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Edited Transcript of FLR earnings conference call or presentation 31-Oct-19 12:30pm GMT

Q3 2019 Fluor Corp Earnings Call

Irving Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Fluor Corp earnings conference call or presentation Thursday, October 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos M. Hernandez

Fluor Corporation - CEO & Director

* Douglas Michael Steuert

Fluor Corporation - CFO

* Jason Landkamer

Fluor Corporation - Director of IR

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Conference Call Participants

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* Andrew Alec Kaplowitz

Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head

* Jamie Lyn Cook

Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Justin P. Hauke

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate

* Kevin James Marek

Deutsche Bank AG, Research Division - Research Associate

* Michael J. Feniger

BofA Merrill Lynch, Research Division - VP

* Michael Stephan Dudas

Vertical Research Partners, LLC - Partner

* Sangita Jain

KeyBanc Capital Markets Inc., Research Division - Associate

* Steven Fisher

UBS Investment Bank, Research Division - Executive Director and Senior Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Fluor Corporation's Third Quarter 2019 Earnings Call. Today's call is being recorded. (Operator Instructions)

A replay of today's conference call will be available at approximately 10:30 a.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 November 6 through a registration link, also accessible on Fluor's website at investor.fluor.com.

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

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Jason Landkamer, Fluor Corporation - Director of IR [2]

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Thank you, and good morning. Welcome to Fluor's Third Quarter 2019 Conference Call. With us today are Carlos Hernandez, Fluor's Chief Executive Officer; and Mike Steuert, Fluor's Chief Financial Officer. Our earnings announcement was released this morning, and we have posted a slide presentation on our website, which we will reference while making prepared remarks.

Before getting started, I'd like to refer you to our safe harbor note regarding forward-looking statements, which is summarized on Slide 2. During today's call and slide presentation, we will be making forward-looking statements, which reflect our current analysis of existing trends and information. There is an inherent risk that actual results and experience 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 10-K filed on February 21. Our 8-K was filed this morning. However, due to EDGAR issues, it has not posted.

During this call, we may discuss certain non-GAAP financial measures. Reconciliations of these amounts to 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 I'll turn the call over to Carlos Hernandez, Fluor's CEO. Carlos?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [3]

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Thanks, Jason, and good morning. Thank you to everyone joining us today. Before we discuss our quarterly results, I want to quickly reiterate the changes we announced on September 24 as part of our strategic review and operational review.

If you would please turn to Slide 3. Last month, we committed to a plan to sell substantially all of our government and equipment rental businesses. Starting today, we will be reporting those business lines as discontinued operations. We also created a segment called Other, where we will keep our 2 fixed price government contracts and NuScale. We're also splitting our Mining, Industrial, Infrastructure & Power segment into 2 standalone segments: Mining & Industrial and Infrastructure & Power.

The actions we have taken over the last few months reflect the reality of our industry. We continue to act with urgency and have undertaken these changes to strengthen Fluor and put the company on a path to deliver consistent and profitable growth. As a result of this process, I believe we have a better understanding of our backlog, and I have confidence our backlog can positively drive future results.

Now turning to our segment updates. If you would please turn to Slide 5. For the third quarter, new awards for the Energy & Chemicals segment were $256 million and ending backlog was $13.7 billion. Ending backlog reflects the removal of the Wanhua chemical plant complex in Louisiana that was booked earlier this year and canceled by the client in the third quarter.

New awards for the quarter primarily reflect the timing of client FID decisions and are not the result of our revised pursuit criteria. We are committed to following a clear criteria to pursue the right contracts with the right terms. And we believe our new pursuit criteria will help us derisk the business and deliver higher margins.

One example of a project that fits our new criteria is the Rovuma LNG project in Mozambique. Fluor and our joint venture partners, JGC and TechnipFMC, were awarded a Limited Notice to Proceed earlier this month. This fourth quarter award allows the joint venture team to progress on the project until a final investment decision is reached in early 2020.

