Fluor Corp (FLR) 2015 Q3 法說會逐字稿

Good afternoon and welcome to the Fluor Corporation's third-quarter 2015 conference call. Today's conference is being recorded.

(Operator Instructions)

A replay of today's conference will be available at approximately 8:30 PM Eastern time today, accessible on the Fluor's website at www.fluor.com. The web replay will be available for 30 days. A telephone replay will also be available through 7:30 PM Eastern time on November 5th at the following telephone number: 888-203-1112 with the passcode of 356-250 being required. At this time, for opening remarks, I would like to turn the call over to Geoff Telfer, Vice President of Investor Relations. Please go ahead, Mr. Telfer.

Thank you, Whitney, and welcome to Fluor's third-quarter 2015 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 market close, and we have posted a slide presentation on our website, which we will reference while making prepared remarks.

But before getting started I'd like to refer you to our Safe Harbor note regarding forward-looking statements, which is summarized on slide 2. During today's call and slide presentation, we'll be making forward-looking statements which reflect our current analysis of existing trends and information. However, there is an inherent risk that actual results 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. During today's call, we may also 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. Now I'll turn the call over to David Seaton, Fluor's Chairman and CEO. David?

Thank you, Geoff. Good afternoon, everyone, and thank you for joining us today. Before we get to talking about the results for the quarter and our expectations for next year, I want to take a moment and share our perspectives on the markets we serve and what we're doing to strengthen our performance and our competitiveness. Since our last call, the global economy continues to be sluggish and commodity prices remain depressed. While commodity prices are showing signs of stability, there does not appear to be any near-term catalyst to drive prices up to where they were just a year-and-a-half-ago. Lower commodity prices that impact our customers' cash flow, and therefore, their ability to fund projects at the same pace. Nonetheless, we do expect customers to move forward with high-quality or otherwise necessary projects, especially those replacing depleting or deteriorating assets. For example, oil and gas customers need to add production to replace their declining production base, as well as to meet the new regulatory demands. Utility customers need to build new power plants to replace retiring generation capacity. Infrastructure customers need to build new roads and replacing aging infrastructure. And the one area which we think is the most challenge to move forward at a rapid pace is LNG, where the spread between gas and other energy sources has narrowed significantly and there is a lot of new supply coming online. Things are never as bad as the media would suggest nor as good as we would hope. Our focus is on the things we can control.

Strategically, our Company remains committed to the direction we set in 2011. We are focused on our transformation from an EPCM services Company to an integrated solutions Company. This transition allows us to provide lower-cost solutions to our customers, improve our margins, and expand our markets. Our latest investment in fabrication in the COOEC Fluor Heavy Industries joint venture with a state-of-the-art fabrication yard in Zhuhai, China gives us large critical, modular capability and opens up new markets in which Fluor could not previously participate. The Sacyr Fluor JV, on the surface, may appear to be just a divestment. But what it really does is allow both Companies to pursue work neither of us were able to pursue on our own. Again, this opens up new markets we did not previously have access to. So now let's move and look at the third-quarter results beginning on slide 3.

Net earnings attributable to Fluor from our continuing operations were $176 million, or $1.21 diluted share. Consolidated segment profit for the quarter was $240 million. Segment profit reflects a modest increase in oil and gas results compared to a year ago, offset by lower results from industrial infrastructure, power, and global services segments. Segment profit margin was 5.5%. Total segment profit margins declined as a result of a cost increase on the gas power facility in Virginia that is nearing completion. Oil and gas margins were 7.9%, up from 5.5% in the third quarter of 2014 and up from 7.4% last quarter. Margin in oil and gas reflects an increase in higher-margin engineering and design activities, lower overhead costs as a result of our efforts over the last year-and-a-half, and implementations of our integrated solutions execution model. Revenue for the quarter was $4.4 billion, down from $5.4 billion a year ago, mainly due to lower contributions from the early cycle oil and gas work and the lack of infrastructure opportunities in our addressable market.

New awards for the quarter were $5.3 billion, including $3.6 billion in oil and gas, $926 million in industrial infrastructure, $534 million in power, and $277 million in government. Consolidated backlog at quarter end was $41.7 billion, which is basically flat with last quarter. We have had no cancellations of projects this quarter, but backlog was reduced by approximately $1.1 billion as a result of foreign exchange fluctuations. Our financial results are summarized on the table on slide 4, and I'll continue my remarks on slide 5. In the third quarter, the oil and gas segment booked $3.6 billion in new awards, including our portion of that KNPC Al-Zour refinery project and a refinery reconfiguration program in the United States. Ending backlog for oil and gas segment was $29.1 billion, up 9% from $26.6 billion a year ago.

