Fluor Corporation (FLR: chart)
Q2 2009 Earnings Call Transcript
August 10, 2009 5:30 p.m. ET

Executives

Kenneth H. Lockwood – Vice President of Investor Relations
Alan Lee Boeckman – Chairman and Chief Executive Officer
D. Michael Steuert – Chief Financial Officer

Analysts

Andrew Kaplowitz - Barclays Capital
Chase Becker for Jamie Cook – Credit Suisse
Graham Mattison - Lazard Capital Markets
Steven Fisher - UBS
Michael Dudas - Jefferies & Co
Mark Thomas - Simmons & Co
John Rogers - D. A. Davidson & Co
Will Gabrielski - Broadpoint AmTech
Joe Ritchie - Goldman Sachs
Barry Bannister - Stifel Nicolaus

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Fluor Corporation’s second quarter 2009 conference call. Today’s call is being recorded. (Operator Instructions) 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 p.m. Eastern Time today, accessible on Fluor’s website at www.fluor.com. A web replay will be available for 30 days. A telephone replay will also be available through 8:30 p.m. Eastern Time on August 16 at the following telephone number. That number is 888-203-1112. Pass code of 2913140 will be required. At this time for opening remarks, I’d like to turn the conference over to Mr. Ken Lockwood, Vice President of Investor Relations. Please go ahead, Mr. Lockwood.

Kenneth H. Lockwood – Vice President of Investor Relations

Thank you operator. Welcome everyone to Fluor’s second quarter 2009 conference call. With us today are Alan Boeckmann, Fluor’s Chairman and CEO and Mike Steuert, Fluor’s Chief Financial Officer. Our earnings announcement and 10-Q were released this afternoon after the market closed. We have posted a slide presentation on our website, which we will reference while making our prepared remarks. 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, and there is an inherent risk that actual results and experience could differ materially. You can find a discussion of those risk factors in our 10-K which was filed on February 25, 2009. During this call we will discuss certain non-GAAP financial measures. Reconciliation of these amounts with the comparable GAAP measures are reflected in our earnings release and are posted on our website at investor.fluor.com.

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

Alan Lee Boeckmann – Chief Executive Officer

Thanks Ken. Well, good afternoon everyone and I want to thank you for joining us. Today we’ll be reviewing our results for the second quarter and providing an update on our current business outlook along with guidance for 2009. I’m going to start off by covering the highlights of our financial performance for last quarter. You’ll see those on slide 3. The second quarter was a very solid one for us. Net earnings attributable to Fluor for the second quarter were $169 million compared to $208 million during the same period last year. And that period included a pretax gain of $79 million from the sale of our equity interest in the Greater Gabbard Wind Project. Earnings per diluted share were $0.93 for this quarter, and that compares with $1.12 for the year ago quarter. And as I said, that did include on an apples-to-apples basis a $0.27 per share gain on that wind farm transaction.

Segment profit for this quarter was $309 million compared with $392 million in the second quarter of 2008. Both the Oil and Gas and Government segments had good profit growth over last year. Segment profit margin overall rose to 5.8% compared with 5.4% a year ago, when you normalize the 2008 to exclude the Greater Gabbard gain. Revenue declined 8% to $5.3 billion. That’s down from $5.8 billion in the second quarter of 2008, driven by decreases in the Oil and Gas, Global Services and Power segments.

Now moving to slide 4, Fluor’s focus on near-term prospects and its diversified end markets have once again allowed us to record substantial new bookings in a very challenging economic environment. Project awards for the second quarter were $6.8 billion compared with $6.4 billion in new awards a year ago. This quarter included $2.9 billion in Oil and Gas awards, $2.2 billion in Industrial and Infrastructure awards and $866 million in Government awards. After the end of the second quarter, our Government group was notified that it had won the LOGCAP IV competition for northern Afghanistan. I have to say this was a tremendous win for us, and the program has the potential to be a very significant one for Fluor with a total contract value of potentially more than $7 billion over five years. Consolidated backlog at the end of the second quarter was $30.9 billion. That’s up $1.8 billion sequentially from $29.1 billion in the last quarter, but it was down 6% from a year ago, primarily due to cancellations and scope reductions in Oil and Gas projects during our first quarter. We had no material cancellations during the second quarter. With regard to our markets and prospects, it obviously varies by business line, but in general our clients continue to express uncertainty about capital expenditure plans. And as a result, we do expect to see variability in the volume of new awards going forward. Let’s talk a little bit about the markets that are represented in each of our segments.

