Fluor Corp (FLR) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the Fluor Corporation second quarter 2016 conference call. Today's call is being recorded.

(Operator Instructions)

A replay of today's conference 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 7:30 PM Eastern time on May 11 at the following telephone number, 888-203-1112. The pass code is 3971457.

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

Thank you, Tom, and welcome to Fluor's second quarter 2016 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 will be making forward-looking statements which reflect our current analysis of existing trends and information; however, there is an inherent risk that our 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, and our Form 10-K, which was filed back on February 18.

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 let me 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 here today. On the call, we'll review our second quarter results and discuss our outlook for the remainder of the year.

I want to start by spending a few minutes sharing our perspective on the markets that we serve. During the past two years, we have experienced sluggish growth in the global economy and especially weak growth in the industrial production. Commodity prices are volatile. I'm not telling you anything you don't already know. But many geopolitical events have created uncertainty which have impacted the decision making of our customers. When you think about, there's been 20 ISIS attacks in the last 12 months, you've got Brexit, you've got Paris, the climate change accord, TPP and et cetera, all leading to the stagnation of decisions that are being made.

Generally speaking, we expect continued slow recovery in the global economy and modest improvement in the EC&M markets specifically. However, with that negative note, we are seeing capital spending return.

We expect customers to award projects at a moderate pace, as evidenced by our award of a bauxite project in the second quarter in mining and the award of the recently announced Tengiz project, which will book in the third quarter.

Despite the challenges of the past 12 months, we have done an excellent job building our non-Energy, Chemicals and Mining portfolio. Said another way, our three non-commodity focused segments have backlog of over $22 billion. This represents a 92% increase over this time last year.

We continue to focus on becoming a more competitive company. As an example, in addition to the $100 million in overhead that we took out of our business in 2014, we are targeting an additional $80 million this year. I firmly believe the size and diversity of our backlog positions us well for the future.

Now let's look at the second quarter results, beginning on slide 3. Net earnings attributable to Fluor for the second quarter were $102 million, or $0.72 per diluted share, compared with $149 million, or $1.00 per diluted share year ago.

Consolidated segment profit for the quarter was $230 million, compared to $282 million a year ago. Improvements in our Industrial, Infrastructure and Power segment were offset by lower mining activity and forecast revisions on two projects in our Energy, Chemicals and Mining segment.

Consolidated segment profit margins were 4.7%, compared to 5.5% last quarter and 5.9% a year ago. Segment margin for Energy, and Chemicals and Mining was 5.1%. The effect of the two forecast revisions in this segment was 1.4%.

Revenue for the quarter was $4.9 billion, up from $4.4 billion last quarter and comparable to the results of a year ago.

New awards for the quarter were $6.4 billion. Consolidated backlog at the end was $47.3 billion, up 14% from $41.6 billion a year ago.

Turning to slide 4, the Energy, Chemicals and Mining segment booked $1.2 billion in new awards. This includes a $500 million award for a bauxite mine in Guinea, our first major mining award in over a year. Ending backlog was $25 billion, compared with $30 billion a year ago.

Looking ahead, we announced a few weeks ago that the Tengizchevroil has reached a final investment decision on the Tengiz Oil Expansion project in Kazakhstan. We're very proud to have been working at Tengiz since 1997 and I am excited about this Fluor-led JV in supporting TCO in this next phase. We will be booking a multi-billion dollar award, our portion of that award, in the third quarter.

Second quarter new awards for Industrial, Infrastructure and Power were $3.4 billion and included the Purple Line light rail project in Maryland, the South Carolina Port Access road in Charleston, South Carolina, and the Greensville combined-cycle power plant in Virginia. We've been very pleased with the pace of new awards in infrastructure, with four significant project wins in the last four quarters, Bergstrom, the Loop 202 in Arizona, as well as the two I just mentioned. Ending backlog for this segment were $12.7 billion, up from $4.4 billion a year ago.

Turning to slide 5, the Government segment had another solid quarter with new awards of $1.2 billion, including task orders for LOGCAP IV. Their ending backlog was $5.8 billion, up from $4.3 billion a year ago.

The Maintenance, Modification and Asset Integrity segment posted new awards of $664 million. This includes a five-year maintenance alliance contract for six power plants for Southern Company. And their backlog was $3.7 billion, up from $2.8 billion a year ago.

Our integration of Stork continues to progress and we are in the process of expanding Stork's capabilities to additional markets. However, Stork's contributions are more than offset by other declines, including our equipment business, due to continued slowdown in mining and delays in construction activities, particularly in Mexico, South America and Mozambique.