This project is aligned with our updated bidding standards announced on last quarter's call. We worked closely with our consortium to develop a project model that appropriately leverages each party's strength and capabilities. We also held a number of meetings with the client over the last several months to reach an agreement on items that were critical to derisking our execution profile. Like LNG Canada, we have a good relationship with strong partners that have deep experience in the LNG space. We're going to continue to work in lockstep with our partners to deliver a project that meets our requirements for safety, productivity and profitability.

As we look to the fourth quarter and early 2020, our Energy & Chemicals prospects include several significant reimbursable projects around the world. These include the Formosa Sunshine petrochemicals mega complex in Louisiana, a project in China for INVISTA and an ethylene oxide plant in Europe for BASF.

Let's turn to Slide 6. The Mining & Industrial group reported new awards of $119 million in the third quarter and ending backlog was $6.2 billion. Mining EPC awards for 2019 continue to track our expectations from last year as we continue to work on FEED and feasibility studies for large mining EPC projects that we expect to be awarded in 2020 and 2021.

Now turning to Slide 7. The Infrastructure & Power group reported new awards of $2 billion in the third quarter and ending backlog was $7.7 billion. New awards included the addition of the Texas DOT I-635 East project in Dallas as well as the I-26 North Carolina DOT project outside of Asheville. Segment profit of $1 million reflects our execution on lower-margin projects that experienced forecast revisions in the second quarter. Now looking ahead, we are pursuing additional road projects in Texas and remain confident in the strong prospects from our Fluor Heavy Civil group.

Let's turn to Slide 8. Our Diversified Services segment reported new awards of $260 million and ending backlog was $2.4 billion. This segment excludes AMECO North America, which has been moved to discontinued operations. Restructuring of Stork continues to progress on schedule, and we anticipate this business will deliver improved results in 2020.

Turning to Slide 9. The Other segment includes our 2 fixed price government projects, Radford and Warren and our investment in NuScale. As highlighted in our strategic review, we recorded $79 million in charges this quarter related to the Radford and Warren projects. These charges reflect additional cost growth relative to our initial estimate, engineering changes and unapproved change orders. The charges taken today reflect our current cost to complete estimate. NuScale expenses for the quarter were $14 million. But I do want to point out that Fluor did not provide funding for NuScale in the third quarter. We expect to receive another tranche of funding in the fourth quarter and are actively engaged with additional investors.

In discontinued operations, which includes our government and AMECO North America businesses, we reported earnings of $40 million or $0.28 per diluted share in the quarter. The government business was successful in winning contract extensions for Savannah River and Idaho National Laboratory. Our plan to divest these businesses are progressing well, and we expect both sales to be complete within 1 year.

And now I'll turn the call over to Mike to talk through the financial results from the quarter and outlook. Mike?

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Douglas Michael Steuert, Fluor Corporation - CFO [4]

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Thank you, Carlos, and good morning, everyone. As you can read about our results for the quarter in our earnings release and 10-Q that we hope to file this morning, I will focus on several key matters.

Please turn to Slide 10. For continuing operations, earnings attributable to Fluor for the third quarter were a net loss of $782 million. Results for the quarter include the following items: a noncash charge of $546 million related to establishing a valuation allowance against net deferred tax assets; $290 million in noncash impairment charges related to our fab yard in China, our investment in Stork and our joint venture with Sacyr; $44 million in restructuring activities; and $79 million in project adjustments on 2 government projects that Carlos just talked about. All of these items are consistent with what we communicated on our strategic and operational review call last month.

As it relates to the adjustment of our deferred tax assets, I want to again point out that while we removed these assets from our balance sheet for technical accounting reasons, they are still available to Fluor for tax purposes. This higher-than-anticipated tax rate this quarter is due to the company being impacted by this valuation allowance and certain foreign charges that could impact tax could not be tax-benefited.

