Fluor Corp (FLR) 2007 Q2 法說會逐字稿

Good day, and welcome to Fluor Corporation's second-quarter conference call. This call is being recorded. (Operator Instructions). There will be a replay of today's conference call beginning at 8:30 PM Central Time today, accessible on Fluor's website at, www.Fluor.com. A telephone replay will also be available running through 12 midnight Central Time on August 14, 2007 at the following telephone number, 1-888-203-1112. The access code of 7971134 will be required.

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

Good afternoon to everyone. Welcome to Fluor's second-quarter conference call. With us today are Alan Boeckmann, Fluor's Chairman and CEO, and Mike Steuert, Fluor's Chief Financial Officer. Our earnings announcement was released today after the market close.

But before getting started, I would like to read our cautionary note regarding forward-looking statements. In this discussion -- in discussing certain subjects, we will be making forward-looking statements regarding projected earnings, market outlook, new awards, margins, tax matters, and other financial 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 rise from any number of factors.

Information concerning factors that could cause actual results to differ materially from the information that we will give you is available in our Form 10-K filed on 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.

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

Good afternoon, everyone. Today, we will be reviewing our results for the second quarter of 2007 and we will also provide an update on our current business outlook and then discuss our increased guidance for the full year. But first, let's talk about our financial results for the second quarter which was very strong across the board.

All of our business segments posted strong double-digit growth in both revenue and profit over last year except for the government segment which declined as we expected. Our net earnings rose 44% to $96 million and that relates to $1.05 per diluted share and that compares with 67 million or $0.74 per diluted share for the same period last year.

Operating profit for the quarter was $187 million. That compares with 162 million in the second quarter of 2006.

Our revenue grew by 22% to 4.2 billion. That compares with 3.5 billion in the second quarter of 2006 and that reflects substantial growth in the oil and gas and the power segments in particular.

Let me briefly recap the results for each operating segment. Oil and gas reported second-quarter revenue of 2.1 billion; that's up 65% from the second quarter of 2006. Their operating profit grew to 101 million which is up 31% over 2006. Their results clearly reflect continued strength in the world energy markets and the associated increase in new project awards over the last two years. The operating margin was 4.7%, down from 5.9% a year ago, as a number of our larger EPC projects moved into the field.

In industrial and infrastructure, we reported revenue of $877 million and that was up 17% over last year. The operating profit in that segment was $23 million which is a 27% increase over the second quarter of 2006. Strong performance across the segment, especially in mining and infrastructure, drove both revenue and the operating profit to higher levels.

With regard to the highway project in California, that project is on track for completion in this year. But we did record another $6 million in charges during the quarter reflecting an additional cost creep. Our operating margins and cross I&I were 2.6%, up from 2.4% a year ago.

As I said and as anticipated, revenue for the government segment declined to $325 million for the second quarter and that compared with $816 million a year ago. Our operating profit was $9 million; that's down from $25 million a year ago. And our operating margin was 2.9%, just about on par with the 3.0% of last year. As you recall, the second quarter of 2006 benefited from the contributions of hurricane relief work for FEMA, also Iraq reconstruction work and the closure and finishing out of the Fernald project.

Revenue in our global services segment was $598 million in second quarter and that was up 24% from the 483 million in the second quarter of last year. The revenue increases continue to be driven by growth in operations and maintenance. But also, operating profit grew 21% to $48 million and that reflected strong growth in both O&M and the equipment service business lines.

Operating margin was 8.1%. That was even with that from last year. Global services continues to deliver solid growth and a substantial operating profit.

Lastly, I would like to talk about the power segment which reported revenue of $280 million; that was up 164% from the $106 million in the second quarter of 2006. Operating profit was 6 million in the second quarter. That compared to $3 million just a year ago. Our operating margin was 2.3%.

The unit received the final notice to proceed on the Oak Grove projects for Texas Utilities. So we will begin to see the revenue ramp up accompanied by increasing profit as that project makes progress.

