units. The overall permitting process has fallen substantially behind TXU's initial schedule due to opposition to the proposed fast-track approval process. However we are encouraged that the recently announced buyer for TXU has indicated their intent to proceed with the construction of the two units at Oak Grove.

Now let's move to corporate items. General and administrative expense for the quarter was $50.1 million, which is down from $52.9 million a year ago. There were no material unusual or nonoperating items in the quarter. Corporate G&A expense for the year was $179 million compared with $144 million a year ago, mainly due to the adoption of the new share-based compensation accounting standards; costs associated with the relocation of the Company's corporate headquarters to Irving, Texas; and nonoperating income from gains on the sale of real estate, which reduced last year's G&A expense.

We had net interest income of $5 million in the fourth quarter and net interest income of $4.3 million for the full year. This is lower than the net income of $7.4 million last year, mainly due to an increase in the nonrecourse project debt that we consolidated at the end of 2005.

The tax rate for the quarter was 32% which brought the full-year tax rate to 31%, both of which were lower than the run rate we expected to see going forward, but were above 2005. There were a number of moving parts, but the lower tax rate reflects the favorable benefit of various deductions, adjustments, and allowances. We continue to expect our normalized income tax run rate going forward to be in the 37 to 38% range.

Now let's shift to the balance sheet to discuss cash and other financial items. First, cash and cash equivalents grew to $976 million at year-end versus $789 million a year ago, reflecting the substantial collection in receivables on government contracts. The debt to total capital ratio was 24%, up from 21% a year ago. Again, this mainly due to the impact of the consolidation of nonrecourse project finance debt.

At year-end, Fluor adopted Financial Accounting Standard 158 relating to new rules for employers accounting for defined pension and other postretirement plans. This is great reading. This resulted in a $180 million after-tax charge to comprehensive income, which reduced shareholders equity in the fourth quarter.

Capital expenditures for the full year were $274 million, which compares to $213 million in 2005. The majority of our CapEx relates to an investment in construction equipment and vehicles to support AMECO's operations globally. 2006 expenditures also included approximately $36 million relating to the construction of our new headquarters facility in Texas. Going forward we expect capital expenditures to total about $200 million to $220 million in 2007.

Depreciation was $38 million in the fourth quarter and $124 million for the full year.

Before we move on and open it up for questions, I would like to make a few comments on our outlook for 2007. We continue to see a very favorable outlook for new project awards driven by sustained global demand for energy and infrastructure. Opportunities across all business segments continue to develop, with sizable projects pending in Oil & Gas, in Power, in Mining, and in the transportation markets. The pipeline of new oil and gas projects is particularly strong especially in downstream refinery, where a number of Front-End Engineering & Design or FEED projects are underway that could result in sizable awards in the future.

Based on the current outlook for each of our business segments and the early state we are in 2007, our guidance for 2007 remains $3.50 to $3.80 per share. This guidance reflects our continued positive outlook for most business segments except Government, due to the substantial completion of Fernald, FEMA, and Iraq programs during 2006, and the slower-than-expected growth in Power due to the delays we mentioned in permits for new coal-fired power plants.

While we do not provide specific guidance on new awards and backlog, we do expect 2007 to be at least as strong as 2006 and believe the backlog will continue to grow to new record levels. With that, Alan and I would be happy to respond to questions.

(OPERATOR INSTRUCTIONS) Mike Dudas, Bear Stearns.

My first question is relative to your outlook, a tremendous year in order and backlog. Talk about how the project mix or the revenues are going to run through the business the next couple years. With the expansion in the new orders and backlog, a lot longer-term lead projects, would we anticipate possibly the earnings flow being a bit more back-end weighted through this cycle, given where the mix of the projects of some of the bigger bookings that you have had so far the last couple years?

Mike, on a revenue basis, you're right. The backlog buildup this year has been on some pretty large projects that have just a bit typically longer schedule than some of the ones we may have booked a couple of years ago. So I think you'll see it maybe stretch out just a bit from what we might have seen and the pattern before.