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

Thank you, David, and good afternoon, everyone. Please turn to slide 6 of the presentation. I'll start by providing some additional comments on our second quarter performance, then move to the balance sheet.

Revenue for the quarter was $4.9 billion, which compares to $4.8 billion a year ago. Revenue gains from Industrial, Infrastructure and Power, MMAI and Government were offset by a decline in mining activity within the Energy, Chemicals and Mining segment. MMAI gains were largely attributable to the Stork acquisition.

As already mentioned, this quarter's earnings per diluted share or $0.72 reflect the impact of forecast revisions on two projects.

The tax rate for the quarter was in line with our expectations at just under 34%. For the remaining two quarters we expect the tax rate will be 33% to 35%, although we may have an opportunity to do better than that.

Corporate G&A expense for the second quarter was $53 million, compared to $48 million a year ago. This increase is largely due to Stork integration costs. While spot commodity prices have improved somewhat, we continue to be diligent on taking costs out of our organization. To put this in perspective, in the second quarter we incurred $16 million in restructuring costs at the corporate G&A level, including Stork, and another $7 million of restructuring expenses at the segment level.

Shifting to the balance sheet, Fluor's cash plus current and non-current marketable securities totaled $1.9 billion, compared to $2 billion last quarter and $2.1 billion a year ago.

Cash provided by operating activities was $91 million for the six months ended June 30, compared to $204 million for the same period last year. Last year had some unusual items, but this year project working capital has grown. This increase was driven in part by normal project execution activities and the timing of billings on several projects, including delayed payments from our customers. While working capital may still have net growth for the full year, we expect it to decline from these levels. Timing always has a big impact.

During the quarter, we paid $29 million in dividends.

Moving to slide 7, Fluor's consolidated backlog at quarter-end was $47.3 billion. The percentage of fixed price contracts in our overall backlog increased from 24% last quarter to 29% as a result of the Purple Line and Dominion Greensville awards in Industrial, Infrastructure and Power. At quarter-end, the mix by geography was 45% US and 55% non-US.

I will conclude my remarks by commenting on our guidance for 2016, which is on slide 8. Although we are pleased to see significant awards across our various end markets and the backlog positions us well for the long term, we continue to operate in an environment where customers continue with lower capital investment budgets and delayed final investment decisions. In addition, the backlog burn rate remains low, whether by client direction or due to the size and complexity of the project.

Having said all that, we would have been in a good position to maintain the previous guidance, had it not been for the forecast revisions on the two projects. Taking this into consideration, the Company's reducing the upper end and narrowing its 2016 guidance range from $3.25 to $3.65 per diluted share to $3.25 to $3.50 per diluted share. The range has some upside to our normalized run rate for the first half because we think that there are opportunities for one or more favorable items to hit in the second half.

Since we mentioned the Purple Line award earlier, you may have seen that it may be delayed for an additional study. These are projects which ramp up very slowly, really not at a high level activity for a couple of years, so this would not affect our 2016 guidance.

Our guidance for 2016 assumes G&A expense in the range of $200 million to $220 million and capital expenditures of approximately $300 million.

We anticipate margins for the remainder of the year in the Energy, Chemicals and Mining group to be in the upper 5% range, Industrial, Infrastructure and Power, excluding NuScale, to be in the 5.5% to 6.5% range, Maintenance, Modification and Asset Integrity to be around 4.5% to 5.5% range, and Government to be approximately 3%. With that, Operator, we're ready to take questions.

Thank you.

(Operator instructions)

We will take our first question from Andrew Kaplowitz with Citi.

Hello, guys. Good evening. It's Alan Fleming on for Andy this evening.

How are you?

Doing well. How are you, David?

Good, thanks.

Dave, maybe you can start by talking about a little bit of noise in the Energy, Chemical and Mining business. You've talked a lot in the past about the new structure in oil and gas, and we really haven't seen that much noise in your oil and gas business for quite some time. So seeing the noise this quarter is a little bit surprising. So maybe you can talk a little bit more about what happened on these two projects. And is this why you're (Audio Difficulties) in EC&M margin for the remainder of the year? Biggs, maybe you can talk about that.

I think it's just simple math in terms of the upper end, lowering the upper end, based on these two programs. We're in negotiation with the customers in both accounts and we're hoping for maybe a little bit better situation as we go forward. But this was the prudent action to take, given the situation.

When I think about how we've changed how we're working in those markets and the new delivery model, both of these projects were bid prior to us having been able to implement the new approach. So I actually believe that what we have in backlog that's been bid and is being executed under our new integrated model are in a much better position than the two projects that experienced the reforecast. So I feel pretty good about where we are. This is unfortunate and we're doing all of the things that you would expect us to do. But just an unfortunate situation on those two projects.