Turning to new awards, good news here. We continue to capitalize on the opportunities for major new energy and infrastructure capital programs globally and that is evidenced by the robustness of our new awards and backlog. I'm extremely encouraged by our continued success in the marketplace and this quarter is another one for the record books. New project awards for the second quarter were $5.8 billion, equal to the record-setting quarter of 5.8 billion just a year ago. Awards in the quarter were diversified, with 2.1 billion coming from oil and gas, 1.8 billion from power, 1.1 billion from I&I and 570 million from global services. The quarter certainly included a $1.7 billion award for the long-anticipated TXU Oak Grove coal-fired power units in Texas.

The consolidated backlog of Fluor Corporation rose to another new Company record of $25.7 billion, up 43% from a year ago and up 8% sequentially over the prior quarter. All-in-all, I can say we're very pleased with our performance in this quarter.

And with that comment, 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?

Good morning or good afternoon to everyone. Our business results are covered in detail in our press release, so I will focus mainly on providing additional information on new awards and backlog for each operating segment and on several corporate financial items.

As Alan mentioned, total backlog at June 30 was 25.7 billion, which is an increase of $2 billion over the last quarter. With the award of the Oak Grove contract, the percentage of fixed-price work in our backlog increased 27% from 23% last quarter. Backlog was split geographically between 45% in the US and 55% outside of the US.

Let me now provide some background on our key new awards that contributed to the 5.8 billion for the second quarter. Starting with oil and gas, new awards were 2.1 billion for the quarter compared with 2.6 billion a year ago. And we booked the RasGas LNG project, which was in excess of $1 billion.

By contrast, there are no new individual awards that were in excess of 350 million this quarter. The largest award in the quarter was for the engineering, procurement and construction management of our solar-grade silicon plant in the US. This is a relatively new area of opportunity that we have targeted and we're having very good success in capturing these projects. We booked additional engineering, and procurement scope on the Marathon Garyville refinery program during the quarter. That was not included in the award; that was previously booked.

We were also awarded a contract at over EUR200 million with engineering, procurement and construction management for the utilities and offsites for the Grupa LOTOS refinery expansion in Poland. In addition, we booked a number of other upstream, downstream, and petrochemical awards in the US and Mexico and in the Middle East. Ending backlog for the segment at June 30 arose to 14 billion, a 68% increase from a year ago.

Moving to industrial infrastructure segment, new awards were 1.1 billion which compares to 2.3 billion a year ago when we booked the San Francisco-Oakland Bay Bridge project. As we've discussed in the past, awards and I&I in particular will be fairly lumpy, especially on the infrastructure side. The awards were broad-based including new projects in mining, infrastructure, life sciences, and general manufacturing.

The largest award in the quarter was for the engineering, procurement and construction management of Phase IV of BHP Billiton's iron ore expansion project in Western Australia. The value of this award was 800 million.

We also announced the award of the A8 roadway project in Germany where we are widening approximately 37 kilometers of the Autobahn. Our 25% share of this EPCM contract is valued at $81 million. This is another instance where public/private partnership approach was successfully applied.

There were two relatively small life science projects in the US and two separate clients. And the balance of the I&I new awards were for mining and manufacturing facilities. Backlog was at 5.7 billion, up 6% from 5.4 billion a year ago and up 8% sequentially.

Our government segment recorded 181 million in new awards in the second quarter. Awards included additional O&M work for DEL-JEN and a FEMA contract for personal assistance. In addition, the unit recorded task orders for the Corps of Engineers under the CETAC-II contract and for the Air Force under the [ACE] contract, both of which are reimbursable contracts in the Middle East.

While it will not affect new awards of backlog until actual task orders are awarded, Fluor is one of three contractors that will [unlock] had four contracts. The indefinite delivery, the indefinite quantity contract is a performance period of one year base with nine one-year renewals. The maximum value to any single yearly contract may be up to $5 billion. Work will be competitively bid by the US Army on a task order basis. We're very pleased to have been selected for the support and long-term program, are anxious to get to work. Backlog at the end of the second quarter was 428 million for the segment, which is down from 548 million last quarter mainly due to the work off of our Hanford contract.