But I do think we're definitely going to start seeing that as we go through '07 and '08. We also, I think as you heard, anticipate a number of bookings in '07 that are the culmination of front-end work that we've done on a lot of projects, particularly in Oil and Gas.

Let me just add a couple comments to that, Mike. That is certainly true in some of our major growth areas, in Oil & Gas, and in Power, and in Industrial & Infrastructure. Some of those projects do have a longer life. We benefited in late '05 and in 2006 with some pretty quick book and burn activity in Government. As we indicated, that is going to be substantially lower in 2007. So you could see a longer average project life.

One other just side comment on that, Mike, is we're down to about a 22% on actual lump-sum projects today, which is down. Lump-sum projects, as we build up in Power and Infrastructure, tend to have more earnings at the tail end of the project as opposed to reimbursable-cost projects.

Thank you, my follow-up, two quick follow-ups. First, what is your professional staffing level at the end of '06? Could you compare that to '05 and how the organization stands to meet the backlog opportunities relative to manpower, and the ability to attract and retain such?

Very good question. Clearly today in the market, with ourselves and all of our peers, having the right resources and having the project teams to put on projects is one of the key differentiators. I think that has really made a significant difference for us.

We grew by about 15% in 2006 in our professional staffing levels. It was pretty much across the board, across the globe. We had a record year of hiring of new college grads. We have had a system for quite a number of decades of being a Company that brings in entry-level people, and develops people, and puts them into an effective working mode pretty quickly. That stood us in pretty good stead in 2006.

I would tell you that while it is a challenge -- and that is one of the reasons that companies or clients come to us -- I think we've done extremely well in that. We've got a very proactive plan of onboarding, using subcontracting methodologies. We anticipate growing probably at least another 10% in staffing levels, maybe even a little bit more than that in 2007.

Jamie Cook, Credit Suisse.

Congratulations. Alan, I always ask this question, so I will humor myself. Anything that surprised your or unusual in the quarter, so we can get a feel for how you beat earnings?

Unusual? Clearly we had a benefit from the tax side, so that -- but that --

That wasn't enough.

That was not enough. That was about $0.07. It was really operating profit performance in each of the groups that came in very strong. And it was across the board, I think, which is even better news.

I think it relates to good, solid execution. But also it relates to the attention we've been paying to selectivity and to marketing and putting better margins into that backlog. So I think it signals good things to come.

Then Michael, are you assuming, when you look at your guidance for '07, are you assuming any more charges related to the embassy projects, the one in Haiti? Or is there anything in there that is depressing earnings?

No, Jamie, there is not. We are assuming a normalized tax rate. We are assuming with inflation, corporate G&A is at 190 to 200 level. But there are no special charges assumed in our guidance for 2007.

Okay. Then my last question, Alan, on the Power side. Obviously TXU was a big announcement last week. You guys, at least you still have Oak Grove. But I guess, one, could you comment on still when you think about Texas, they still do need a lot of power generation. What happens with TXU getting taken out by KKR? Does someone else come in there?

Then I guess outside of Oak Grove and TXU, can you sort of talk about other opportunities that you are bidding on?

Absolutely, Jamie. The situation with TXU and the announcement of the transaction there by KKR and others was unexpected by all of us. But they have come out and said that they are committed to going forward with the lignite plants, Oak Grove, which is one of those.

I absolutely agree with you. I live here in Texas, and I lived through last summer's brownouts. I look at the reserve margins. There are going to have to be new generation put on the ground here in Texas or in very close proximity where the grid can handle the increased power needs that are coming from here. This state is continuing in a very large growth mode through this economy. So somebody is going to fill that void.

I think we are in a great position to address that. We're talking to some other clients. But I think it goes beyond Texas. The entire North American market is looking at substantial new power generation, primarily from coal.

