Geoff Telfer - Fluor Corp. David T. Seaton - Fluor Corp. Bruce A. Stanski - Fluor Corp..

Steven Fisher - UBS Investment Research Jamie L. Cook - Credit Suisse Securities (USA) LLC Andrew Kaplowitz - Citigroup Global Markets, Inc. Jerry Revich - Goldman Sachs & Co. LLC Tahira Afzal - KeyBanc Capital Markets, Inc. Michael S. Dudas - Vertical Research Partners LLC Andrew John Wittmann - Robert W. Baird & Co., Inc..

Good afternoon and welcome to the Fluor Corporation's First Quarter 2018 Conference Call. Today's conference 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 P.M.

Eastern Time today, accessible on Fluor's website at investor.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 May 10, at the following telephone number, 888-203-1112, the pass code of 7615156 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, Ashley, and welcome to Fluor's first quarter 2018 conference call. With us today are David Seaton, Fluor's Chairman and Chief Executive Officer; and Bruce Stanski, Fluor's Chief Financial Officer.

Our earnings announcement was released this afternoon after the market closed, and we have posted a slide presentation on our website, which we will reference while making prepared remarks. But before getting started, I'd like to refer you to our Safe Harbor note regarding forward-looking statements, which is summarized on slide 2.

During today's call and slide presentation, we'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 filed earlier today and our Form 10-K filed on February 20. During today's call, we may also discuss certain non-GAAP financial measures.

Reconciliations of these amounts with the comparable GAAP measures are reflected in our earnings release and posted in the Investor Relations section of our website at investor.fluor.com. Now let me turn the call over to David Seaton, Fluor's Chairman and CEO.

David?.

Thank you, Geoff, and good afternoon, everyone. Thank you for joining us. Let's start off by discussing the challenges that we are experiencing on the same gas-fired power project we discussed last quarter and the steps we're taking to complete this project and in Fluor's participation in the specific end market.

Craft productivity and estimating were materially different than the original baseline expectations we made in the initial charge on this project last year.

While those factors were included in our initial charge, the majority of the $125 million charge taken this quarter is driven by extremely low ongoing productivity and the financial impact that this has relative to the initial expected timing of when the two units would be available for power production based on the current outlook.

As of last week, this project is 86% complete, with an expected completion date in Q4 of this year. Last August we made a number of changes to our power business. This included bringing in new leadership, removing certain executives and closing our power operation office in Charlotte.

I also stated that we were in the process of assessing the gas-fired market to determine if there are opportunities for risk-adjusted returns that are consistent with our expectations and long-term experience. I'd like to share with you the outcome of our review and the further actions that we are taking.

I'm going to ask everyone to pay close attention. The U.S. power consumption growth rate is less than 1%. Power producers do not really need additional capacity other than satisfying regional needs.

We, the industry, and the entire E&C community have led our clients to believe that a gas-fired power project costs approximately $650 per kilowatt, although virtually no one has delivered one for that value.

The customers start at that figure, negotiate it downward and there's always some contractor that is willing to say okay to the lower number using some excuse to justify the win, Fluor included. We have had 12 gas-fired power projects since 2003. 10 of the 12 have underperformed our as-sold expectation with three suffering losses.

Competition, both public and private, have had similar experiences with no current projects performing as expected. Some industry leaders think these are cookie cutter projects, but they are not. These projects have different machines, different site locations, different labor pools, all of which produce different outcomes.

Craft labor, in this case, has been the major issue. Therefore, Fluor will discontinue the pursuit of lump-sum gas-fired power market from the end of Q1. We will finish the existing projects and fulfill our commitments. However, we are not exiting the entire power market.

Our power services business, which includes maintenance, shutdowns, turnarounds and environmental upgrades are very robust and we will focus also on renewables as well as nuclear. We will use our resources, both financial and human, to focus on other end markets to support our margin expectations.

We will continue to update the investment community on this discontinued business until the last project is complete. Now, let's review our first quarter segment highlights, which begins on slide 3. The Energy & Chemicals segment booked $721 million in new awards for the quarter and ending backlog was $14.1 billion.

During the quarter, we continued to grow our self-performed construction capabilities in the Gulf Coast with the award of MEGlobal's new monoethylene glycol facility. This represents our fifth major construction project in Freeport, Texas over the last six years.

Our COOEC-Fluor yard is very active right now with pipe and steel fabrication and module assembly underway for two offshore projects and a large onshore module project. The yard achieved a major milestone in April with the first of more than 185 modules for that onshore project being loaded out.

The yard recently opened new piping and painting facilities to support the workload and has more than 6,500 craft workers on site. Our investment in this fab yard is a major part of our integrated solutions model that is now beginning to pay dividends. We continue to see indications that the energy market is turning.

