Jason Landkamer - Fluor Corp. David T. Seaton - Fluor Corp. Bruce A. Stanski - Fluor Corp..

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

Dudas - Vertical Research Partners LLC Anna Kaminskaya - Bank of America Merrill Lynch Chad Dillard - Deutsche Bank Securities, Inc..

Good afternoon and welcome to the Fluor Corporation's Second Quarter 2018 Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode and a question-and-answer session will follow management's presentation. A replay of today's conference call will be available at approximately 8:30 P.M.

Eastern Time today, accessible on Fluor's website at 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 August 9 at the following telephone number, 888-203-1112, the pass code of 8635678 will be required.

At this time, for opening remarks, I would like to turn the call over to Mr. Jason Landkamer, Director of Investor Relations. Please go ahead, Mr. Landkamer..

Thank you, and welcome to Fluor's second quarter 2018 conference call (1:05). 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 market close [Technical Difficulty] (1:18) slide presentation on our website, which we will reference [Technical Difficulty] (1:20) 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.

There are (1:36) risk that actual results and experience could differ materially. You can find a discussion of our risk factors, which could (1:42) contribute to such differences in the company's Form 10-Q filed earlier today and our Form 10-K filed on February 20. During this call, we may discuss certain non-GAAP financial measures.

Reconciliations of these [Technical Difficulty] (1:54) comparable GAAP measures are reflected in our earnings release and are posted in the Investor Relations section of our website at investor.fluor.com. Now I'll turn the call over to David Seaton, Fluor's Chairman and CEO (2:05).

David?.

Good afternoon, everyone and thank you for joining us. On today's call, we'll review the second quarter results and discuss our outlook for the rest of this year. Earnings attributable to Fluor for second quarter $115 million, or $0.81 (2:21) per diluted share, compared to a net loss of $0.24 (2:25) million, or $0.17 per diluted share a year ago.

Second quarter revenue was $4.9 billion and new awards were $5.4 billion. This represents the first time new awards exceeded quarterly revenues since the third quarter of 2016. Please turn to slide 3. For the second quarter new awards for Energy & Chemical segment were (1:05) $493 million, ending backlog was $12.4 billion.

During the quarter, we received a limited notice to proceed on (2:57) LNG Canada project in Kitimat. And we have assembled a remarkable project team and are preparing [Technical Difficulty] (3:04) investment decision, which is expected later this year.

We've collaborated with this customer extensively to create a project that will be successful for all parties involved. We started by taking the original FEED package and worked with our partner JGC to design a more economical and appropriate [ph] plot plan (3:23).

We then optimized the design using our zero-based execution approach to define minimum operating requirements and improved capital efficiency.

And finally, working [Technical Difficulty] (3:34) with the client we were able to leverage our supply chain, fabrication capabilities allowing us to [Technical Difficulty] (3:42) of needed onsite labor above or 35% which is probably the largest risk on that project. I look forward to talking more on (3:50) this project once FID is achieved.

We also saw (3:56) opportunities on two other LNG projects. We recently [Technical Difficulty] (3:59) our bid for project in the U.S. that could move [Technical Difficulty] (4:04) in 2019. The other prospects in Mozambique currently expected to reach FID in the second half of 2019.

Outside of our LNG opportunities, we expect a decision on a large petrochemical plant later this year with another one expected early next year. Globally we expect that the financial health of our clients will continue to drive CapEx spending on select advantage projects.

This includes significant downstream and [Technical Difficulty] (4:36) in Asia and Europe, Africa Middle East.

While we continue to pursue a number of prospects [Technical Difficulty] (4:42) and internationally, we will maintain our [Technical Difficulty] (4:45) and limit our pursuits to projects that allow us to fully leverage our people, systems and processes to maximize opportunity and more importantly minimize risk.

The one challenge for the quarter was a project in Europe of which we have $36 million in backlog remaining at the end of the quarter. And at the end of July the project was approximately [Technical Difficulty] (5:08) complete and we expect to reach final completion in September.

Turn to slide 4, the Mining, Industrial, Infrastructure & Power group reported new awards of $3.6 billion in the second quarter including the South Flank iron ore replacement mine for BHP in Australia and the Los Angeles International Airport Automated People Mover project. Ending backlog for the segment was $12.4 billion.

I'm pleased to see the mining market continue its upward trajectory [Technical Difficulty] (5:40) as clients turned to us to help improve their capital efficiency. At the end of the second quarter our backlog stood at $4.8 billion which is a significant improvement from $1.2 billion a year ago.

We expect some additional awards over the next two quarters that should drive mining backlog into the $6 billion to $8 billion range by year-end.

We continue to see opportunities in infrastructure which includes our recent announcement that our team was the preferred bidder on the Gordie Howe International Bridge project connecting Windsor, Ontario and Detroit, Michigan.

