Fluor Corp (FLR) 2014 Q3 法說會逐字稿

Good day and welcome to Fluor Corporation's third-quarter earnings conference call. Today's call is being recorded.

(Operator Instructions)

A replay of today's conference call will be available at approximately 8.30 PM Eastern time today, accessible on Fluor's website at www.fluor.com. The Web replay will be available for 30 days. A telephone replay will also be available through 8.30 PM Eastern time on November 5 at the following telephone number, 888- 203-1112. The passcode of 5937050 will be required. At this time, for opening remarks, I would like to turn the call over to Ken Lockwood, Vice President of Investor Relations. Please go ahead Mr. Lockwood.

Thanks very much, operator, and welcome, everyone, to Fluor's third-quarter 2014 conference call. With us today are David Seaton, Fluor's Chairman and Chief Executive Officer and Biggs Porter, Fluor's Chief Financial Officer. Our earnings announcement was released this afternoon after the market closed and we have posted a slide presentation on our website, which we will reference while making prepared remarks.

Before getting started I would like to refer you to our Safe Harbor note regarding forward-looking statements, which we have summarized on slide 2. During today's call and slide presentation, we will be making forward-looking statements which reflect our current analysis of existing trends and information. There is an inherent risk that actual results and experience could differ materially. You can find a discussion of our risk factors which could potentially contribute to such differences in the Company's Form 10-Q which was filed earlier today. Also during this call we may discuss certain non-GAAP financial measures. Reconciliations of these amounts with the comparable GAAP measures are reflected in our earnings release and posted in the Investor Relations section of our website at investor.fluor.com.

With that, I will turn the call over to David Seaton, Fluor's Chairman and CEO. David?

Thanks, Ken. Good afternoon, everyone, and thank you for joining us today. I am pleased to report that we had a very good quarter, including strong earnings, significant new awards, and growth in backlog. On today's call we will review these results, our guidance for the balance of 2014, as well is talk about our initial guidance for 2015. If you'll turn to slide 3, I want to begin by covering some of the highlights from the third quarter. Net earnings attributable to Fluor from continuing operations were $183 million, or $1.15 per diluted share, which compares with $173 million, or $1.05 per diluted share, a year ago.

Our consolidated segment profit for the quarter was $335 million, which was an 8% increase from $311 million a year ago. The growth in segment profit results was mainly driven by a 65% increase in oil and gas, reflecting very strong performance. As expected, oil and gas margins declined slightly from last quarter as project execution on existing projects increased but we are still at a very strong 5.5%. Consolidated revenue for the quarter was $5.4 billion, which is down from $6.7 billion a year ago, but again mainly due to significantly lower revenues in mining and metals business.

oil and gas revenues increased 15% over last quarter as existing projects and backlog transition from the detailed engineering phase into the field of construction as construction gets underway. New awards for the quarter were strong at $6 billion, including $4.5 billion in oil and gas, $700 million in government, $460 million in industrial infrastructure, and $382 million in power. Consolidated backlog at the quarter end rose to $42.3 billion, which is up 16% from $36.5 billion a year go.

Our financial results are summarized on table 4 and I will continue my remarks on slide 5. During the quarter, the oil and gas segment booked new awards of $4.5 million -- $4.5 billion as I said previously, which includes a refinery project in Malaysia for Petronas and the Fort Hills oil sands project in Canada. The oil and gas segment also continues to book a number small- to medium-sized projects which indicates our clients are still moving forward with feed and detailed engineering projects. Ending backlog for oil and gas segment was a record $26.5 billion, which is up 41% from year ago.

We continue to track a robust list of sizable projects in the United States, Mexico, the Middle East and Asia and expect a number of major feed programs to convert to EPC as we move to 2015. Finally, our success in US Petrochemical market continues with the award of Sasol Chemicals complex in Louisiana, which we announced earlier this week. Fluor, with our partner Technique, will execute all aspects of this world-class ethane cracker and derivatives complex. We will take this project into backlog in the fourth quarter.

Turning to slide 6, new awards for industrial and infrastructure were modest at $460 million and included a number of small mining and industrial services awards. Backlog at the end of the quarter was $8.7 billion, down from $13 billion a year go. This decline continues to be driven by a lack of significant awards and moving into EPC for the mining and metals business line. Mining and metals business market, however, is showing very early signs of returning with feed and study work picking up. We could see some small to midsize awards in the near term with potential for a few major prospects by the end of next year.

We continue to pursue a number prospects in infrastructure. However, a highly competitive marketplace remains unchanged. We expect to book the A9 public/private partnership financed highway project in the Netherlands in the fourth quarter and have several opportunities in the United States as we are pursuing in 2015.

Now if you turn to slide 7, it shows the government group posted new awards of $700 million which includes approximately $400 million for the Department of Energy's Paducah Gaseous Diffusion Plant in Kentucky. This is a great project that allows us to deploy a decade long nuclear remediation expertise and adds another long-term contract to our DOE portfolio. Ending backlog for government stood at $5.2 billion, similar to last quarter. With regard to LOGCAP IV, we expect task order volumes to moderate down as a number of the sites and personnel we have served are reduced.