One of the good things that we have in our portfolio is the ability to work in the integrated gasification combined cycle area, which is one solution to if there becomes too much environmental resistance against coal. We also have technologies that are proprietary to us on carbon capture that would allow us to put systems around a coal-fired plant to help capture the carbon.

So I think we are in a great position. It is a strong market, and we have seen significant bookings and expect them to continue on the betterment side of power.

But on the new, for example, building a new plant, is there anything that you are close to potentially winning? Everyone is counting at some point on Oak Grove. But is there anything else that you are close? Or do you think -- we see sort of a pushout in the actual spend on the new generation side?

I think you're going to see a bit of a pushout in the new generation for coal. I think that is pretty much -- and I think that is not just Texas. But I think at the end of the day, when we start to have rather significant shortages of electricity around the U.S., that some of those will go forward.

Alex Rygiel, Friedman Billings Ramsey.

In your 10-K and on this conference call you did discuss your I&I segment, and you did mention that your business mix has shifted away from manufacturing facilities to the larger projects, and mining projects. Can you talk little bit about the margins and the risk, and how that shift has changed margins and risk?

Actually to be honest it has not changed a lot on the margin side. The risk I think actually is less. In the manufacturing we tend to do more guaranteed max projects; whereas in mining all of our work is reimbursable. So from a risk standpoint we have a better profile there.

But the margins tend to be pretty similar. Mining is one of the lower-margin businesses because of the significant revenues there for the capital goods. But in the M&LS, where we do a lot of construction management, those margins tend to be low as well, although they are good return on assets numbers.

Lastly, as it relates to the DOE and other environmental project opportunities, can you talk about the status of your existing DOE projects? Talk about the upcoming opportunities that you see on the horizon over the next 12 months, and then also talk about the opportunities over in the UK.

Certainly. As you know we completed our work rather successfully on the Fernald project in Ohio. That is great news. The bad news is that it is no longer in our backlog and no longer contributing to earnings as we go through '07.

We do have and are working still on our fairly significant effort at Hanford and got an extension on the contract there. We are absolutely committed to competing for the work at Savannah River project, which is coming up during this year, the recompete of that program. That project is being split into two contracts, where the incumbent currently holds one contract for the entire scope. So we are very positive about our position and opportunities there.

There are a few other award opportunities through the year, not anywhere near as large as the Savannah River one in DOE; and we are pursuing those.

The one holds the most promise in terms of size and scope and fitting our profile is the nuclear decontamination work in the UK. We have been active over there now for the last several years, getting in position for that, and actually adding value to the current effort that the British nuclear group is performing over there. We have a contract where we're doing management consulting and assistance at their Sellafield site. That contract has gone extremely well and I think put us in a very strong position for the ongoing competition for work there.

That competition is starting in earnest now for some of the work around the Magnox reactors there; and it will go on into next year as they recompete the Sellafield work. I think we stand a very good chance of getting a significant part of that.

Thank you very much.

Sanjay Shrestha, Lazard Capital Markets.

A couple of quick questions here. First, as it relates to your guidance for '07, Alan, in your prepared remarks you did mention that you are looking for claims recoveries. But I have got to imagine that none of that claims coming back from the embassy project is included in that.

That is correct.

There is no gain or loss from claim recoveries included in our guidance.

Terrific. Another question then. When you guys are looking at sort of the change in the mentality, for near term at least, of coal-fired power market, do you think -- based on some of the ongoing conversation you're having right now -- that we might actually start to see the acceleration on the integrated gasification combined cycle power plant? As well maybe a renewed and accelerated talk related to nuclear power plant? Can you talk about that somewhat? I know you did mention a little bit, but can you go into some more detail on that?

I think that is going to be a natural outcome of what we're seeing now. I don't think it will have any positive effect for us or our competitors in this year. But I do think that you're going to see new IGCC plants go forward as we move on into '08 and beyond.