The second project in this region for Fluor and our partner, as we recently completed a Parkway in Windsor that will connect to this bridge. We expect the bridge authority to reach financial close (6:32) on this project this year.

Our results (6:36) for this segment include an additional charge related to our gas-fired project in Florida and we have $37 million in backlog remaining on this project at the end of the quarter. And through the end of July the project is 93% complete.

I am pleased to report that last night we were able to successfully achieve first fire on power block 1, which is a huge milestone. And supports the overall individual (7:02) completion dates that we're moving [Technical Difficulty] (7:02). This project along with our Greensville County [ph] project are (7:12) scheduled to be completed by year-end.

And this will mark our exit from the fixed-fire power market in the United States. Our power group is currently refocusing its efforts on other end markets. Turning to slide 5, the Government group reported new awards of $742 million which includes [Technical Difficulty] (7:31) for LOGCAP IV in Afghanistan. Ending [ph] backlog (7:37) was $2.3 billion.

Looking at our opportunities (7:40) for the second half of 2018 we were recently selected by the U.S. Navy's Naval Sea Systems Command and the National Nuclear Security Administration to manage the Naval Nuclear Laboratory. And we are also part of a team that recently won a contract to oversee operations at Los Alamos (7:57) National Laboratory.

As we have said in the past, we have wanted to have a bigger role in this space and I'm pleased to see that our strategy (7:59) is coming to fruition. Recent (8:02) wins are in addition to our pursuit of LOGCAP V contract and the liquid waste contracts at Savannah River and Hanford. Turn to slide 6 please.

Diversified Services reported new awards of $513 million which includes an (8:26) award to operate and maintain gas fields in Colombia. Ending backlog for the quarter is $2.2 billion.

As you may have heard, our oil and gas clients are beginning to increase spending levels on major maintenance programs, Stork (8:38) is well-positioned to benefit from this increased level of spending. Before Bruce provides a financial update, I want to briefly comment on tariffs.

We've done a lot of homework over the last few months looking at the impact of tariffs on us and our clients. After doing a deep dive on our projects we believe we can mitigate the Fluor exposure to tariffs through purchasing strategies and contract provisions. Now I'll turn it over to Bruce.

Bruce?.

Thanks, David, and good afternoon, to everyone. If you turn to slide 7, I'll start by discussing new awards and backlog. This quarter we booked new awards of $5.4 billion, driven mainly by $3.6 billion in our Mining, Industrial Infrastructure & Power segment.

We were pleased to win several big awards this quarter across the end markets we serve and are encouraged by the growing pipeline of work our clients have entrusted to us. Our book-to- (9:32) bill ratio improved from 0.53 last quarter to 1.1 (9:37).

As David mentioned, we recently won both the Los Alamos National Laboratory contract (9:44) and the Naval Nuclear Laboratory contract in our Government (9:48) Group. I think it's important to note that when we transition on to these sites, we'll see significant margin contributions as we recognize fee (9:56) with no corresponding backlog component.

Please turn to slide 8 (10:03). Revenue for the second quarter improved to $4.9 (10:05] billion, led by increased revenue contributions from the Mining, Infrastructure Industrial & Power segment, as well as the Government segment. Corporate G&A expense for the second quarter was $18 million, compared to $47 million a year ago.

Expenses in the quarter (10:21) reflect the benefit of $25 million related to foreign currency exchange (10:21) fluctuations. Now turn to slide 9. For the quarter, we reported net income attributed to Fluor of $115 million, or $0.81 per diluted share.

Results for the quarter do include a $0.56 charge related to estimated cost increases on a downstream project and a power project, $0.21 for the combined positive impact of foreign currency fluctuations at the corporate level as well as for an embedded derivative relating to [Technical Difficulty] (10:59] our joint venture partner in Mexico.

And additional non-recurring [Technical Difficulty] (11:04) related to final close out efforts on hurricane related work in Puerto Rico contributed $0.10. We have provided some highlights from the balance sheet on slide 10. So if you would please turn to slide 10.

Fluor's cash plus marketable securities for the quarter was $1.8 billion, flat to last quarter. Quarter-end domestic cash balance was approximately 13% of the total cash and marketable securities.

Our domestic cash position reflects the use of cash needed to fund our working capital in Puerto Rico, as Puerto Rico pays its subcontractors before it can invoice the government and return that cash to us and our legacy projects until they are complete. Before I discuss outlook, I want to cover a few housekeeping items.

This evening, we will file an S-3 to renew our (12:00) shelf registration that expired at the end of July. In conjunction with this shelf, we will also file an 8-K that presents our (12:07) 2015, 2016 and 2017 audited results under our new business segment reporting structure. Just to be very clear, this is not a restatement of our financials (12:11).