Moving to global services, the operations and maintenance business had another strong quarter with bookings of 570 million in new awards which compares with 280 million a year ago. Operations and maintenance awards are focused on oil and gas and power industries this quarter. The largest award this quarter was for a one-year extension at a major oil and gas facility in the US.

In addition, we received a three-year extension of a long-term multi-site contract for a large power producer. Backlog at the end of the second quarter was 2.6 billion compared to 2.5 billion a year ago.

The power segment had a very strong quarter with new awards at 1.8 billion. Of course, the big story here is the new award for the final notice to proceed on TXU's two 800-megawatt coal-fired units at Oak Grove in Texas. The value of this award is 1.7 billion. These are supercritical units that will burn lignite coal. This is a lump sum contract. As we have previously discussed, the risk to Fluor is less than what we would have normally assumed in previous power cycle. The project is scheduled for completion in mid 2010.

In addition, we were awarded an engineering procurement construction contract for another flue gas to sulfurization unit in Kentucky. Also in the betterment area, we were awarded a contract to perform preliminary engineering for a new scrubber technology in which Fluor has an exclusive EPC arrangement. Ending backlog for power segment rose to $3 billion, more than double the 1.4 billion at the end of last quarter.

Moving on to corporate items, corporate G&A for the quarter was 52 million which compares with G&A of 54 million a year ago. Our full year EPS guidance for 2007 assumes G&A would be in the range of 190 to 200 million for the year. We had net interest income of 8.1 million for the quarter which compared with net interest expense of 721,000 a year ago. The increase in income is a reflection of the significant increase in our cash balances.

The effective tax rate for the quarter was 33.4% compared with 37.5% in the second quarter of 2006. This rate is a little below what we expected and reflects a benefit from the resolution of certain prior period tax issues. Continue to expect a normalized tax rate of about 37.5%.

Now, a few comments on the balance sheet and discuss cash and other financial items. Consolidated cash balance increased to 1.5 billion, up from 1.1 billion last quarter and up from 585 million a year ago. Approximately one-half of this cash is located outside the United States.

Cash flow from operations was very strong, contributing 348 million in the quarter. As expected, we collected substantially all the previously-unbilled fees on the Fernald project during the second quarter. This accounted for 118 million of positive cash flows in the quarter.

Our debt to total capital remained at 25% in the second quarter. Capital expenditures for the quarter were 72 million with the majority attributable to the equipment services business but also including some investment associated with the expansion of our workforce and required supporting infrastructure.

Appreciation in the quarter was 35 million. Overall, Fluor's financial condition continues to strengthen and of course remains in excellent shape.

Finally, let's talk about our outlook and guidance for the full year. All business segments delivered operating results that exceeded our expectations for the second quarter and the first half. We continue to win substantial new projects awards across our diversified businesses which we expect to continue to drive growth in revenues and backlog.

Based on the overall strength of the financial results to date, we're increasing our full year guidance for earnings per share to a range of $4 to $4.20 per share for 2007. Our previous guidance for 2007 was a range of $3.50 to $3.80 per share.

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

(Operator Instructions). Jamie Cook, Credit Suisse.

Congratulations. I guess my first question, Alan, I understand on oil and gas, the margins were 4.7% and that makes sense as you move more into the construction phase on the oil and gas side. But can you talk about what we -- what the -- how we should think about margins going forward and sort of the prospects for sort of some -- there wasn't a large oil and gas win in the quarter. I understand it's lumpy. But can you talk about the prospects going forward?

Yes, well, on the margin question, Jamie, we've talked about that before. As we move into the field in construction, we tend to bring on a lot of revenue which is passed through revenue and that does depress margins.

I don't really get too excited about the direct margins. What we're continuing to look at is our increase in absolute value of profit, our return on assets and our return on our resources. We're doing quite well on all of those metrics.

When you look at the current mix of work and how that's going to roll out, I would say we may move a little bit around that number but that's kind of steady-state. It may increase if we get any significant engineering scope. But we're going to continue as we've been booking these projects to roll them out and go into construction and that will have pass-through revenue.