To your question on margin rate, those projects have a fairly minor affect on the margin rate on the next two quarters. I think it's really just more a matter of overall mix that's affecting the margin rate for the rest of the year.

Okay. All right. That's helpful. Let me ask you, switch gears, ask you about bookings. If you look at Energy, Chemical and Mining awards and you put the sizable mining award aside, you booked about maybe $600 million to $700 million of Energy and Chemical work, which is generally on par with 1Q. I know, David, you'll probably say bookings are going to be lumpy. But is this the reasonable level of Energy and Chemical underpinning work that we could expect in this kind of environment? And do you think it maybe marks a low point in Energy and Chemical awards, given you said that you're seeing a little bit of increasing capital spending? Maybe you could talk about that.

I will use the lumpy term, to start with. It is going to be lumpy. But as we've signaled, there's going to be a pretty big quarter next quarter, just on the back of TCO in that market. What's interesting right now in both mining and in oil and gas, is we've seen over the last two years, with oil price being down, them pulling back, reprioritizing their capital spend, and now they're to the point where they've got to do some things.

I think mining -- just pick on mining. I don't think anybody on this phone expected us to book a $500 million project in mining any time soon. And I would argue that that's the first of several good awards, maybe not quite that size, but we're starting to see some things loosen up in specific commodities. So I think mining has hit the bottom. And it was a pretty low bottom. And we're starting to see some improvement in that market.

When you look across the realm of energy and chemicals the same phenomenon is happening. The good projects are still moving forward, evidenced by TCO. Chemicals are still continuing to look at new crackers. In fact, I believe you're going to see probably a new cracker complex per year go to FID over the next several years, if you're in the United States.

So I think that all in all, we're going to start to see E&C start to pick back up, based on what we're hearing from our customers and the things that we're bidding on. So I kind of feel like energy and chemicals has hit a low point last quarter, this quarter. But I don't see that as the normal run rate going forward into next year.

Okay, guys. I appreciated that. I will pass it along.

Thank you.

And we'll take our next question from Jamie Cook with Credit Suisse.

Hello. Good morning -- I'm sorry, good evening. David, on the projects in the EC&M business, I guess I'm still not comfortable. This sounds like an execution issue, with these fixed price contracts. What percent complete are we and why do you feel comfortable there's not more to come? And Biggs, my other question is, I'm having a hard time -- your margin assumption in the back half of the year, what's changed in EC&M in terms of mix that would drive the margins that much lower? I have a hard time believing this is not related, to some degree, to these two projects.

Jamie, the first part of your question, one of those projects has achieved mechanical completion. And the other one is well down the road in construction. So I feel pretty good about where we are on those two projects. I know you've heard me say that on other occasions, but we've really delved into some of the root cause.

Are they fixed price?

Yes, they are. In the second case, you have some significant weather events that impacted those projects. Those events are behind us and we know what the effect was. And as I said, we're in negotiation with both customers to try to retrieve some of that loss that we think we deserve. But it's where we are right now.

And can you tell us a dollar amount associated with what needs to be completed? And then Biggs, again, there's got to be more than mix that's implied in the back half of the year on your margins in EC&M to get to your new margin forecast versus your old one?

We're in the high 60% complete range on the other one.

Okay. And then Biggs, just help me. The math doesn't make sense, and I'm also having a hard time figuring out the ramp in EPS in the back half of the year versus the first half of the year, how we get to the low end, even to the low end of your guidance. It implies in the back half of the year, where it, I don't know, $0.90 versus the first half of the year we've been at $0.70.

Okay. Well, on the margin rate, these two projects are not going to have, as I said, that significant effect on the margin rate yet. The one that's not complete will have some effect on it. But I think more than that, it's just a matter of risk. But I think there's lots that goes into the forecast of revenue relative to earnings, including the phase of the projects, construction phase versus engineering, how much material content there is. It is somewhat subjective. So it's not a precise estimate, by any means, but it's our best judgment. And it is driven, as I said, by mix, not a forecast of other issues, if that's what you're implying. If we thought we had other issues, we'd book them today.

Well, I guess my question is within EC&M, are there other projects that are slowing relative to you what would have thought? The first quarter, you talked about PEMEX, you talked about Sasol is there anything else going on? And then sorry, second half versus first half guidance, and then I'll be done.

So in terms of slowing, that wouldn't affect margin rate, unless it significantly affected earnings leverage of overhead. So no, slowing wouldn't address your question on margin rate. It's just a matter of overall mix.

But to answer that, there's nothing else that we see slowing that would impact. Just the two that we talked about last quarter.