Nothing has changed in our overall results, just the classification. We also wanted to alert you (12:26) to our progress in closing out our significant (12:28) pension plans around the world. As you might recall, we settled our U.S. pension plan back in 2015. We are now working towards settling our UK pension plan that was frozen in 2011.

While our expense for this quarter was small, just $2 million, we do expect to see additional settlement charges in the future. We don't expect this settlement to have a material impact on our cash position.

Settling this UK plan will result in lower future expenses and eliminate the actuarial and (12:58) investment risk inherent in defined benefit plans. Finally, I want point out (13:02) the appendix we've added to the presentation that we posted online (13:07) in this afternoon.

In this appendix, you'll find a summary slide updating the status of our gas-fired power project as well as more detail on how we are managing our real estate and G&A expenses. Now if you'll be so kind, turn to slide 11. I'll conclude my prepared remarks by commenting on our guidance for the (13:27) second half of 2018.

We are maintaining 2018 earning guidance in the range from $2.10 (13:36) to $2.50 per diluted share. Guidance assumes G&A expense of approximately $50 million per quarter excluding any impact of foreign exchange fluctuations, (13:47) integration or pension expenses and tax rate of 25% to 30% (13:53).

NuScale expenses are expected to be $75 (13:56) million in 2018 while the run rate for NuScale (14:00) expenses are higher than normal, to-date, we will still limit our investment to (14:05) $75 million this year and invest at a lower rate after this year (14:09).

If you turn to slide 12, we anticipate 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% (14:25) range, Government to be approximately (14:30) 3% and Diversified Services to be around 4.5% to 5.5%.

As a final point, we're excited to announce that we're planning to hold an Investor Day in New York on Friday, November 16. We look forward to sharing our progress and goals for 2019 with our investor community. With that, operator, David and I are ready to take questions..

Thank you. One moment. And our first question will come from Jamie Cook with Credit Suisse..

Hi, good evening. I guess a couple of questions one for David, and one for Bruce.

First, Bruce with regards to the guidance, I'm just trying to understand how you're thinking about normalized earnings if we ex out all the charges because if I think – if I back out all the one-offs (16:02) in the second quarter, it implies you're earning about $1 of earnings.

And if I think about the range of guidance it implies in the back half of the year you're anywhere between $0.70 and $0.90 each (16:14) quarter.

So why is the second quarter over a $1 and the back half (16:20) run rate much lower than that or did something inflate (16:24) the second quarter? My second question relates to the slide you guys sort of glossed over in terms of real estate footprint and corporate G&A expense. I mean it looks like there's a new cost savings program evolving here.

So if you could provide a little color, it looks like there's lot of opportunity to reduce square footage, reduce corporate G&A and if you could give color on (16:47) how much NuScale could come down in 2019? And then David I'll try one more time, when do we see an end to the problem projects?.

Okay, Jamie I'll go ahead and start. [Technical Difficulty] (16:58) the phone is clipping your questions a little bit but I understand....

Yeah, we're hearing that on your end in the (17:05) prepared remarks. So I don't know if there's something wrong with the line..

Okay. Something wrong with the line here. Well, yeah just talking about guidance and where we are so we're holding to (17:14), of course we don't give quarterly guidance. We're holding to our $2.10 to $2.50 EPS range with the $2.30 midpoint.

And you know from the first half to the second half of the year (17:26), for us we're guiding very simply, in the first half of the year (17:30) we delivered $0.68 with between the two quarters, and the second half of the year simply doing the math from the midpoint of (17:36) $2.30 we expect to deliver $1.62 in the last two quarters (17:39) of the year.

But you know we're really not going to get into how that will fall in the quarters (17:45) because there is a lot of moving parts here, but we still are comfortable with our $2.30 midpoint..

But why is the implied EPS ex (17:51) everything else north of (17:52) $1 in the second quarter, like I threw out there (17:54) was there a gain in the fourth quarter we don't know in E&C or is that just – it doesn't make sense given where you were, what the run rate is in the (18:04) back half?.

Sorry, can you repeat that? (18:08), I apologize, Jamie, but you're getting really clipped. (18:09).

If I look at the second quarter and I add back the (18:13) problem projects, FX and Puerto Rico, earnings are about $1.06 or something like that dollar, okay.

If I look at your guidance in the back half of the year, it implies, I don't know, $0.75 (18:29), so I'm just trying to figure out why the implied (18:33) run rate is going down or was there something inflating the second (18:37) quarter?.

Well, certainly in the second quarter, we did get a huge benefit from the FX -.

No, I'm adjusting, I'm adjusting for that..

Okay. And from a run rate basis, we had a nice benefit from the Puerto Rico contract here as we closed it out. We don't expect any more earnings or maybe very limited earnings from the (18:54) contracts, so that's out of the portfolio.

We did see pickups in mining (19:03) as well as E&C in the second quarter, but we have some – a lot of puts and takes in the second quarter like you said..