New awards for the quarter in industrial and infrastructure were $926 million, including the Bergstrom Expressway project in Austin, Texas. Ending backlog for the industrial infrastructure segment was $6.6 billion, compared with a $8.6 billion a year ago, as we continue to work off the existing mining projects. Turning to slide 6, revenue in government group -- revenue in government was $661 million, up from $615 million a year ago. Third-quarter new awards were $277 million, and ending backlog was $3.8 billion compared with $5.2 billion a year ago. In the power segment, third-quarter new awards were $534 million and included the full notice to proceed on a gas-fired power plant in Florida. The ending backlog was $2.2 billion, which compares to $1.8 billion a year ago.

Now before I move on, I want to take a moment and comment on the announcement that took place Tuesday evening regarding our discussions to support Westinghouse in completing the two nuclear projects. Right now, we're working on a professional services agreement to assist Westinghouse in assessing the construction status of Plant Vogtles' unit three and four in Georgia and two additional units at VC Summer nuclear station in South Carolina. During this assessment period, final terms and conditions will be worked out for a construction-only subcontract under Westinghouse's leadership for both projects. While we don't typically give out specific details, I want to point out that any future contract will be on a cost-reimbursable basis and there will be no liability for pre-existing conditions associated with the prior construction. We're pleased to be working for Westinghouse on these projects and will work closely with the talent that is already on both sides.

With that, I'll now turn it over to Biggs for some of the details on operating performance and the corporate financial metrics for the quarter. Biggs?

Thank you, David, and good afternoon, everyone. I want to start by providing some additional comments on our performance for the third quarter, and then move to the balance sheet. Please turn to slide 7. As David mentioned, EPS from continuing operations for the third quarter was $1.21 compared to $1.15 the year ago. Earnings include $0.04 per diluted share for pension expenses not included in our guidance. Excluding this expense, earnings would be $1.25 per share. In the third quarter, the Company created a new joint venture with Sacyr Industrial by selling 50% of its ownership interest in a Spanish subsidiary. This resulted in a pretax gain of $68 million, or $0.30 per diluted share after tax. This was approximately $28 million more than what we saw as a minimum pretax gain we booked. In terms of how this translates into our outlook, this additional gain was offset by the unusually large cost increase on a gas-fired power facility in Brunswick County, Virginia.

Corporate G&A expense for the third quarter was $35 million, comparable with the year ago. Both periods reflect lower comp expense due to a decline in share price. NuScale expenses were up in the quarter and are expected to be $80 million to $90 million for this year and next year, as we move toward design certification submittal to the NRC. The design certification is critical to being first to market and in attracting new investors. We expect net NuScale expenses to decline after submitting the DCA in 2015.

Shifting to the balance sheet, Fluor's financial condition remains strong with cash plus current and noncurrent marketable securities totaling $2.3 billion. This compares to $2.4 billion a year ago. Cash flow from operations was $366 million for the quarter and $570 million year to date. The year-to-date number is particularly strong, considering we paid $312 million in the first quarter for nonrecurring legal settlements related to Doe Run. Improvements in cash generation were mainly driven by favorable changes to working capital in oil and gas. During the quarter, the Company returned over $176 million in cash to shareholders through share repurchases and dividends. Over the last 4 quarters, we have repurchased $855 million worth of shares. We remain on track to complete our $1 billion share repurchase program by the end of this year. Moving to slide 8, Fluor's consolidated backlog at quarter end was $41.7 billion. The percentage of fixed-price contracts in our overall backlog was 24% to quarter end, and the mix by geography was 34% US and 66% non-US.

Before we take questions, I will conclude my remarks by commenting on our guidance for 2015 and 2016, which is on slide 9. We are narrowing our 2015 guidance from continuing operations to a range of $4.05 to $4.20 per diluted share, from $4.05 to $4.35 per diluted share, excluding all pension settlement-related charges. For 2016, we are establishing our initial EPS guidance in a range of $3.50 to $4 per diluted share. Our range for 2016 reflects continued weakness in commodity prices. Guidance for 2016 assumes that G&A expense will be in a range of $190 million to $200 million. NuScale expenses of $80 million to $90 million and an effective tax rate tax rate of 33% to 35%. Guidance also assumes capital expenditures will be approximately $300 million. In comparing 2016 to 2015, I would point to two things which have affected 2015 results: the Fluor Spain gain and the effect of stock price decline on G&A expense. If you adjust for these, the midpoint of our 2015 and 2016 guidance is fairly in line. With that, operator, we're ready to take questions.

(Operator Instructions)

Jerry Revich.

Good afternoon

Hello, Jerry, good afternoon.

I'm wondering, David, now that we're closer hopefully to the joint venture with COOEC closing, can you just talk about over what time period do you think that business could be a meaningful earnings contributor to you? And step us through the plan as soon as you folks close, in terms of looking for opportunities to fill up the fabrication yard?

You're talking about the fabrication yard?