I’ll start with our largest market, Oil and Gas, and ask you to turn to slide 5. This segment had a relatively strong quarter from a new awards perspective. As expected, over 80% of the new awards were for international projects with the largest award for upstream work on Imperial Oil’s new Oil sands Development in Canada. In downstream, while the U.S. market has slowed considerably as we expected, we do continue to target international opportunities which we think are developing over time. In petrochemicals there are a few large prospects in the Middle East and Asia, and in this quarter we booked additional scope at the Saudi Kayan Petrochemical Facility. Finally in upstream we continue to see client budgets shift towards expansion of oil and gas production. As most of you will know by now, we bid the (6:36) Havisham Five program but in fact we lost to a competitor who bid a substantially lower price. We will continue to pursue large projects on a selected basis where we believe we have a competitive advantage and an effective strategy to win that includes adequate risk protection.

Fluor recently won a nice FEED contract for Santos for the preparation of an execution plan and a cost estimate for the engineering, procurement and construction of the upstream facilities required to deliver coal-seam gas from Santos operated coal-seam fields in central Queensland to a proposed liquefaction facility to be located at Gladstone. We have also announced the formation of a consortium with Global Industries to pursue offshore projects in the Middle East and North Africa. The combination of Global Industries with Fluor’s offshore solutions business will allow us to offer a full service model to our offshore clients.

As I move on to Power on slide 6, this market remains relatively lackluster, given reduced demand and the lack of a clear U.S. energy policy. In Natural Gas, we booked a fire rebuild project to repair a gas fired plant in Italy, and we’re tracking various gas prospects in the U.S. and Europe. In nuclear we continued our support of Toshiba on NRG’s south Texas project which will be one of the first plants to receive a CLL, and to participate in DOE’s Loan Guarantee Program. New coal projects continue to be rare, but we did receive a limited notice to proceed for a 960 megawatt coal plant for the Tenaska Trailblazer project. This is an interesting project in that they plan to include carbon capture and sequestration in the plant design, and a key part of our scope is to select the technology to achieve this. On the environmental betterment side, we were selected to conduct FEED work for a nitrogen oxide reduction program at Fiddler’s Ferry Power Station in England. Fluor is currently performing preliminary engineering and construction planning services for selective catalytic reduction of emissions at Scottish and Southern’s four unit coal-fired power plant, as well as providing client technical support and project cost estimation.

In Industrial and Infrastructure, our backlog grew again this quarter with the award of a large mining project. We also see additional mining opportunities that will close during 2009. This is certainly an area where our diversification is bearing tremendous fruit when other markets are pulling back. In Infrastructure we continue to focus on select road and rail opportunities in the U.S. and Europe, mainly those that are conducive to a PPP model structure or a design build advantage that we have. As always, these prospects require long development periods and often require financing. The next big project in the queue is the I-95/395 Interchange in Virginia, which appears to be moving out into 2010. We recently submitted a proposal on a mid-sized road project in Texas and we expect to have the client make that decision in the third quarter of 2009.

Moving to the Government segment on slide 7, this group is having a very strong year. During the quarter the group recorded over $800 million in new orders, including approximately $600 million at Savannah River from the American Recovery and Reinvestment Act or ARRA. This is stimulus funding and $160 million for LOGCAP task quarters were also booked in the quarter. On the LOGCAP IV award in north Afghanistan, we are working with the Army to develop a transition plan which will likely span over the next 90 days and will give us more visibility into how work under this contract will roll out and on what schedule. New awards will be recognized as the specific task orders are incrementally approved and funded. Our Global Services segment is unfortunately seeing some fairly significant weakness in the Operations and Maintenance portion of its business. Our customers are deferring scheduled maintenance and discretionary spending to a greater extent than we had anticipated. And while we believe that long-term contracts will sustain this segment at its current levels, we do not expect results in this segment to pick up materially until the broader economy improves.