And there is nothing inflating E&C margins, if we add back the $67 million in downstream?.

Nothing, special, no..

Okay. All right, sorry.

And then just sorry on the cost [Technical Difficulty] (19:22) David on the problem projects, just how comfortable?.

We're always looking at how do we [Technical Difficulty] (19:31) reduce our run rate. [ph] We've gone through a process (19:34) over the last couple of years of really [ph] what we (19:39) talked about in terms of disbursed execution and what we've done is we've been able to kind of stabilize that head count across the board.

And there is two activities that we've undertaken; one is the densification effort, so that we're maximizing the square footage of the existing facilities. And then over the next few years, we're going to exit an existing facility [ph] in Houston and (20:07) build another one.

And in doing so, we will [ph] reduce our footprint in Houston (20:14) from about 1.2 million square feet [ph] to about (20:16) 600,000. So yeah we're focused on overhead reduction and making sure that that [ph] we're as sharp as (20:26) we can be.

On those two projects, I'll start [ph] with (20:34) the power project, [ph] I'll hold a weekly call with a (20:36) project team including the President of that group which is almost resident at the site.

I can't overstate the importance of first fire yesterday (20:49) because it supports the schedules that we have not withstanding the charge that we had.

The charge that we had this quarter was missed [Technical Difficulty] (20:58) both in terms of material and labor associated with it which [ph] on other (21:05) projects that would have been handled by contingency and because this thing is out in lights everything stands out and that's why we had to announce it.

I still believe that because of the schedule, there is a positive adjustment at the end of the year available to us assuming that we continue to perform. But my accounting friends have made us report it the way that we've reported it.

On the project (21:38) in Europe that project completed in September, again we're in negotiations with the (21:43) customer and I expect some relief associated with that write down that we took in the quarter. But that project is all but done. So, I think these legacy issues as we get to December will be – are (22:02) all behind us..

I am sorry, David. Back on the real estate (22:07) footprint, I mean is this something in terms of cost savings? Are you going to end up (22:11) quantifying this? Is it big enough to talk about and just too early? I am just trying to (22:14) to figure out..

It's too early. We won't break (22:16) ground until probably mid-2019. (22:21) Our lease at the existing Sugar Land facility ends in, I think it's June of 2021. So, it's going to be significant – it won't be significant until we get to 2021..

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

Thanks, Jamie..

Thank you. And we'll take our next question from Steven Fisher with UBS..

Thanks. Good afternoon. I just want to come back to the question about the E&C margin because if you do add back or [Technical Difficulty] (22:58) for the quarter, I know Bruce, you said there was nothing special in there.

But then why would margins for the back half of the year then be implied at much lower rate? Or is that just some [ph] conservatism (23:13)?.

Well, Steve, you kind of see (23:16) very high margins in the second quarter from margins that have been lagging that in (23:21) E&C in prior quarters. So, as we look forward into future quarters, we are still sticking to our (23:27) 6% to 7% range for the second half (23:30) and we think that's very reasonable, so..

But I think that when you look to the future (23:39) we've talked about integrated solutions, we've talked about the things that we've been investing in and doing to change the model.

And the question that you guys asked, I don't know four years ago was do you think you'll ever get back into the 6% margin range in E&C? And I believe because of what we've done, yes we're going to get back to 6%, and stay at 6% as we run through this next cycle.

And as I said, we're on the early side of this cycle, and I believe the things that we've done and the pieces of projects that we're doing now that we were subcontracting before supports a higher margin going forward as we get into next year, and the year after..

Okay. That's helpful.

The E&C bookings were a bit light, just trying to [Technical Difficulty] (24:41) how much project deferral there is? And then kind of related, [ph] you last talked about (24:48) a potentially lower win rate going forward, so to what extent are you still seeing some aggressive bids that makes the lower rates still likely or have we sort of cleared the decks on that? And now what you're focused on is really all projects that you can be equally competitive with others out there?.

Yeah, I feel pretty good about where we sit right now. You know, we've had some things shift from quarter-to-quarter still, some decisions being made. I think, there's a little bit of trepidation on our customers because of tariffs. You know, we've done the studies and we know what those – what (25:27) that impact could be.

In most cases, it doesn't impact the client's model. So I think that our win rate will be more solid than maybe I've suggested in prior discussions. A good line of sight in the second quarter and – I'm sorry third quarter and fourth quarter is awards (25:42) and pretty high confidence in hitting some big numbers in those two quarters.

So as I said in my (26:03) prepared remarks, this is the first time we've seen a positive move in backlog since 2016, and I think you're going to see that that reality as we go through the next few quarters (26:20).

But decisions are being made [Technical Difficulty] (26:23) confidence is maybe stronger than it was last quarter when I kind of maybe had a little bit too stern a warning.

But we feel pretty good about where we're headed in this long awaited change in the cycle that we've [ph] talked about (26:43) and we're on the very beginning [ph] edge of that (26:44).

