Geoff Telfer - Fluor Corp. David Thomas Seaton - Fluor Corp. Biggs C. Porter - Fluor Corp..

Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker) Steven Michael Fisher - UBS Securities LLC Andrew Kaplowitz - Citigroup Global Markets, Inc. (Broker) Andrew John Wittmann - Robert W. Baird & Co., Inc. (Broker) Tahira Afzal - KeyBanc Capital Markets, Inc.

Anna Kaminskaya - Bank of America Merrill Lynch Chad Dillard - Deutsche Bank Securities, Inc. Chase Jacobson - William Blair & Co. LLC Michael S. Dudas - Sterne Agee CRT.

Please stand by, we're about to begin. Good afternoon and welcome to the Fluor Corporation's Third Quarter 2016 Conference Call. Today's 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 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 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'll 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 two.

During today's call and slide presentation, we'll be making forward-looking statements which reflect our current analysis of existing trends and information. However, there is an inherent risk that the 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?.

Thanks, Geoff. Good afternoon, everyone, and thank you for joining us. First, I'd like to address the challenges that are – 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.

And then 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 detail review. The result being our charge for the third quarter, which is related to additional craft hours and indirect costs required to complete the above ground 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 high direction (3:19) during – 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 projects, 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 three. Net earnings attributable to Flour for the third quarter were $5 million or $0.03 per diluted share compared with $176 million or a $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 the Industrial, Infrastructure & Power segment. Consolidated profit margins were 0.5% compared to 5.5% a year ago; the effect of the charge in Energy, Chemicals and 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% through 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 four, the Energy and Chemicals and Mining segment booked $5.6 billion in new awards.

This includes an award for the Tengiz oil expansion program in Kazakhstan; 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 during this expansion.

During the quarter, we received notice that the contract for one of our LNG EPC projects 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 and Chemicals for the quarter was $23.7 billion, compared with $30 billion a year ago. In Industrial, Infrastructure & Power segment, we continue to see positive trends in revenue as we progress through two nuclear projects, Fluor Westinghouse, and as infrastructure project start to ramp up.

Ending backlog for this segment was $11.5 billion, up from $5.1 billion a year ago. Turning to slide five, 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. Ending backlog was $3.3 billion, up from $2.7 billion a year ago.

Now that we've covered the quarter, I would like to take a moment and 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've seen significant increase in industry infrastructure in power new awards and backlog which should contribute to our growth next year. Looking forward, we do expect a modest improvement in the economic growth next year, which should lead to greater consumer spending and growth in industrial production.

We expect these increases and 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 longer – lower for longer mindset on the commodity prices – is starting to distort the E&C contracting market.

We were 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 in feed pricing creates an unusual and challenging marketplace.

But we've seen this cycle before. Having said all 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, intentionally focus on execution and project completion. Finally, we are prepared to deal with this lower for longer attitude.

This includes controlling our own cost structure, preserving our sound capital structure and 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, and good afternoon, everyone. Please turn to slide six of the presentation. As usual, I'll 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 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 a 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 on an IRS audit and an increase in R&D tax credits. We've 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 non-current 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 seven, 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% U.S. – excuse me – and 53% non-U.S. I will conclude my remarks by commenting on our guidance for 2016 and 2017, which is on slide eight. 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 and 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 and Mining segment, we're reducing our 2016 guidance to a range of $2.20 to $2.40 per diluted share from $3.25 to $3.50 per diluted share previously. The range includes opportunities with respect to tax and other upper sides related to contractual matters.

For 2017, we're 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 a shift in 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 $200 million to $275 million depending upon AMECO opportunities; and NuScale expenses of approximately $80 million. With that, operator, we're ready to take questions..

We go first to Jamie Cook with Credit Suisse. Go ahead, please..

Hi. Good evening.

Can you hear me okay?.

Yeah, Jamie. Thank you..

So David, I guess just a 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 then, I guess the other question I have is I'm a little perplexed by your 2017 guidance.

If we – it implies a step down in earnings – earnings of about $0.75 per quarter, whereas if we looked at where you were 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 restructuring and integration costs that go away.

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..

Okay. First on CPChem. It's exclusively in the construction phase. Mostly 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's 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 ISBL or the Inside Battery Limits.

That's what we really started in the third quarter and when we saw where we were, but more importantly, what it was going to take to get finished, is what resulted in the additional craft hour supervision, indirects, materials and the like. We sit at about 60% complete in construction.