Okay. Thank you. And then second half versus first half?

Second half versus first half, I wouldn't take the as reported numbers from each of the first two quarters and treat them as a run rate. I'd go back to the first quarter and I would take out the Stork transition costs and the legal matter that we recorded in the first quarter, and you'd add that back and I think you'd be in the mid $0.80 range for the first quarter, around $0.85. And then if you normalized the second quarter for just the two projects, you're going to be up at $0.88, even if you don't address any of the restructuring costs. So then just take that $0.88 for the second quarter and assume that repeats itself, and you're at $1.76, so now you're pretty close to the bottom of the range from an as reported standpoint for the first half, plus taking the second quarter on a normalized basis and applying it to the next two quarters.

And as I said in my prepared remarks, the range we have considers that we're going to have some positive events, we believe, in the second half, which is more the norm for us to have positive events. We do record things fairly conservatively and more often than not, we have project revisions that are improvement over time, as opposed to downward revisions. So we don't expect more of those. We would expect more to have some improvements, and there's some areas I'm not going to go through specifically, but I mentioned tax rate, there's some particular upside with respect to, as well. So we have some things that we think are going to help us in the second half. But as I said, doing the math on the first to the second half, I think you're at the bottom range, just by doing it on a normalized basis, and then the fact that we have opportunity of some improvement enables us to establish a range above that.

Okay. Thank you. I'll get back in queue.

And we'll take our next question from Tahira Afzal with KeyBanc.

Hello, folks. At least your bookings are up.

Thank you.

(Laughter) Everyone's forgotten that, I guess. I guess importantly, these are pretty big bookings for you guys. How does this all play out, as it looks, into 2017? Are you potentially now looking at a scenario where revenues could actually grow?

I think so. If you look at what we're experiencing here is what we've tried to convey over time, and that is the value of the diversity of our company. When a lot of our competitors that are more centered in one or more industries are at lows and we just keep building. Unfortunately, we had those two issues this quarter, but when you look at what we've been able to do over the last few years is build backlog, which will lead to revenue. Now we've said in the past that these projects are bigger and longer in duration, which to me is a good story because that means it services us for many years after awards. So I think we're at the point where we're going to start to see, as we did this quarter, revenue increases, and obviously the profitability that's there is going to follow that.

So when you think about 2017 is, I think, going to be still a reasonably difficult year, just because of the lull that we experienced in new awards last year and the beginning of this year. But as we get into 2018, 2019, 2020, I think we've got a great growth story.

And David, when you said difficult year, because nowadays in this doom-and-gloom scenario kind of macro world, difficulty means earnings quantitatively down. Assuming, barring execution issues, if your revenues are growing, would it be sufficient to just hold your margin, segment margins, where they are and potentially see quantitatively a better picture than this year?

I think 2017 is just one of these things where when you look at the projects, you're in the beginnings of the projects. The example I will use is the one Biggs spoke of. You guys have read the same things I've read about the Purple Line. We weren't expecting really any profitability in 2016 or 2017 on that project, just because of how long the tail on those projects are. I remind you, the Eagle P3 project that we just completed was a 10-year endeavor, when we first started that effort. So when you look at 2017, you've got to take into account we've got several projects in backlog that look like Purple Line or P3 that are back-end loaded in terms of their profit curve. So I think 2017 is going to be another difficult year. I think we'll be okay. But I would say flat is a good thing when we look at 2017. But I really believe you're going to start to see profitability growth as we get into 2018.

Flat is good enough. So for me, at least, David. Thank you for answering my questions.

Thank you, Tahira.

We'll take our next question from Steven Fisher with UBS.

Thank you. Good afternoon

How are you?

Good. Once you get through these two projects, how do you think about the trajectory from there on the EC&M margins for, say, over the next year? Are we able to get back into the 6s, or is the range of possibility still just pretty wide, depending on what you book?

I think it's pretty wide. But as a general comment, I would say that the margin in backlog has improved over the last two years. So I think being able to improve on where we are from this quarter is certainly very possible.

Okay. And then David, as you head into the part of the year where you're going to be setting your strategic priorities for 2017, how does this latest round of volatility in oil prices in the last several weeks influence your thinking about your mix of business, M&A, and where you want to allocate capital?

That's a good question. I would say we look at the volatility the same way our customers do, that it's never as bad as it seems and it's never as good as it seems. And none of us use spot oil prices or spot commodity prices in our long-term planning process.