I mean mining alone if you go to – what was it, close of year 2016, we had $800 million in backlog, and today we're over [ph] $4 million and projecting $6 billion to $8 billion (27:01). And I see the same change in trajectory, oil and gas and some of the other stuff.

I think it's understated a little bit but, what the [ph] Government group has been able to (27:18) do with the laboratory community [ph] we believe (27:20) is tremendous.

And again you look at recurring revenues and earnings in our business is usually a very, very small percentage, and what we've been working on with the acquisition of Stork and with our focus on government is growing that recurring earnings, which just allows us to grow in this cycle bigger than we were in the last cycle.

So if you're sensing a little bit of optimism more so than the last quarter, it's correct because we can see the awards that are in front of us..

Okay. That's good to hear. Thanks very much..

Thanks, Steven..

Thank you. And next we'll hear from Andrew Kaplowitz with Citi..

Good afternoon, guys..

Hey, Andy..

Just kind of (28:17) following along those lines, I think, it was asked (28:20) before but when you look at mining, LNG, (28:22) infrastructure this year, I mean, the visibility toward bookings for you guys is good, but you know, when compare this cycle to other cycles, and maybe you can give us perspective, right.

So if we look at the 2013 and 2016 PetChem cycle, the 2011 mining cycle, you know, 2016 refining cycle.

Do you think ultimately over the next three years, you're going to be able to book more work than those cycles, [Technical Difficulty] (28:51)?.

Yeah. Andy you breaking up. I'm sorry, we've got a bad line today. But I think the short answer to your question is yes. In the last call maybe I think, it was last call, we began the eighth year in January, the eighth year of downturn in terms of capital spending across the board.

And we've been signaling the bottom for some time, well, we've seen the bottom (29:24) and the way I look at these cycles and what we've done on the integrated solutions (29:32) on – not just doing it [Technical Difficulty] (29:35) but just the skill sets around supply chain, our construction capability, our fabrication capability, I think, we've got a great opportunity to be a much bigger company in this cycle than we were in [ph] previous (29:51) cycles.

I was in China two weeks ago in our yard that is absolutely chock-a- (29:58) block full of modules for the Al-Zour power plant. And I'm telling you if you go and walk that site you can see why we did what we did and how successful we're going to be. There was 14 sailed out in May and they're fitting perfectly (30:26).

So not only is the competitiveness of our offering proving out, but the quality of our offering is proving out. And I think that, that's only going to be an added benefit when you look at this next cycle and the projects that are in front of us and the customers that are looking to us (30:45) for surety in terms of cost and schedules.

So, again I – you – just like Steven's comment, I'm pretty bullish on what we've invested in, it's just a shame that (30:57) this noise on legacy projects that have dampened some really good quarters over the last two years, and we've done everything in our power to lessen that risk, and better insight in surety in terms of our performance going forward..

So, I know that there are connections. So let me just ask you sort of a concise question. Do you hit any more milestones on that checked in Europe to get over that hump there because I think it's the same project that you have issues on some time (31:36) ago..

We're in startup this quarter (31:41) basically the answer to that nothing stands in the way of a startup in their operation in September..

Okay. Thanks guys..

Thank you..

And our next question will come from Tahira Afzal with KeyBanc..

Hi, folks..

Hi, Tahira..

So David can you talk a bit about what makes the integrated solution maybe for us who are not really from the industry maybe you can sort of highlight one or two elements that really help control the risk.

And I see not only for yourselves, but throughout more E&C names (32:25), if there's a problem project there's a domino effect and stuff to control once there's a cost increase.

Is there anything within the integrated solution model that does help prevent something like that?.

Well, I think in my prepared remarks the comment about 5% of the labor off the job site is key just because of the location. And regardless of where you are in the world, there is a limit on skilled capable crafts people, whether it's the Gulf Coast, the United States, the Middle East or anyplace else.

So one of the risk mitigations is being able to put things in a controlled environment in terms of quality and safety and the things that go with it. Maybe other and this is a technical terms, so be prepared its one throat to choke. Our customers are looking for one company that they can look to, to deliver these assets.

And more and more – most of our customers are looking past the unit rates and looking for total delivery. And that's what we're focused on, that's what we've invested and that's why I feel like in this cycle we've got the ability to connect the dots and there's no – there's no middleman that we've got to negotiate with.

We can get things done in a more timely manner and make sure that we stay in sequence. In every one of the problem projects something has gotten out of sequence..

Right..

And lots of reasons why, some is the customer, some is the equipment supplier and some is of our own fault (34:27) making sure you stay in sequence is the biggest risk mitigator to delivering cost and schedule (34:36)..