For 2015 we anticipate full-year revenue of approximately $800 million, down from just about $1 billion in 2014. The release of task order awards will obviously depend on the US strategy in Afghanistan on an ongoing basis. The power segment new awards were $382 million, as I said, including engineering and construction for a new gas-fired power plant in South Carolina. Ending backlog was $1.8 billion compared to $2.1 billion a year ago. We continue to bid for new gas-fired opportunities in North America and expect opportunities for power generation and plant betterment to improve in 2015. With that, I'd like to now turn it to Biggs to review some of the details of our operating performance and the corporate financial metrics for the quarter. Biggs?

Thanks, David. Good afternoon, everyone. Please turn to slide 8 of the presentation. I'll start by providing a few comments on our third-quarter performance then move to the balance sheet. As expected, overall revenue for the quarter was down fairly significantly year over year, mainly due to the continued fall off in mining activity. oil and gas revenue improved 12% last year and increased 15% over last quarter.

While we continue to execute a substantial amount of higher-margin feed activity in oil and gas, large projects are starting to move into the field which will generate higher revenue and cause the margin on a percentage basis to moderate. Industrial and infrastructure revenue continued to contract. This contraction, along with successful project closeouts in mining and metals and favorable project execution performance from infrastructure contributed to strong margins in the quarter.

Turning to slide 9, corporate G&A expenses for the third quarter were $35 million, down from $46 million a year go. The decrease was mainly due -- mainly the result of lower stock price driven compensation costs. The effective tax rate in the third quarter was approximately 33%, an increase from the 29% tax rate a year ago. The lower 2013 rate was due to US federal tax research credits which were not extended beyond 2013. We expect our tax rate for the remainder of 2014 to be between 32% and 33%.

Please turn to slide 10. Before I move to the balance sheet I want to provide an update on discontinued operations with regard to the Doe Run lead business which the Company sold in 1994. In October, we entered into a settlement agreement with counsel for a number of plaintiffs who had filed lawsuits against the Company. As a result in the third quarter we recorded an additional after-tax charge in discontinued operations. This settlement is expected to result in cash outflows upon the receipt of releases from the plaintiffs. We do not expect any material charges to result from our main lawsuits relating to the Doe Run lead business.

Finally, Fluor's Board of Directors approved the termination of the US defined benefit pension plan, effective December 31, 2014. The settlement of the plan, subject to regulatory approval, is expected to be complete in 2015. The Company expects to recognize additional expenses when the plan is settled, including unrecognized actuarial losses of approximately $160 million, included in accumulated other conference of loss plus additional amounts where the settlement obligation exceeds the current pension liability. We do not expect this settlement to have a material impact on cash position. Settling this plan will result in lower future expenses and eliminate the risk of rising pension benefit guarantee core premiums.

Shifting to the balance sheet on slide 11, cash plus current and non-current marketable securities totaled $2.4 billion, down from $2.7 billion last quarter. This quarterly decline was primarily due to increased working capital balances at quarter end. In addition, the Company repurchased approximately $100 million worth of shares and paid $33 million in dividends. As of September 30, for the year, we have returned approximately $504 million in cash to shareholders through share repurchases and dividends. While substantial already, we intend to pick up the pace of share repurchases from the third quarter level. Moving to slide 12, as previously mentioned, Fluor's consolidated backlog at quarter end was $42.3 billion. The percentage of fixed-price contracts in our overall backlog declined to 18% and the mix by geography was 28% US and 72% non-US.

I will conclude my remarks by commenting on our guidance for 2014 and 2015, which is on slide 13. In line with my comments in early September, we are narrowing our 2014 guidance from continuing operations to a range of $4.10 to $4.30 per diluted share from the previous range of $4.10 to $4.45 per diluted share. For 2015, we are establishing our initial EPS guidance at a range of $4.50 to $5 per diluted share. Our range for 2015 reflects our rising backlog and solid growth opportunities in oil and gas and a stable to moderate improvement in the Company's other end markets. This range excludes any pension settlement related charges because they are not fully estimable at this time.

For 2015, we anticipate growing revenue contributions from all business groups and expect earnings to grow over the course of the year. Guidance for 2015 assumes that G&A expense will be in a range of $190 million to $200 million and an effective tax rate of 33% to 35%. For 2015 we expect CapEx to run roughly in line with the pace this year at around $300 million. With that, Operator, we're ready to take questions.

Thank you.

(Operator Instructions)

Jamie Cook with Credit Suisse.

Hi. Good evening and congrats, actually, on a nice quarter there. I guess a couple of questions. First, David, I know you don't like questions on guidance within guidance but I will ask it anyway because last year you set yourself up for it. When you guided last year you said earnings should be backend weighted versus first half, and as I look at the guidance today I'm just trying to get a feel for how you're thinking about guidance. Should we expect earnings growth through each quarter? Is it more backend loaded?