Last week, you saw our announcement for the LNG Canada project with our joint venture partner JGC. This project expected to reach final investment decision late this year is one of the key prospects we are tracking for 2018.

Other opportunities include additional chemical derivative and refining opportunities, both domestically and international, and we see additional upstream and LNG opportunities as we move into 2019.

First quarter new awards in Mining, Industrial, Infrastructure & Power segment were $1.3 billion and included a large copper mine expansion project in Peru. The ending backlog was $10.3 billion. In this segment, we continue to see some great opportunities in copper, gold and iron ore replacement projects.

Infrastructure has opportunities in the United States, but my enthusiasm has tempered a bit as we wait for a long-term federal infrastructure bill. Our application with the NRC for NuScale's continued progress, we were recently informed that the NRC completed phase one of the review process.

This essentially means that the NRC has reviewed the application and provided questions on any items requiring clarification or change. NuScale and the NRC have confirmed the review is proceeding on or ahead of schedule. We expect that the passing of this milestone will attract additional investors.

And last week, NuScale was selected to receive additional cost-sharing funds for SMR development from the Department of Energy. Turning to slide 4, the Government Group posted first quarter new awards of $43 million with an ending backlog of $2.4 billion.

This quarter we substantially completed our power restoration work with the Army Corps of Engineers in Puerto Rico and I'm very pleased by what we were able to accomplish in just a very few short months.

Looking at our opportunities for the balance of 2018 and we were recently informed that our work at the Savannah River Plant has been extended until July of 2019 and we are pursuing the LOGCAP V and Hanford liquid waste projects. Diversified Services segment posted first quarter new awards of $433 million and had an ending backlog of $2.3 billion.

Results for the quarter reflect growth from Stork operation in Latin America and North America. I'm pleased to see that the clients are beginning to increase their maintenance spending.

In closing, outside of my disappointment with the charges this quarter on the power project, I am encouraged by my conversations with customers and their expectation of economic growth. We remain enthusiastic about our prospects with many sizable orders in the future.

And this is going to be a multi-market, multiyear upturn and we are well-positioned to meet the needs of our clients. I'm also encouraged by the performance of the projects that are taking full advantage of our integrated solutions approach as well as a growing acceptance by our clients. Now, I'll turn it over to Bruce.

Bruce?.

Thanks, David, and good afternoon, everyone. Please turn to slide 5 of the presentation. I'll start by highlighting some income statement items and then move on to the balance sheet. Revenue for the quarter was $4.8 billion compared to $5 billion last quarter. Revenue improved in Government driven by Puerto Rico.

It was offset slightly by declines in our other segments. Corporate G&A expense for the first quarter was $57 million compared to $54 million last quarter. Expenses for the quarter improved when you exclude the $12 million related to foreign currency exchange losses due primarily to fluctuations in pound sterling.

For the quarter, we reported a net loss attributable to Fluor of $18 million, or $0.13 per diluted share. Results for the quarter include a $0.69 charge related to the previously mentioned gas-fired power project.

$0.17 for the combined impact of foreign currency losses at the corporate level as well as for an embedded derivative related to a project with our joint venture partner in Mexico and a non-recurring hurricane-related work in Puerto Rico, which contributed $0.20.

In our last call, I noted that the paint was still drying on tax reform and that our tax rate may vary as we receive additional guidance over the course of 2018. While that is still the case, our tax rate, excluding the charge of the power project, would have been about 30% for the quarter.

This higher-than-planned tax rate is a reflection of the large amount of revenue generated outside of the United States in higher tax jurisdictions and lower-than-anticipated earnings domestically. Q1 2018 results represent the first results published under our new revenue recognition standard.

Under the retrospective method that we have adopted, you can see a reconciliation of these results to the old standard in our 10-Q. For the quarter, the impact of the new standard was minimal due to timing, progress and mix for affected projects.

We expect to see positive albeit much more modest impact on expected results for the remaining of the year. Shifting to the balance sheet on slide 6, Fluor's cash plus current and noncurrent marketable securities for the quarter was $1.8 billion, down from $2.1 billion last quarter.

The reduction in cash has been primarily in domestic cash, which reflects our need for strong cash balances to fund earnings generating businesses. Relative to cash, a good example this quarter is the power restoration project for the U.S. Army Corps of Engineers in Puerto Rico.

Current assets for the Government Group increased by approximately $370 million, as higher working capital needs were required to complete the project and generate the increased earnings associated with this job. Available domestic cash at quarter-end was approximately 20% of our total cash and marketable securities balance.

We expect to build this balance over time to support not only future projects that have initial capital needs but also P3 infrastructure opportunities. Cash utilized by operating activities is $136 million for the quarter primarily as a result of the cash demands from Puerto Rico. During the quarter, we paid $30 million in dividends.

