Fluor Corp (FLR) 2016 Q3 法說會逐字稿

Good afternoon and welcome to Fluor Corporation's third-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 p.m. 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 p.m. Eastern time on November 9 at the following telephone number, 888-203-1112.

The passcode of 2888258 will be required.

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

Thank you, Kevin. And welcome to Fluor's third-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 would 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 the actual results could differ materially. You can find a discussion of the risk factors 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?

Thanks, Geoff. Good afternoon, everyone, and thank you for joining us.

First, I'd like to address the challenges that we have seen on our fixed-price project for CPChem in the Gulf Coast which resulted in a significant charge being taken this quarter. In the second quarter, revision was made to the project forecast to recognize the impact of several heavy rain events and abnormal site flooding.

This situation has created an out-of-sequence work schedule which continues to have a negative impact on productivity to this day. However, it was during the third quarter that the lack of productivity led to an updated detailed review.

The result being our charge for the third quarter which is related to additional craft hours and indirect cost required to complete the aboveground portion of the project.

This charge takes into consideration the out-of-sequence schedule and the current levels of productivity. These additional hours became apparent in the third quarter with the increased rate of pipe erection in the process units, which was not proceeding at the expected production rate.

All of this is evidence of what can happen with complex stick-built construction projects when faced with unusual weather conditions and other site disruptions.

To answer one of the questions you are likely to have, there are always risks in our business, but these circumstances are currently not evident on any of our other projects.

Now let's turn to the third-quarter results, beginning with slide 3.

Net earnings attributable to Fluor for the third quarter were $5 million or $0.03 per diluted share compared with $176 million or $1.21 per diluted share a year ago.

Consolidated segment profits for the quarter was $25 million compared to $240 million a year ago.

Results for the quarter include improved performance results from industrial infrastructure and power segment. Consolidated profit margins were 0.05% compared to 5.5% a year ago. The effect of the charge in Energy, Chemicals & Mining segment was 4.8%.

Revenue for the quarter was $4.8 billion, up from $4.4 billion a year ago. New awards for the quarter were $7 billion. In fact, new awards are up 29% for the first nine months compared to last year.

Consolidated Fluor backlog at the end was $44.3 billion, up from $41.7 billion a year ago.

Turning to slide 4, the Energy, Chemicals & Mining segment booked $5.6 billion in new awards. This includes an award for the Tengiz oil expansion program in Kazakhstan, and we're proud to have been working at the Tengiz site for just under 20 years. And I'm pleased to see our customer moving forward with high-value projects such as this expansion.

During the quarter we received notice that the contract for one of our LNG EPC projects that we have had in backlog has been suspended. We have made an adjustment to backlog to remove the EPC portion of this project. We also removed some smaller projects which have been similarly suspended.

As a result, we expect to see a faster conversion of our backlog.

Backlog in Energy, Chemicals & Mining for the quarter was $23.7 billion compared with $30 billion a year ago. In the Industrial Infrastructure & Power segment we continue to see positive trends in revenue as we progress through two nuclear projects for Westinghouse and as infrastructure projects start to ramp up. Pending backlog for this segment was $11.5 billion, up from $5.1 billion a year ago.

Turning to slide 5, the Government segment had another solid quarter with new awards of just under $1 billion. Awards for the quarter include the additional funding on the Department of Energy Savannah River project. Ending backlog was $5.9 billion, up from $3.8 billion a year ago.

The Maintenance, Modification & Asset Integrity segment posted new awards of $350 million. This includes operations and maintenance work in the United States, Australia and the United Kingdom. The ending backlog was $3.3 billion, up from $2.7 billion a year ago.

Now that we have covered the quarter I would like to take a moment to share our perspectives on the markets we serve and what we are doing to strengthen our performance and competitiveness. Through the first three quarters of 2016, overall global economic growth has underperformed our expectations.

We continue to experience greater-than-anticipated headwinds from the commodities and related markets, which impact our Energy, Chemicals, & Mining and Maintenance, Modification & Asset Integrity segments.

On a more positive note, we have seen significant increase in Industrial, Infrastructure & Power new awards and backlog, which should contribute to our growth next year. Looking forward, we do expect modest improvement in the economic growth next year which should lead to greater consumer spending and growth in industrial production. We expect these increases in economic activity will lead to greater project opportunities for Fluor.