Got it, David. That's actually pretty helpful. I guess [Technical Difficulty] (34:41) just in some of the LNG projects you're seeing out there, David. I saw that Woodside recently pulled out of one in the U.S. Are you seeing some reshuffling in terms of developers and where they want to be positioned.

And does that change what you feel you're better positioned for?.

No, it doesn't change what we're targeting at all. You look at it LNG now and it's almost synonymous with the way the offshore market runs, where the beginning of exploratory wells, somehow the partners change. Either in percentages or completely changed out and I think you're going to see that in LNG.

There's always going to be a leap and in some of the other companies are going to ebb and flow, so I don't see that as abnormal (35:37) and it certainly doesn't change the ones we're focused on..

Got it. Thank you, David..

Thank you..

And next, we'll hear from Jerry Revich with Goldman Sachs..

Hi, this is Corinne Jenkins is on for Jerry Revich. So I was hoping you could talk a little bit more about the mining backlog, it sounds like you're expecting to have between $2 billion and $4 billion, so my assumption would be is that some pretty big projects.

I was hoping you could talk about how quickly you'd expect those to ramp?.

Well, yes, the one at Quellaveco, (36:09) that's been announced that – that you know we're on. It's a very large project. And then you know what you've got is a lot of replacement capacity type projects that are out there. You've seen the commodity price like I have, copper kind of leading the way.

In most of those projects or things again that have been pushed to the right on the schedule because of capital needs and this kind of downside. Yeah, we're tracking. We're tracking a lot of very large projects and it's not just this year. I mean I think this is going to be a longer cycle in mining than maybe we've seen in the past..

Thank you.

And then on the infrastructure side, so you boast a couple of projects that they're public private partnership, could you just tell us if you're seeing that kind of work or if that's just a couple of one-offs?.

No, as I've said, before I think the public private partnership approach has to be the leading approach, if these studies are going to get done. I mean, you've seen that our Congress can't pass or even sign a good infrastructure bill, I think he's been pretty clear about what he wants and in both cases they've used PPP as the go to model.

But federal government, state governments, they can't afford them, so you got to go to the private side to be able to fund them. And there is a lot of money sitting on the sidelines (37:47) waiting to fund these things. So financial closure on these things on a schedule that we expect is pretty high probability there.

But as you can see with the LAX people move or Gordie Howe, all those things are starting to move forward. And there's several more kind of big programs that we're doing right now that they give us confidence that that business is going to continue to to grow (38:24). Now if the U.S.

federal government can get their ducks in a row and pass a infrastructure bill, I think that supersize is the opportunity there..

And our next question will come from Andy Wittmann with Baird..

Great. Thanks for taking my question. In the first quarter, the change in the revenue recognition didn't have really a material effect on your reported revenues or your profits, but looks like the 10-Q calls out that on a pre-tax basis it's about $30 million and most of that it says fell in the E&C segment.

The missing piece to the "gain" that other analysts looking for, or is that level of impact from (39:16) revenue recognition supposed to stick around in the second half?.

Yeah. As you've seen in our Q (39:24), we have a revenue recognition, a narrative and it's got tables in it where we're comparing the current quarter old way versus new way and then year-to-date old way new way. And from that table, year-to-date we're a little over $21 million (39:41) in the rev rec column.

So, as you remember, at the beginning, we reduced our retained earnings by about $340 million. And that's what then gets re-recognized on a basis consistent with rest of our people companies in the E&C industry recognized revenue. So, it's a slower burn but you don't get the engineering high margin and then the construction smoothes it out.

So that $340 million will be burnt off over 3 plus years. The challenge, of course, is how to predict what comes in (40:18) each quarter. First two quarters of this year are very reflective of that. In the first quarter, we were $1.2 million (40:25) and then $20 million in the second quarter, getting to $21 million, (40:18) $21.7 million in the table.

So, we will see that inflection come and it will grow as time goes on. It's just a matter about how our contracts burn through each quarter and how much of that rev rec we pick up..

Yeah. So that all makes sense (40:46) but I guess maybe the question is, given it's lumpier, what's in the guidance? Are you expecting that to – in the first quarter, you said that for the year you don't (40:55) expect a material effect. We got a bit of material effect here in the second quarter.

Is that going to be negative or flat? How are you thinking about it in the second half of the year but I think that might be the missing piece to the revenue or the EPS deceleration that people are trying to understand better?.

Well, I said in the first quarter call, we're rolling the impact of rev rec into our overall guidance of our $2.10 to $2.50 now this year. And that is (41:21)..

Right so.

Yeah, all right, are you expecting a (41:24) benefit in the third and fourth quarter revenue recognition?.

Well, again, burning off the quarters we'll (41:32) see the impact by quarter. I've kind of fallen away from giving up [Technical Difficulty] (41:38) to provide guidance on that rev rec because it changes so much quarter-to-quarter. That's why we rolled it into our overall guidance..