Moving to slide 7, new awards for the quarter were $2.5 billion and ending backlog was $29 billion. Approximately 38% of our backlog is predominantly fixed-price contracts and the mix by geography is 40% U.S. and 60% non-U.S.

Lastly, I want to point out that starting in Q1 of 2018, we have moved our Mining business into our Industrial, Infrastructure & Power segment to better align our external reporting with how these business segments are now being managed.

We have posted on the Investors section of our website our Fact Book for the quarter, which includes recast segment information for the past two years under this new reporting structure. I will conclude my remarks by commenting on our guidance for 2018, which is on slide 8.

We are revising our 2018 earnings guidance range from $3.10 to $3.50 per diluted share to $2.10 to $2.50 per diluted share. Our guidance reflects the impact of the gas-fired power charge for the quarter, the impact of foreign exchange losses and a much more modest contribution from U.S.

tax reform and the new revenue recognition standard than we expected. This guidance also assumes G&A expense of approximately $50 million per quarter, excluding any impact of foreign exchange gains or losses and a tax rate of 25% to 30%. NuScale expenses are expected to be $75 million in 2018.

Expenses were a bit higher this quarter as a result of a delay in government funding, which has now been resolved.

We anticipate average margins for the remainder of 2018 in the Energy & Chemicals Group to be in the 6% to 7% range, Mining, Industrial, Infrastructure & Power, excluding NuScale, to be in the 2.5% to 3.5% range, Diversified Services to be around 4.5% to 5.5% and Government to be approximately 3% to 4%.

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

Thank you And our first question is from Steven Fisher with UBS..

Thanks. Good afternoon.

I guess, one of the things that troubles me about the power project charges is the challenge that you've had in assessing the right productivity of the craft and it's troubling just because – it seems like you're moving more into the self-perform construction area where you're going to be even more reliant on forecasting that type of craft activity.

So, I guess, how should investors get comfortable that taking on some of the bigger fixed-price projects with all that craft exposure is really a good investable strategy?.

That's a good question, Steve. Thank you. Look, as I understand how tragic this is, no one is more mad than I am about what's going on. But I want to point you to a couple of key points here. One is, this is one of 1,000 projects that we execute at any given time. And we execute with excellence.

I mentioned the projects in Freeport being construction and we have executed with excellence in those cases. This project is challenged of where it is in the State of Florida. Being able to bring the kind of talent that we want is difficult.

I think you can also look to the fact that in that particular case, when it's a bad project, a lot of people don't want to be associated with a bad project. Where we are right now, at 86% complete, we're taking into account a much lower productivity factors.

Given the schedule that we have and the needs of our customer, we feel good that we can finish it for what we took this quarter. I'll contrast that and answer what the going forward comment is. I don't think there's an inherent risk in fixed-price construction.

I think the risk is regional and associated with the approach we use for the particular project, the LNG project in Canada as an example.

Our approach is different than our competition was in that we took a significant amount of labor off of that site and into our fabrication yard where it is in a controlled environment both from a productivity perspective and from a safety perspective.

So when we think about the integrated solutions, a part of that is being able to lessen the exposure to craft in certain areas and make sure that we've got an execution approach that delivers for the client and delivers the expected profit to us.

I know it's hard for you guys to understand where we are on this project and the statement that this is an anomaly. We've had these projects in the past. And when a project goes bad the way this one went, it goes real bad.

And while I cannot guarantee performance of future projects, I am confident that based on the fact that the projects that are exercising our new approach are performing very well and we have some very large lump-sum projects in Kuwait and other places that are performing as expected or better.

Whereas this one is hard to swallow and hard for people to understand, I get that, I don't think it's a fatal flaw in our system..

Okay. That's helpful.

And then moving on to Shell, so what is your confidence that it moves forward? And can you just talk a little bit more broadly about the risk you're taking on the project? And then, I guess, broadening that out, just related to customer CapEx, I'm curious to what extent contracting structure is kind of holding back customer decisions at this point.

And are you finding that customers are saying, hey, we'd go forward on that project if we could just get the EPC firm to give us a fixed-price or lump-sum contract? Is that happening?.

Well, I think there's a little bit of that happening. I think the question is whether people are putting the right numbers in there to do that. I can tell you, in our case, Jim Brittain specifically managed the development of that estimate, and I have great confidence in him and the team that pulled that together.

So we are taking the risk, but we're taking it on the terms that we expect with the kind of coverage ratios that we would expect.

In the case of these power projects, I can tell you that, as I said, there's a per-kilowatt cost, and we got roped in, just like a lot of other people did, into saying that if you don't do that price, you're not going to win that project. And we're not interested in playing those games anymore.