We do believe that in order to maintain supply-demand balances in key commodities like crude oil and copper, our customers will need to move forward with major capital projects. But it will be gradual. We also expect infrastructure and government spending to continue.

As we move into 2017 I remain concerned that this lower for longer mindset on the commodity prices is starting to distort the E&C contracting market. We are now seeing customers not only expecting lower prices without addressing capital efficiencies, but also demanding contractors take on risk that is, in some cases, outside of the contractor's control. This, along with an increased level of irrational bidding and fee pricing, creates an unusual and challenging marketplace. But we have seen this cycle before.

Having said all of that, it's imperative that we maintain the discipline in our approach to pricing and risk management. That means not only seeking the right clients but the right projects with the right clients.

It means making sure we appropriately price for risk, advise our clients on the benefits of an integrated solutions approach and, when we win the contract, intensely focus on execution and project completion.

Finally, we are prepared to deal with this lower for longer attitude. This includes controlling our own cross-structure, preserving our sound capital structure, demonstrating the value of our integrated solutions approach.

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?

Thanks, David. Good afternoon, everyone.

Please turn to slide 6 of the presentation. As usual, I will start by providing some additional comments on our third-quarter performance, then move to the balance sheet.

Revenue for the quarter was $4.8 billion, which compares to $4.4 billion a year ago. Revenue gains from Industrial, Infrastructure & Power, Maintenance, Modification & Asset Integrity and Government were offset by a decline in the Energy, Chemicals & Mining segment.

As already mentioned, this quarter's earnings per diluted share of $0.03 reflect the impact of a charge for a petrochemical facility in the United States. If you add back $1.10 to our results, it's obviously otherwise a strong quarter. Although obscured by the large charge, there were offsetting favorable profit pickups which positively affected ECM margins and consolidated results.

Corporate G&A expense for the third quarter was $27 million compared to $35 million a year ago. The quarter benefited from lower compensation expense as a result of the charge and from the foreign exchange gain. While there were no significant restructuring expenses at the corporate level this quarter, we remain focused on reducing overhead costs throughout the organization.

Taxes in the quarter benefited from the favorable resolution of an IRS audit and an increase in R&D tax credits. We have been successful in capturing these types of tax benefits on a regular basis and will continue to focus on doing so in the future.

Shifting to the balance sheet, Fluor's cash plus current and noncurrent marketable securities totaled $2.1 billion compared to $1.9 billion last quarter and $2.3 billion a year ago. Cash provided by operating activities was $362 million for the quarter and $452 million year to date. While working capital has increased since the beginning of the year, we saw improvements this quarter, as we expected.

During the quarter we paid $30 million in dividends.

Moving to slide 7, Fluor's consolidated backlog at quarter end was $44.3 billion. The percentage of fixed-price contracts in our overall backlog remained at 29%. At quarter end, the mix by geography was 47% US and 53% non-US.

I will conclude my remarks by commenting on our guidance for 2016 and 2017 which is on slide 8.

To start with, it's worth spending a minute summarizing what drove Q3's results, which were strong if you eliminate the big charge; this was driven by lower G&A, favorable taxes, foreign exchange benefits and favorable profit adjustments in Energy, Chemicals & Mining, aside from the big charge. These favorable items were, in the aggregate, worth over $0.30 of EPS.

As a result of the project charge in the Energy, Chemicals & Mining segment we're reducing our 2016 guidance to a range of $2.20 to $2.40 per diluted share from $2.25 to $3.50 per diluted share previously. The range includes opportunities with respect to tax and other upsides related to contractual matters.

For 2017 we are establishing our initial EPS guidance at a range of $2.75 to $3.25 per diluted share. Our range for 2017 assumes continued challenges in our commodity focused segment and the shifting mix from higher-margin engineering to procurement construction activities, offset by increasing opportunities in infrastructure, industrial and government.

Our guidance for 2017 also assumes G&A expense in the range of $200 million to $220 million and capital expenditures of approximately $227 million -- excuse me, $275 million, depending upon AMECO opportunities and NuScale expenses of approximately $80 million.

With that, Operator, we're ready to take questions.

(Operator Instructions) Jamie Cook, Credit Suisse.

Just to follow up on the CPChem project, can you just provide us an update of what percent complete you are relative to where we were last quarter and the scope left in the project that is left to be complete and potential for any recovery longer term?