The project is scheduled to be mechanically complete in late summer, early fall of next year. So, we're within a year of completion, based on the delayed schedule that we had because of the weather events. So I feel like – 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 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're going, we shouldn't have these kind of issues in our backlog or in the projects that we win.

So I think we're 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, in 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's 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 – and not the number we presented. The other issue is I think the competition is extremely tight.

And we're 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're just not big enough to fill the void of some of other 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, since you're trying to do a run rate analysis. It is laborious to go back over the full year and do the pluses or minuses. I mean, it can be done, but it's a longer list of things.

But if you just look at Q3 results, the $0.03 of income, and you add back the CPChem charge, and you back out what I indicated were $0.30 or more of positives, and you annualize that, you're going to get around $3.30 on an annual basis.

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

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

Yeah, so I guess, a couple comments there. 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've said before on ECM, we do expect segment margins to go down.

They were – if you look at third quarter here – there's obviously quite a bit of noise in there; there is the charge and then there is the positive 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'd be just over a 6% margin at the EBIT level. We expect the fourth quarter to be between 5% and 6%.

And then, we'll 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..

Thanks..

We'll go next to Steven Fisher with UBS. Go ahead please..

Thanks. Good afternoon..

Good afternoon..

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

Yes, it is a loss project and zero margin planned for next year..

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

Yeah. I don't really want to get into that level of detail, but against the size company we are, it's really – not singularly going to be a big driver on what margin is on a consolidated basis – what margin 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 site, so about 52 inches. At Chocolate Bayou, we had over 110 inches and Sasol projects 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 sort of larger projects that you still anticipate needing to book in order to hit that, say $750 million above, or is it really just kind of what you have in backlog today plus just kind of a normal flow of smaller to mid-size projects?.

I mean, I'm going to infuse the lumpy word again. I think that when we looking 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 phase as an otherwise from a 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're not assuming at this point any new big projects that would have a meaningful impact on next year that would....

There is always a mix of projects....

...need to get booked?.

...that we chase. I mean....

No, I know but the book between....

We factor them all when we do our analysis. It's probability of a project going forward, it's the probability of us winning, and all that factoring ends up working this 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..

Yeah. We don't look at – we don't plan the year based on must win projects..

Okay. Fair enough. Thanks a lot..

Thank you..

We'll go next to Andrew Kaplowitz with Citi. Go ahead, please..

Good evening, guys..

Good evening, Andrew..

David, maybe I could ask you the question in a different way about backlog. When you look at the landscaping in your ECM business, the backlog is down about 20% including the TCO award. But if we look at past cycles, your backlog has dropped a fair amount more than that.

So, do you think we could be nearing the 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 like, how do we think about that?.

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

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

Just ECM..

Oh, just ECM..

Yeah..

Well, the majority, I mean, if you think about it, mining has basically zero in it now. And it had – 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 Kinemac (25:16) came out..

Yeah..

Right. So, when I think about the backlog in ECM, it's clean. Yeah. I mean, there's no stranded backlog in that. So, when you think about the normal conversions, the rates that we've used in the past, we're probably back to more of the norm for next year..

But if you had to sort of think about when your backlog itself bottoms, David, is that sort of a 2017 thing? Like it's hard to pin it down, I know, but you know as well as I do that investors look at when backlog bottoms as sort of 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're at the bottom.

I mean, there may be some marginally up or down in the next two or three quarters, but when you look at what we're proposing on, what spending decisions are going to take place in that market – 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're 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....

Okay..

...people are questioning and focused on how much was in backlog that might be stranded, how much wasn't burning and to our actions of reducing backlog for what has been suspended now taking the big downward adjustment.

We should have taken those kind of concerns off the table, so that should give people greater visibility and more confidence of what we're working with now is some – 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 kind of – kinds of issues you're facing.

I know there's unique projects, CPChem, and the flooding issues and stuff, but you still want to book work, right. And you're 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 is partly the discipline that we apply. And as I said in the prepared remarks, I mean, 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're some short-term behaviors that will challenge that. But I think in past cycles, we've been able to say no politely on certain things, and in some cases changed the opinions of our customers in terms of what risk they're expecting us to take that we have no ability to control.