So I think when we look at Canada, it was bid on a different basis. It's bid utilizing our integrated solution approach. It's bid utilizing our yard in China. It's in a place in BC that we know how to work.

The equipment that is being procured, we know how to do that, and the evidence is how well we bought the two refinery projects out in Kuwait give me great confidence that we can do this. The business model, as I understand it, would suggest that there's a high probability of this project being funded – final FID this year.

When you look at Shell's strategy around gas, when you look at the potential partners that they pulled together on this project, I have a high confidence level that FID will be achieved this year..

And just to clarify, the craft labor productivity on this project will be your risk?.

Which project?.

LNG Canada..

Yes, it will be..

Okay. Thanks, David. Appreciate the color..

Thanks, Steve..

And our next question comes from Jamie Cook with Credit Suisse..

Hi. I guess, just a follow-up question to Steve.

Understanding the industry leadership – you're being an industry leader in terms of exiting the gas-fired power business, even one of the biggest players in the industry, how do we think about being more proactive on the energy side? Because, to be fair, you took charges in power, but we've also taken charges in E&C over the past couple of years probably totaling about $300 million or so.

So, what can you do as an industry leader to change the approach for contractors taking risk with the charges you've had and with some of your – with the other players in the industry on the verge of bankruptcy? And then my second question, understanding that you're saying you have a different approach from your peers with your integrated solutions model and you will be using that on LNG Canada, have you ever delivered a project of LNG Canada's size using your integrated solutions model and why should that not be concerning to us that we're trying this on such a large project?.

Well, it is a large project, Jamie, I agree with you. But when you look at the total value of – when you look at the two projects in Kuwait specifically, they're probably the best model of that. And in those cases, our piece is $4 billion or $5 billion. So I think, yeah, it's a bigger number. I don't think anybody's actually done it.

Well, I know we haven't done a project that large using our tools and systems, but I can tell you that in the fact – let me back up. If you go back and you mentioned several projects in E&C, it's really one, and it's CPChem, and we broke that down in terms of the lessons we learned.

Now that project as well as these power projects were bid prior to the maturation of our integrated solutions approach. And there are fatal flaws in the bidding process of all of those projects.

They were execution issues that weren't properly covered and you didn't have the coverage ratios you expect on a project that has the kind of risk that those projects had, part of it driven by market in terms of the power business.

But one of the things we've done is we looked at CPChem and the results and we broke it down into the issues that led to that loss. And we applied those lessons learned just in the case of E&C on the CFP project, which is the Clean Fuels Program for Kuwait.

We had issues and challenges, but we're above our expected as-sold profitability there and we're nearing completion. And we use those learnings as we bid the Al-Zour plant, which was a bigger lump-sum project with partners in Kuwait.

And I can tell you that the application of those lessons learned there has even bettered our situation relative to that project. And it's not quite as far along. But we had the client in our China yard last month and saw the first module sail out.

And I can tell you that the customer is pleased and I can tell you that I'm very pleased because it's meeting the schedule requirements and it's meeting the cost expectations. Learning from that one. I mean, it's a journey that we're on, Jamie, as you can appreciate. We applied all of those to LNG Canada.

And basically utilizing that modular approach, just as one case, and going back to Steve's question, we were able to take about a third of the craft expectation from a stick-built project to the module approach off of that job site. So, you look at....

I guess, I understand that and I understand that you've shifted your business model and you think this will allow you to drive greater capital efficiency for your clients and allow you to handle the project differently. But again, companies are going bankrupt because they're taking on risk.

So are you changing your – or are the conversations changing with customers in that you're saying I won't do this anymore or we won't do this anymore?.

Well, I just said that, Jamie. I just said that about one segment of the power market..

I know, but I'm talking about energy..

We are having these conversations in oil and gas. We are starting to change the dialogue. Customers are continuing to try to shed risk. In a lot of cases, we're saying no. And I already see that our win rate will drop as we go through 2018 and 2019.

And I'm satisfied with that drop in win rate because we're only going to win projects that meet our expected coverage ratios and the approach is utilizing the integrated solutions approach. So, yeah, the dialogue is changing..

Okay. That's helpful. I appreciate the color. And then sorry just a follow-up question for Bruce. Bruce, the cash flow in the quarter, you talked about the working capital associated with Puerto Rico.

Can you just provide some context on how much was Puerto Rico and just how broadly – how do we think about the drag on cash this quarter and how to think about cash flow for the year? And then I'll get back in queue. Thank you..

Sure, Jamie. And that's why I kind of – for the first time we kind of provided on this call some guidance about U.S. domestic cash, what percentage of our total cash and marketable securities it is because that cash draw this quarter was all in – just about all in U.S. domestic cash and it was primarily all in Puerto Rico.