And the other question I have is I'm a little perplexed by your 2017 guidance. It implies a step down in earnings of about $0.75 per quarter, whereas if you looked at where you work run rating in 2016, it was more like $0.90 a quarter.

We have TCO, you have Westinghouse, you have the infrastructure projects, you have one-time structuring and integration costs that go away. It's just your 2017 guidance doesn't make a lot of sense to me, so any color you can provide on that would be helpful. Thank you.

First, on CPChem, it's exclusively in the construction phase. Most of the issue is relative to piping productivity. When you look at the degree of difficulty of the design, the weather events and everything else, it took us out of sequence. And everybody that has been in this business knows, when you get out of sequence, the costs go up. And that's what we've seen here.

As I said, in the second quarter we had a review but we had not really gotten into the piping scope on the ISBO or the inside battery limits. That's what we really started in the third quarter, and we saw where we were but, more importantly, what it's going to take to get finished this work resulted in the additional craft hours, supervision, indirect, materials and the like.

We sit at about 60% complete in construction. The project is scheduled to be mechanically complete in late summer or early fall of next year. So we are within a year of completion, based on the delayed schedule that we had because of the weather events.

So I feel like with -- we took a really hard look at this, almost a conservative look at this, because of what we knew we had to get done.

I will mention that this project was bid prior to some of the changes that we've made and some of the innovations that we've applied in the integrated solutions model. So when you look at where we are going, we shouldn't have these kinds of issues in our backlog or in the projects that we win.

So I think we are at a place where we've got our hands around what it's going to take. I'm extremely disappointed, as I said in the release and where we are. But I feel comfortable that going forward, these types of things will be less of an issue.

When you look at 2017 I would say it's just in a couple of places. One is there has been a delay in the award of some of the projects, even with the TCO project. So it's a book-and-burn issue that drives us to the number we presented.

The other issue is I think the competition is extremely tight and we are probably maybe a little bit more conservative in terms of the win rate that we look to get because we are going to maintain that discipline in terms of risk and pricing. We've got -- when you look at the other businesses, though, I think we see good growth opportunities, but they are just not big enough to fill the void of some of the larger programs and projects that are there.

So we've taken a bit of a conservative view at next year.

And Jamie, I'll just help you a little bit with the math on that as well. If you are trying to do a run rate analysis, it's laborious to go back over the full year and do the pluses for minuses. It can be done, but it's a longer list of things. But if you just look at Q3 results, you have $0.03 of income and you add back the CPChem charge and you back at what I indicated were $0.30 or more of positives and you analyze that, you're going to get around $3.30 on an annual basis.

And then you factor that for the things that David described in the mix issues, and you are then looking at the range that we've given.

And I'm sorry, Biggs, what are you assuming -- and I'll get back in queue -- any help on what you are assuming on segment margins, in particular on the EC&M side?

A couple comments -- we're going to hold off giving segment margin across all the segments or any kind of update on that until we get to February and we can really have a better view of what mix across the whole business looks like by segment.

But as we said before on ECM, we do expect segment margins to go down. They were -- if you look at the third quarter here, there's obviously quite a bit of noise in there. There's the charge and then there's the positives from the other things described, including the comp expense reduction which affects ECM as well as other parts of the Company. There's foreign-exchange in there and there was favorable project performance.

If you adjust ECM for all those things in the third quarter, it would be just over 6% margin at the EBIT level. We expect the fourth quarter to be between 5% and 6%. And then we will talk about all the segments, including ECM, a little bit more by the time we get to the year-end conference call, next February.

Okay, thanks. I'll get back in queue.

Steven Fisher, UBS.

Is the CPChem a project now a loss project? And on the guidance can you talk about how much it's a drag for next year, like how much revenue do you have expected to burn next year on that that might be at either zero or low margin?

Yes, it is a loss project and --

-- zero margin is the plan for next year.

And how much of a revenue base earning next year on that?

I don't think we want to get into that level of detail. But again the size company we are it's really not singularly going to be a big driver on what the margin is on a consolidated basis, the margin rate is on a consolidated basis.

Okay. And what are the implications of this project for the Sasol projects?

Different project bid at a different time under different conditions. I'll contrast the Dow project, which is about 60 miles from Chocolate Bayou. We had the normal rainfall year to date at the Dow sites, about 52 inches. At Chocolate Bayou we had over 110 inches. And the Sasol project is in Lake Charles, Louisiana.