With respect to prospects, we still have some very significant prospects out there. And I think we will continue to see those. The challenge is we're only dealing with a three-month period of time. And so those discrete actions and transactions can move across a time boundary and roll into one quarter from the other.

So yes, there wasn't a significant award in the oil and gas group today -- or this time. But we had quite a number of what I would call medium-term, medium-sized ones which is also very encouraging. So it was a good quarter all-in-all and the top two awards in the Company were out of our power group and out of I&I.

Then I guess my next question, you mentioned within the industrial and infrastructure side that the highway project that we've had some issues with should be completed at some point during 2008. So I guess I'm just trying to figure out how I should think about the margin. I am assuming that is depressing the margins to some degree. And as sort of the stuff on the mining side begins to burn through, how should we think about margins going forward? I'm assuming that we should have a fairly -- a modest at least increase on the margin side.

That project, I think you said 2008. It will complete this year.

Oh, I'm sorry. Well 2007. I meant 2007.

So we will obviously look forward to the completion of that project. And, I think we are well in position to do that.

But, you're right. It does depress margins. It is rolling through as a loss on the books each time we have to take a hit when the situation changes there. So, it will be good to get it behind us. And then, we'll be in the claims phase and arbitration phase of that project.

Should I assume the stuff on the mining side of margins in that above sort of a 3% range?

Well, see, mining has the same issue that we run into in oil and gas. They are large projects. And as they move into the field, it tends to depress the margins. And in general, mining itself does come in at a little bit lower margin than our oil and gas projects typically.

Okay so, somewhere maybe in between.

Do you have any further questions?

If I could ask one more question.

Go ahead.

Sorry, just last congratulations on TXU. Can you just talk about, there's been a lot of press about the push-out in coal. So outside of TXU, can you talk about sort of your thoughts on coal new gen and sort of the opportunities out there?

Yes, there's just not another solution in the US in the timeframe that is required for meeting the power demands in coal. I think we're seeing a few more gas power generation prospects than before. But they are for peakers and basically picking up stranded assets.

We are pretty convinced that there will be additional coal awards. I can't speak about timing. I think as we witnessed with TXU, sometimes the permit phase of that can take longer than we'd like. But we're working on quite a number of prospects in the coal side.

Congratulations. I'll get back in queue.

Andrew Obin, Merrill Lynch.

Just more on power gen backlog just to clarify what Jamie has said. Are you seeing growth opportunities in backlog near-term because all of the growth rate now has been driven by one project? Should we expect other big awards over the next six to 12 months there?

Well, that's possible. Probably not likely of that size, although I will tell you that it's not just that new gen. We've been getting a significant number of awards in the what I call the plant betterment side as well in that. I think there's a good chance that we will book at least one if not more projects that are the front end as we had with TXU that then lead into a full release as permits are gained. So I think that's definitely in the works.

On that topic, just in terms of the backlog growth, could you give us an idea -- can you separate the growth into new awards versus feed work moving into construction stage -- the 40-plus% of your revenue growth? How much of it is due and the backlog -- particularly backlog growth actually? How much of the backlog growth is due to separate new awards versus existing feed work moving into construction stage?

Andrew, let me make sure I understand. Are you asking about the total backlog or power?

I'm sorry. I'm talking about the total backlog.

Well, as you know, our strategy, we've been pretty straightforward about it, has been to get in and do the feed work for these very large projects. We are in a very unique position to bring value to that. So, a significant number of the awards we have been getting are the follow-on EPC awards to work that we started in the study phase with.

Sure, but backlog year-over-year went from 18 billion to 26 billion, which we're very happy about. But, how much of it -- you already had -- of that growth, how much is just -- do you have the numbers? How much of it is just feed work moving into the field work versus brand new awards, brand-new projects that you got awarded in the quarter?

I don't have numbers that I can split out for that to be honest with you. We haven't really looked at it in detail that way. Although, I will tell you a significant amount of it is the follow-on opportunity to convert feed work into total EPC.