And then the second question to that would be over the past couple of years when you have guided you have tended to hit the low-end of your range versus the historic Fluor which is tended to sort of be in raise. I feel like your margins are finally coming through, your revenue is trying to -- finally, growth is starting to come to run the oil and gas side, which makes me hopeful. The low-end of your range is probably fairly conservative.

And then my last question is on I and I. The margins throughout the year have been fairly impressive and I know there was some -- the third quarter you had some closeouts and you had favorable mix but I'm just trying to think about sustainable margins in I&I on a go-forward basis. Is the 6[%] range the way to think about it with mining now a smaller percent of the total? Thanks.

Thanks, Jamie. You are right. I don't like giving guidance within the guidance. I could give you a smart answer and say that I'm hoping that our SG&A is significantly higher in the following quarters, because our stock price is much higher and the related executive compensation follows. But I think in terms of where we are, I'd go back to what I told you guys the last couple of quarters. We are in the early stages of what I think a very long, very large cycle in oil and gas. I do believe that mining and infrastructure are poised to return as we get through next year. So I guess I'm not going to say it's backend loaded, but I think that it's going to be fairly normal throughout the year. I will ask Biggs to give a little bit of color on that, particularly around I&I.

As David said, it is normal but in a growth period normal would mean that it is going to go up as we go through the year, so I don't think that should surprise anybody that it will be a progression. The guidance is a guidance, I don't think it makes sense to be more qualitative about it, kind of your question in the middle there. With respect to the I&I margin, it definitely was high for the quarter. Somewhat in numerator and denominator concern or phenomenon because revenues had gone down with mining but we had good for performance on mining projects as they close out and we had very good performance on infrastructure projects, so clearly a high level of income relative to revenue led to the higher margins. I think that going forward, it obviously is early going into the year but I think we should expect more the 4% to 5% levels as opposed to 6% but with good performance certainly there is opportunity to do better than that.

Last question and I promise I will get back in queue. David, when I think about your bookings within oil and gas, they have been fairly impressive considering you have been booking work cost-plus relative to some of your peers who are booking work fixed price. How do I think about the profitability of the stuff you are putting in backlog given that you are still booking at cost-plus and the market is still fairly competitive? I mean, is it customers are wanting the higher-end contractor? Is it what you have alluded to before, Fluor has a better mousetrap today relative to where you were before so your margins are better? Just some color there and I will get back in queue. Thanks.

I think you answered my question -- your own question.

See how smart I am?

I'm telling you, its amazing. I think I'd stick with what I've said. We continue to improve the quality of margin in backlog. I can't speak to what our competition is doing but I can speak to the fact that we are winning a fair amount of work and the quality is improving. You can figure out what that means. We will end up booking some fixed-price projects as we get into next year that will be sizable. And I feel very confident about the execution approach to deliver the profitability at the end of the day and again, I think it will be improving margin and backlog.

All right. I appreciate the color. Congrats.

Thanks.

Andrew Kaplowitz with Barclays.

Hey, guys. Nice quarter.

Thank you.

David, looking at the oil and gas market, obviously you watch the same stuff we do. Maybe you can step back and talk about your confidence level in today's oil and gas market in the sense that, do you still feel very confident that you can maintain or grow oil and gas backlog over the next year or so? And what are your customers say, especially some of the guys who are in the higher cost areas about the oil sands and stuff when we see this kind of volatility?

You know, that's a great question, Andy. I think that we will continue to book in the face of what we see, but just from prospective standpoint, if you look back three or four years ago we were at $80 oil then. And if you compare then with now and CapEx spend with those major oil and gas customers then and now, it is pretty consistent. Some of the marginal players, maybe some of the non-integrateds might have a little more issues than the integrateds but I think they will trim in some areas but the things that we are focused on they need to maintain reserve replacement or to maintain market share and any kind of fuel or any kind of derivative chemical product that is there.

Low oil prices and low gas prices obviously makes people like Sasol happy so I think that continues as well. We have not seen our customers run to the doors, so to speak, relative to the capital plans. I think its business as usual with maybe a little more scrutiny on some of the marginal projects that are out there. But the things that we are chasing I feel -- I have great confidence in them continuing to go and those that are in front of us to reach FID. I feel good about where we stand but from a prospective standpoint I don't think it dropping from $100 a barrel to $80 something a barrel markedly changes our customers' spending behaviors. Particularly now when they're focused more on capital efficiency, and we are lined up for that. So I think even in a tighter market I think it puts us in a better position, actually.

And to be clear though, David, even at $26 billion and change of backlog in oil and gas, you still feel like it can grow over the next year, even with burn rates increasing?

Yes.