Yes, the China fabrication

Yes, Zhuhai. Yes, we are on track to finish the JV hopefully by year end, if not into early next year. I saw some of the slides that are available to us now in terms of opportunity set that is now available that was not available to us before we made this investment. And even though you've got lower cash flow from our customers in the oil and gas segment, they are still continuing to spend money. We believe that right now the yard is full with COOEC work and we expect that to continue, and then as we expand, fold in some of the other programs and projects that were there. So we feel pretty good that it's going to be profitable and a good earner for us as part of 2016 and then grow from there. As I've said in the past, I've seen these cycles before, and these oil company still have to put reserves on their books. I think that's well set to accomplish that. But I would caution you that that yard is not just for offshore. The majority of the work that we are looking at right now is, in fact, modules for onshore projects and primarily in oil and gas, but in other markets as well. So 2016 we should see a ramp-up, and then 2017 and 2018 on a steady-state of growth.

I would just add, it will be gradual. We get the JV form here end of the year, early next year. And the yard is certainly being utilized today, but the capacity is going to grow over time. The dollar investments that we are making and that COOEC's making in that yard will flow into an increased capacity over time. And so it's going to start out at a lower level and then grow.

Okay, thank you. And then I&I, I think you folks are looking at expanding the scope of that business to international markets outside of the US. To a greater extent, I'm wondering if you can flush out for us when do you think that part of the portfolio, it can become a significant contributor to your business and layout for us how we should be thinking about the action plan there?

Well, I would break it into three pieces. Clearly, one of the biggest contributors over the last few years has been mining, and you've seen the commodity pricing that's there. We are starting to see some, as I've said, in the last quarter, we continue to see feed and study work in the mining sector come in. But again, that's reasonably small in terms of revenue, but it gives us good insight into what's being planned. I really don't anticipate seeing anything of a meaningful nature in mining until late 2016 early 2017.

The second piece of that is infrastructure. Obviously, we won another project here in Texas and we're pleased with that. But I'd point you to what we have been able to achieve in Germany and the Netherlands lately. When you think about the infrastructure business, I see it growing into western Europe, eastern Europe, and then on an opportunistic basis in the Middle East. We're doing the Saudi Landbridge Program, which is the heavy freight rail in Saudi Arabia. We're doing the Bay Crossing in Qatar, so that business I think has a good footprint globally and is poised to grow.

The final piece of that is industrial services, and we're seeing really good opportunities in the life sciences and biotech market. And that is traditionally in three or four places, Singapore, Ireland, Puerto Rico and then some other places around the globe. But it's conglomerated in those places. We've got a great history of being able to perform there. In addition, in the industrial services we're starting to reengage with some old-line customers like Procter & Gamble and DuPont and some others, and we're seeing some partnership-style opportunities growing with those traditional customers that fall within that business line.

Okay. Thank you, and lastly congratulations on the Westinghouse win. I'm wondering, David, if you're willing to give us a framework for how should we should think about the Fluor scope of revenue on that project compared to the backlog that CBNI reported? Just some high-level context there would be great.

It's premature for us to say right now. We're in the process of supporting Westinghouse in an assessment of those programs. That will take 30 to 45 days. So really all we're doing is really supporting Westinghouse right now. I will say there is great talent on both of those job sites, and hopefully if Westinghouse sees fit, then we will be able to work on most of the construction there. But I remind you, we won't be doing all of the construction. Westinghouse will still have responsibility for a fair amount of that, as well as the fabricated equipment. So we are pleased that Westinghouse has the faith in us, and we will have to wait and see. But hopefully towards the end of December, we will know and we will announce whenever that information is available.

Okay. Thank you.

Brian Konigsberg, Vertical Research Partners.

Hi, good afternoon.

Good afternoon.

Just for clarification of the guidance for 2016, does not include anything from Vogtle and SCANA at this point, is that correct?

When we built the plan, we considered all of our prospects in terms of the 2016 plan.

Okay, so there is a piece assumed.

We're just not be discreet on different pieces and how they add up or contribute. There can be upside from a lot of projects, but everything gets considered in terms of its probability and its size and it's potential range as we go into this. And then as we get a little further into the year, we will get -- into next year, we get more defined with that. But it's premature to really give any more clarity than that with respect to how this was considered.

But it's fair to say it was part of the planning process?

It's certainly a part of the process as we went into the last few weeks, yes.

Okay, fair enough. And then separately, can you talk a little bit more about the cost overrun you briefly mentioned in the presentation about the plant in Virginia that I think you said offset the gain in the quarter? A little more detail on that and how far along are you one the project, how buttoned down is that with the charge you have taken?

We are nearing completion of that project. We feel pretty good about our estimates to go. It's been a challenging project. It's in a geographic area that's had two significantly bad winters, which contributed to that, as well as some technical challenges in terms of the machines that are being installed. We feel good about where we are in our current estimates.

In terms of we don't quantify specific projects, but I did give a pretty indicative statement in my comments in that we -- on Sacyr, or on the Spain JV, we recorded $68 million versus a minimum of $40 million, so that's $28 million more recorded than what we anticipated. And that was substantially offset by this cost increase on New Brunswick. So that gives you a pretty good feel for what the size of it was when you're trying to figure out what the relative impact is of both.