I think it is just a natural outcome of a technology that continues to get better. Also of just the need for cleaner energy. I think in terms of any delays in the market on the coal-fired side, that won't materially affect us in terms of earnings in this year. I do think it may have an effect on our new awards, although I still stand by the statement that I've made and Mike made on this call -- that '07 will be a very strong year for new awards, notwithstanding Power.

Barry Bannister, Stifel Nicolaus.

This is actually Robert Connors in for Barry of Stifel Nicolaus. For my first question, in 2006 you guys booked approximately 2 times your current revenues. This is for the Oil & Gas segment. The last time bookings in this segment were this strong was 2003 at roughly 1.4 times your revenues; and that led to 2004 revenue growth of up 29% and 55%, respectively. So basically is there any reason that Oil & Gas can't grow faster than the 2005 rate of 55% year-over-year, considering that bookings (inaudible) strong?

Clearly the strong bookings are going to result in better revenues year-over-year. Again, the difference in the two markets that you're talking about -- the bookings that we did in that prior cycle that you mentioned were very largely driven by the Clean Fuels Act. Those projects because of their very nature, and the fact that they typically weren't good return on asset projects for our clients, we did a tremendous amount of front-end work; and then booked those projects just as they got the capital approvals from our clients. As a result, then they were typically about an 18-month cycle at best. So we did ramp up very quickly against that.

The bookings we're making now are much larger and they are over a longer period of time. So I don't think you'll see that same level of build-up, at least at the same percentage. Although it absolutely will go up. But I don't think you can repeat that cycle in terms of the numbers that you mentioned.

Okay, thanks. Then as a follow-up, according to the Arab Times, Kuwait's Al-Zour refinery cost estimates increased from roughly $10 billion to $15 million, or just over $33,000 per barrel. It does not seem to be [DNC's] as you guys are making less than a 6% margin in the Oil & Gas segment. So what is leading to some of these cost increases? Is it materials? Is it labor? Can you just provide some detail on that?

Yes and yes. It is all the above. You know, in the market that we are in, it is across the globe. It is a very strong market, and it is not just Oil & Gas, although that is the significant mover.

But materials, just the price of commodities themself have gone up. But then when you add to that shop space capacity for fabricated pipe, for heavy wall vessels, for large compressors and reactors, we are seeing some significant inflation price increases in there. But also for labor.

So there is upward pressure virtually across the globe on construction projects, but most heavily influenced in Oil & Gas.

You are right; that project has gone up. That is a matter of public record. But it is still going forward. We are working with the client on some strategies to mitigate that. We haven't had any project cancellations in Oil & Gas, although we've seen some that have been deferred in terms of some scope to get the price back within their approval levels.

Philip Dodge, Stanford Group.

First, are you expecting any awards of LOGCAP contracts in the immediate future?

Well, the project is being competed for as we speak, and we are one of the competitors. We're hopeful of getting that award. We did receive what was the Navy's version of that, which previously was called CONCAP award. That was protested by one of the competitors. But we just heard within the last two days that we've been released against that protest and will now start getting task orders on that work.

So I am hopeful of LOGCAP, but I will tell you that, because these type of contracts are basically contingency-based contracts and are on task orders, we really don't put much into our outlook for that and certainly nothing into backlog.

No; there is nothing in backlog. We do have a modest level of contingency (indiscernible) activity in our outlook for 2007.

Understood, thanks. A couple of income statement items. The guidance on corporate for 2007, 190, $200 million, as I recall is about the same you originally gave for 2006 and came in under. So are there some containment achievements there that are slowing that down?

We did come under our guidance for 2006. We did not spend quite as much as we thought we were going to spend on the relocation during the year. So we had some benefits there. But we were little slower in ramping up some of our staffing at corporate for our new headquarters in Irving, Texas.

But we do expect some inflationary growth and we do expect growth in several of our corporate functions commensurate with the kind of overall growth we're seeing in the Company.