Okay that's good. David, this might be for Biggs but if you can chime and that's great too. When we look at your new 2015 guidance, you have a few businesses that need to turn from what they have been doing over the last couple of years. Especially I&I when we look at revenue and I keep thinking it might stabilize in terms of revenue but you look at the backlog and it is still down obviously vary significantly. What should give us conviction in the statement that Biggs made that revenue should rise in all of the segments? I would say I'd single out I&I and government as two segments that I worry about a little bit.

Talk about those two specifically, from a revenue and backlog standpoint, I&I is really driven by mining. And we are beginning the early stages of the next wave. There are some big programs that maybe took a little bit of hiatus that are being dusted off. But again, I think it is sometime mid-next year before we see any action there.

On government, honestly filling up what we earned and burned on LOGCAP is going to be a hard road so I don't see government's backlog necessarily increasing over the near-term, but I think with oil and gas, the start back of mining, a few other things that we are doing, power is a great story with some of the wins that they've got, even though this quarter it appears that their backlog is marginally down over last quarter, we still see growth there as well. So just some color. Biggs, if you would like to follow on that.

I think you got it all, really. One thing I would add on, on government, if you look at margins, their margins are pretty low in the first half of this year. Improved in the third quarter on project performance, and we would expect the first half of next year certainly to be at a better margin performance level than the first half of this year so that alone gives you some lift on government. I think David is right on everything else that he said. I think that it is consistent, really, with what I said in early September that through the second half of this year we saw those businesses forming fairly flat but then we'd be able to improve from there. So I think that's what we're looking for.

Biggs is it fair to say that I&I revenue could stabilize at current levels from 3Q?

I don't want to get too specific. I think -- I just want to say there is opportunity for them to continue to improve, certainly on the bottom line. On revenue I would look for possibly a dip initially as we continue to transition out of some of the old mining work but then maybe go up from there.

That's helpful. Thanks, guys.

Robert Connors with Stifel.

Hey, guys. Good quarter.

Thank you.

Fluor's done a pretty good job and you guys done a pretty job in the US pretty much splitting the US cracker market. You guys won three. Just wondering going forward in the US, what else you guys are possibly looking at. Is there more downstream petrochemical work, as well as to get a flavor of what type of projects are out there on the oil and gas side, internationally speaking. I know you gave us a geographic breakdown but just trying to get a flavor of particularly what end markets.

In the US, and the US is pretty broad, and I wouldn't -- I would also add power to the US story as well as infrastructure to the story in the out years. Clearly, I remember sitting in this call four, five, six years ago and saying that maybe one, maybe two crackers would be built in the United States and now there's two or three more that are -- that really have merit that we are pursuing right now. So I think there is still more to come there. I think there is a significant amount of refining work coming. We feel good about a couple projects that we are already working on, on the front end, some of the front-end pre-FID things that look very, very positive.

So I think the US is still got a lot of headroom over the next couple of years. Clearly from a new award perspective, and then obviously for the next two to three from an earnings perspective. So I'm a little bit bullish on the United States. I don't think the peak is going to be as high as maybe we expected a couple years ago, which really put a hard -- really put craft labor in a hard spot. We feel like we are in pretty good position on craft resources and being able to deliver those projects. So I feel pretty good about where we are in the US.

Canada continues to be a great market for us as evidenced by the oil sands work that we continue to do. But then you look outside of the United States, Latin America is a growth area for us, particularly Mexico. I think Southeast Asia, there is more work obviously than just the Petronas project that we were awarded. But that's from China Sakhalin all the way down into Southeast Asia, I think are growth markets. The Middle East still continues to be a great place for us and there is significant opportunity there, as well as southern Africa, both on the south and eastern sides of the continent. So I think that everybody over the last few years has salivated over the US market. It's important, but from Fluor's perspective it's only one piece of the pie for us. Like I say, we are a global Company and have global reach and that gives us access to a lot of capital spend.

Okay, great. And then for my follow-up, just on the equipment business, just trying to get a flavor of when you expect the timing to roll over from the Afghanistan work and mining work and when we will start to see that reflected on the ramp in oil and gas.

What we are just starting to go to the field on a couple projects in the US, with several more to come. I think we're sometime next year when it flattens out. We had a lot of business in Afghanistan for both -- primarily for other than Fluor, which took a bigger hit in Afghanistan relative to the forward operating base shutdowns and which assets actually stayed operating. So that was -- it is almost like the decline in government is more exaggerated in our equipment business. But I tell you, it's a solid business and it's part of that critical path we need relative to having the equipment tools and things we need to build these things. I believe that there are probably 20% of Amica's business right now is actually Fluor work. I think that will shift dramatically as we get through next year.

Okay, great. Thanks for taking my questions.

You're welcome.

Steven Fischer with UBS.

Thanks. Good afternoon.

Hi, Steven.

David can you just comment on how the execution is going on your fixed-price projects right now?

Pretty good. I feel really good about where we stand. It's got the normal puts and takes as any project does, but I feel really good about where we are at this stage of the game on our fixed-price projects.

Okay. So no concerns there, it sounds like.

Remember, it's only 18% of our backlog.