Got it. Just real quickly, the NuScale costs -- oh, you provided that in the outlook, $80 million to $90 million. Okay, I'm good to go. Thank you.

Thank you.

Thank you.

Jamie Cook, Credit Suisse.

Good evening. My first question, the revenue in oil and gas, the decline was much greater than what I expected and the declines have accelerated throughout the year. So David, is that a big concern? Is it just customers slowing the pace of the projects that you have? And as I look to 2016, what's the risk that projects continue to get lengthened or pushed out or how to think about revenue for oil and gas in 2016? The other side of it is, while the revenues have been disappointing, the margins, obviously, have been -- have well surpassed most people's expectations, but I'm also assuming you are not going to tell me assume a 7% margin in 2016. So when I look to 2016, do you feel more comfortable with the revenue pace or the margin pace? Because just the revenue declines have just been somewhat concerning. And then I have a follow up after that.

Let me start, and then I will ask Biggs to maybe give a little color to this. And I will start at a high level. When you look at the oil price drop, clearly all the oil companies took a deep breath and evaluated all of their capital plans. They looked at and prioritized those, and then in the ones that met that priority, gladly they are most of the ones that we're doing, they are going back and looking is the design proper, is the cost estimate as sharp, given the current market conditions? Because some of these things were estimated a year ago and boards were asking for more information. So that's what's causing the delay.

The good part is, and it gets to the second part of your question, is as I've stated previously, we have changed the way we are doing work. And in doing so, we're able to provide these customers that are looking for more capital efficiency exactly that. And I'd contrast some proof there. If you go back and year ago or a year-and-a-half ago, we were awarded the clean fuels program in Kuwait, which was a competitive lump-sum turnkey project against open competition and we won. And in fact, we're buying the majority of the equipment and materials, not our Korean partners. That same approach led us to the award that's in this quarter on the two packages for the fourth refinery, the Al-Zour refinery. So that's proof that the new approach that we're using, that integrated model that we are using, is giving us confidence that it opens the aperture to the lens that we can go chase. And at the same time, it's satisfying the customer's need for capital efficiency.

So I think over the longer term, we'll be hard to beat. And in doing so, when we win these things, we're not doing it on a price basis, we're doing it on a value basis and we're going to make more money. So I think margins in oil and gas will be higher than the last cycle, but I wouldn't tell you it's going to be seven or six or anything else. But over the longer term, it's going to be much better. Now when I think about what's in front of us in 2016 within oil and gas, as we've said, we've had no cancellations. And for the projects that have been delayed for that deep breath or whatever you want to call it, are starting to get to the point where FID is imminent. So I'm not looking for 2016 to be a big growth year, but I do believe the combination of some of these projects moving forward and our ability to win them and make more money puts us in a unique position as you get to late 2016, early 2017 and beyond.

So it's fair to say, sorry David, just because I think you were getting into how you're thinking about the award pace too, for oil and gas. As you think about oil and gas, I don't even know that it would be, in the second half it's probably more late 2016 at this point before you start to see any acceleration in order pace and awards, is probably the proper way to think about it?

I think it's going to be lumpy, Jamie. I think if some decisions that have been pushed come to fruition in the first quarter, first quarter could be big. If they don't, it pushes to second quarter. I just think it's going to be a lumpy year, and there are some pretty big programs in there.

Okay, and then Biggs, I didn't know if you had any other question. Then I had one more question.

I think David gave you a very thorough description of what's happening from a broad standpoint and looking at it over time. And to drill into the quarter a little bit, the revenues being down, and relative to what we thought. To be real specific on that, there were no project delays or deferrals in the quarter which affected that number. Obviously, the order book was good. The bottom line was good. The performance was good. I would say more we just missed a little bit in our estimating in terms of how it was going to play out in the quarter, and that there's really no underlying message or concern that anybody should have from that circumstance. We would expect the fourth quarter to be relatively similar in terms of oil and gas revenues to the third. And then over the course of next year to grow, so we do expect growth in oil and gas revenues next year on the strength of the orders that we've already recorded and we do expect to come in.

And then, sorry, one last follow-up just relative to Westinghouse and congratulations. And I know you said in the prepared remarks or actually in the prepared remarks in response to a question, it's cost-plus. There is no risk to you in terms of pre-existing cost issues, whatever. But David, I just look at this, I don't -- it seems like a big win for CBI, a big win for you. I don't understand Westinghouse, but they seem like the loser there. But as you think about this project, is there any risk to Fluor in terms of future? Where with the risk be to Fluor, if any?

I don't think there's any more risk to Fluor than any other project that we do. There's obviously reputational risk because we've got to perform, but we did not and will not accept the same commercial terms that was in the previous contract.