Andrew, that's especially true in oil and gas and power where we do a lot of upfront work. It's probably not quite as much the case in I&I.

That's correct.

So, based on that, I would expect that you do have plenty of visibility on oil and gas given how much feed work you have.

That's absolutely been our strategy and it continues to be a very successful one.

You have certainly made me happy tonight.

Richard Paget, Morgan Joseph.

Could you give us a little bit more detail on how you expect LOGCAP to play out? I know with these IDIQ contracts, it's kind of hard to gauge. But, if you could give us any better sense of timing and/or potential magnitude?

We really don't have a lot more definition to give at this stage. That award has been protested. But the protests will have to be resolved before the government can go ahead and complete the task orders. But it is going to be completed on a task order by task order basis. So, it's very difficult for us to predict at this time how that is actually going to roll out.

And it's also -- as I mentioned it's -- we're not quite sure how long the protest period is going to last as well. But we're very confident that the protests won't be upheld and we will be able to move forward on this work. But there is just some uncertainty surrounding that right now. But I think as we move forward, we'll be able to give you some more clarity. But it's just very difficult right now.

Okay, with the protests though, that's probably going to be resolved by the end of the year?

Oh, I would think so.

Yes, definitely -- I certainly hope so.

Barry Bannister, Stifel Nicolaus.

I&I appears to have about half the assets turns of oil and gas based on the 10-K. So, why are the mining margins below oil and gas?

It's very difficult Barry to take the assets turns of I&I and attribute it across each one of their fairly diversified product lines. Mining does not have a lot of assets tied up in it. The assets that are tied up currently in I&I, we've already run some infrastructure projects, especially the highway's agencies project where we've had to consolidate that for FIN 46 purposes where we consolidate the debt and the related assets involved.

So, if you look across I&I infrastructure, it has very attractive margins within the segment. Mining because of the significant amount of pass-through revenue has somewhat lower margins. And the other businesses in that segment are pretty well in between those two.

But it has a much better ROA, more comparable with oil and gas because it doesn't tie up a lot of assets you're saying?

Yes.

(multiple speakers) When I look at the Oak Grove coming into the backlog at 1.06 million per megawatt and there have been several coal-fired awards recently at 1.6 million or about 33% higher per megawatt, how is it booked fixed versus cost-plus? What type of margin are we looking at? And specifically, can you ever get those margins back to the old gas-fired levels?

First of all, we won't quote margins on a per contract basis. We don't quote margins on our new awards in any case. But that project was booked on what I call a modified fixed-cost basis. There are certain elements of that project that will be handled a bit differently than fixed cost.

It was a developed price where we worked very diligently with our client to put as many of the risks behind both of us before we entered into a fixed-cost price and then put some allowances in on some other costs.

Yes, I don't mean to put you in the spot. More generally speaking, beyond just that project, is there a possibility as the coal resurgence continues of Fluor returning to the good solid margins of the gas-fired power boom days six years ago?

I think the answer is yes. But I need to qualify that. If you looked at the boom that we had back in the gas-fired, the really significant margins occurred as the cycle wound down as we finished project. That cycle stopped fairly abruptly.

But when you get into the tail end of these projects, you have gone past and covered and mitigated the risks you are able to release contingencies and able to recognize even in some cases incentives. So, the tail end of these projects is where the most significant profit take-up occurs.

Then last question, it looks to me and I just stepped in, we're just working on it now -- but it looks like the tax rate may have added about $0.07. But it also looks like on a per share basis, there was a $6.3 million or $0.07 freeway charge. So, were those two just kind of a wash and what we did see was a clean number and a clean [beat]?

Pretty much.

Yes, that's a good way to look at it, Barry.

So, the 6.3 million was essentially a freeway charge?

Yes, it was. It was -- we've said all along that we're going to have probably modest noise on the SR 125 projects until we complete it this fall. That's been the case this quarter.

Your partner has written off its receivables as per their way but you are carrying receivables. How good do you feel about them and how much are there?

Obviously, we feel good about them or we would have treated it differently. We use an 81-1 method of accounting for claims. We get third-party verification of what we think is a fair claim amount and that way we think we give them a more and truer representation of our results.