So different circumstances, different approach. And without the kind of risk associated that -- with weather would do.

Okay. And then just lastly, in terms of your guidance for next year, to what extent are there any larger projects that you still anticipate needing to book in order to hit that, say, $750 million above? Or is it really just what do you have in backlog today plus a normal flow of smaller to mid-sized projects?

I'm going to infuse the lumpy word again. I think that when we look at our new award plan for next year, it's pretty strong. It's a little bit different in terms of mix, but clearly it will be early in engineering phases and otherwise from the schedule perspective on the book and burn that would take place in 2017.

We don't see a huge drop-off in terms of new awards. I think it's going to be in terms of timing and when those projects start to burn revenue and obviously the margin associated with that.

But to be clear, you are not assuming at this point any new big projects that would have a meaningful impact on next year that would need to get booked?

Well, there's always the big projects that we chase.

I know, but the book between --

We factor them all when we do our analysis. It's the probability of the project going forward, it's the probability of us winning. And all that factoring ends up working its way into our guidance as opposed to us picking one single project and saying that's the one that's going to drive our results.

So we pursue enough different things to where we look at it that way as opposed to counting on just one or two projects.

Yes. We don't plan the year based on must-win projects.

Okay, fair enough. Thanks a lot.

Andrew Kaplowitz, Citi.

David, maybe we could ask you the question in a different way about backlog. But when you look at the landscape in your ECM business, the backlog is down about 20% including the TCO award. In past cycles your backlog has dropped a fair amount more than that. So do you think we could be nearing a backlog bottom as CapEx from your customers begins to level off? Or should we still expect some further declines here over the next few quarters? I know you want to say lumpy; you just said it already. But how do we think about that?

Andy, I'm not sure I understand where your question is coming from. Which backlog is down 20%?

Well, just year-over-year in ECM, when I look at it.

It's just ECM.

Oh, it's just ECM? Well, the majority -- if you think about it, mining has basically zero in it now. And it still had a fair amount of work off last year. So that's part of the answer. And then the second piece of the answer is obviously TCO went in, but Kitimat came out. Right?

So when I think about the backlog in ECM it's clean. There is no stranded backlog in that. So when you think about the normal conversions rates that we've used in the past, we are probably back to more the norm for next year.

But if you had to think about when your backlog itself bottomed, David, is that a 2017 thing? Again, it's hard to pin it down, I know. But you know as well as I do that that sort of look at when backlog bottoms is a turning point.

Sure.

So when do you think that could be?

I think, if you look at the going-forward basis, I would argue that we are at the bottom. There may be some marginally up or down in the next quarters, the next two or three quarters. But when you look at what we are proposing on, what spending decisions are going to take place in those markets going forward, I think we're going to start to see new awards start to tick up as we get to the back half of next year. And obviously, 2018-2019, I think, will be extremely good years.

So the simple answer to your question is I think we are pretty much at the bottom right now, when you look at all of those markets together. Oil and gas, I think, is going to be a little bit later in that uptick, but I think you're going to start to see some things start to break as we get into next year.

I would just add that people have been questioning and focused on how much was in backlog and might be stranded, how much wasn't burning. And through our actions of reducing backlog for what has been suspended now, taking a big downward adjustment, I think we should have taken those kind of concerns off the table.

So that should give people greater visibility and more confidence in what we are working with now is a base that's there to be built on.

Got it. Okay, that's helpful, guys. So David, your commentary about lower for longer -- it's a little worrisome, given you already have some project-related issues. And what I mean is, how do you protect the Company from the kinds of issues you are facing? I know there's the unique project CPChem and the flooding and stuff. But you still want to book work. Right? And you are saying that your customers are pushing back on you and trying to put the risk on you. How do you protect the Company from that going forward? How can you get us comfortable that you can protect the Company in a tough environment?

Well, I think it's partly the discipline that we apply. As I said in the prepared remarks, we have a very specific key account process that we have where we focus on the customers that we have the best chance of being able to be successful with in terms of delivering those projects and delivering the profitability that we expect.

There are some short-term behaviors that will challenge that, but I think in past cycles we have been able to say no politely on certain things and, in some cases, change the opinions of our customers in terms of what risks they are expecting us to take that we have no ability to control.