So, as I said, this isn't the first time we've seen this behavior, both on our customers' sides and on 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're able to skate to where the puck's going to be, and not – not have to rely on, going back to a previous – previous question, not rely on a must-win project. We're 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've been bad anyway. But I think we could've done a better job in terms of mitigating some of those risk earlier, but it would still have been a bad project.

But the fact of matter is, we're going to maintain our discipline and we're going to protect the company just like we have in past cycles that looked just like this cycle. Now, 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've gotten their head around the fact that the commodity prices are going to be maintained at current levels for a long, long time; and they have in fact changed their business model to deal with a lower for longer oil price as an example.

So, when you look at what's out there, they're prioritizing those projects. They – you can argue they've 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're 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've gotten comfortable with the lower prices and they're starting to move forward with projects that are critical in terms of their growth trajectory.

So, we're 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're seeing much better behavior from customers in terms of the priorities that they're doing, and these high value projects are typically the most critical and most complicated projects, which I think feeds right into our value proposition with those customers and what those customers expect us to deliver.

So, I kind of denoted a little bit of negativity in the way you used the term – the phrase, lower for longer, but in fact I actually see that as an opportunity now..

I'll just add....

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..

Thanks, Andy..

We'll go next to Andy Wittmann with Robert W. Baird. Go ahead, please..

Great. David, in your prepared remarks you talked about 2017, just the economy kind of being better.

Just 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're thinking about that as it relates to guidance? Maybe touched on that a little earlier..

Well, I think I'll 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 the counter-cyclical piece to this, and I'll let Biggs talk about burn, the counter-cyclical piece to this is they've 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've done and are a 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 counter-cyclical 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 that was 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..

Yeah. Okay. And 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.

Are we 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's really down that materially here.

So I was 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 and with the NRC, the dialogue with the customer base have all been very, very positive.

I think there has 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. Sorry..

I would just add, I had said previously that the decline would be modest..

Right..

And as David says, we have to pay the NRC fees, we have to add the staff to respond to their questions. And then, the other spend really gets paced by what's necessary to support the first customer and their schedule. So, we don't want to slow down and not support that. So, that works its way into the equation..

Yeah, that all make sense. Then just, Biggs, quickly, we noticed there's a tweak in the purchase accounting for Stork in the quarter – obviously you'll get your 12 months to get that finalized.

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

Yeah. 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 a services business, you don't make those types of adjustments. There are just different kinds of adjustments that go on.

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

Thank you very much..

We'll go next to Tahira Afzal with KeyBanc. Go ahead, please..

Hi, folks..

Hi, there..

Hey. So, 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 on 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'll 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 of the types of projects that are good examples of the type of discipline that you will be drawing the line at?.

Well – first off we haven't sharpened our discipline – all we're 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 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 they have – there was responses out from the NRC on the readiness reports that was submitted. The buildup, the timeframe between the readiness report and the events, the design certification submission is quite little.

What gives you comfort that – and how should we get comfortable that everything will be covered by the time we submit the design and the costs will be within what your assuming?.

Well I'm we – 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 39 months, but the Secretary has promised that there would be help, whatever that means, in terms of accelerating the review, because this is the only the U.S.

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 a 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 U.S. 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 kind of 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..

Thank you, Tahira..

We'll go next to Anna Kaminskaya with Bank of America. Go ahead please..

Hi, good morning. Good morning, sorry. Just wanted first to follow-up on your comments regarding irrational pricing and risk.

Is it just more concentrated in the energy projects or are you seeing declines, maybe in power industry or infrastructure, kind of taking advantage of the competitive nature and also trying to push down pricing?.

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've spent the last four years improving our ability to compete. I think our integrated solutions, 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. Those that cannot and don't want do the change, if they're good key customers and the risk profile is right, and it matches with our discipline, we'll build a stick built for them again.

But they won't enjoy the benefits of some of the learnings that we've had. So I think like as I said, this isn't the first time I've seen this. We're going to maintain our discipline, and there'll be some folks that will do some silly things, and maybe in a few years, they'll regret that, but it is what it is.

But we've proven over time that we can compete. It hadn't been that long ago, where some people that we're asking these questions on the phone, said we could longer compete against the Koreans; we proved that to be of an incorrect statement.

And we'll 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, I guess, tax structure. Just some of your competitors paying much lower tax rate, you're an international company, your tax rate is still kind of in mid-30%s.