Corporate G&A for the third quarter was $10 million compared to $61 million a year ago. G&A expense is lower due to reduced compensation accruals and favorable foreign exchange adjustments. Last month, we announced our plan to reduce overhead by $100 million. That plan is underway, and we will provide an update later this year.

Shifting to the balance sheet, please turn to Slide 11. Fluor's cash plus marketable securities for the quarter were $1.85 billion, slightly below last quarter. Our available domestic cash improved from last quarter and now represents 28% of total cash and marketable securities. The asset impairments that we took this quarter are all noncash. In addition, a portion of the restructuring charges from this quarter and going forward are also noncash. Cash utilized by operating activities for the quarter totaled $25 million. We used approximately $70 million in cash to fund the loss projects in the third quarter and expect to fund roughly $250 million in the fourth quarter.

As announced on September 24, yesterday, we declared our new quarterly dividend of $0.10 per share. This dividend reduces our cash usage by $15 million per quarter and aligns our payout with other similar dividend-paying companies. We remain focused on rebuilding our balance sheet and are confident that our financial flexibility will be further enhanced as we complete the sale of our government and equipment rental businesses. These sales, along with the monetization of surplus real estate and other non-core investments, are expected to generate in excess of $1 billion in aggregate proceeds.

And now if you'll turn to Slide 12. I'll conclude my comments by talking about our outlook for the fourth quarter. Although the company suspended guidance for 2019, we anticipate margins for the fourth quarter to be 4% to 5% for Energy & Chemicals; approximately 2% for Mining & Industrial; again approximately 2% for Infrastructure & Power; and 4% to 5% for Diversified Services. I also want to point out that Energy & Chemicals margins in the third quarter were positively affected by [project] (added by company after the call) closeouts, which resulted in margins higher than we expect in the fourth quarter. We are currently reviewing our operational plan for 2020, and we expect to issue 2020 guidance for the full year at the end of our call in February.

With that, operator, we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Jamie Cook from Crédit Suisse.

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Jamie Lyn Cook, Crédit Suisse AG, Research Division - MD, Sector Head of United States Capital Goods Research, and Analyst [2]

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I guess a couple of questions. One, as we sit here a month later relative to your strategic outlook call, if you could just comment on your view on the health of the backlog and whether we properly understand where the risk is in the backlog and risk of incremental charges going forward.

I guess second, on the asset sales, given some of the transactions that have been announced since you announced the decision to sell the government business, sort of where we are in the process and whether you're more optimistic.

And then last, Mike, understanding you don't want to give long-term guidance or guidance for 2020 yet, is there any help you can give us sort of on cash flow, how long the problem projects burn on the cash flow, when we expect cash flow to be positive outside of asset sales and cash from operations, I guess?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [3]

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Jamie, I'll take the first two, and I'll ask Mike to take the third one. With respect to the backlog, as you can see this quarter, we took a couple of charges on a couple of government projects, which we had indicated we expected to do that. With respect to the rest of the portfolio, our estimates have been holding very well. And I'm very optimistic that while we can't guarantee that we won't have charges in the future, we've gotten our arms around the backlog and are feeling very, very confident about where we are there.

With respect to the transactions, it's very early in the process, but I can tell you that there is significant interest with respect to both businesses. We've engaged our investment bankers for both businesses. We've got a list of interested buyers and we'll be progressing that very promptly. We're probably a little bit further ahead on the bid on the rental business, but we expect to close both transactions probably no later than mid-2020. And we're very positive about how those are going to progress. Mike?

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Douglas Michael Steuert, Fluor Corporation - CFO [4]

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Sure. Jamie, let me talk about the cash flow issue. First, as we look at the charges that we took in the second quarter in some of our loss projects, we did experience modest outflows in the third quarter. We will have some outflows in the fourth quarter and through 2020. The vast majority of those projects will be well along their completion path by the end of 2020. So we expect to see all that. But at the same time, we are working on improving underlying operations and expect to have positive cash flow from the rest of our businesses.