Yes, but it looks more benign than I had expected. Then finally, was there any positive ForEx in the December quarter?

A modest amount, nothing material.

Andy Kaplowitz, Lehman Brothers.

My question is around pricing, general pricing of contracts. You mentioned selectivity, Alan; that you are getting to choose your contracts better. But are you getting overall better pricing in Oil & Gas?

The reason why I ask is, if I look back in history for you guys, the backlog mix today looks relatively similar to the backlog mix in the mid and late 1970s, and your margins were materially higher then. So I am just wondering what is different; and if in fact you are starting to get pricing in backlog.

I would love to go back to those days and age. Back then it was big -- even though the mix was similar, I have to agree with you there on the Oil & Gas side, the Company was almost entirely Oil & Gas at that point in time. We also had very little what I would call international competition back then. Our competitors tended to be just a very few U.S. companies. The world has changed dramatically in the intervening 30 some odd years.

So I think it is just a different mix of competitive dynamics that have created the market that we are in today. We work hard to pick the right projects, to put our best value proposition forward, and to beat the competition, while we're serving our shareholders.

I understand, but are you seeing better pricing and backlog in Oil & Gas because the market is so robust, or is it sort of --?

We are, absolutely. I think again the key there is to be able to add value to your clients and to be picked out of your competition as the selected contractor. When the market is as tight as it is, when it is as active as it is, it just gives an opportunity for pricing increases across the entire marketplace.

Okay, great. I know you don't want to give specific guidance on a segment, but when I look at Government with $360 million in revenue in the quarter, is that sort of the run rate that you are settling down to now? What is the opportunity in '07 to either do more than that or less than that? What should we be looking for in your Government segment in terms of new awards?

That is a pretty good run rate going forward. But it is really going to depend on the level of a lot of activity that is difficult to forecast in terms of contingency ops that we talked about a minute ago, as well as our support for FEMA-type-related activities. We continue to be very successful in winning recompetes for FEMA support. But it is uncertain at this stage the level of support required depending on the natural disasters and hurricane season in 2007.

Roger Paget, Morgan Joseph.

I just want to circle back to guidance. Back at the end of October for '06, the top end of the range was 260. You have come in way above that. I realize there was some tax and other things. But you commented that better profitability, better margins, and then we have pretty strong backlog, so we have some good trends going there. But you're keeping your '07 guidance.

I realize that some of the Power stuff might get pushed back. Are you guys just being overly conservative? Or are there some other forces that kept you to have the same viewpoint?

I think we clearly are going to have a good year in '07, but we are sailing up against a couple headwinds. One is in tax rate. We do not expect to be able to repeat the same tax rate minus any unforeseen settlements that would be positive. So even if you just looked in round numbers, we have probably got at least a $40 million headwind in taxes. We're going to have a significant decline in the Government earnings over the year from '06.

So when you put those two together, we got a significant amount of money we have to make up, just before we started it on an even basis. So while I think there's opportunities to beat the range, I would say that we're going to stay with the range we have right now, because we think that is the prudent approach this early in the year.

Okay. Then looking at Oil & Gas, some of the industry statistics -- and I'm referring today the HPI box scores -- it looks like some of the new projects have slowed a little bit. Are you seeing that '07/'08 could be a plateau in this market?

It is hard to say. It really is hard to say. I think there is going to be continued need on the upstream side. So my gas is '07/'08 may be a plateau for the downstream portion of the market; but I think you'll probably find that the investments will start to shift more to the upstream side as we get through '08 and into '09 and '10.

So it is hard to look that far ahead and predict it. My sense, though, is it is going to still remain a very strong market, even if it does plateau. It would stay a very strong market through the rest of this decade and certainly into the first years of next.

Even if the level of activity kind of flattens, we do have a lot of FEED work that we hope to convert into full EPCM in 2007, which should give us some solid growth in backlog and new awards.

John Rogers, D.A. Davidson.