Okay. I'll – my next question is just on – we were thinking that there was going to be a payment for the Chinese fabrication venture that was due sometime (41:57) this summer, it was around [Technical Difficulty] (41:58).

It didn't come in the quarter is it is third quarter or is that payment been delayed or somehow changed?.

It's been delayed. Basically we've invested as much as we can invest until the next projects come in. But there is an investment coming but it will be towards the end of the year. If not – it could slip into next year, but towards the end of the year..

Okay. Great, thanks very much..

Thank you and next we'll hear from Michael Dudas with Vertical Research..

Good evening, everybody, David.

If 2019 booking opportunities accelerate and FIDs come through do you anticipate that maybe the market might – clients might start to speed up their awards just because they're going to run out of some [Technical Difficulty] (42:57) capacity, engineering capacity and could we get to the point where we saw like in the early cycles of 2006, 2007 where things really heat up if the economy stays strong and these energy projects finally get pushed through?.

Michael, I think so. As I've said, they've pushed their spending both on the major maintenance and shutdown, turnaround kinds of things as well as on the capital side to the right for the last six, seven years.

And they still have to do the same things to (43:34) meet their bogeys in terms of reserves, new product that they're looking to do, if you get back into the petrochemical side, mining side.

One of the fears I have is, if you think back to that last cycle, it got a little pretty overheated in terms of those commodities, the engineering equipment, the building materials that we had. Hoping there's a little more structure and discipline in this cycle which I (44:11) signaled before.

I'm hoping it doesn't (44:11) peak bigger than it was, I mean there's more [Technical Difficulty] (44:14) out there available now than there was in the last cycle to be – put a point on it. But I just think it's going to point to a longer period of that peak.

But there's a lot of big projects that are lining up, and I feel really good about our position to capture our fair share..

But with your integrated solutions and your new model, can that mitigate and actually benefit you if those environments pick up in a couple of years?.

That's the plan. (44:55).

Thank you. Secondly – No I – good answer.

Follow-up is, take your temperature on NuScale, where we stand, there's been some interesting articles I've seen in the press last month or two on the prospects and how you're feeling and any timing relative to better visibility on getting off some of the expenses that we're seeing?.

Well, I'm pretty bullish about where we are. I mean we're the only small module reactor technology that's actually matured to a point [Technical Difficulty] (45:27). There's a lot of people talking about what they've got, but really all they've got something on a [ph] piece of paper (45:32).

We've got equipment being built and tested to support the NRC [ph] requirements (45:39) and design certification. So I feel pretty good about that, getting through that first phase which we did this last quarter puts us in a position where outside investors are starting to show interest.

The Department of Energy has been very supportive of what we're doing and how we're doing it. And I think that we're headed towards what we expected, but as I said our expected investment was all (46:15) meant to be replaced by others and that's what we're looking for.

And I put a lot of pressure on the NuScale team to actually do that and [Technical Difficulty] (46:30) the DoE is [ph] helping with that, (46:36) in terms of that match, and as I said [ph] there's (46:45) is peaking.

So, I feel pretty [ph] good (46:48) that we're on our schedule, and I'm not willing to say what – how much less for 2019, but it'll be significantly less..

And, David I'll take under 8.5 wins this year. Thank you..

Good luck.

Who is your quarterback by the way?.

That's the Cowboys I mean. Thank you..

Sorry..

And thank you. And I do apologize for some of the audio issues we're having. And we'll take our next question from Anna Kaminskaya with Bank of America..

Hi guys. Maybe I'll kick off with I don't know if you'll be willing to comment on 2019 growth prospects, but if I just look at your pipeline of projects, you should be ending the year with kind of double-digit backlog growth. Can you comment on how quickly can you convert it into revenue, if it's a double-digit backlog growth.

Can we expect double-digit revenue growth next year? Any color you can provide around kind of burn rate on backlog?.

Yeah, I'm probably not going to get too deep into that. The new rev rec approach smoothes things. So in previous times, we would have been doing the engineering early which [Technical Difficulty] (48:10) margin than the [ph] construction did (48:13).

So that fast ramp up and peak won't match the last cycle, I guess is the way I would categorize it, but these projects are starting quick and we are burning percent complete [ph] more (48:34) quickly than we did in previous cycles.

So, I wouldn't predict double-digit but I think we've got a good growth story and we'll obviously give you more of that type of detail when we have our Investor Day..

That's helpful. And maybe switching to free cash flow. Any comment on what the outlook could be for the second half, it's been coming a little bit weaker than I would have expected. Is it just where you are in the project cycle, is it just some of the problem projects just taking some of the free cash flow out of your company.

How do you expect the ramp of free cash flow through the rest of the year?.

So Anna, pretty straightforward, free cash flow is equal to net income.

So as we see our net income growing, that's going to be all [Technical Difficulty] (49:23) cash coming in and as we see the growth in the second half [Technical Difficulty] (49:26) both in our revenue and earnings burn that's going to really help our [Technical Difficulty] (49:30).