But it's completely cost -- is there any portions of the project that are fixed price or is a completely -- I'm sorry is there anything fixed-price in there?

Once we get to that stage we expect a fully reimbursable contract.

Okay, all right. Thank you, I will get back in queue.

Alex Rygiel, FBR.

On the Westinghouse topic, any other opportunities outside of Georgia and South Carolina that you're also in discussions with? And understanding the NuScales -- or excuse me, Westinghouse has its own SMR technology any opportunity to marry up NuScale with Westinghouse?

It's premature to say. We think we've got the best SMR technology that's close to being submitted for design certification, so we feel very confident about this. But I wouldn't get too far out over my skis on the Westinghouse relationship. They are a great partner, a great company, and we work well with them. They've got a situation on two projects that they need our support and assistance, and because of that long-term relationship, we're willing to provide that. But we need to make sure we get through this assessment period. They are running the show, and we'll support them any way we can.

Fair enough, and David, you commented that LNG is most challenged. How should we view that statement as it relates to LNG project work in backlog right now?

I think it's a slow roll, like it's been. I think you've got several new projects coming online, with some pieces of difficulty in Asia. You've got the ones in the states, one or two that are under construction that will go forward. But getting the rest of them to actually a sanctioned FID and actually turning dirt are going to be problematic, I think, as I said because of that energy spread that exists. And in particular with the low oil price, most of these are sponsored by significant oil and gas companies where their cash flow is impinged by the price, and maybe their priorities are a little bit different. I think when we look at what's in backlog and what is coming, clearly the refining sector is alive and well. You look at their financials and they are doing quite well. You look at petrochemicals and the wave of ethylene crackers that we have underway, again, we have three of them under way right now. And we expect another wave of five to six to move closer to win FID as we go through 2016. It's not good for the upstream guys right now, but the other parts of those companies are doing quite well.

Thank you.

Steven Fisher, UBS.

Hi thank you, good afternoon.

Hi Steven.

Related to Brunswick County, David, you've been very careful on setting up the organization to manage these fixed-price projects to minimize risk. And I do remember that this plant had been competitively bid. Just trying to get comfortable with the fixed-price mix that's in the rest of the backlog now. Is there something different about the way the organization was structured for Brunswick County versus the other gas-fired power plants you have in backlog and you're going to put in there? And then more broadly, the other oil and gas projects now you have in backlog on a fixed-price basis, just trying to be comfortable with the fixed-price now.

That's a great question. I would put the Brunswick situation in three categories. None of which, do I believe are embedded in how we've done any of the others. And in fact, we've learned from this and have implemented some of those learnings as we bid some of these other programs. It falls into three categories. One is the weather that we experienced was a huge factor. As you remember, last winter was the coldest winter in a long, long time, maybe in history. And certainly Appalachia, I come from not too far from there, it can be really, really cold. And we had issues associated with weather. Secondly, we had issues with labor productivity, something that is both in and outside of our control. But in terms of the learnings, I think that's where we've learned the most. The third piece is that Mitsubishi machine, that's the first time it's been installed in the United States, and the learnings from that put us in I think a better position going forward.

So it's not symptomatic within the organization. You are correct; we've taken a very measured look at many of the programs and projects we're doing, including the ones that are fixed-price. And I don't see a fly in the ointment, so to speak, and I guess that's kind of what you were getting at, relative to what we've got in backlog or the competitive nature of our offerings.

The power projects have been competitively bid for the last many years, and we've done well on them over the last several that were competitive bids. I wouldn't put something in a distinct category just because it happened to be competitively bid. It's more attributable to the things David just described, as opposed to it being a competitive situation.

Okay, that's helpful. And then related to the Westinghouse contract just trying to think about what the impact would be there on working capital and cash flow. And I appreciate that there is perhaps cost overrun risks, but I imagine you're taking on thousands employees, and I'm wondering if you are able to structure -- I know it's in process, but will you be able to structure the contract so that there's no cash flow lagging and dragging down on your working capital on cash flow?

Not any more than any other projects that we do. When we start off, there's obviously a little more expense than cash coming in, but in this case, it won't be significant. And again, as I've said, it's premature to even talk about that because we've got to get through the assessment in support of Westinghouse before we get to what it actually -- what scope we will actually do.

Okay. Fair enough. Thank you.

Thank you.

Tahira Afzal, KeyBanc Capital Markets

Hi folks.

Hi Tahira.

David, first question is really in regards to the [optics] of backlog. Clearly given especially the fab yard you bought, you're in a really good competitive position so I can see you gaining market share potentially. But how should I think about when I listen to customer calls, and they are calling some 30% cost reductions, how does that shore up in terms of the optics of what you're booking going forward?