In addition, as you mentioned, we're working on asset sales. But we're also working on selling a lot of other non-core investments or other assets that will positively impact cash flow. And we have some claims and some other assets on the balance sheet that we hope to monetize over the next year as well. But we're not at the point yet that we can really break it out with the amount of definition that I'd like to and perhaps we will in February. But I am cautiously optimistic that we'll see some -- net of all the other special items, we'll see some positive cash growth throughout the latter half of 2020 and as we move into 2021.

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Operator [5]

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(Operator Instructions) We'll now take our next question from Andrew Kaplowitz from Citi.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [6]

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Carlos, can you step back and talk about the bookings environment as you see it? You didn't book much in E&C in the quarter. And I think you mentioned the cancellation in your prepared remarks. But during your strategic review, you suggested that Fluor's overall backlog could be flattish in '19. With the understanding that you've removed government and AMECO from continued operations, have your expectations for backlog changed a bit, given the cancellation? And are you seeing any incremental delays on project awards?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [7]

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Well, we have seen a little bit of delay. We had indicated earlier that the Rovuma project was delayed to probably the second -- first or second quarter from the final notice to proceed. But I think the new awards for 2020 as we're looking at now will be fairly consistent with what we said. It's going to be fairly flat to 2019 with the exclusion of -- obviously, with the exclusion of the government and AMECO businesses. But we are pursuing several big reimbursable projects in E&C and pretty optimistic about those. So I can't say that we're seeing a lot of growth, but we're not going to see much deterioration either.

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Andrew Alec Kaplowitz, Citigroup Inc, Research Division - MD and U.S. Industrial Sector Head [8]

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And then when you look back, it seems like you impaired most of the investments that the previous management made over the last several years with the notable exception of NuScale. So at this point, do you see any risk of further impairments? And then when you step back, it seems clear that Fluor needs to improve the way it invests its cash. So how do you take that lesson and move forward? Do you do fewer JVs? Do you do something different than integrate the delivery model? What do you do going forward?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [9]

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Well, I'll let Mike answer the question as to whether we anticipate future impairments. But no, you're absolutely right in terms of our investment experience. We -- we're going to be much more cautious in the future with respect to our investments. We pursued a strategy of getting into fabrication. And that strategy is a valid strategy, but we haven't had the success at the yard that we expected as early as we did. We are expecting now that the LNG modules will be relayed to that yard in early to mid-2020. So that yard, we expect, will be performing better than it has in the past.

With respect to the Stork investment, we probably paid more than we should have for that, but we're restructuring now, and it's going to be performing at a higher level in 2020. So yes, we've made some investments that may have been better made, but we're dealing with them right now. And we're not going to be making investments in the future that don't have a rigorous review in terms of its potential or its expected return. Mike, do you want to talk about impairments?

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Douglas Michael Steuert, Fluor Corporation - CFO [10]

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Sure. We did take a very close look at impairments. And the majority of the impairments were in regard to the fab yard in China. And we had a modest impairment on Stork and Sacyr Fluor. As Carlos mentioned, our outlook for both of those -- well, for both the fab yard and Stork is improving as we move through the remainder of this year and 2020. And we definitely think our impairments are sufficient for those. And I wouldn't expect any further impairments.

As we move forward and generate cash, I don't think you're going to see us making similar investments. Our priorities for cash are to rebuild our cash balance, strengthen our balance sheet and then, of course, return cash to the shareholders as we get to a healthy balance sheet and a healthy cash position. But that's how we look at it currently, Andy. And we certainly at this stage do not anticipate any further impairments.

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Operator [11]

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We'll now take our next question from Steven Fisher from UBS.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [12]

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The E&C margin in the quarter and the forecast were better than we expected. And I know you did cite some closeouts. But is the Q4 rate kind of the starting point for 2020? And how should we now think about the trajectory of the margin in that segment?