As you can imagine, we ramped that job up very quickly and had to fund that working capital, but that money has been sent out and coming back with earnings that are recognized in the quarter for the Government Group, but the receivables and cash don't get paid. We don't get the money back until after this quarter.

So that's why we think this is a timing event. We really wanted to emphasize that this need for U.S. easily accessible cash is very important to us and we're going to concentrate on continuing to build that U.S.-based cash balance..

Okay. But is there any way to think about cash flow for the year relative to net income just as other projects – you win other projects that might have working capital needs? I'm just trying to think about cash flow for the year..

Well, sure. I mean, it's the ebb and flow effect here.

We time our working capital and we also keep our cash in the locales where we see our project wins to occur in the future so that we have enough cash to start up and ramp up, especially with these FIDs start to stack up on us with the customers as they pull the trigger and make the programs go forward.

But as far as a working capital balance, we're going to target $2.1 billion or more on a go-forward basis..

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

And our next question is from Andrew Kaplowitz with Citi..

Sorry, operator, we can't hear you..

Good afternoon. Can you hear me? It's Andy Kaplowitz.

How are you?.

Hi, Andy.

How are you doing?.

Good. So, David, well, the power project is 86% done you said. I think you have one more project in backlog in the same ilk, right? And it's probably about the same level done.

Is there anything else you could do on the projects to assure investors that they can invest really for the next couple of quarters in Fluor until the projects are done? I think I remember back in the day Alan Beckman saying he was going to visit his embassy problem project every week toward the end of it.

Can you do that? Shouldn't you do that? Anything more you can do?.

I'm not sure I heard the last part of that, Andy. You kind of broke out just a little bit. You're talking about....

So I just said that – yeah, back in – I think it was 2006 or something like that, I'm showing my age, but Alan Beckman had said he was going to go visit the embassy projects, his problem projects literally every week until it's done.

So, as a CEO, what more can you do, David? Like, we always get the question, can I invest in Fluor till these problem projects are done.

How would you answer that?.

Yeah. I mean, I've been on the project site twice this year. And I have personally directed different resources there. And I hate to even say confident, but I am in the ability of the project to complete within this number as well. And look, we used an abysmal productivity rate in setting the number that we wrote down.

So I have confidence that we'll be able to finish. As you said, we're high 80s percentage. We're starting to turn over systems to the customer on Unit 1. Unit 2, I think will be an easier finish than Unit 1 has been. So I feel pretty good about the team that's there now.

And yes, I'm going to be – I'm not going to say I'm going to be there every week, but I'm going to be on a routine basis and I have already taken personal review of this project. With regard to the other one and this is a hell of it, it's the project in Virginia is going very well. It is in the same kind of completion percentage.

And those guys have done a better job relative to managing that craft and making the progress that they need to make. So I feel very good about that project and what that team is doing. But yeah, I mean, when things go bad, the boss has got to be there, and I get that. And I have been and will be as we finish this project..

Okay. That's helpful, David. And then, look, the power project is what it is. But if we look at the rest of the segments, in the quarter, they're at least a little below our expectations and below the guidance for the rest of the year.

So, look, I don't want to read too much into one quarter, but maybe talk about the visibility for margin performance going forward. It's just hard to see – if I look at E&C, you've got a little bit of a step-up there modeled (35:05) and maintenance, I'm not sure why the margin is low there in the quarter..

Well I think that, as we talked about in previous quarters, I think that we've been looking for the bottom. And I think we see it in terms of new award production. I think the second quarter might be – it'll be better, but it'll still be sub what we think it will be, and it is heavily loaded towards the backend of this year.

But I think 2019 is going to be another great year. And it's on the back of refining, petrochemicals, gas, LNG. It's on copper. There's lot of work that's coming this year in the mining sector, primarily in South America, some in Australia again. So I think, as I've said in the prepared remarks, I think we're in a multi-industry multiyear upturn.

So as disappointing and as angry as I am about this particular quarter, I got to tell you I'm pretty excited about what's in front of us. And I realize the credibility hit that this takes with investors. I think we got it. And I think we're going to finish. We don't have that much time left to finish.

So I believe that we've seen the bottom and as I've said, the quality of what we've put in the backlog relative to the integrated solutions is better margin with a better risk-adjusted coverage than the power projects that we've put in the backlog four years ago..

So, just a quick clarification for Bruce. You've got a $0.30 difference between your charge and your lowered guidance. I guess, half of that or a little more than half of that is FX.

Is the rest of it the difference from the $0.85 you said last quarter in rev rec plus lower tax, is that number now, call it, $0.15 lower or am I missing something?.

Well, you're not missing anything, Andy, and actually the exact amount that we're decrementing for the range that I gave last quarter of $0.75 to $0.95 for both tax and rev rec included, we expect to be significantly lower. The time I said about two-thirds of that range would be associated with rev rec.