Is there kind of a structural opportunity to take it down lower and kind of what are you baking into your 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 U.S. domiciled company and there's no plan to change that. Others with very low rates probably are not U.S. domiciled and that's just a whole – another rich discussion but....

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

Yeah, so let's just – let's 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 gets more limited. The kind of upsides 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 companies achieve 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-30%s type of rate for 2017; is that the right rate?.

I'm not going to give....

Okay..

I'm not going to give any more guidance yet. We'll see if we can elaborate that a little bit more as we get through the year..

Thank you very much..

Thank you..

We'll go next to Chad Dillard with Deutsche Bank. Go ahead please..

All right. Good evening..

Hey Chad..

So, I just want to dig into your IIP margins. I guess you did about 4.5% ex- NuScale. So, it's a bit – it's actually below the other range that you guys gave for – during the second quarter. So, I was just trying to think through was 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 the moving pieces there would be helpful?.

Yeah. There's nothing really unique or to point out. There's always pluses or 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 the moving pieces for 2017?.

Yeah. So, as I said earlier, I think Jamie asked a question, I think we're going to hold off giving more segment-by-segment margin guidance. We'll consider doing that when we get to the fourth quarter call in February when we're 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 on – just sticking with Infrastructure actually – can you just talk about what sort of visibility you see, seems like new awards were a little bit slower at least from – versus my expectations – I mean, did you see any push outs or any delays in the backend of this year?.

No. The one thing about Infrastructure that's different than most of our other businesses, is just how long the 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, that our Infrastructure group is probably as busy on the bidding cycles than I have seen them in many, many years, again lots of different projects and lots of different locations that we're bidding.

And I see them over the next three or four years to be a significant contributor to both the 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 programs and projects, because I think that's what – that's what's going to drive that market in the near-term in the United States.

So, I'm pretty excited about what they've been able to do and the changes they've made to be, again, more competitive and more attractive in terms of delivering these projects..

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

Thank you..

We'll go next to Chase Jacobson with William Blair. Go ahead please..

Hi. Good evening..

Hey, Chase..

So, 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 kind of take that and you layer in Fluor's strategies to gain share, reduce your price.

And you looked from a high level and maybe assumed like a flat spending environment, how does this – what does 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're going to focus on. As I said, this has happened before, and there're 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, a feed is typically between 1% to 2% depending on difficulty of process of TIC for the cost of the feed. We're seeing some of our competitors bidding at less than 0.5% of TIC for the feed.

Now you can argue that that's not producing or delivering the same level of information or data to make the 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're not going to have a solid EPC bid.

And you'll see the change order game play, and we're just not going to go down that road. Now, like I said, I'm confident in the new award plan that we have embedded in our overall 2017 plan and outlook. So that means that, based on using your term of – is it 30% – well, no, we're fine.

We've got the projects that meet our criteria to go chase and we're going to maintain that 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 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 I guess just given the, I guess, 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're going to look for add-on types of things that make sense, that 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 shouldn't expect any change, I guess, in our capital allocation strategy..

Okay. Thank you..

Thank you..

We'll go next to Michael Dudas with Vertical Research. Go ahead, please..

David, Biggs, good evening..

Hey, Michael, how are you. Welcome back..

Thank you..

Are you a Cubs fan in addition to being a Giants fan?.

No. No, David, sadly not. I do congratulate all our friends in Chicago, all around the world. I did marry a Chicago girl though..

As do I, and how about those Cowboys?.

Well, you would have made a lot of money if I would have found a new home or job before Tony Romo threw his first touchdown pass. All right.

So, I'm sure we'll have a lot more to talk about on Monday, but my question is, David, for you first, if we're (55:33) to have a really good 2018 and 2019 as you've kind of indicated, when does customer client confidence need to kick back in? Is it soon? Is it mid-2017? Is there a catalyst that's upcoming in the very near-term that could help? What are your thoughts?.

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

And I think that what they've done is they've 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 of the impairment taken care of with the lower oil price. You're seeing the oil companies kind of bottoming out in terms of their profitability, and we're 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're 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 get 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's 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 have 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 and integrity business, I think that we're starting to build again that confidence in our ability to deliver in 2018, 2019.

So I think we – a 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. See you on Monday..

See you on Monday. Thank you..

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 on the charge this quarter, but the challenges on the project were far from normal. But irrespective of that, we are taking steps to ensure 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 is 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 to Fluor.

And for those of 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..