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Douglas Michael Steuert, Fluor Corporation - CFO [13]

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I think you could, at a high level, say, this is a starting point for 2020. But again, we're going to be going through a very detailed review of 2020 as we close out this year. And we'll feel much better about providing detailed guidance in February. But we are pleased with how the businesses are performing as we exit this year and are going to be setting high expectations for performance in the next year.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [14]

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Okay, that's helpful. And it seems like Infrastructure & Power profit dollars will still be pretty immaterial in the fourth quarter. But you are putting some new big projects in there, like the I-635. So until LNG Canada and some of the other big energy projects ramp up, is this going to be the swing factor segment for overall profitability, do you think? And how long will it take for that segment to start showing a more normalized margin, which I assume should be more like the mid- to upper single digits?

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Douglas Michael Steuert, Fluor Corporation - CFO [15]

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It's going to take a while for the loss projects that we took in the second quarter to burn through backlog. But as we exit 2020, moving to 2021, I think you'll start seeing much more of a return to normalized margins. We're very pleased with I-635 award. We have a great track record with Texas DOT. And we think that's going to be a real good contributor as that moves forward. In addition, the other activities will again be moving out of backlog as we go forward throughout 2020.

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [16]

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Yes, let me just add something to that, Steve. We've got now almost 20 projects in the infrastructure business, which is a very healthy number of projects. And some of those have been around for a while. And those are the ones that are not delivering the margin right now. But as we work our way through those, I think we should expect improved margins as Mike indicated.

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Steven Fisher, UBS Investment Bank, Research Division - Executive Director and Senior Analyst [17]

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Great. And then just lastly, Mike, I wanted to follow up on the cash flow question that Jamie asked. If you can't quantify it, are you thinking that the net burn through the first half of 2020 will be a bit less than you were thinking a few months ago?

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Douglas Michael Steuert, Fluor Corporation - CFO [18]

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On a net basis, yes, I've been pleasantly surprised over the last couple of months of the cash-generating capability of our ongoing businesses if you take away these loss projects. We certainly have been, as an organization throughout, focused on cash flow generation. And I just see us generating a fair amount of cash from that as well as from collecting cash from other non-core assets and investments that we're really scrubbing our balance sheet.

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Operator [19]

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We'll now take our next question from Jerry Revich from Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [20]

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I'm wondering if you could just expand on Rovuma LNG. So congratulations on the contractor selection. Where we've had issues with projects in the past, it's been either a function of timing overruns, issues getting change orders approved or engineering design issues. And so as it relates to those 3 pockets of risks, if you will, can you just talk about how you folks have been able to mitigate those issues within the bid for Rovuma LNG?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [21]

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Sure. Well, first of all, we've mentioned in the past the changes we've made in our selectivity or pursuit criteria. And clearly, the Rovuma project met all of that criteria. We have 2 very strong partners in that project, JGC and Technip. Both have significant experience in the LNG arena. We have engaged in discussions with our customer for a number of months now in derisking the project. We've had high-level conversations with that customer with respect to what's happened in the industry in general as far as the allocation of risk having been disproportionately shifted to the contractor. And so it's been a very, very cooperative process.

There are certain risks in the projects that we have not taken. I can't go into detail in those. But there are some risks that's remaining with the owner. In terms of schedule, in terms of productivity, this is a stick-build project and we feel very confident that we have addressed all the risk issues here. So it's going to be a matter of showing you. But I am extremely positive about this project. And we are -- and so are our partners, so I'm looking forward to it.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [22]

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And obviously, we know your background, Carlos, in terms of focusing on terms and conditions. We're just trying to build our comfort level around timing, in particular. So when we've seen the cost overruns in terms of productivity and labor hours, it's been in part due to a function of tight project timing. So can you just talk about that particular aspect of the contract structure, if you wouldn't mind?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [23]

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Sure, not at all. No. Obviously, one of the key issues in these projects that -- or any project that we have struggled with in the past has been where we've had an inadequate schedule. And that is part of our criteria now that we're not going to agree to a schedule that's overly aggressive. And in fact, that has actually caused a project for us to be canceled by the owner because we wouldn't agree on what the owner wanted for the schedule.