Okay. Biggs, how are you thinking about cash flow in Q4 and in 2015? And what are your latest thoughts about what to do with your international cash?

On the first question, as I said, there were some timing matters with respect to cash in the third quarter. As a matter fact I say that, I'll always say that, that cash during any particular quarter can be heavily influenced by the timing when you have really large receipts that could come in right before the quarter end or move afterwards. I think that the fourth quarter should be certainly better than the third quarter, absent some other timing phenomenon just hitting. As to 2015, I think (technical difficulty) I expect a fairly normal relationship between cash and earnings.

I think that with respect to international cash, there is no real change in philosophy. We've always said there can be some inefficiency associated repatriation. It's a country-by-country matter, and it gets fairly complex. There is no simple answer their. But we always just have to take that into consideration when we look at how we move money around the world or when we make determinations about how much excess we might have.

Okay. And maybe one last quick one. What you guys assumed for the Chevron Kitimat? Your guidance for next year?

We really don't guide project by project but I can tell you that we are where we thought we would be.

Okay. Thanks a lot.

Alex Reichel with FBR.

Thank you very much. Nice quarter, gentlemen.

Thank you.

David, in I&I what needs develop for some of the larger projects to move forward that you mentioned in the second half of 2015?

You know, we are starting to see -- there is some improving -- improvement in some of the commodity markets. At least most of them feel that they've bottomed and I think you've got some of the bigger mining companies that are looking at when things turn it's all about who can put it on the water. And it's those big companies that are revisiting copper, iron ore, a couple of other commodities, but mostly those two. So the dialogue and the discussion, the feed projects and the actual committing funds to get back in the game is prevalent right now. So again, I think we see some things moving as we get towards the second half of next year.

And secondly, can you update us on what the bid timeline is for the Kuwait refinery project? And then as a relates to Mozambique, it looks like Anadarko is having some success with a few supply deals. Has the timing of that project moved forward at all?

Anadarko first; no, I think we are on the normal schedule of them choosing a contractor in the first quarter of next year. We feel really good about our position, and we will continue to track that very closely. With regard to KNPC, they delayed the bid submittals until the end of the year. So we are probably midyear before any of those packages are awarded. Midyear 2015.

Helpful. Thank you very much.

Vishal Shah with Deutsche Bank.

Hi, thanks for taking my question. Just curious if you have seen any change at all in the competitive landscape in either the oil and gas or I&I business?

Not really. I think -- let me back up. In oil and gas I don't think I've seen a whole lot. It's a very competitive market and I'm very pleased with our ability to compete in that difficult market. I think we are still -- when you think about I&I you kind of got to break it into mining and metals and infrastructure. In mining and metals for the very, very large projects, obviously they are competitive but there is very few companies that can actually do some of that stuff. But in infrastructure, particularly in the United States, it's extremely competitive.

We've had this dialogue before. And I really don't mean this to be an arrogant statement because I really don't mean it this way. We have the ability to say no to some of the things that our competition can't say no to in terms of pricing and profit expectation, because that's really the only segment that they chase and we can put people someplace else. So we are keeping our power dry. We are being very diligent in the projects that we choose to chase and very diligent in how we bid them. It is very, very competitive. But as far as delivery relative to the PPP market in the United States I don't think there's anybody better than Fluor.

That's helpful. And really can you talk about what percentage of your backlog in oil and gas is related to oil sands directionally, how its spending (technical difficulty) quarters?

I wouldn't go into giving you specific percentage but it's not dramatic.

Thank you.

Thank you.

Jerry Revich with Goldman Sachs.

Good afternoon.

Afternoon.

David, can you say more about the prospect list of the Middle East, Asia and Mexico? What end markets and project size to the extent you are comfortable fleshing those out for us?

I think in Mexico, obviously it's the oil and gas sector. To a lesser degree petrochemicals, a little bit of power. Latin America is basically the same mix. In the Middle East, it's all over the board from infrastructure programs to offshore oil and gas, onshore oil and gas, petrochemicals, some power, we feel pretty good about our position in the Middle East. But as I said, all of those areas have some pretty robust capital plans in front of us and I think we're pretty will positioned in all areas.

Okay. And then in the US can you just update us on the timing of contractor selection on Lake Charles LNG? Has that shifted around it all and has the FID moved around at all?

No, it is still next year.

Okay. And lastly, on the prospect list in the US for I&I for the PPP projects, can you talk about how visibility has evolved over the past quarter? Any changes? It sounds like you might be more optimistic this quarter than the last but let me ask that question directly.

We had a flurry of them, if you go back to the beginning of the year and it has settled out. I wouldn't say they were heavily into the bidding cycle on some of these things, but when you look at what's in front of us, it's a mid- to late-next-year kind of thing from a bid perspective. So again, when you think about our portfolio you'd just keep layering things on top and we get into 2016 I think it will be back and a good contributor.

Okay, thank you.

Yuri Lynk with Canaccord Genuity.