I think the relationship with the Zhuhai yard puts us in a very competitive position. It's a low-cost producer. You marry that with what I think is probably the best supply chain capabilities in our marketplace, and I feel very comfortable that we can not only satisfy the capital efficiency needs of our customers, but also the profitability that we expect. I actually think that we've been -- I'd like to say we're our brilliant, but I think our timing is just right in terms of these investments we have made, the overhead reduction that we went through last year and into this year, the organizational shifts that we've made, focus on direct hire construction and fabrication, it puts us in, I think, our sweet spot. And the fact that our customers are prioritizing and looking for lower-cost projects falls right smack dab in the middle of the strategy that we've deployed. So I feel pretty bullish on our ability to satisfy our customers and win and satisfy our shareholders.

And David, does the other projects in scope just looking smaller as you gain share, is it enough to offset the fact that it's small project might be getting smaller in size just because costs are lower on the materials, et cetera?

I don't know. I think the portfolio will still be pretty robust. But clearly, if the customers allow us to do what we have learned, these projects are going to be significantly lower in cost. So therefore, you're going to see a drop in revenue from what the project should have looked like a year ago and what it should look like going forward. But I don't think that's significantly less. And there are customers that embrace this. All of them are saying that they want more capital-efficient programs and some of them are willing to do things differently and others aren't. And we'll supply service to them and do those projects too, but in those cases, the projects won't come down 30%.

Got it. Okay, and last question, David. We've seen some positive movement, at least in headline news on some of the UK nuclear projects. Is that an area you are looking at, at all, or is it only from the SMR side, so pretty long term right now?

We're looking at both the SMR side and the next-generation reactor there. And, in fact, during discussions with some folks, but we're also part of the decommissioning infrastructure in the UK, as well. We're well footed, I think, in the UK nuclear space.

Got it. Thank you very much.

Thank you, Tahira.

Michael Dudas, Sterne Agee.

Good evening, everyone.

Good evening, Michael.

David, just I'll get back to Westinghouse on the contract. When I read in documents about liquidated damages and more risk involved, that's just a Westinghouse issue. And again, as you guys negotiate your contract, that's not going to be anything that Fluor needs to be concerned about, correct?

That's correct.

Okay, fair enough. Secondly, when you think about energy in oil and gas and what the customers are going through right now, it's been a year-and-a-quarter since prices have peaked. What do you think is going to take Fluor customers to get more confident? Is it the dollar price of the barrel of crude oil or is it just a better sense of global economic activity, or even the US, which seems to be hitting a little bit of a soft spot here? What do you think it's going to take and is that something that you can foresee happening in 2016?

Man, if I knew the answer to that, I could retire. You and I could go to all the Giants games we wanted to go to.

You could buy the Cowboys. I know you could.

Yes, Michael, that's a great question. I'd just make two comments. The first comment is I'm hearing from many of the oil and gas customers that $70 is the new $100. And I think that what you've got is some stability in terms of oil price. It's volatile; yesterday it was up 6%, not sure exactly what it ended up today. But I think the oil and gas companies have gotten comfortable with the fact that $120 a barrel isn't something they should plan anything on. So if they are thinking that $70 is the new $100, then they're planning on something that's significantly less than $70. Now, it's taken time, and the second point I would make is in this process, these customers, and I might risk getting in trouble with some of them, but I think some of them would tell you that $120 a barrel made them lazy in terms of their capital decisions. So they are trying to stepping back again, as I said earlier in what are those priorities and what is the actual need from a capital perspective, making sure that they've got that capital efficiency card played within their program. And then slowly but surely moving towards FID.

So I think they've kind of -- the deep breath has taken place. But they also see that if they don't keep doing, particularly in the upstream, some of these programs, that, you have got to think about it. Some of these programs take 10 years from the first test well to actual production. They can't wait much longer. So that new statistic of you pick the number, I don't know if it's $50 or $40 or $35 or whatever the number is they are using in the models, they are clearly using a lower number. And many, many of these projects that we were pursuing made sense at that new number. But it needs to be reconfigured, and we need to -- they need to let us apply some of these things that we have learned in order to get those project values down. So I think we're in that shakeout period right now where some things are slowly but surely moving towards FID that are in the upstream sector. But that's just one piece, as I mentioned. Refining is doing quite well, petrochemicals are doing quite well. There's power projects in front of us. There's infrastructure programs in front of us. So it's not just a one-trick pony fourth Fluor when it comes to upstream oil and gas.

That's very helpful, David, thank you.

Thank you.

John Rogers, DA Davidson.

Hi, good afternoon.

Hello, John.

In terms of your backlog and what you're talking about now for 2016, how much work left in the backlog was won or is projects that are being completed based on commodity prices of two years ago? In other words, you're finishing off large projects that need to be finished at this point?

Cerro Verde in Peru is one big one that is finishing up on the last of the big mining things that are there.

That finishes in 2016? Late 2016, maybe early 2017. Okay.

That's really the only thing of any consequence that finishes next year.