So as I said, I think we've got good visibility into what, obviously what's in our backlog now, and good visibility into the things that we think we'll take into backlog for the remaining part of the year. So I would argue that the latest oil price drop -- it was back up again today. So it lost what it lost and it gains what it gains, and we just keep moving on. I think the point I'll make is that our customers, particularly oil and gas customers, they're basically re-entrenched in terms of $40 oil, and those priority projects are still moving forward, evidenced by the decision on TCO.

Okay. So no major changes. Biggs, can I ask you one quick one? What is your expected run rate of spending on NuScale in the second half of the year, and when will you know about some of these upside items?

Well, the NuScale, our number for the full year is still for the $90 million range. So you can compute from that what it would likely take the rest of the year. And I don't know that there's a big difference between the third and fourth quarter in terms of the level of spend. I think it's about the same over both those quarters.

It shouldn't be much different, because we will file the DCA at the end of the year. So spending will continue until then.

And that's a good point. That's obviously a very key milestone for us. What was the rest of your question? I'm sorry.

When will you know about some of those other upside items you talk about (Indiscernible)

I don't want to be too specific, because it could be the third quarter or it could go into the fourth quarter, just depends upon circumstances. So we'll obviously, though, by the time we get to the third quarter, at least, which isn't until November 1, we'd have a pretty good idea of what's going on with respect to them, at that point in time, I would think.

Okay. Thanks a lot.

We will take our next question from Jerry Revich with Goldman Sachs.

Hello. Good afternoon and good evening.

Good afternoon.

David, the Tengiz project was a nice surprise over the past couple of weeks. Can you talk about to what extent you're looking at with your customers other potential large scale projects that can make sense even in a relatively negative oil price environment? Are you optimistic that there could be additional project decisions like this that are large scale that can move forward in this environment, based on the feed work that you're doing with your customers?

Were you specifically addressing mining and/or oil and gas? I missed the first piece. You kind of broke up there.

Yes, sorry, David, oil and gas.

Okay, oil and gas. As I mentioned, I think we're still in a long-term growth market for chemicals, both ethylene complexes and the downstream derivatives. We're starting to see some of those smaller projects start to hit, and I think there's a good slate of those that we're working on right now, pretty much across the globe, to be honest with you, from China to the Middle East to obviously here in the US. Refining, there's still several projects out there in refining. Upstream is starting to spend, TCO being the example. I don't want to wear that out, but we're seeing those types of programs and projects starting to see the light of day since our customers have gotten through their reprioritizing process. So I think as we get into the end of the year, early 2018, we're going to start to see, I think, backlog growth begin again in our Energy and Chemicals group.

And David, what we've seen from you folks over the years is when you folks stub your toe on a project, there's a pretty big learning curve that's applied going forward. So as we think about the ethylene project that you're bidding on going forward, can you talk about structurally what you'll do differently compared to these two projects that were the issue this quarter? Can you flesh that out for us?

I think the learnings have already been applied in how we've put projects into our backlog in the last year and a half. In both cases, I would call them special circumstances that created where we are. It is not a systemic problem and we understand the root cause very, very well. So I think we're a learning organization and we're applying those learnings. But I don't think the situations that caused those problems will be recreated in another situation, if I can say it that way.

So it wasn't an issue of bid price. It was as the project went on, on one you spoke about weather, on the other one, the specifications were different, or can you flesh that out a bit more?

As I said, we're still in negotiation with both customers. So I really wouldn't want to get in too deep. But in neither case was it a bid price problem. It was an execution problem that was caused by several factors, weather being one, quality of delivery of certain pieces of equipment and that sort of thing is what led to the re-forecast on those projects.

Thank you.

We will take our next question from Andy Wittmann with Robert W. Baird.

Great. Hello, guys. Biggs, I wanted to understand a little bit more, if you could, on the SG&A line with the revised guidance here. I think I heard you say that you carried $16 million of restructuring costs in this quarter's SG&A line. So I guess if I'd stripped that out of the second quarter and apply a run rate, we'd come in pretty materially below the guidance range that you gave us. Does that imply that there's other restructuring to happen in the second half of the year, or what justifies the guidance rate of SG&A that you've given?

You're right. If you take all the charges out, you get to that $38 million, which is obviously a much lower number for the third quarter. There's probably some accrual adjustments in there that might not recur. We'll have to see, depends on stock price volatility and those types of things.

To answer your question, are there more restructuring charges? There may very well be some more as we go through the year, as we continue to take costs out of the organization. Sometimes you incur some costs upfront to do that. So I think we're allowing for some of that.

I think from a Stork standpoint, from an integration cost perspective, we've incurred the transaction fees back in the first quarter and some of our consulting costs, we incurred more consulting costs associated to the integration this quarter. But that's pretty much all done. So I don't think there's going to be a lot of additional integration-related costs. But we're likely to have some rightsizing-type costs throughout the organization in the second half, but I'm not going to give specific guidance on that.