Good evening, guys.

Good evening.

Most of my questions have been answered. I just have a couple of housekeeping items. Just on the SG&A,obviously a big decline. I understand there is some stock-based comp in there, but would any of that decline be due to the restructuring initiatives you put in on oil and gas? It is kind of flat in the organization.

I think some of it is, but I think the real benefit of that is probably in the out years. We've really changed the game here, and I feel good about where we are from a cost competitive perspective. Biggs, I don't know if you want to add any color to that.

I think that's accurate. There is benefits in there but there are also still some cost associated with doing it as well. I think the big driver is the comp expense being down on the lower share price.

Okay, got it. And Biggs, while I have you, how much is left on the buyback at present?

How many shares are left to authorized?

Yes.

I think it is 9 million. 8 million or 9 million. I'd have to look exactly.

That's close enough for me. Okay guys. I'll turn it over, thanks.

Thank you.

Sameer Rathod with Macquarie.

Good afternoon. Couple of questions here. What -- obviously pretty oil volatile market but in your mind, what do oil prices have to do and how long do they have to do them before the market cools down a bit in North Americas or globally?

I talked about that earlier. It's all a matter of perspective. I think that a moderating -- its interesting you look at one report and it says that oil is going to hit $70 in now quarters before it returns to $80. And another one leads us to $100 a barrel again in the near term. So its somewhere in there.

I think the commodity -- this commodity markets will drive them but again, the CapEx of our customers and their eagerness to spend that on reserve replacement and product improvements didn't wane when it was at $80 or $70 the last time and I don't expect it to this time. But just like anything else, if you have a dramatic drop and I wouldn't even venture a guess as to what dramatic -- how you define dramatic, would have lots of people at least taking a deep breath, but my experience, I've been here 30 years. My experience says that, that deep breath is measured in quarters, not years.

Right, absolutely. My next question is on the cost inflation in the Gulf. I know you said that you feel pretty good about the craft labor component. Are there specific specialties or anything that you are starting to see tightness in? Have you seen a pickup in labor costs in the region? That's it for me. Thank you.

From a big projects perspective and where we are from an execution standpoint, the two that stand out to me right now is the Dow product, PDH program as well as CP Chem. We have not seen -- the labor costs are equal to what we thought they would be. The only tightness I would say is in welders. And we've beefed up our training program and actually have started a training school in the Houston area so we think we will be in a pretty good place relative to new people entering the market and the skills that they are going to need to be successful. So with things moving around last year, early this year from a timing perspective, I think it really dampened the issue that was out in front of us. And I think because we are at the first the field on these projects, we are going to create a better following for the out projects and be able to maintain those resources over the longer term, if that makes sense.

Thank you.

Andy Whitman with Baird.

Hi, guys. Thanks for taking my questions. Biggs, I wanted to start with you and just get some more detail on some of the items in the quarter and specifically you did mention that there were some closeouts in the I&I segment. I was hoping you could clarify those. As well as, we noticed there was at least some gains either from equipment sales and/or at the exit from joint ventures. I was hoping you could give us the magnitude of those and what segments, if they were shown in a segment, they appeared in.

I think it's a little finite to go into each and every project and talk about its effect. As I said before, there is always going to be a certain amount of closeout activity; there's always going to be a certain number of adjustments on projects, positive and negative, and I just try to give you some flavor for whether or not they drive the margin rates in a particular quarter relative to the norm when we give those kind of comments about a particular group being possibility influence by project performance or closeout. So it just doesn't make sense to try to quantify because more judgmental of this nature.

And you are right, as we come to the Amico side, as we come out of any project or come out of Afghanistan, there is going to be favorable profit typically because we are able to realize gain on sales. That's a normal phenomenon. It happens every quarter and in this case, coming out of Afghanistan, it did have a little but more than average affect in the quarter.

Okay, that's helpful. And then just because we all love pension accounting so much, I thought I'd dig into that a little bit. Was as a plan that was -- are you not accepting new entrants for or is this a buyout of all existing pensioners in the plan? And you mentioned that it doesn't have a cash cost. Is that -- presumably, that's because you are just shutting down plan not actually buying folks out but maybe some detail on that would be helpful.

The answer to your first question really is both. The plan was frozen to new entrants several years ago. But what we are doing now is basically settling our obligations to all those participants. They can either take lump sum or they get an annuity in return for the settlement but they make those decisions out into the future after it has regulatory approval. As to the cash aspect of it, the plan is fully funded. If you look at it from an actuarial standpoint today, there is still going to be some cash cost depending upon the elections that the participants make. Not to get even more technical about it, but we don't expect that additional cash cost to be significant, as we said.

That's helpful. Can you talk about the impact that this is going to have in your 2015 guidance on a year-over-year basis in the SG&A line?