If you look at our Q, rev rec in the quarter was only accretive to earnings by, what, little over $1 million, $1.1 million. We expected a whole lot more than that. And again, as I said in my prepared remarks, it has to do the timing and progress and mix of all these jobs around the world and how rev rec is calculated.

The total that we have and you could see that in our retained earnings, about the $360 million, which last quarter we thought that's what the total impact would be over 3.5 or 4 years. We still believe that number is correct. It's the timing of it. And that's why we are being much more prudent here on what's actually going to come in this year..

Thanks, guys..

Thank you.

And our next question is from Jerry Revich with Goldman Sachs..

Yes. Hi, good evening..

Hi, Jerry..

David, can you talk about where you see the mining award cycle in terms of expansions versus greenfield and when do you expect to see meaningful pickup in terms of the greenfield portion of the book there? Obviously, we've had mid-sized project so far by Fluor standards based on like a pipeline.

When do you think we could see more meaningful greenfields booked for you folks?.

I think it's going to be a while before you see greenfield. What we're seeing right now is kind of replacement type projects and they're big projects. I mean, there's two or three projects that are in the near term that are in excess of $1 billion in copper, iron ore and to a lesser degree gold.

But in terms of really ramping up capacity, I don't see that for a while. I don't think we're there yet. But in this cycle, I think you're going to see a lot of upgrades, a lot of replacement capacity, going deeper or harder to process ores, which is right up our alleyway and there's some very large projects that we're pursuing.

But I wouldn't even venture a guess as to when you're going to see the real large $10 billion kind of new capacity mines and processing facilities coming on. But I think we've got a long tail on the stuff we've just talked about over the next – in terms of new award, so probably the next two to two-and-a-half years..

And, David, how does the cadence of new awards look in terms of what you would expect to be awarded this year versus what the 2019 or maybe 2020 event? How would you characterize the cadence of that activity?.

I guess, I'd use the word steady. I think over the next six to eight quarters, you're going to see something pretty good size within that mining sector. We've really done a lot of work leading up to this cycle on frontends and studies and stayed very close to these customers and help them develop these projects.

So, I think that team's done an outstanding job of really looking at which projects that we want to go get, where we have a differentiated offering. And I think over the next, like I said, six to eight quarters, you're going to see a pretty steady new award flow..

And David, on LNG Canada, are you willing to talk about based on your plan what proportion of the man hours or total fabrication work will be done at your fabrication facilities versus onsite and how that's different from a similar scope LNG projects in the past.

Can you frame that for us at all?.

No. I really I want to get into segmenting that. I would just say that our yard is going to be busy for quite some time..

And we hear modular project approaches from a lot of your competitors as well.

Can you just frame for us on a project of this size how is your approach using fabrication yard to modularize and effectively drive less craft labor onsite, how that's different from the approaches that some others are using just to help us all build comfort with the fixed-price risk there?.

I think lots of people are talking about modularization because we are. Other companies have done it in the past and have that expertise. But I would use Kuwait as an example. There's lots of people fabricating pipe racks.

We're fabricating fleet process modules fully loaded with pipe, instrumentation, electrical, lighting, everything, which goes back to Redwater in Canada. But it all starts with the design approach that we've taken, which is different than our competition. It deals with how these modules are separated, it has with the weight of these modules.

But the most important thing is how do you load that module sufficient to where you gain the productivity on the job site once those modules appear. Our experience in both CFP and the – Suncor and the other projects that we've done – setup has been flawless, which again goes back to that design approach, the design procedures that we've implemented.

So I think that we do have a little bit different mousetrap than anyone else and that's been proven. And we're way down the road on the two biggest ones that we've done so far, which is the two Kuwait projects.

And seeing what's actually stacked in these modules on Al-Zour shows a significant difference in terms of what our competition is trying to accomplish..

I appreciate the color. Thank you..

Thank you..

And our next question is from Tahira Afzal with KeyBanc..

Thank you.

David, you talked about being fairly selective going forward might impact your win rate, but can you talk about maybe the areas that do carry – is there commonality (44:40) in terms of the risk you're more selective around in terms of maybe the types of projects or the regions?.

No, I wouldn't segment that, Tahira. I think, as I've said, we started on this journey when I became CEO. And I think where we are in that journey is perfecting the approach and we've been able to prove it. And if that is correct and I believe it is, I believe that it kind of gives us the latitude to choose the right projects for that approach.

Say thank you, but no thank you to the ones that don't. And I don't think market or region necessarily have a bearing on that. And we're not going to be the low bidder, but we're going to have the best solution in some cases.

And that should give everyone comfort that we're actually doing the – we're looking at things differently today than we looked at when we bid those four power plants..

