Fluor Corporation
Q2 2018 Earnings Call Transcript

Published: 3 Aug 2018

[Operator:]

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

[Jason Landkamer:]

Thank you, and welcome to Fluor's second quarter 2018 conference call (1

[David T. Seaton:]

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

[Bruce A. Stanski:]

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

[Operator:]

Thank you. One moment. And our first question will come from Jamie Cook with Credit Suisse. Jamie L. Cook - Credit Suisse Securities (USA) LLC 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

[Bruce A. Stanski:]

Okay, Jamie I'll go ahead and start. [Technical Difficulty] (16

[Bruce A. Stanski:]

Okay. Something wrong with the line here. Well, yeah just talking about guidance and where we are so we're holding to (17

[Bruce A. Stanski:]

Sorry, can you repeat that? (18

[Bruce A. Stanski:]

Well, certainly in the second quarter, we did get a huge benefit from the FX - Jamie L. Cook - Credit Suisse Securities (USA) LLC No, I'm adjusting, I'm adjusting for that.

[Bruce A. Stanski:]

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

[Bruce A. Stanski:]

Nothing, special, no. Jamie L. Cook - Credit Suisse Securities (USA) LLC Okay. All right, sorry. And then just sorry on the cost [Technical Difficulty] (19

[David T. Seaton:]

We're always looking at how do we [Technical Difficulty] (19

[David T. Seaton:]

It's too early. We won't break (22

[David T. Seaton:]

Thanks, Jamie.

[Operator:]

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

[Steven Michael Fisher:]

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

[Bruce A. Stanski:]

Well, Steve, you kind of see (23

[David T. Seaton:]

But I think that when you look to the future (23

[Steven Michael Fisher:]

Okay. That's helpful. The E&C bookings were a bit light, just trying to [Technical Difficulty] (24

[David T. Seaton:]

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

[Steven Michael Fisher:]

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

[David T. Seaton:]

Thanks, Steven.

[Operator:]

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

[Andrew Kaplowitz:]

Good afternoon, guys.

[David T. Seaton:]

Hey, Andy.

[Andrew Kaplowitz:]

Just kind of (28

[David T. Seaton:]

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

[Andrew Kaplowitz:]

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

[David T. Seaton:]

We're in startup this quarter (31

[Andrew Kaplowitz:]

Okay. Thanks guys.

[David T. Seaton:]

Thank you.

[Operator:]

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

[Tahira Afzal:]

Hi, folks.

[David T. Seaton:]

Hi, Tahira.

[Tahira Afzal:]

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

[David T. Seaton:]

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.

[Tahira Afzal:]

Right.

[David T. Seaton:]

And lots of reasons why, some is the customer, some is the equipment supplier and some is of our own fault (34

[Tahira Afzal:]

Got it, David. That's actually pretty helpful. I guess [Technical Difficulty] (34

[David T. Seaton:]

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

[Tahira Afzal:]

Got it. Thank you, David.

[David T. Seaton:]

Thank you.

[Operator:]

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

[Corinne Jenkins:]

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?

[David T. Seaton:]

Well, yes, the one at Quellaveco, (36

[Corinne Jenkins:]

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?

[David T. Seaton:]

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

[Operator:]

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

[Andrew John Wittmann:]

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

[David T. Seaton:]

Yeah. As you've seen in our Q (39

[Andrew John Wittmann:]

Yeah. So that all makes sense (40

[Bruce A. Stanski:]

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

[Andrew John Wittmann:]

Right so. Yeah, all right, are you expecting a (41

[Bruce A. Stanski:]

Well, again, burning off the quarters we'll (41

[Andrew John Wittmann:]

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

[David T. Seaton:]

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.

[Andrew John Wittmann:]

Okay. Great, thanks very much.

[Operator:]

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

[Michael S. Dudas:]

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

[David T. Seaton:]

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

[Michael S. Dudas:]

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?

[David T. Seaton:]

That's the plan. (44

[Michael S. Dudas:]

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?

[David T. Seaton:]

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

[Michael S. Dudas:]

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

[David T. Seaton:]

Good luck. Who is your quarterback by the way?

[Michael S. Dudas:]

That's the Cowboys I mean. Thank you.

[David T. Seaton:]

Sorry.

[Operator:]

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.

[Anna Kaminskaya:]

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?

[David T. Seaton:]

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

[Anna Kaminskaya:]

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?

[David T. Seaton:]

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

[Anna Kaminskaya:]

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?

[David T. Seaton:]

Clearly, as we win these big projects, the customer advance [Technical Difficulty] (50

[Anna Kaminskaya:]

Great. Thank you very much.

[Operator:]

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

[Chad Dillard:]

Hi, good evening guys.

[David T. Seaton:]

Hi, Chad.

[Chad Dillard:]

Hi. So, David, you shared where you thought mining backlog is exiting the year to (50

[David T. Seaton:]

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

[Chad Dillard:]

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?

[David T. Seaton:]

Yeah. I would [Technical Difficulty] (53

[Chad Dillard:]

Thanks. I'll pass it along.

[David T. Seaton:]

Thanks, Chad.

[Operator:]

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

[David T. Seaton:]

Thank you, operator. I'll attempt to close us out here. As we moved, as I've said into the second half of (54

[Operator:]

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