Andy Kaplowitz, Lehman Brothers.

Nice quarter. Can we talk about infrastructure for a second? Obviously there's been a little bit more focus on infrastructure spend, post the disaster in Minnesota. And I'm just wondering, has anybody approached you -- what do you think of it in terms of long-term prospects, anything incremental that can come out of it for you and your peers?

I think we've always had the view over the last several views years that infrastructure is a good, solid market to be in and one that's going to be a growing market. There have been recognized as a number of older infrastructure programs in the United States that need rejuvenation, need rebuilding.

We are actually doing similar assessment programs and management programs for a couple of states' DOTs in the United States. I think we're in a strong position to be a major player as that ramps up. I think it will ramp up. I think the very unfortunate situation that occurred in Minnesota just is a very significant although very sad reminder of the state of some of our infrastructure.

Unfortunately, you are right. Has anybody called you about increased work already or is it still too early for that kind of thing?

We're doing what we can to help respond on an emergency basis in that particular situation. But, no, I don't think we've got -- it's too soon. I think we're seeing a lot of discussion around the network of the need to look into increasing and improving the infrastructure.

Understand. You've built up a significant portion of significant amount of cash on the balance sheet now. I know you've talked about it in the past, Alan. What are some of the priorities in terms of cash deployment? Maybe we could just go over them again, especially as you are getting more cash on the balance sheet.

One of our first priorities has been payment of an appropriate dividend stream and we will continue to do that and book a dividend increase as earnings go forward.

Second priority has been acquisitions. We've been very deliberate in terms of acquisitions. They're certainly very pricey these days and we haven't made any for 18 months or a couple of years now. But we continue to look at acquisitions as a use for cash if the values are supportable.

Of course, we continue to look at our share repurchase program as well. And we will look at share repurchases from time to time as appropriate. But, those remain our three priorities for the use of cash.

Is it just hard to come by acquisitions these days because of valuations being relatively high or are you just being extra cautious?

I think it's a little bit of both. Valuations certainly have gone up across-the-board in this industry but we're very cautious. We stay pretty disciplined. We want to only look at deals that are accretive and they have to fit into the strategy that we're deploying in each of the market segments.

Right, and certainly right now, we have our share of internal growth opportunities.

One more quick question, I'm sure I am just being picky here. On the SG&A as a percent of sales, your sales are obviously increasing very significantly. You are already at a low run rate in terms of SG&A as a percent of sales. Is there any room here for more leverage on SG&A? It seems like there would be going forward.

It's modest. There certainly is room for leverage but we did have some fixed costs. But as a corporation, we've been trying to go to more of a variable cost model so that we can better manage our costs as the business grows or shrinks. And we've experienced some efficiencies in doing that. But it's not going to be the big driver for going forward.

[Lawrence Nesbitt], Nesbitt & Associates.

Congratulations on a great quarter. I would like to go back again to the infrastructure issue that we were just discussing. And I was wondering whether in your opinion the likely infrastructure increase work that we will be getting as a result of the Minnesota tragedy, is that likely to be mostly just assessments of infrastructure situations or do you foresee a fair amount of major contracts for complete replacements of such things as bridges?

Well, you know, it's hard and I think it's too early to say what the net effect of that will be. Although, I think I can say with some confidence that there will be a significant number of assessment -- statewide or countywide assessments going on as a result of that. What that tells us and how it's contracted for and whether or not it's something that suits us from a competitive standpoint is something we will have to gauge as we go forward.

So right now, it's pretty hard to tell if there will be any complete replacements of things like bridges?

Well, I think you can assume that there will be. But to what extent is hard to say.

Ian Macpherson, Simmons & Company.

Nice quarter. Alan, on the BHP award, it seems like a larger size award on that side of the business that we've seen in a while, so I'm curious to know what the outlook is on that side for mining, if we might do that as sort of a one-off award or perhaps a sign of more to come on that side?

