Fluor Corporation (FLR: chart)
Q3 2008 Earnings Call Transcript
November 6, 2008, 5:30 p.m. ET

Executives

Ken Lockwood - VP, Corporate Finance and Investor Relations
Alan Boeckmann - Chairman and Chief Executive Officer
Michael Steuert - SVP and Chief Financial Officer

Analysts

Jamie Cook – Credit Suisse
Barry Bannister - Stifel Nicolaus
Michael Dudas - Jefferies
Andy Kaplowitz - Barclays
Curt Woodworth - J.P. Morgan
Graham Mattison - Lazard Capital
John Rogers - Davidson
Richard Paget - Morgan Joseph

Presentation

Operator

Welcome to the Fluor Corporation’s third quarter conference call. This call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow management’s presentation. A replay of today’s conference call will be available at approximately 8:30 pm Eastern Time today, accessible on Fluor’s website at www.fluor.com. The web replay will be available for 30 days. A telephone replay will also be available through 8:30 pm Eastern Time on November 13, at the following number; 888-203-1112, the pass code of 4804796 will be required. At this time for opening remarks, I would like to turn the call over to Ken Lockwood, Vice President of Investor Relations. Please go ahead, Mr. Lockwood.

Ken Lockwood – Vice President Investor Relations

Thank you operator, welcome everyone to Fluor’s third quarter 2008 conference call. With us today are Alan Boeckmann, Fluor’s Chairman and Chief Executive Officer; and Mike Steuert, Fluor’s Chief Financial Officer. Our earnings announcement was released this afternoon after the market closed and our 10-Q was also filed today. We have posted a slide presentation on our website, which Alan and Mike will reference during their prepared remarks. Before getting started, I would like to refer you to our Safe Harbor note regarding forward-looking statements, which is summarized on slide two.

During today’s call on slide presentation we will be making forward-looking statements. These forward-looking statements reflect our current analysis of existing trends and information and there is an inherent risk that actual results and experience could differ materially. You can find a discussion of those factors that might cause expectations to be different than actual results in our 10-K filed on February 29 of 2008 and in almost recent 10-Q filed today on November 6, 2008.

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

Alan Boeckmann – Chariman and Chief Executive Officer

Thanks Ken. Good afternoon ladies and gentlemen and thank you for joining us. Today, we will review our financial results for the third quarter of 2008, and will talk about our market outlook particularly in light of recent economic developments and then discuss our initial EPS guidance for 2009. As you have seen from our earnings release, our third quarter was extremely strong; with all key financial metrics rising shortly from that of a year ago. More importantly, our focus on winning the major long-term capital projects with will-funded clients continues to generate significant growth and opportunity for Fluor. I would ask you to turn the slide 3. Here I want to provide some highlights of our financial performance in the third quarter. Our revenue rose by 38% to $5.7 billion and that compares with $4.1 billion in the third quarter of 2007. This was driven primarily by significant growth in the oil and gas and power segments.

Operating profit for the quarter increased 71% to $324 million and that compares with $190 million a year ago, reflecting solid profit contributions from all five business segments. Operating margins increased to 5.7% and that compares with 4.6% in the third quarter of 2007. Net earnings for the third quarter were a $183 million, as an increase of 95% over $94 million a year ago. The earnings per share effectively doubled to $1.01 per diluted share that compares with $0.51 per diluted share for the same period of last year.

Moving to slide 4; new project awards of $8.8 billon, completely eclipsed our previous record that was set just last quarter. The third quarter of course included the $3.4 billion award for the BP Whiting Modernization Project in the U.S. and a large gas processing project in Russia along with a $1.3 billion mining project in Latin America. Consolidated backlog at the end of our third quarter rose once again to a new company record of $36.5 billion, as a $3.5 billion sequential increase over last quarter and a 31% increase from the same period a year ago.

As you turn to slide 5, I want to make some comments on our markets. First, I think it goes without saying that the current economic environment creates uncertainty on a number of fronts and this is certainly a story that will continue to evolve overtime. And it would be naive to suggest that our clients, our projects and our prospects are totally insulated from the issues of the credit market or a slowing global economy, but having said that I would note that we have had no material cancellations to-date and I know just two projects that have been slowed somewhat, but only temporarily.

We remain optimistic that our substantial backlog in our diversified business model will allow us to continue to grow throughout 2009. The dramatic reduction we’ve seen in oil prices since they peaked in mid-July is certainly of interest to our major clients, and as you are all aware though they are focused on the long-term and their price level that will deliver acceptable returns over the life of that project. I think its worth noting that when oil was trading in a range of $50 to $70 per barrel in 2005 and 2006, we booked $15 billion in new awards in oil and gas. So, I think it’s fair to say that our clients were not assuming that long-term prices would be $100 or more per barrel. Of course this price point varies depending on the type of project and I think everybody knows Oil Sands projects do require a higher sustainable price considering the cost associated with producing useable oil. On the other hand, I believe that the projects that we are working at in the Middle East and Russia for example are significantly less susceptible to recent price declines.

It is noteworthy that Fluor has just secured almost $9 billion in new awards this quarter with over $5 billion coming from oil & gas projects. So I really don’t expect demand for these new long-term programs to suddenly dry out. Finally, with regard to important global trends, we are beginning to see lower costs for some building materials including, certainly copper, nickel and steel products, which we believe should actually have a positive impact on our new projects. There are still long delivery times on key components and fab space, but as steel cost comedown for example, it should help the economics of future projects.

Let me comment on each of our market segments as we look into 2009 and I am turning now to slide 6. Starting with government, we continued to pursue opportunities to expand our services with the Department of Energy. We are expecting to hear on liquid waste contract in the Savannah River in the very near future. Looking ahead there are several other large DOE procurements next year. We are continuing to seek opportunities in the U.K. and their planned nuclear remediation program. On LOGCAP IV, we have received our first task order during the third quarter and while it was relatively small we are encouraged that the contracting process is finally beginning. Overall, we continue to see our government businesses are stable and select opportunities for growth even in a soft economy.