Got it, okay. And David, you mentioned renewables, nuclear I get, and it seems NuScale has come through against all I think, media hype or skepticism and it's doing really well.

But would love to get a better sense of what you're thinking on the renewable side?.

Well, I mean, solar and wind are going to be part of it. We're not going to obviously take the kind of approach as I'm suggesting in E&C with those kinds of things. But we've got an expertise there and we're going to continue to do the projects when they come up.

We follow that and particularly the solar side very carefully and technologies are changing. It's becoming more amenable to the models that they need to do. But, I think, the bigger issue is the power generators and where do they need the power.

And I think that really translates into opportunity for NuScale because it's not going to be in the places where you think. It's going to be in places where there's a new industrial capability going in. So I think internationally there's a big market there. In the U.S., it's going to be in places like Idaho where project number one will be.

But I'm very encouraged by what we've been able to accomplish there. As you said, there are a lot of naysayers. We submitted our design certification on time – first one ever. It was docketed ahead of schedule terms, ahead of any technologies that have been in front of the NRC in their lifetime.

We've hit all the schedules and passed phase one with flying colors. The client base is growing. The DoE sees the value of nuclear power and specifically the small module reactor and the flexibility that that gives for not only government institutions but also, as I said, some of these industrial complexes around the globe.

I'm really, really satisfied with what they've been able to accomplish. Now, we got to keep after it and get the NRC approval done. But I think from a technical perspective, it's proven its worth. And now we get into the legal reviews and all the licensing kinds of things that go on.

So I feel pretty bullish about where we are in terms of bringing in new investors and those projects moving forward in the timeframe we've communicated previously..

Got it, okay.

And, David, just to follow up to that, when you look at renewables or maybe matter of fact, re-look (48:55) even outside on your overarching business, do you think or do you see anything that technology-wise or process-wise that could be as potentially disruptive as NuScale? As we look at renewables as well, it's more the traditional opportunities that you see out there..

Well, if governments completely walk away from lowering greenhouse gas, that would be something that would be a problem. And clearly when you burn gas, you have emissions. Nuclear, you do not. And I think people are starting to realize that.

But I think the issues that I see that could be disruptors are more geopolitical issues because some of these places for us to be able to participate the country that it's going to needs a 123 Agreement or we won't be able to deploy that technology there. The Saudis don't have one yet, but they're working on it.

I've had conversations with the folks in Saudi as well as within the DoE and they're moving in the right direction for that. So it's those kind of things that I think are really the disruptors that I'm concerned about..

Got it. Okay. Thank you, David..

Thank you, Tahira..

And our next question comes from Michael Dudas with Vertical Research..

Good afternoon, everybody. David, as you look at the bid list over the next four to eight quarters, how much of that is involved with the integrated solutions that you guys have? Every now (50:44) project has that support towards it.

And what about the current projects that are still in the backlog? Are they scrubbed to the point where it's using these technologies and systems that you've created or is there still some from (50:58) the "legacy issues" that might not achieve on a profit or productivity scale?.

Thanks, Michael. Couple of comments. Number one, when you have an issue like we've had, you can bet that we turned everything upside down throughout the company on that 1,000 projects that I mentioned. But I'd point you back to that 1,000 projects that I mentioned.

We had four power projects that were bid by the same management team at the same time and we and we accepted. We being me and my management team accepted those bids primarily because we just come off of a project in that market where we had bettered the as-sold margin expectation. Different things happened.

We ended up with a problem, but it's a confined problem within a group. And I acknowledge the question by Jamie on E&C and specifically the CPChem project again bid before we exercise this.

So I believe when we look at the risk in the backlog based on our reviews, based on where we are on finishing projects that are questionable without the benefit of the integrated solutions, I think we're in a good place.

With regard to the integrated solution, not every customer, not every project is going to enjoy the full implementation and we're okay with that. But when that lack of implementation of the full model is driven by a customer, there needs to be a very serious question about where the risk resides.

And going back to again Jamie's question, we're already having those conversations. And in some cases, either we or the customer because they won't accept what we want to do have parted ways and I'm okay with that too because what our customers have asked us to do is to become more capital efficient and more sure in terms of cost and schedule.

We've invested over the last five years significantly in our tools and systems. And in this model, which includes fabrication, direct (53:28) our construction, our supply chain capabilities. When we're able to deploy those, I think we're going to be in a very good place. And where we're not, there will be a risk-adjusted approach to that..

Understood. And to follow up, David, on your comments regarding Government and Infrastructure, handicap how you think with LOGCAP and some of the other opportunities you see throughout the year help Fluor's position.

And is infrastructure just solely Congress not going to get back together and allowing the funding for the larger type projects that you guys would rather be involved in or is the PPP projects or are they just not quite ready to get let out in the timeframe that you'd need to see, say, this (54:13) year into next?.