Okay. I'm just trying to understand how much is contributing to those earnings. The second question is in terms of your CapEx guidance, the $300 million, it seems like a significant uptick given the market conditions. Can you talk about that a little bit, maybe what's driving that?

Of course it is an estimate; it can be higher or lower. The biggest variability of it is associated with equipment demand. So in terms of projects moving to construction and having demands in that regard, we certainly expect growth. We don't expect a lot of growth out of mining at this point, as we've talked about, which was where certainly a lot of the business in the past has been associated. The other part of spending is on the more corporate-related CapEx. So to the extent we have buildings for our own use that we invest in around the world is a demand for capital. We make those decisions as we go through time. In some cases, we have options to purchase and that sort of thing is embedded in that number. But that's one of the reasons why it ended up being something different, at the end of the day, it might be more or less depending on the circumstances and what we decide to do from a standpoint of lease versus buy.

Thank you, Biggs. Thank you all very much.

Andy Wittmann, Robert W Baird & Company.

Hi guys. Thank you for taking my question. A couple of them here around guidance. I'm just curious as to how much of next year's range do you believe is already in backlog, has already been booked as under contract? And how much more do you need to make that range? How does that compare to history as well?

I think, obviously, from a historical standpoint, our burn relative to backlog has been higher, but that's almost the new norm now. So we will look at it at the end of the year, and we will actually publish [just take] as part of our 10-K what we expect the burn rate to be and the backlog at that point in time. I think it's a little early to say right now, but it's probably going to end up being a lot like the way this year's was in terms of how it played out, in terms of the relationship of the revenues that actually burned out of backlog. I don't expect anything real different, I don't expect -- I don't think there's any more risk to it or any less.

The stretch percentages are consistent with prior years.

Biggs, you said burn is, you said is high relative to back -- but you mean it was low -- you got lower revenue --

The burn's been low. It was higher in the past; it's lower now.

Got it. Are there any --

I know there is a lot of conversation about what might be in there that is causing that, but this by the nature of the projects we have being very large and very long-term in their execution, you're going to have some slower burn.

Yes. And one of those projects has been LOGCAP. As you went into FY15, you guys gave a view what that would look like. Can you update us on what you think LOGCAP is going to contribute to next year as it relates to this year?

Well the -- based on what -- the same things you read, through count should be about the same in Afghanistan, so it would be consistent with what we see this year if there is no other LOGCAP available to us. We did win the call-off contract -- one of the call-off contracts in the African continent. But in my conversations with the Army, they still feel like they are going to have a pretty significant presence in Afghanistan. And if you read the news, we're probably going to have a few more people in Iraq and potentially Syria. That creates some opportunity for us as well.

And the African contract is another contingency contract, so you'd need something to happen there for that to deliver results. Is that correct?

That's right. That's right. We're following the military and the deployments that they do. A great example of that was the Ebola scare earlier this year, and we were tasked to build facilities and the like for the medical -- US Army Medical Corp and how they dealt with controlling that epidemic. That's an example of where it's not just war fighters, I guess, is what I'm getting at. There's also some things around humanitarian care that the military gets the mission for and we are there to support them.

That's good perspective. Then there's a lot of talk year about tapping the petroleum reserve, the strategic petroleum reserve here. Is that an added profit kicker for you guys as you look into next yea? Or is that not an earnings driver for you?

No, we don't get paid on oil. I wish we did sometimes. No, that's just -- our contract is to manage of facility. The US government is going to determine whether they sell off part of it to create some cash flow for them for other purposes and then refill it over time. That's really doesn't have any impact on our profitability.

Final question, David, just on ethylene. Just curious, you talked about seeing more going through -- can you talk about the impact of low naphtha prices and how that is addressing and affecting the profitability of your customers and the impact that might have on the next wave of crackers?

It's certainly in the discussion. I really don't know what impact it would have on the plans that are underway or certainly the ones that are being suggested right now. Most of them, there is no -- to my knowledge, I don't think any of the ones that are in the next wave are naphtha crackers, but I might be wrong in that.

But from a competitive standpoint, the naphtha somewhere else versus ethane here.

No. I think the more interesting thing is who's going to be investing in the US in ethylene. And it's the traditional players, but in a lot of cases, they're partnering with folks like the Saudis and the Chinese, and I think that helps us because of our presence in those other places, in terms of building those facilities the client relationships that we have and those types of places around the world.

Thank you.

George O'Leary, Tudor, Pickering, Holt & Company

Good afternoon, guys. Just one for me, as the rest of my questions have been asked. A lot of talk in the upstream sector, particularly around offshore products, but also to some extent onshore products, onshore projects around standardization. And we've heard from some of the manufacturing folks that you could actually reduce the headline project price or project cost and actually increase the operating income they can earn. And I was just wondering if that same effect potentially exists for you guys if the standardization phenomenon plays out over time?