We also have some additional expense in the fourth quarter, just things that come in. The fourth quarter is usually higher.

Typically, it's higher. That's a good point, Dave. Typically, the fourth quarter is higher, anyway.

Okay. My next question was, Biggs, you also talked about some of the working capital, that some of the working capital was a bit of a draw. Is that associated with some of these problem contracts that you identified in the quarter that you just need to figure those out with the customer? You also mentioned generally customers are paying more slowly. Can you attribute that to anything, the type of customer, the mix of work, the geographic location of the customer. Is there something happening in the mix of business that's driving this?

Sure, that's a good question. In one case, it's a relatively new contract which there are just some, as frequently happens on the front end of a contract, some delays in getting invoices structured exactly the way the customer wants and then getting it all converted to cash. Another case is just timing, and in fact, we did get a payment in shortly after June 30 on one of the ones that was driving up working capital. And then finally, when you talk about specific locations or issues, Mexico has been a challenge. PEMEX has been very slow pay. They've started to catch up, but that has slowed down the pace of cash flow from our joint venture in Mexico. So those are the characteristics of some of them, to try and address your question.

Okay. Great. I'll leave it there. Thank you very much.

Thank you.

And we'll go next to Chad Dillard with Deutsche Bank.

Hello. Good evening.

Hello, Chad.

The Government space continues to be a pretty good bright spot for Fluor, based on the recent bookings momentum you guys have had over the past couple of quarters. Can you just talk about some of the prospects you see ahead of you in that space?

Yes. I'm really proud of that group, in terms of what they've been able to accomplish in the DOE space. And I think there's a couple of other projects we're chasing there that in the near term will hit. And also, some extensions to existing contracts in terms of time that will continue to come in as we go through this year.

I think in terms of the DOD and the LOGCAP type business, you've seen troop levels stay the same. But you're also seeing some other hot spots that we're active on, as well as some base management contracts that we're in the process of bidding. So I think that if you look at that business two years ago and how big our LOGCAP business was, obviously that's come down. But I'm really pleased with what they've been able to fill the bucket back up with in terms of quality of project and also what the bid slate is. So we've got a heavy bidding period in front of us for the rest of the year.

Great. That's helpful. And just moving over to the Infrastructure side of the business. Can you also just talk about what you're seeing in terms of number of projects, the size, opportunity? Are you actually starting to see the market tighten versus some of your competitors?

I think it's a great market in front of us. I still think we need some help from the legislative side of things, in terms of funding and a comprehensive infrastructure plan. But one of the things I'm most pleased with is the balance of size of projects that we're going after. So obviously, you're going to have the big Purple Line kinds of projects, and that's been in our sweet spot. But I'm particularly pleased with the South Carolina port project. It is about a $200 million project which proves to us that we can be competitive at that level project. Now when you look at the future, and particularly in the United States, you're going to see more $200 million projects than you're going to see $1.6 billion projects. So we've proven to ourself that we know how to be competitive on those smaller projects, and I think that's where the market is going to be.

So if you get into 2017, 2018, obviously, you've got to get past the election before really anything happens, but when you get into 2017 and 2018, there's a litany of projects in that $200 million, $250 million range that's in our sights. I'm expecting the Infrastructure group to continue to grow, both in terms of the big projects, because those are things we're going to always go after, but more importantly to balance that portfolio with the more moderate size programs. So I'm really pleased with the changes that have been made there and where we're headed.

Great. Thank you. That's it for me.

Thank you.

We'll take our next question from Anna Kaminskaya with Bank of America.

Good evening, guys. I just wanted to follow up on the free cash flow. What should we expect for the second half of the year? I think you mentioned that you got one of your receivables paid. When will it turn positive again?

Well, I do expect second half cash generation to improve. As I said, working capital should come down in the second half. So you should interpret from that. We expect it to be better relative to income in the second half, so cash from ops to improve on that basis. I didn't think we'd get all the way back to get working capital normalized by the end of the year.

So I have to step back, too, and say, with some big projects and some big payments, timing always has a big effect. And that's why we don't give cash guidance, the range just ends up having to be too broad to where it's not all that meaningful. But I think that a general assumption that we get $100 to $200 million of improvement out of working capital in the second half would be reasonable.

$100 million total working capital, right, not just receivables?

Excuse me?

You've said $100 million improvement is just raw working capital, (Inaudible)

$100 million to $200 million of improvement in working capital in total. Take cash out of working capital and almost everything else in there is project-related.