On infrastructure, I think it's a timing thing, Mike. You look at the gestation period of some of these things and I think I've told this group a couple of calls back about how long it took to get the Denver Eagle project from basically proof of process to cutting a ribbon and taking a decade.

I would argue that the LA People Mover is no different than that. The Purple Line is no different than that. You saw that even though it was sanctioned and moved forward, the government intervened again, but they were pushing more the regulatory side of that equation as opposed to the PPP model or where that financial model set.

So, yes, disappointed that Congress can't get their act together. I get it. Tax reform was a big deal. You read the papers like I do and the vitriol that's going on in that place. So getting them to an infrastructure bill that starts this process is problematic.

But when I look at what we're chasing and where those projects are in that gestation period, I think we're going to see a steady – kind of a steady award cadence over the next three years. I hope it's going to accelerate. I think it will accelerate.

But I think it's as much the regulatory situation as it is a comprehensive infrastructure bill by Congress.

I'm sorry what was the first part?.

Government..

Government..

(56:02)..

Feel good about where we are. I mean, I think that that team has done an outstanding job of growing that business. When you look at the number of DoE sites we've added over the last three years, I think we have a good brand in that market and are continuing to bid those projects and being successful.

If you're not doing a good job, they don't extend you which is evidenced by the Savannah River Plant extending us for a year to get them ready for the rebid, which I feel good that we'll be successful in that rebid. On the DoD side, I think we've proven to the Army that we're a contractor of choice and we provide the best value.

And I think we'll continue to win in that business. It's a good solid annuity style business, as we've said in the past, and I feel really good about where the brand sits with those customers..

Thank you, David..

Thanks, Mike..

And our next question comes from Andy Wittmann with Baird..

Hey, guys, thanks for taking my questions. Maybe Bruce or David, this one's for you, I guess. On NuScale, I guess, the Q said that the funding was going to run out here earlier in this quarter. But you said on the call earlier that it had been extended, maybe just clarifying that.

And can you just talk about how long it's been extended or the dollar amount of the matching funds that you've been able to realize with this extension?.

Sure. And then this is the ongoing process of kind of renewing the government matching funds that they're providing for the development of this technology and they are very fiscal-year driven – government fiscal-year driven so that end of that year is September 30.

And we were notified that the application we did, we got the award back for their next tranche of funding, which is in the tune of about $40 million that will be coming to us as soon as we get that agreement penned with them. The usage of that money flows through this year and we already are applying for additional funds for next year.

It's kind of a knock-on effect relative to burning the funds up on its current agreement while you're applying for the next one to keep the development of technology going through.

So, that's why I said, in the quarter, we're a little overspend, if you kind of – four quarter or $75 million spend, it would look like we're going to overspend, but that will clearly normalize before the end of the year and we will not be spending more than $75 million on NuScale, but be progressing the technology as we intended..

And I think it also ought to be said that the administration as well as the Secretary of Energy have seen small module reactors and nuclear in general in a positive light. So I think we're in a better position to continue to secure the matching funds as we go through time..

Okay. That's helpful.

And then just on Puerto Rico, given that it's kind of episodic in the numbers, can you talk about just quantifying that so we can get a better sense about what the revenue underlying the Government segment might be running at?.

Well, certainly that type of business which we call contingency type of business and, of course, you know Andy, I have a little bit of experience in the Government Group here, these are areas where we are well-positioned and postured to fill immediate needs of the government and the people it supports and protects, and Puerto Rico was just perfect example of that.

But pretty much no different than any other kind of a contingency event, whether it be in Afghanistan or any other portions of the world, some of them get sustained a lot longer.

So the underlying business of that we see a good solid business, as David said, but those type of areas are where we can build upon this Department of Energy base, what we do for them, decontaminating, decommissioning nuclear facilities, supporting their nuclear operations, running their strategic petroleum reserve, these episodic type of events or contingency events are kind of the icing on the cake there because we're able to really demonstrate how we pull from all aspects of Fluor to fix a problem that's facing our nation or national security..

Okay. Thanks..

That concludes today's question-and-answer session. Mr. Seaton, at this time, I will turn the conference back over to you for any additional or closing remarks..

Thank you, operator. Despite a disastrous quarter and our disappointment, I'm really excited about the future. No one is more disappointed than I am relative to where we are on a very finite sample of projects and we do know where the end is and we believe we've captured that.

But I think, again, we're in a multiyear, multi-industry growth mode and in the past you've seen Fluor outperform our competition and grow significantly. And I think we're poised to do so and I think the new approaches that we're applying give us better visibility into how those executions are going to be performed.

I appreciate your interest in our company and I wish you a good day..

This concludes today's call. Thank you for your participation. You may now disconnect..