In Rovuma, the way we have structured that contract is that the risk lies with the party that's best able to manage the risk. For example, the client is responsible for all in-country risks. We're not going to -- we're not responsible for security, but of course, we are responsible for our people's security. And we're not going to be mobilizing onto the site until security is in place and it is at an acceptable level. There is a robust force majeure definition, including all places where the work is being performed, not just in-country. And we have procured subcontractors, Tier 1 subcontractors with a proven track record and have appropriately allocated risk to them. And as I mentioned earlier, the project really meets our pursuit criteria.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [24]

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Okay. I appreciate the color. And then on the infrastructure project opportunities, we've seen a couple of companies stepping away from the larger projects because of inadequate risk terms on multiyear infrastructure projects. Can you just talk about your assessment of the market environment and what your opportunity set looks like? Do you agree with the assessment from a few of your competitors and partners?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [25]

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Yes. One of the differences between some of the competitors that have exited the mega infrastructure, P3 or other large infrastructure projects is we do have the capacity and the balance sheet to take on those projects. But we're not going to take on projects, for example, where we don't have the right team to execute. We have -- we just recently walked away from an opportunity because we didn't have the right team. I think that there will be plenty of opportunities in infrastructure, especially as we complete the existing projects.

And in the geographies where we have said we're going to execute infrastructure projects, we're going to be able to get work. For example, in our Heavy Civil business, which is a business that's construction only for smaller projects in the $100 million to $200 million range typically, we have a couple of opportunities where we're going to be doing those on a unit rate basis, taking out quantity risk. So I think we're well positioned in infrastructure, but we're not going to get ahead of our skis and take more work than we can execute effectively.

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Operator [26]

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We'll now take our next question from Michael Dudas from Vertical Research.

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [27]

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Carlos, when you're looking at the projects that you're waiting FID on and from the risk standpoint that you renegotiate or rethinking about it for, how do those contracts that are waiting for award, how does that fit in relative to what was done because those were probably looked on quite a bit in the past? And then what are you telling your sales folks or your operating folks relative to the new level of projects that you're bidding in the next -- now through the next 6 to 9 months? How much differently are those changing? Is that like making you look at different parts of the energy market, different parts of the mining market relative, given the risk mitigation that you're trying to portray through the organization?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [28]

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Yes. With respect to the projects that we're waiting for FID on, such as Rovuma, that project as well as actually the LNGC project did meet the existing or the new criteria in terms of contract negotiations. Obviously, those projects being as significant as they are, they received a tremendous amount of scrutiny. And we addressed all the issues. We either mitigated them, negotiated them out or appropriately priced them in.

What we're telling our salespeople is -- what I'm telling our salespeople is, "Look, we're going to pursue excellence in execution." And that starts at the bid, no-bid stage. We're not going to bid a project that we don't think we can execute effectively. And we're not going to take terms and conditions that unduly put risk on us. And we're not going to agree to schedules that we can't meet. And this change in approach to a more risk-balanced approach has taken very well within the organization.

When we review projects, and every significant project comes to review to myself and the corporate management team, we have a list of the criteria. And every project proposal or every package checks off whether the criteria is met or not. And that's now standard operating procedure in review of projects. So the message has been delivered and well received. And I think it's going to serve us well.

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [29]

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I appreciate that, Carlos. And just a quick follow-up, in Infrastructure & Power, that segment you have now, what's the power part of that business...

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [30]

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Good question, Jerry. That's basically...

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [31]

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That would be Mike, by the way.

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [32]

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I'm sorry, Mike. That's basically running off the power projects we have, some warranty issues. But you're right, there's not any substantially new -- any new business in power. We do have a power services business, but that resides in the Diversified Services segment.