Well, mining has had a good long string of one off awards. It's been a good market, particularly with commodity prices staying as high as they have for as long as they have. Our clients in that regard are looking to make capital expansions as they build out their business.

So, no, I wouldn't say that it's the end of the cycle. It's certainly a very large one. And we were awfully glad to have that confidence placed in us by BHP Billiton. But we're in a good market which continues to stay strong on the mining side and I anticipate we will have future awards.

Okay, and if I might just ask for a quick follow-up, you touched briefly on the strategy of looking at acquisitions and if you could provide any more color on the types of acquisitions that make the most sense to you right now. I think I've heard in the past, you talk about more upstream oil and gas. Is that still a priority or are there others that you would care to elaborate on?

Well, in our case, we look at acquisitions to be a strategic play to fit in with our overall strategy of penetrating markets and being profitable in those market areas. And offshore oil and gas is one area that we have been looking at. We also are looking at prospects on the what I call the O&M businesses and also in infrastructure. Certainly, we'd look at others if they made sense but that's kind of been our focus.

Steven Fisher, UBS.

In the power business, you mentioned some retrofit opportunities. Can you just tell us how many more scrubber projects you see in the pipeline that you might be able to book in the next few quarters?

It's hard to say. They're still out there. I think we will continue to book them really over the next couple of years. The opportunities particularly given the regulation issues, the opportunities that are going to be coming up with respect to potential opportunities in the CO2 side as well I think can provide a very good market. I don't think it's seen the end of its run by a long shot.

How do the margins on those projects compare to say new capacity edition projects?

Well, they tend to be a little bit lower because they are not as risky. They are generally reimbursable cost projects as opposed to fixed costs and fixed-price awards. But they are still good margins.

Okay and then on the oil and gas side downstream, refining margins in the industry have come down over the last couple of months. Are you hearing any concerns about falling margins from your customers on the future downstream projects and the viability of them? I know every project is going to be different but anything you might have heard there?

I wouldn't say I've heard anything that threatens any of our current backlog or immediate prospects. We have had and we've talked about it in previous calls -- seen some significant escalation in that marketplace, particularly around the cost of construction and the cost of equipment. And we've had some rescoping efforts as a result of that.

But pretty much the entire prospect list has gone forward sometimes in a modified form but it has gone forward. I think the commitment to spend particularly to upgrade these refineries to accept the heavier crude is a change that has to be made. And in addition, those that are around capacity expansion are still driven by a very, very high utilization in the United States refineries.

(Operator Instructions). Michael Dudas, Bear Stearns.

Alan, how do you characterize the type of front-end engineering work that you're looking at or getting asked about today as opposed to what you were seeing say three or four years ago as we were starting to enter this pretty good phase? I guess I am limiting it more towards the oil and gas front so you can be more broader in all your end markets.

Well, in the oil and gas side, we're seeing fewer front-end opportunities on the downstream side because that process is -- we're well into it. We're still doing some but it's not as robust as it was a couple of years ago. Right now, things that are coming in are more on the upstream side. And I think that is an area that's going to get an increased focus as these other investments play out on the downstream side.

So, still got a good pipeline there. In the downstream side though, as I've said, it may not be as robust as we were looking at a couple of years ago.

Looking out, relative to the -- across your end markets, where do you think three years from now we will see strong acceleration into backlog and orders relative to what we're seeing today or will be in a market that you're not actually focusing on right now?

Well, three years is a long ways to look out. But from a strategic plan standpoint, I expect over the next three to five years to be seeing some significant bookings in our power business, particularly in the coal side and maybe even starting then into the nuclear side. I think we're going to be seeing continued bookings. The cycle to me is going to still be strong in oil and gas. It may shift as I said to the upstream side. And I believe infrastructure will be a significant play as we move forward and continue to grow that business.

More on a global business basis or are you thinking more domestically?

Well, we have been playing globally in that business. We've been doing roads mostly in the US but we've been doing other infrastructure oversees, such as the high-speed rail system in the Netherlands, London Underground, so it will be a global business for us.

Can you comment on your current staffing levels and what you have added to the headcount year-to-date and where you stand relative to working off this big backlog bulge over there?