Congratulations on the quarter. I was wondering, Alan or Mike, if you could talk a little more about margins. I know you don't give margins in backlog anymore. But if you could characterize it a little in terms of the impact of procurement and capital equipment and how we should think about margins going forward.

Well, clearly we have worked hard to continue to improve the margins in that backlog. You are right; we don't quote that any longer. But I think you can assume that we have done well there. It shows in the bottom-line results.

But as you get these very large projects that have tremendous capital spending associated with them, you tend to have just a lower margin against that large revenue base. So that is pretty natural business model for all of the engineering and construction firms.

I would say though, John, maybe this is not the crux of your question, but it is a point I'd like to make. Is that in this inflationary time of capital goods, we have found that we have a real competitive edge there because of our capabilities in procurement. The relationships we have with suppliers, the ability to do the front-end work that helps to get early identification of the long-lead item equipment, and the ability to negotiate early has really given us a competitive advantage over some of our competitors as we move into these really large programs.

So in this market, as strong as it is -- but also as difficult as it is -- it really plays to our strengths.

Okay. One other thing I could. Just in terms of the way that 2007 plays out on a quarterly basis, anything particular to think about in terms of projects starting up, finishing off, that might distort quarters or anything?

There's no special items to distort it, John.

Or scheduling, I guess.

As we begin the year, we are generally conservative in our profit take-up on a lot of activity. You generally see a stronger fourth quarter as we are ending the year and know we're coming out with a lot of contingencies and issues. So I don't see that pattern changing in 2007 as opposed to prior years.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) Steven Fisher, UBS.

Your free cash flow was held down a little bit in 2006 by working capital and CapEx. You mentioned that CapEx would be down around $60 million in 2007. Can you just comment on your working capital expectations? I'm not sure if I missed that for '07.

Working capital in 2006 was a little volatile. In the first two quarters we built up quite a bit of working capital in support of our FEMA activity. That came down dramatically in third quarter, and a little more in the fourth quarter where we were at positive cash flow in both those quarters.

2007 we look for modest cash flow growth throughout the year, throughout the quarters, on a more even basis. But we will be investing some amount of working capital to support the strong growth that we're seeing in our underlying business. So 2007 will be an investment in working capital, but will still generate positive cash flow. But in this industry you really generate most of the cash flow at the end of the cycles as opposed to during the buildup.

Okay, great. Then can you just run through some of the FEED projects that you have that could go into EPC in 2007? Maybe talk about what you have in backlog for Garyville and Detroit and those types of things?

Well, the significant increases in backlog from new orders in '07 are going to be on the downstream side of Oil & Gas primarily. We do have some mining projects out there and infrastructure. I think on the Power side as well we will get some projects into backlog. But the biggest component is going to be downstream Oil & Gas, particularly driven by modifications and revamps here in the United States for crude slate changes and refinery expansions. I really would hesitate to go into individual and specific projects, but that is pretty much a general overview.

Okay, great. Just one last quick one. Back in the labor, as you look at your staffing needs for the next one to two years and we progress through the cycle, are you going to be more in need of craft labor or more in the engineering side?

The buildup this year has been primarily on the home office engineering design side. But with some construction. The construction craft is going to be the focus as we go through probably mid, late '07 and on in through '08, '09. Significant buildup on the construction side during that part of the cycle.

Brian Chin, Citigroup.

We have seen some recent press commentary on what has been going on out at Hanford and the K Basin. I just wanted to get a little bit more detail from you guys in terms of what you're seeing out there.

Sure, we have a contract at Hanford that has a number of parts (inaudible). One is emptying what is called the radioactive sludge out of the K Basin East. We have had a technical challenge with some folks there, and we thought that maybe we were not -- going to not be able to make the May deadline. We informed our client of that. We're not used to having project communications appear in the newspapers, but that is the nature of that business I guess.