Okay. And then just bigger picture, if I think about overall terms of contract or returns in the oil and gas industry, if you could compare and contrast what you're seeing now versus maybe what you saw back in 2008-2009, arguably it's a prolonged downturn versus the last downturn. How should we be thinking about what has changed since the last downturn? How should I be thinking about it?

I think we're a much more competitive company, first. So I think when you look at the integrated approach that we're doing and being able to utilize all of the assets the company has available to it, we've got a better cost model. We've got a more effective and efficient execution approach. And in the same vein, we're seeing improvement in terms of margin and backlog. That's things that we can control. And I think from the outside looking in, it's a highly competitive market. And as I said, you really have to look at us a little bit differently because of the diversity, and we're seeing different pressures in different markets based on where they are in those cycles.

Clearly, if you go back to one of my previous comments about infrastructure and what I'm pleased about in terms of those smaller projects, there's a lot more competitors out there that can do that. But the point I'd absolutely make is that there is absolutely no difference in the way we look at our contractual liabilities, what we're willing to accept, as well as what types of margin we're willing to accept. And if that causes us to lose some projects, so be it. We're going to maintain the discipline that I think has proven effective over 104 years of our history.

And just a quick follow-up on your Maintenance and Modification Asset Integrity segment. How should I be thinking about energy or downstream exposure in that segment versus Chemical, and what are you seeing on some of the work that is being let out from your customers?

It's the same sorts of things that they been doing in that space. If you really look at that particular segment, it's about being able to access customers' operating budgets as opposed to capital budgets. And those have not changed. They still have to maintain those facilities and keep those facilities going. So I think by broadening our offering, by adding Stork, allowing Stork access to the Fluor world, I see that business growing pretty good over the next several years.

But keep in mind, it's still a small percentage of the total. But the beauty of it is, I hate to use this term, annuity, but it's almost an annuity style business to where, when you think about that and you think about parts of Government, that's going to pay the light bills and we're going to be able to grow on the back of the other types of businesses. So it raises, if you will, that sure spending, that sure earnings stream over the longer term and grows that, and then we're able to layer on top of that the capital spend in the different markets that we serve.

But if I think on a pro forma basis, what is the true oil and gas exposure within that business?

Oh, within that business?

Yes.

I would say it's probably 70%.

Okay. And is it evenly split between North America and Europe or is it more skewed towards Europe post Ford acquisition?

No, it's all over the place. It's the US. When you think about the legacy Fluor side of it, of the business, it's South America, it's Australia. Obviously, Western Europe, as well as the Middle East. So it's pretty diverse in terms of its geographic footprint.

Great. Thank you very much.

Thank you.

We'll take our next question from Rob Northley with Alembic Advisors.

Hello, guys. This is Nick Chen for Rob tonight. Thank so much for taking our questions. First off, in terms of the Brexit impact you're seeing, how is that impacting your European businesses?

Very little. It's interesting, it's almost like everybody woke up the next day and the world did not end. But we really haven't seen the spending habits or any of the projects that we're working on change. I think movement might get interesting as we go through time. But remember, the eventual end of Brexit won't occur for another two years. My estimation.

The only other affect is that we were talking about Stork's business. Stork does have work in the North Sea, so devaluation of currency does have an effect on Stork's revenues and income for the year. That's one of the headwinds that Stork has been dealing with is overall foreign exchange environment.

It's not a part of your question, but since we're coming close to the end of the call, I'll go back and come back to the margin question that Jamie was asking about earlier, because I continue to try to think of how better to answer her question. And I would just say that to the extent that someone questions whether it's all mix, I think it would be more realistic to make the assumption that we're being conservative, rather than to make the assumption there's something in there we're not talking about.

Got it. And then just in terms of capital allocation priorities. It seems like buybacks have been pretty minimal this year. What are your priorities right now? Obviously, you did the Stork deal. Should we expect other M&A in the pipeline right now?

I think we're focused on integrating Stork right now, and doing a good job of that. I still think our priorities haven't changed. We're going to look for opportunities like Stork that are niche in size and in nature that fill a void in our service offering. We're going to look at maintaining the dividend performance that we've practiced over time. And when there's excess cash, then we'll look at other means of returning that to our shareholders, and that still remains our priority.

Okay. Great. And then just one last question, if that's okay. I was hoping you could comment on labor costs, especially around the Gulf region.

That's a great question. I think it's basically kind of moderated a little bit. When you look at a lot of the projects that were at least scheduled to go forward that are now delayed, and in some cases cancelled, we haven't seen that big glut that we needed. So I think labor cost in the Gulf is pretty stable right now.