We are growing. We added about 15% in professional staff this last year. We will approach somewhere close to that again this year. We've had a record year of hiring in new college grads last year and we will equal that or more this year. It is a global hiring effort as our -- we're basically in good shape and healthy across the network globally.

Our systems allow us to bring people in on a fairly quick basis to get them productive even at an entry level. And we've been doing a substantial amount of that. I think we're in excellent shape with respect to our home office staff. Clearly, it's not easy. It's a competitive market. But we're meeting our goals there. The big challenge is going to be in some locations with respect to construction and we're putting a lot of focus on that.

Joe Ritchie, Goldman Sachs.

Nice quarter. It's a quick question regarding the liquidated damages provision on the Southern California project. I am looking at your Q and it looks like you haven't reserved anything yet. You are doing venture partner reserved approximately 25 million before tax. Could you just help me understand the difference in the way you are treating the liquidated damages provisions?

Yes, we have -- we are very much in sync with our partner with respect to the cost of the project, the status of the project. Where we differ is we each use a different accounting method for claims, both fully allowable under accounting guidelines.

In our case, we look at the claim and our expected benefit from that claim and then take that benefit to offset the costs incurred. We believe very strongly that we have justification for the delays that have contributed to the schedule and moving out past the date where liquidated damages would be imposed.

Our partner, although I'm convinced he has the same belief that we do, has a very different accounting method where they go ahead and account for the loss immediately. And then when they do receive compensation then book that back into earnings. We followed our method for many, many years, in fact decades because we believe it gives a truer result of the ongoing operations.

Okay and then out of curiosity, you said the project is expected to be completed this year. When do the liquidated damages kick in and what is the magnitude of the damages?

I will have to refer you to our Q for that, rather than talk about it here on this phone call.

Nice quarter.

Barry Bannister, Stifel Nicolaus.

During the Q, you partially answered the question so I won't dwell on it too much but it was about the rising costs affecting your customer psyche on projects going forward. I was reading over the transcripts of all the integrated oil companies and it was unusual that every single one of them was complaining about rising costs for projects. But they didn't quite go to the point where they said it would delay their [FID]. They were mostly in the stage of rescoping, trying to bring costs down.

Do you think that if the price of the projects is up as much as it is that as we look out to 2008, there might be a lull where project awards slow if for no other reason than just to wait for the price of motor gasoline and diesel to rise in order to justify the project, in other words, kind of a dip in the road based on these inflation of costs? Is that a plausible scenario?

We have worked pretty closely with our customers but I don't get the opportunity to sit in their board meetings with them. So, it's hard for me to say how they would react in that regard, Barry. I do know, as I mentioned we have been involved with many of our customers at looking at opportunities to rescope, come up with alternate execution strategies, look at bringing in additional suppliers to get the costs down and reaction to the inflation we've seen.

That has caused some of these awards to move out a quarter or two. But it hasn't stopped any of them. And we are pretty much booking still at the face value of what we started off with as an original estimate, albeit maybe in some cases with a little lower scope.

Andy Kaplowitz, Lehman Brothers.

Alan, I don't think anybody mentioned it. Can you give us a quick update on the UK nuclear cleanup opportunity, specifically Sellafield?

Well, we are in the middle of the competition for Sellafield, it is a phased process. It really won't be completed until sometime next year. But we are in the thick of it. And we expect to be successful.

Okay, sounds good.

At this time, we have no further questions. I would like to turn the conference over to Mr. Boeckmann for any additional or closing remarks.

Thanks very much, Operator, and I would certainly like to thank all of you for participating on our call this afternoon. This was the first time that we had done the call in the afternoon right immediately following our announcement. I would be interested in your feedback on that.

As you can see, our operations are really hitting on all cylinders. And our results bear that out. We have had strong operating performance and substantial market opportunities that continue to reinforce my confidence in our business outlook. I think the big step-up in our guidance for the year reflects that confidence level. We certainly appreciate your interest in Fluor, your continuing support and your confidence in our Company. Have a good day.

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