We have done a -- I think we have had an extremely strong performance record at Hanford. We have significant expertise around that program, including experts from DOE. I'm optimistic that we will get our hands around it and move forward. We've been operating there now over the last several days on a continuous basis without problems on that pumping system, so I am encouraged.

But again that is just a project with extremely complicated material requirements under extreme hazard conditions, and requires some pretty significantly intrinsic and complex designs to make it work.

Great. One more question on the labor side. Can you comment on, of the labor capacity increases that you have had, can you just characterize what proportion of those are folks where you have some type of pension benefit or commitments to, in the event that the cycle was to turn the other way? Versus folks that are a little bit more on a contractual basis that are relatively easy come, easy go.

We have had a buildup that has been very global. It has not been in any one specific location. So in looking at the potential requirements and benefit requirements, they vary greatly around the globe.

I will tell you that we do have a strategy where we have the ability to move work on any given project among a number of different locations. That allows us to level-set our resources in each location; to not have to build up to unnatural peaks in each office.

We also have a strategy that uses a fairly significant amount of contract hires for those peaks. We also use subcontracting techniques. So even though we have grown by 15%, we've been pretty careful to do it in a manner that does not jeopardize having to have a significant layoff on an interim downcycle.

We do not have, due to the nature of our workforce and benefit plans, unusual severance or layoff cost in our cost structure. As we have grown our workforce, as Alan said, we have certainly reflected those costs of that workforce, including pension and other benefits in our cost structure. That is --

Those are captured on a current basis (multiple speakers) our system. So of all of a sudden we have a big downturn from a labor standpoint, we do not incur dramatic costs. The only costs we may incur there is in I would say more the real estate side. But again there we look at pretty flexible arrangements around real estate.

Right, we've been growing our real estate assets on a very determined basis so that we can easily exit those in the future. But in regard our pension plan, we do fully fund it. Essentially fully fund it every year end. That is reflected in our cash flow. We did that again at the end of 2006, and our plans both in U.S. and overseas are very close to fully funded if not totally fully funded.

A follow-up by Barry Bannister, Stifel Nicolaus.

Just regarding the mix in I&I, it seems, as you said, a lot of it has been shifting towards mining. Can you sort of quantify what the mix in the I&I backlog is related to mining versus, say, a year ago?

Actually it would be pretty close to a year ago. We've had a significant, good long run in mining, and significant performance both in execution and new awards year-over-year for the last couple or several years. So.

But what has happened is that the manufacturing side has come down. But we have had tremendous performance in new bookings in '06 in the infrastructure side.

Right. Life sciences also is up in '06 as compared to prior years.

Okay, thank you. In Power are there any sort of, say, pre bid/proposal costs related to the TXU cancellations of the eight coal-fired plants that could be expensed in, say, '07?

No. We expense those. We do not capitalize the costs and put them on our balance sheet.

Okay, thank you.

With that operator, I'm going to provide some wrap-up comments. First of all, let me thank you for handling this call today. But thanks also to all of you who participated and asked your questions today.

As we have discussed, the overall outlook for Fluor is extremely positive. We have a significant number of strong markets and those are each collectively contributing to a sustained growth scenario for the Corporation.

We achieved record results in 2006. We delivered double-digit earnings growth that exceeded our expectations for the year. But perhaps more importantly, we have built a backlog of nearly $22 billion that provides a substantial baseload of projects that will fuel and accelerate our growth rate and build momentum for the future.

I would also point out that if you would look at your records and at the information that you have gathered over the last two years, and look at our backlog growth, impressive as it is, you'll find that the slope of our curve outpaces that of any other competitor. I think it speaks to our global position, our business model, and our overall value that we give to clients.

2007 is shaping up to be a very good year, with EPS growth of nearly 25% if you take the midpoint of our current guidance. We expect a continued high level of new awards and backlog growth. We are confident that we can continue to deliver superior results and value to our shareholders. We greatly appreciate your interest in Fluor and your continuing support and confidence in our Company. Thank you so much for being with us today and have a good day.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.