But certainly our focus [Technical Difficulty] (49:35) build that U.S. cash balance. That's why we're providing visibility in the MD&A and in our disclosures here [ph] is one (49:42) you to track it right along with us.

But no, that's [ph] where our free cash – we see our (49:46) free cash increasing as the year goes on and [ph] well, even more so (49:50) into 2019..

The opportunity for upside to come above 100% conversion with some of the prepayments on projects, kind of what are the potential upsides or downsides to free cash flow relative to your net income in the second half?.

Clearly, as we win these big projects, the customer advance [Technical Difficulty] (50:11). And right now, we're not really planning on the upside of customer advances because we do keep that earmarked for the projects, a lot of [Technical Difficulty] (50:19) but we do.

But that does very much drive our cash balance and you'll see that in our free cash flow..

Great. Thank you very much..

Thank you. And the next question will come from Chad Dillard with Deutsche Bank..

Hi, good evening guys..

Hi, Chad..

Hi. So, David, you shared where you thought mining backlog is exiting the year to (50:43) $6 billion to $8 billion. I was wondering if you could do the same thing for oil and gas. Then also it seems like the LNG cycle is kicking into full gear here with the LNG Canada win.

I'm just trying to get a sense for how you think about the comfort level with carrying multiple LNG projects.

Should the opportunity actually arise?.

Yeah, I think we shared the backlog today, it sits with E&C at about $12 billion. The previous peak was about double that. And I think we can grow past that in this cycle. I'm not going to give you the number but I think that significant growth over that 24 (51:23) is available to us in this cycle. With regard to LNG, yeah, you're right.

It's starting to percolate here with that win, is a big win for us. But I remind you that we're teamed with [Technical Difficulty] (51:43). So we're leveraging their resources, not just Fluor resources and we'll continue to [Technical Difficulty] (51:49).

They have had more than – I don't know what the peak was but certainly [Technical Difficulty] (51:56) [ph] 2 or 3 (51:57) in their backlog at one time in the last cycle. I'm not uncomfortable with the same number as we get into the cycle. I said though, I think it's going to be a little bit longer cycle this time.

So, when you think about LNG Canada, as an example, you've got about 12 to 18-month design cycle and those people will start to become available nine months into the process. So as you can see based on timing, we could have several in the backlog at the same time as long as their percent of (52:22) completion, fits the resource (52:41).

But the good thing about Fluor and when you do have those big projects, is you attract the best and brightest. We've proven that over our history and again in this cycle we'll do that again.

I think with the discipline around the design systems that we've changed, some of the predictive tools that we've got and the added capabilities that we have in terms of supply chain construction, fabrication, give us better – bigger bandwidth in this cycle than we've had in previous cycles..

That's helpful. And just really quickly on diversified services, it seems like the backlog continues to tick down in that business.

And I'm just curious whether you're starting to see – whether you're close to the bottom or any green shoots, and how you're thinking about timing for that business picking up from bookings perspective?.

Yeah. I would [Technical Difficulty] (53:44) some of the businesses within Stork, and some of the [Technical Difficulty] (53:47) on the Flour, of the historic Fluor side. As I mentioned, most of those customers in oil and gas, and in mining and everybody else stopped spending.

And we're seeing a tremendous [ph] uptick (54:04) in terms of those major [ph] maintenance projects, those (54:06) turnarounds and shutdowns. So the 2019, 2020, 2021, [ph] I think we'll (54:13) I see them grow pretty rapidly frankly, as those projects come up. As you know, there's a lot of assets on the ground that need to be maintained.

And I think that our business model allows us to do that for those customers as well..

Thanks. I'll pass it along..

Thanks, Chad..

And as there are no further questions in the queue. We'll turn it back to over the presenters for final comments..

Thank you, operator. I'll attempt to close us out here. As we moved, as I've said into the second half of (54:53) 2018 there's a number of signs that the cycle is pivoting from this multi-year trough in my conversations (55:00) with the customers, they're optimistic but measured in their efforts to move some of these projects forward.

They can deliver value across the range of the economic cycles. Our clients are being thoughtful in which firms they engage, and they're looking at more than just an E&C provider, they're looking for strong capability in the functions, but that can deliver (55:26) in terms of cost and schedule.

They [Technical Difficulty] (55:30) into focus on characteristics other than the lowest EPC bid. We are approaching this next cycle differently than we have the prior cycles.

We made (55:45) progress in the past few years and transformed the company (55:30) from a transactional reimbursable model to [Technical Difficulty] (55:52) supports collaboration and allows our company to bring innovative solutions to each and every project on which we work.

I thank you all for participating in the call today and greatly appreciate your support in Fluor. Have a good day..

And that concludes today's conference call. Thank you for joining..