So as I said, this isn't the first time we have seen this behavior both on our customers' sides and in our customers' sides. But I think we're going to maintain that discipline. And I think that's where our diversity is part of the answer for continuing to grow.

We are able to skate to where the puck is going to be and not have to rely on, going back to a previous question, not rely on a must-win project. We are going to maintain our discipline.

I think that even the CPChem project went through a pretty rigorous circumstance. But we had some uncontrollable events that have led us into a situation that would have been bad, anyway. But I think we could have done a better job in terms of mitigating some of those risks earlier but it would still have been a bad project.

But the fact of the matter is we are going to maintain our discipline and we are going to protect the Company just like we have in past cycles that looked just like this cycle.

And I would like to comment on the lower for longer piece. When you think about our oil and gas customers, as well as our mining customers, I think they have gotten their head around the fact that commodity prices are going to maintain current levels for a long, long time. And they have, in fact, changed their business model to deal with the lower for longer oil price, as an example.

So when you look at what's out there, they are prioritizing those projects. You can argue they have taken a longer deep breath here, not having the confidence that the oil prices were going to moderate. And therefore that pushes even the high-quality projects out in time. And that's what we are experiencing now.

I would also say that the conversations we're having with our customers is they've gotten comfortable with their new model, they have gotten comfortable with the low prices and they are starting to move forward with projects that are critical in terms of their growth trajectory. So we are seeing many, many of these customers moving these projects towards FID as we get through next year into 2018, 2019, 2020.

So where lower for longer can be seen as a negative, I actually see it as a positive because we are seeing much better behavior from customers in terms of the priorities that they are doing. And these high-value projects are typically the most critical, the most complicated projects, which I think these [ride] into our value proposition with those customers and what those customers expect us to deliver.

And I denoted a little bit of negativity in the way you used the phrase lower for longer. But in fact I actually see that as an opportunity now.

Okay, David. That's fair enough.

It's a broad brush to talk about all commodities as the same. There are some, like copper, where there predictably will be some recovery a little faster than on others. But otherwise, it's all as we described.

Thanks, guys. Very helpful.

Andy Wittmann, Robert W. Baird.

David, in your prepared remarks you talked about 2017, just the economy being better. I was wondering, as you think about your guidance, is that predicated in the guidance as you look at it here that you will get some of those book and burn type of things? I know, I guess in the context of when you file your K you always talk about how much of the backlog you expect to burn.

Can you give us a little preview of how you are thinking about that as it relates to guidance? (Multiple speakers).

I will comment on the market. We're still looking at low GDP growth globally and some of the same statistics that you guys are using in terms of overall growth. I think that the countercyclical piece to this, and I'll let Biggs talk about the burn, the countercyclical piece to this as they have waited so long that they have to do some of these projects.

Many of these companies rely on reserve bases and other statistics in terms of their product production rates that they just won't simply be able to make if they don't make some of the improvements that are out in front of us.

I think, if you think about the Kuwaitis right now, those two big projects that we have out there you can argue were bid in a countercyclical time. But in fact, if the Kuwaitis don't move forward on the fourth refinery like they have done and our success, they would end up being net importers of motor fuels in the future.

So there's things like that that are going to drive decisions that may seem countercyclical to the statistical representation of GDP growth or market performance.

On the burn rate, yes, we will in the K update it. And I don't want to front run that at this point in time because there's obviously a certain degree of work that goes into doing that, for that document.

But clearly, as a result of having removed from backlog the LNG project and anything else similarly situated that wasn't burning, all other things equal, obviously, the burn rate is going to go up just by virtue of taking it out, because there was no revenue being created by it. We were at a very, very low rate of work and continue that way with respect to that particular project.

So no revenue, a lot of backlog has been removed, no revenue is being removed. So the burn rate is going to go up as a result of that.

Okay, then just one more question and a quick technical one. Just on the NuScale, thank you for the guidance for next year. I just wanted to check on that one.

I was still on track for the near year-end submission on the design cert? And then I guess there was some at least modest investor expectation that after the design cert submission that that would start rolling off. It doesn't look like it has really done that materially here.

So just wondering if you could talk about an update on the NuScale program.

We are on target to submit at the end of this year. But unfortunately, when you submit these things you actually have to pay the government to do the review. So costs don't just end with that.