As we said, it's not really estimable at this point in time. The only thing that we can really point to is that it will trigger the recognition of what's previously been unrecognized prior service in actuarial cost switches sits in OCI and that amounts to $160 million before tax. So we know we will be taking the charge for that. But how much additional charge there is depends upon the final decisions made by all the participants and whether it is lump sum or annuities and a whole bunch of other variables.

In terms of cost savings, though, is the angle that I was --

Savings, I'm sorry. Going forward, it's in excess of $10 million a year. Some of it is as I said is we don't pay some of the administrative costs anymore and PBGC premiums, but also importantly I think everybody expects PBGC premiums to be going up over time. So the savings probably grow if you think of it that way, because we will be avoiding those future increases.

Maybe the last question for David. The 10-Q highlighted that Russia was a driver in an upstream project in your oil and gas segment. I'm curious as to what you are thinking, how you are planning for, if you are planning for the potential for US sanctions to go deeper and how that could affect that part of the business.

You know what is under sanctions doesn't impact us at the moment. To your point, who knows what deeper sanctions mean. But given where we are on those things we are chasing and everything else, I'm not too concerned about it at this point.

Thank you.

John Rogers with DA Davidson Investment Bank.

Hi, good afternoon.

Good afternoon, John.

David, a little clarity in terms of your backlog now, within the oil and gas segment, how would you break it out between upstream and downstream work? And then on the industrial -- I&I side between mining and infrastructure, metals and mining?

From a backlog standpoint I would say upstream downstream is probably close to 50/50. When you consider that I put petrochemicals in the downstream bucket. As far as mining and infrastructure, that is the hard one based on where we are but it typically is two to one, mining over infrastructure. That's probably a fair assessment right now, and then it grows from there when the big programs go in.

Okay that's where it is now, the mining is still in that magnitude?

Right.

Okay. And then in terms of the global services business, it is a smaller segment. Will that ramp up with the revenue on the oil and gas side pretty substantially?

You know, it will ramp up. I don't know how you define substantially, but I think it's going to be flat for the first part of this cycle because you've got a decrease from Afghanistan hitting Amico, as example before we really start to ramp up on the oil and gas side. I think probably flat for next year but improving margin in that business. Our temporary staffing business follows one-to-one what we what we do in engineering. So yes, as we ramp up on oil and gas backlog, or burning the backlog, that should improve.

Okay, and then just last I guess maybe for Biggs In terms of the settlements on the Doe Run, when does that cash flow out?

As I said, it's only when we get releases from the plaintiffs and so time is going to be based upon that.

Okay. Alright, thank you.

Thank you.

Michael Dudas with Sterne Agee.

Good evening, everybody. David, I won't ask you to predict the outcome of next Tuesday's elections in the US. But --

I thought you were going to ask me to predict the Cowboys-Giants game.

I just want to make sure you have not bought your Super Bowl tickets yet.

After Monday, no, I put that on hold.

I figured as such. But if the consensus holds and the Republicans take over the Senate, is there anything from a legislative or regulatory issue that could help the velocity of some even more permitting or more opportunities for the business that you see in the United States?

Comprehensive tax reform and comprehensive immigration reform. I'm telling you, if we can get those two things right given the momentum that behind the economy and get the regulators out of the way or at least not creating new obstacles, the American economy will be on fire again. I am so optimistic that -- I'm not optimistic, I am so sure in that statement.

There are so many question marks out there whether it is EPA situation with the power guys, whether it is the regulators on the moratorium on export of oil products, if we can get the government to work with us, and look at the job creations there, you look at the tax revenues, even at a lower rate that can be generated by growing economy, we wouldn't have -- we wouldn't be talking about the deficit problems and all the financial problems the United States has. With that, I will get off my soapbox. You got another question?

No, I think that's fine.

Michael, no kidding. I've been very vocal about this as a member of the BRT and some of the other -- the National Association of Manufacturers where I am an executive board number. We got -- we can fix this, but there needs to be some rational thinking in Washington. And that is a -- that is not a partisan comments. Because both sides of the aisle are part of the problem.

Duly noted. Think keystone can be healthcare?

You know, I don't know. But I think what you are seeing is the Canadians looking elsewhere and the US trying to figure it out without it. I wouldn't predict -- I wouldn't give odds on that one right now.

Thanks David. Appreciate your thoughts.

Thank you.

Justin Ward with Wells Fargo.

Good evening, guys. Thanks for taking my questions. Just a few on the oil and gas backlog. Obviously, it's very impressive at over two times your Q3 revenue run rate. Can you give us a sense of how much of that $26 billion in backlog is expected to be completed in the next 12 months?

Very little. Very little. Like I said, we are on the beginning phases of a growth curve. You've got some projects that are finishing up like BP Whiting, a few other big programs, but we are in the early innings if you will on that backlog.

Okay. Considering its pretty extended over the next few years, is there a sense of how much of that oil and gas backlog is potentially at risk if oil stays in this $80 range or are you guys expecting all that to go forward regardless?

We are pretty conservative on how we take in projects into backlog. I am very confident about what is in backlog. If it were -- if oil prices were to drop significantly, I would be concerned about future awards but not what's in our backlog.