Absolutely, we're well down that road in terms of standard designs, and in offshore, it's all about weight and reducing weight as well as the benefits that we are providing in the supply chain of all the commodities. So we're well down the road on that initiative. And in fact, that's what really started for us about four years ago, so I think we are well-positioned and aligned with our customers.

Great. Thank you for the response, guys.

Thank you.

Jeff Volshteyn, JPMorgan.

Good evening, thank you for taking my question. I wanted to ask about the government segment. Saw some mixed strength there, revenues were up, new awards [were] down quite a bit. So following up on your earlier commentary, now that it seems that the government budgets, particularly the defense budget, remains at similar levels, what are you seeing in the pipeline for 2016 and 2017 for federal work in the United States? And perhaps some of the key international markets as well?

Well we work for the US government and the British government in that space, and we are continuing to see opportunities in the Department of Energy space, if you will. Some of those big programs are in the process of being bid, and we're in the process of getting extensions in some others. So you're going to see in terms of DOE business some lumpiness, just because of when those things come forward. There is some of the -- of one of them in this quarter but it's just a bridging period before we could take in the full extension. So there is an example where it was a little bit this quarter but a bigger number coming later, and that's just in one facility in the DOE space. So there's growth opportunity there, but is going to be tough competition. Everybody has teamed up with one another, and it's pretty fierce competition.

In terms of the DOD, they are doing the same things that a lot of the private sector is doing, in terms of cost rationalization, some shutdowns, being more competitive in terms of how they provide the service to the military. So some of these base contracts will be coming up, and it will be more based on best value and how much money you can take out of the endgame, not just the rate per hour for an individual. But then there's also a fair amount of deployment bases that are coming up for bid during the next two years that we feel like we have got a good position to deal with. It's going to be a lumpy thing. It's not going to be as big as it was at the height of LOGCAP in Afghanistan. We've said that in the past. But it's a good steady state, almost annuity-type business that provides some of the underpinning of the Company, and it's for a pretty good customer.

Okay, thank you. And then on Kitimat, could you update what's going on there?

We continue to support our customer, and again, that's one of those that has been rationalized and poked and prodded and re-estimated. And we're waiting on our customer and what they want to do next. But we're still supporting our customer there. As you know, they brought a new partner in. The new partner had new ideas, and they are looking at we going back to some of the fee documents and incorporated some of the new partners wishes. It's going to be a slow roll.

Our level of effort there has been low over the last year, and we would expect it to be that way.

Okay, just a few more clarification questions. On the nuclear projects, did I hear you right that Westinghouse will be keeping some of the work beyond their prior scope?

Well, they kind of had the whole scope before and they have got the whole scope now. We're trying to figure out exactly what they will maintain and what they will ask us to do for them. It's a little too early to say.

Understood, and then for guidance, just mechanically, were you expecting the $0.30 gain in this quarter earlier in the year or is this a new update for guidance for 2015?

No. We were anticipating some gain from this transaction as it was developing. When we had the second-quarter call, we were pretty clear that we thought it was going to be at least $40 million, which assuming the tax rate played out as expected, would -- or at a normal tax rate would have been $0.18. In the call I said there's some things to be estimated, including the fair value of what we are retaining, which under GAAP we were going to be recording a gain with respect to. And that was something we didn't know exactly how it was going to play out and that's what produced the ultimately -- the gain at $68 million relative to the minimum of $40 million. So clearly, the $40 million we said was in our guidance coming in. Then after that it was a range of possibilities. It obviously ended up playing out at $68 million. By the same token, as I already said, we weren't planning on having any problem projects. So there just ended up being an offset in terms of the circumstances of the quarter and the year between the extra gain that we recorded on the Spanish venture and then the one power project.

That's very helpful. And just the last one for me on foreign exchange that's embedded in your guidance.

From a foreign exchange standpoint, there was a slight negative effect in the quarter; it was about a $1 billion negative effect on backlog. On EPS in the quarter, it was about $0.03. I think last quarter it was about $0.02. Other than that, and so it's been fairly small and we're not projecting anything significant on a go-forward basis. We did have a lot of natural hedges and specific edges we put in place, and we would assume that those continue to play out to be relatively effective.

Thank you very much.

This does conclude the question-and-answer session. I would now like to turn the conference over to Mr. Seaton for any additional or closing remarks.

Thank you, operator, and thank you to everyone who participated on our call today. As you can see by our results this quarter, the oil and gas group continues to perform well. Customers with high-quality projects continue to move forward, even in a tough environment and even as long as some of them are taking to get to FID. Myself, along with the rest of our management team, have seen a number of cycles like these over the years. We know that it's important to remain flexible, and the decisions we have made over the past few years to cut overhead costs and develop a better solution for our customers gives us just that. As we look ahead to 2016, we see not only some headwinds but also pockets of opportunity. Our ability to deliver in any environment has been proven and enhanced over the last few years. With that, we really appreciate your interest in our Company, as well as your confidence, and we wish everyone a good day.

This does conclude the presentation. Thank you for your participation.