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [33]

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Understood. And final thought is back to your comment on the pursuit process. Is that reducing the project funnel that you anticipate to be looking at over the next several months as well?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [34]

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It probably will reduce it a little bit but not in a significant way. We are -- one of the things we're also doing is we're going to be chasing more mid-cap type of work, which we had moved away from. We had gone almost -- not exclusively, but largely after mega projects. And some of that mid-cap work will be reimbursable. So I think overall, it's not going to have a huge impact on our backlog.

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Operator [35]

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We'll now take our next question from Sean Eastman from KeyBanc Capital Markets.

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Sangita Jain, KeyBanc Capital Markets Inc., Research Division - Associate [36]

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This is Sangita for Sean. I just want to ask on the favorable resolution that you talked about in the mining segment, if you could quantify that for us maybe?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [37]

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Yes. That was a long-standing dispute that we had with a client and have been in arbitration for several years. That was actually the result of what we had a really pretty favorable or balanced terms and conditions. And that is in the, I think, in the $25 million to $30 million range.

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Sangita Jain, KeyBanc Capital Markets Inc., Research Division - Associate [38]

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Okay, that's very helpful. And as we think about your long-term free cash potential 2020 and beyond, how should we think about your CapEx for your continuing operations?

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Douglas Michael Steuert, Fluor Corporation - CFO [39]

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We're going to have a very modest CapEx going forward for continuing operations. Absent the AMECO equipment rental business, most of our CapEx is really going to be to support our IT infrastructure and our office buildings. And we just see modest requirements there going forward in terms of investments. So it is not going to be a material part of our cash flow equation.

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Sangita Jain, KeyBanc Capital Markets Inc., Research Division - Associate [40]

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So should we think about it as less than half of what you have now, which is like $200 million-ish?

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Douglas Michael Steuert, Fluor Corporation - CFO [41]

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Oh, it's much less than half.

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Sangita Jain, KeyBanc Capital Markets Inc., Research Division - Associate [42]

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Oh, okay. Okay, great. And my last question on the government business that you have up for sale. I understand the process is ongoing and you can't share much. But can you let us -- share with us how you think whether it's going to be one large transaction? Or are you seeing multiple buyers and it could be broken up into pieces?

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Douglas Michael Steuert, Fluor Corporation - CFO [43]

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That, to some extent, is going to depend on the nature and value of the offers. But I suspect it's more likely than not going to be one transaction.

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [44]

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Let me correct something I said. I think I told you $25 million to $30 million for that resolution. Actually, I think it's more in the $20 million range. I was thinking of something else.

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Operator [45]

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We'll now take our next question from Michael Feniger from Bank of America.

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Michael J. Feniger, BofA Merrill Lynch, Research Division - VP [46]

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Just on the mining side, you guys highlighted how you're encouraged about 2019 -- 2020, 2021. I'm just curious if you could talk about the strikes going on in Latin America. It's been a lot in the press. Are you hearing anything of how that could impact the pipeline, how customer conversations are progressing, given that backdrop?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [47]

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Yes. Mike, at this point, that's not really impacting. We're basically doing FEEDs and feasibility studies or obviously we have some projects ongoing as well. But at this point, it's not impacting our visibility into the future in an adverse way.

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Michael J. Feniger, BofA Merrill Lynch, Research Division - VP [48]

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Fair enough. And following the strategic review, I'm just curious if you guys had any time to reflect how this business without government services, how we should be thinking about free cash flow conversion going forward, the balance sheet structure going forward. And with the proceeds you're going to be getting, I mean why wouldn't we see any notable buyback to like maybe offset the dilution there? I'm just curious how you guys are thinking about that following the strategic review?

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Douglas Michael Steuert, Fluor Corporation - CFO [49]

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That's a great question. We do see the cash flow generation capability of the business going forward remaining fairly solid even with the sale of government and American Equipment. American Equipment was not a significant cash flow generation capability the way that was managed and the way we invested in new equipment. Government was a solid cash flow generator, but our remaining businesses are as well. So we don't see a significant change in profile. As we look at the proceeds that we are going to receive from these sales, and $1 billion was a conservative estimate, we're all optimistic we can do better than that.