We feel good about the submittal, the dialogue with the NRC, the dialogue with the customer base have all been very, very positive. There have been some latest news articles about the first site and the like. So, we had signaled that it would be continuing costs, and this is what we think it's going to cost to help the government do the review.

Got it, that's helpful. (multiple speakers) Sorry.

I would just add I had said previously that the decline would be modest. And as David says, we have to pay the NRC fees, we have to have the staff to respond to their questions. And then the other spend really gets paced by what's necessary to support the first customer in their schedule.

So we don't want to slow down and not support that. So that works its way into the equation.

That all makes sense. And then just, Biggs, quickly -- we noticed there was a tweak in the purchase accounting for Stork in the quarter. Obviously, you will get your 12 months to get that finalized.

But can you talk about any normal margin that might be flowing to the P&L as a result of where you are today on that?

Yes. We don't -- it's a bit different on a services business. It's not like a project-oriented business where you normalize margins and you have purchase accounting effects from that. On the services business you don't make those types of adjustments or there's just different types of adjustments that go on.

So I understand your question but I don't think it applies to much in terms of Stork because of the nature of our business and how GAAP applies to it as opposed to a project business.

Thank you very much.

Tahira Afzal, KeyBanc.

First question, David -- and I don't know if this is for you or for your team. But I understand that you build out wins and awards and outlook-based probability variances for projects. And you just talked about being more disciplined around your win rate. Can you give us indication of roughly what your win rates have been and where you think they will be going within that on the oil and gas or the ECM side?

And also what the line is going to be, if you are being more disciplined -- can you give us a point of reference or the types of projects that are good examples of the type of discipline that you will be drawing the line at?

First off, we haven't sharpened our discipline. All we are going to do is follow the same discipline. And I really don't want to talk about which projects would fall into that category.

As far as our win rate, our win rate is -- we don't disclose that and I wouldn't intend to try to do that now. But I would provide some color that over the last three years we have hit all of the statistics that we expected to hit, in terms of new awards both in revenue, gross margin and gross margin percentage.

And in order to do that we had to hit the win rate we expected. I would argue that we have a great repeat rate with our key customers. And I feel very confident that the new award plan that we have in place for 2017 is pretty solid.

Got it, David. And the second question was really a follow-up on NuScale. As you know, there was responses out from the NRC on the readiness report that was submitted. The buildup, the timeframe between the readiness report and the design certification submission is very little.

What gives you comfort that -- and how should we get comfortable that everything will be covered by the time you submit the design, and the cost will be within what you're assuming?

We wouldn't be going forward if the costs weren't in line with what our customers would expect from a cost per kilowatt. The submittal period is, I think, 39 months. But the secretary has promised that there would be some help, whatever that means, in terms of accelerating the review because this is the only US-owned nuclear technology. And there's some enthusiasm within the DOE to promote this.

We also are focused on the UK. And that dialogue has gone extremely well. We've had a lot of visitors out in Corvallis from both the DOE, NRC, other customers, the UK folks, which gives us confidence that, A, the process makes sense to them; B, that the submittal will see a positive result and as expedient a result as is possible; that the business model, including the cost per kilowatt, matches what their expectations are. So that, I think, is a pretty strong and positive story.

Now, will it take 39 months for the NRC to review this? Maybe. We hope that this is exciting enough, since it is the only US technology that's moving at this pace, that they will expedite that.

The early questions that have been asked and the answers that we have provided, I think, give us a pretty good view that we've got something that's going to be positively received, once the final submittal is made. So I feel pretty good about what we've got in terms of technology and scope and business model. And it's just a matter of time for the NRC to do their review.

Got it. Thank you very much, David.

Anna Kaminskaya, Bank of America.

Just one, first, to follow up on your comments regarding rational pricing and risk. Is it just more concentrated in the energy projects? Or are you seeing other clients maybe in power industry or infrastructure taking advantage of the competitive nature and also trying to push down pricing?

You know, it's a great question. We've seen -- as I've said, I've seen these cycles before. And when there is movement in terms of lack of capital programs, it becomes a buyers market. And we see a lot of customers across the board looking for benefits from that. So I wouldn't say it's just oil and gas. It's across the board in terms of competitiveness.

Now, the good news for us is we spent the last four years improving our ability to compete. I think our integrated solutions and some of the capital efficiency things, actions that we've taken to lower capital cost, to increase cost and schedule certainty has been well received by our customers.