Thanks so much, guys. I'll jump back into the queue.

Thank you.

We'll take our next question from John Rogers with D.A. Davidson.

Hello. Good afternoon. Thanks for fitting me in. First thing, maybe for Biggs, I appreciate your comments about the margins. But given the schedule, is there a significant revenue ramp in any of these segments in the second half of the year and how should we think about it between the third and fourth quarter?

Well, I think that yes, we expect revenues to go up. This has been one of the harder things to forecast over the last couple of years. So I don't want to get too far out in terms of being real specific about what we expect, but I do think it's pretty reasonable to expect revenues to go up. I think Industrial, Infrastructure and Power looks like it should go up. I think MMAI, likewise, can go up, as Government. I think that Energy, Chemicals and Mining, this is one that's a little harder to say exactly, but it is quite possible that it goes up, and that's one of the things that will affect ultimately that margin rate. Because the margin is a little more predictable sometimes than the revenue line. And that makes sense. But that's just been the case, and so that's one of the reasons I went back and I said it could be that we're just a little conservative from a margin rate standpoint.

And I think it's safe to say in the Energy and Chemicals piece, we'll see some increase as we get into next year.

Okay. I appreciate that. And then David, your comments relative to where we are in the cycle are always useful. One thing I wanted to check on is when we've got through downturns before, often times work is booked, and I know you said the problem projects were related to execution, not bidding. But you're comfortable with what you've got in that backlog that either these projects or there are others, because they're fixed price nature, exposed to some sort of cost inflation, that the risk of additional charges, either from these projects or others that may have been booked during the slide aren't going to come home to roost.

No, I don't. I think we're looking at a couple of anomalies in terms of that. I'd go back to what, in Biggs' prepared remarks, we're at 29% fixed price, which isn't outside of the norm. And I do believe that the new approach that we've taken, the way we're looking at execution, the way we're looking at supply chain, the use of fabrication, the direct hire construction approach, I have more confidence in being able to deliver those projects today than when we started this journey five years ago.

Okay. And then just finally, relative to your optimism about a turn in booking prospects, and the mining award in particular was notable, but with TCO, is that what you're hearing from the clients that they're getting to the point now that they're either comfortable with the world or whatever that they can move forward with some of these projects, is that what's giving you the confidence?

Absolutely. The conversations I'm having, it's okay, we've studied this enough, and they're coming up with the same answer they came up with before. And they're finally saying, let's get on with it. Because they need those reserves added to their base or they're not growing, in terms of replacement of, whether it's gas or oil. I think that, as I've said, I think they've gotten comfortable with the new 40, or the new 100, I guess, is at 40. So in those conversations that I've had, some people are saying, well, I really don't need to spend any capital in the next year or so, but man, I'm going to have to catch up later, which I think concerns me a little bit, because as we saw in that last boom, there was hyper inflation, there was no customer happy and it didn't do anybody in our industry, in the service industry any good. So I'm kind of hopeful that they stay with a good regimented approach and a good solid march forward in terms of bringing those capital programs to FID, as opposed to a herd mentality and you see a glut again. Because I don't think that's good for anybody.

I hope you're right. Are these year-end decisions, do you think or just spread throughout?

I think they're normal decisions as we go over the next couple of years. As I said, I think when you look at the cracker complex, as an example, I think there's several years of one a year going to FID. I wouldn't say it's any particular quarter, but I think it's pretty positive momentum, if you will, that supports at least a little bit of enthusiasm. I'd probably moderate your description of my enthusiasm a little bit. But I think there's good things out there and I think we're in a good place to be competitive.

Okay. I'll get back in queue. Thank you.

And ladies and gentlemen, that does conclude our Q&A sessions for today. At this time, I'd like to turn the conference over to Mr. Seaton for any closing remarks.

Thank you, Operator. And I really appreciate everyone participating tonight. As I said in my opening remarks and throughout the Q&A, commodity prices remain volatile. And I think this, along with some uncertainty that's created by some geopolitical issues, is causing some of our customers to maybe extend that decision. But at the end of the day, those final investment decisions will be made.

I'm pleased to see the progress in our ability to diversify the backlog, as I mentioned, beyond just a commodity focused segment. But I also believe our capital structure and our discipline around cost and the flexibility that we have in operations allows us to make some strategic investments for the long term.

I believe our integrated solutions approach is continuing to produce positive achievements, and the performance improvement in engineering, supply chain, construction, I think the overall schedule delivery that we're seeing has been well received by our customers.

With that, I really appreciate your interest in our Company and the confidence that you place in us, and I look forward to speaking with all of you soon. I wish you all the best. Thank you.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.