And in addition, we're optimistic with what we can do with liquidating some of our other assets. Clearly, as we improve our cash position as we reduce our debt to what we think is an appropriate level to remain solid investment-grade, our next priority is returning cash to shareholders. And if we get to the point that we're comfortable with our balance sheet, comfortable with our cash position and we see some excess proceeds, we will definitely consider share repurchase.

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Operator [50]

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We'll now move on to our next question from Chad Dillard from Deutsche Bank.

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Kevin James Marek, Deutsche Bank AG, Research Division - Research Associate [51]

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This is Kevin on behalf of Chad. I just had a quick question on the bidding environment for oil and gas. Has the lower risk model that the company adopted changed the conversation with customers? And if so, how has the project funnel changed?

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [52]

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We've been having, Kevin, since May 1, we've been having conversations with our major oil and gas customers precisely about this issue of the bidding risk environment. As you know, there have been a number of players in the space that have left the oil and gas because of the environment that has existed for several years. Our customers understand it. They get it. They are now telling us, "Look, we need Fluor to be a successful company." And we got to understand, we've got to work together to derisk projects. And we've already seen some of that in some of the projects that we've talked about. So we're not -- lump sum is not going to go away. But a balanced lump sum is going to be the model for the future. It has to be.

We are -- one of the things we're doing now on a lot of projects is we're starting up as a reimbursable cost during the design phase. And once we have a design substantially complete and the vendor data substantially procured, then we're in a very good position to lump sum the balance of the project. And that's something that we found a lot of receptivity from the clients on. So there will be projects that we will walk away from, for sure. But as I said earlier, I think that overall, we are in a very positive position in our industry because of our ability to execute the large projects, our relationships with our clients and the fact that others are not capable of managing risk as we will be able to do so.

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Operator [53]

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And our next question comes from Justin Hauke from Robert W. Baird.

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Justin P. Hauke, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [54]

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I've got another 2020 question. But hopefully, this one's a little bit more quantifiable. Just on the corporate SG&A expense, what's -- that was pretty stable for several years running, $45 million, $50 million a quarter. With the restructuring and assuming that a more normalized comp next year, what level of G&A do you think is kind of the run rate for the business with the divestitures?

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Douglas Michael Steuert, Fluor Corporation - CFO [55]

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It'll start out on the $45 million to $50 million range. And our expectation is as we implement these cost reduction programs that we announced as well as of some other adjustments that are in line with the divestitures that it will gradually decrease throughout the year. All the cost reductions don't take effect at one fell swoop. But our initial pass through that process has identified a lot of opportunities. They're not all going to reside at the corporate level. A lot of them are going to reside in the business units. But we do expect a gradual reduction of corporate G&A throughout 2020.

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Justin P. Hauke, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [56]

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Okay, great. That's helpful. And then just what was the size of the Wanhua debooking? Maybe we have that, but I didn't think you quantified it.

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [57]

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Yes, that was about $500 million.

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Operator [58]

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Ladies and gentlemen, this concludes today's question-and-answer session. At this time, I would like to turn the conference back over to Mr. Hernandez for any additional or closing remarks.

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Carlos M. Hernandez, Fluor Corporation - CEO & Director [59]

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Thank you, operator. With our strategic and operational review now complete and our restructuring underway, Fluor is now focused on returning to excellence in our operations and consistent profitability. Our employees remain our greatest asset, and I thank them for their ongoing hard work and dedication to Fluor. We're committed to working together as a team to execute our strategic priorities and position Fluor for continued success. And I'm confident we have the right people, the right structure and the right global footprint to leverage our talent and capabilities to generate shareholder value. Thanks to all of you for participating on our call today, and we greatly appreciate your support of Fluor. Thank you.

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Operator [60]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.