So those that are willing to get beyond the price war and can actually look at value are looking at us very favorably. And those that cannot and don't want to do the change, if they are good key customers and the risk profile is right and it matches with our discipline, we will build it stick built for them again. But they won't enjoy the benefits of some of the learnings that we've had.

So like I said, this isn't the first time I've seen this. And we are going to maintain our discipline. And there will be some folks that will do some silly things, and maybe in a few years they will regret that.

But it is what it is. But we've proven over time that we can compete.

It hasn't been that long ago where some people that were asking these questions on the phone said we could no longer compete against the Koreans. And we've proved that to be an incorrect statement. And we will continue to do what Fluor does and continue to grow this Company and improve our offering to our customers.

Great. And my follow-up question is just regarding your tax structure, just some of your competitors are paying much lower tax rate, you are an international company, your tax rate is still in mid-30s.

Is there a structural opportunity to take it down lower? And what are you breaking into her 2017 guidance? I think you mentioned something of some positive revisions or some potential tax upside in 4Q or 2017, so I'm not sure if I took your comment out of context. So if you could provide some comments around it.

So we are a US-domiciled company and there's no plan to change that. Others with very low rates probably are not US-domiciled. And that's just a whole other rich discussion.

Yes. If you can tell me when comprehensive tax reform is going to take place in the United States, I could give you a better number.

We will set aside that kind of radical change. We don't get to choose where our projects are. We don't get to choose that much, then, where income gets generated. So our ability to go and take advantage of lower tax rates around the world is more limited.

The kind of upside we have are the ones like we had this quarter. We settle issues. We find strategies around the periphery to go execute against. But there's limits on the kind of step change that the Company achieves through more radical means.

So I don't want to preclude ways that we're going to drive the rate down in the future. But it's not going to be a really significant change like you would see from others that are domiciled elsewhere.

Okay. So I should assume just low 30s type of rate for 2017? Is that the right range?

Not going to give you any more guidance yet. We will see if we can elaborate that a little bit more as we get through the year.

Thank you very much.

Chad Dillard, Deutsche Bank.

I just wanted to dig into your IIP margins. You guys did about 4.5% ex-NuScale. So it's actually below the other rates that you guys gave for -- during the second quarter. So I was just trying to think through is there anything unique in there, and then how to think about the run rate exiting 2016 because that sets up for 2017. And I understand there are probably some newer projects starting up that may be a little bit lower margin in the beginning.

So any thoughts on moving pieces there would be helpful.

There's nothing really unique or -- to point out. There's always pluses and minuses as we go through quarter to quarter and have various mix items. I don't think it was significantly out of line with what we would have thought.

And then just how to think about it as we move through the fourth quarter and then just early thoughts on moving pieces for 2017?

Yes. So as I said earlier -- I think Jamie asked the question. I think we're going to hold off giving more segment-by-segment margin guidance. We will consider doing that when we get to the fourth-quarter call in February, when we are just one quarter further along and have a more defined view of what the mix is going to be within each of the segments.

Got it. Okay. So just sticking with infrastructure, actually, can you just talk about what sort of visibility you are seeing? It seems like new awards were a little bit slower, at least versus my expectations. Did you see any pushouts or any delays in the back end of this year?

No. The one thing about infrastructure that's different than most of our other businesses is just how long a gestation period is on these bids.

So I've used the term lumpy. I would argue that they are the most lumpy, just because of how long it takes for those projects to go from concept to actual funding decisions.

We had the Purple Line this year. But I guess from a color perspective I would say that our infrastructure group is probably as busy on the bidding cycles than I've seen them in many, many years. Again, lots of different projects in lots of different locations that we are bidding.

And I see them, over the next three or four years, to be a significant contributor to both revenue growth and profitability, as some of these projects come together.

One of the things I mentioned in a previous call was how excited I was about the project in South Carolina, because it showed we could be competitive on the smaller infrastructure program projects because I think that's what is going to drive that market in the near term, in the United States. So I'm pretty excited about what they have been able to do and the changes they have made to be, again, more competitive and more attractive in terms of delivering these projects.

Thanks, guys. I'll jump back in queue.

Chase Jacobson, William Blair.

David, I wanted to follow up on some of these competitive environment questions. You talked about doing the right projects with the right clients.