Okay great and just one more. This earnings season as we listen to all your oil and gas customers earnings calls, there's a lot of discussion about expectations of using the lower oil price environment to be more aggressive in getting some deflation, some cost deflation from their supply chain. In light of that commentary, do you guys expect negotiations to become a bit more aggressive going forward if oil doesn't rebound in the next six months or so? And how do you guys generally prepare for that?

I don't see any difference in our oil customers. If the price was $200 a barrel, they would still be as difficult as if it is at $80 a barrel. It is never easy from a negotiation standpoint. They are always looking for better capital efficiency and I think the thing this time that I feel -- have confidence in his we have changed how we approach the market, that solution driven total project approach is something that the customer is interested in and we are competitive.

One of the questions earlier was about how we feel about our lump-sum projects. We competed in some pretty difficult markets head to head with global competitors of one and I still feel very good about where we stand on those projects that are fixed-price as well is the ones that are reimbursable. So not really a specific answer, but we can compete regardless of what the oil price is and our friends in the oil industry are always difficult, very tough negotiators.

All right, thanks a lot guys.

Tahira Afzal with KeyBanc.

I just about made it.

At least you are here.

Hi, guys. I had two quick questions. Number one, David, how do feel about some of the Naptha refineries coming back and becoming more economic and if oil prices are around $80, $85, do you see some change in the dynamics marginally between the [Eton] based and Naptha. That is my first question. And the second question is, David, a while back you talked about [south perform]. You broke up BMC rules on some pretty big scopes. Would you look at taking some risk on the south perform side at this point given the craft labor issues are less pronounced and could that potentially present more margin upside for you in the medium to longer term?

Controlling instruction is part of our strategy whether it's through our other resources or otherwise. But I'd point to two projects in the Gulf Coast now, one is CP Chem which is lump-sum turnkey utilizing fluid craft and the other being the Dow Gulf Stream project which is PDH and a cracker. So we are already way down that road and feel very good about our position there. But I want to make sure you understand that does not mean that we are going to direct hire every project around the world.

So you look at -- I may be putting words in your mouth, I'm expecting you are talking about Petronas when you talk about PNC. We're probably not going to do direct hire in Malaysia but we will in the US, we will in Canada, we do in some places in the Middle East. We obviously do in Latin America. We obviously do in the southern part of Africa already. So I don't see it as a change, I just see it as appropriate implementation of our overall construction strategy. And I feel really good about where we stand there. Not to say that there won't be some pinch points in certain crafts in certain regions just from a skill set standpoint, but we've got plans in place, and training opportunities in place for people to where I think we will stay reasonably ahead of the game.

To your first question, I think it's a little too early to tell whether Naptha creates a different wave of spending. I think most of these customers in their projects cycles are a little bit further down the path to start questioning what the feedstock is going to be. I think it's going to stay where it is at least in the near-term.

Thanks a lot, David.

Thank you, Tahira. With that being the last question, I will prompt our operator here and thank everyone for participating in the call. But I think as you can see in the results of our third quarter, the only group -- gas group continues to perform will and also has sizable as the prospects both domestically and abroad that we are focused on and I am pleased by our overall results to date considering revenues has been impacted by a lack of opportunity at least near term in the mining and metals market. Looking to 2015, I believe we are in a great position to capture additional awards across all of our end markets. And we expect revenue to increase as our existing portfolio of oil and gas awards transition to the construction site.

Finally, I want to take a moment and take an opportunity to announce to the investment community that Ken Lockwood, our Vice President of IR and Corporate Finance has elected to retire from Fluor after 34 years. He and I are the old guys in the room and I can tell you I can't thank him enough for what he has done for this Company. He has held a number of senior finance and operating roles in this Company since he joined in 1980.

I'm especially grateful for the integrity, professionalism and leadership that he has shown in this role over the past ten years and I know you will all want to join me in wishing him just the very best in his retirement. I wish him a well done. Ken and I have been through a couple of wars together here at Fluor and I've come to rely on Ken quite a bit. I wish you and your family all the best in retirement.

Succeeding Ken will be Jeff Telfer, also a long-serving Fluor veteran who for the past 11 years has been the CFO of the oil and gas segment and prior to that was the controller for mining as well as other industries. He has been here as long as I've been here, too. But I want to make sure that acknowledge Jason Landkamer and the job he has done and how well he has done as the Director of Investor Relations and obviously he will continue to be a very important person in our Company and will continue in the role that he has done. I really don't have a chance in this kind of a forum to thank those guys that do this for us but Jason, you and Ken are great folks to work with and again, Ken, I wish you all the very best.

With that I really appreciate your interest in and confidence in our Company. I think we are in a good place for a pretty good growth spurt here, and I wish everyone a good day.

Thank you. Again, we appreciate attending Fluor Corporation's third-quarter earnings conference call. This does conclude today's conference and you may now disconnect.