So if you take that and you layer in four strategies to gain share, reduce your price, and you look from a high level and maybe assume like a flat spending environment, what does this do to your market opportunity? Does it reduce it by 30%? Does it reduce it by more than that or less than that?

Well, I'm not going to get into percentages. But I'll make a couple of comments.

One, it's not lowering our price; it's lowering our cost that we are going to focus on. As I said, this has happened before and there are certain places around the world where the procurement process is such that they can't look past low price, they have to look at -- they can't look at value.

So I'll give you an example where the typical project in the process industries FEED is typically between 1% to 2%, depending on difficulty of process of TIC for the cost of the feed. We are seeing some of our competitors bidding at less than 0.5% of TIC for the fee.

Now, you can argue that that's not producing or delivering the same level of information or data to make a decision on the EPC. So I would argue that it's a disservice to the customer, eventually, because if you don't have a complete FEED you are not going to have a solid EPC bid. And you will see the change order game play, and we are just not going to go down that road.

Now, like I said, I am confident in the new award plan that we have embedded in our overall 2017 plan and outlook. So that means that, based on you using your term of is it 30% as well, no. We are fine. We've got the projects that meet our criteria to go, Chase, and we're going to maintain the discipline and go after those projects, which means we're probably not going to go for some of the projects that are taking this price mentality to what I think is a dangerous, dangerous game in terms of long-term capital efficiency.

So not quite the answer you wanted to hear, but I feel pretty good about where we are.

Okay. No, that's helpful. And just, given the more cautious or just the current market environment, can you just update us on capital allocation strategies beyond the CapEx budget for next year?

Well, we still have the same approach to that. We're going to maintain our dividend. We are going to look for add-on types of things that make sense to expand our offering to our customers, and then look at other ways and means of returning cash to shareholders. But I don't think you should -- you shouldn't expect any change, I guess, in our capital allocation strategy.

Okay, thank you.

Michael Dudas, Vertical Research.

My question is, for David, if you were to have a really good 2018 and 2019, as you indicated, when does customer/client confidence need to kick back in? Is it soon? Is it mid-2017? Is there a catalyst that's coming in the very near term that could help? What are your thoughts?

I think that we are already starting to see some of the customer confidence come back. As I said earlier, going back to Andy's question, the lower for longer conversation, I think they've gotten comfortable that we are not going to see $100 oil -- just to use the oil and gas guys, we are not going to see $100 oil again.

And I think that what they have done is they have gone through their prioritization process and redone their models at lower for longer commodity prices. And I'm starting to see the confidence come back in terms of moving some of these things forward.

If you stay on the oil and gas guys, you've seen all the impairment taken care of with the lower oil price. You are seeing the oil companies bottoming out in terms of their profitability. We are starting to see, I think, some confidence in moving some of these capital programs further or forward.

I think when you look at power we are starting to see some opportunities in power come back. And you've seen us take some limited notice to proceed projects in this year that obviously are scheduled to hit final notice to proceed during 2017.

I talked at length about infrastructure and where I see that going. Our pharmaceutical, biotech and advanced manufacturing group, the drugs that have been approved by the FDA is significantly higher than it has been in the last decade. So we are seeing growth opportunities in that business.

And again, I think the overlay to that is what we've done to try to lower our cost of service, our cost of delivering these capitals to answer the bell of our customers around capital efficiency.

So when you put all of that together with an overlay of solid annuity type programs in the government world, in the Asset Management && Integrity business, I think that we are starting to build again that confidence in our ability to deliver it in 2018 and 2019.

So, I think we -- long answer, but I think we have already gotten to where confidence is returning and some of these projects are moving forward to FID within our customer organizations.

Thank you, David.

That does conclude the question-and-answer session for today's call. I'd like to turn the conference over to your presenters for any additional or closing comments.

Thank you, operator. And thanks for all of you for participating in our call today. As I said, I was extremely disappointed in the charge this quarter, but the challenges on the project were far from normal. But irrespective of that, we are taking steps to assure this doesn't happen on other projects.

As we look into 2017, while market conditions remain less than ideal, the basic fundamentals of our business remain strong. There's continued strength in new awards, our capital structure is sound, and we anticipate we will continue to generate positive cash flow.

With that, we greatly appreciate your support of Fluor. And for those that are joining us on Monday, we look forward to seeing you on Monday in New York. Thank you and have a good evening.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.