Feb 25, 2009
Executives
Ken Lockwood – Vice President, Corporate Finance and Investor Relations. Alan Boeckmann – Chief Executive Officer Michael Steuert – Chief Financial Officer, Senior Vice President
Analysts
Michael Dudas – Jefferies & Co. Jamie Cook – Credit Suisse Alex Rygiel – FBR Capital Markets Andrew Kaplowitz – Barclays Capital Will Gabrielski – Broadpoint Amtech Graham Mattison – Lazard Capital Markets Barry Bannister – Stifel Nicolaus Andrew Obin – Bank of America Securities Steven Fisher – UBS John Rogers – D.A.
Davidson Brian Chin – Citigroup Joseph Ritchie – Goldman Sachs
Operator
Good afternoon and welcome to Fluor Corporation’s fourth quarter and year-end 2008 conference call. As a reminder today’s call is being recorded.
At this time, all participants are in a listen-only mode. A question-and-answer session will follow management’s presentation.
A replay of today’s conference call will be available at approximately 8:30 pm Eastern Time today, accessible on Fluor’s website at www.fluor.com. The web replay will be available for about 30 days.
A telephone replay will also be available through 8:30 pm Eastern Time on March 4, at the following number; 888-203-1112, the pass code of 4383516 will be required. At this time for opening remarks, I would like to turn the call over to Ken Lockwood, Vice President of Investor Relations.
Please go ahead, Mr. Lockwood.
Ken Lockwood
Thank you, operator; Welcome to Fluor’s fourth quarter and 2008 year-end conference call. With us here today are Alan Boeckmann, Fluor’s Chairman and CEO; and Mike Steuert, Fluor’s Chief Financial Officer.
Our earnings announcement was released this afternoon after the market closed and we have posted a slide presentation on our website, which we will reference while making prepared remarks. Before getting started, I would like to refer you to our Safe Harbor note regarding forward-looking statements, which is summarized on slide two.
During today’s call and slide presentation, we will be making forward-looking statements, which reflect our current analysis of existing trends and information and there is an inherent risk that actual results and experience could differ materially. You can find a discussion of those factors that might cause expectations to be different than actual results in our 10-K filed today February 25, 2009.
With that, I will turn the call over Alan Boeckmann, Fluor’s Chairman and CEO.
Alan Boeckmann
Thank you, Ken. Good afternoon everybody and thank you very much for joining us today.
Today we’ll be reviewing our results for the fourth quarter and also for the full year of 2008. In addition we’ll provide an update on our current business outlook and discuss our earnings guidance for 2009.
But first before we get into the specifics on behalf of the – over 40,000 employees of Flour Corporation, let me brag a little about 2008. It was without a doubt the strongest year in our Company’s history, with record selling revenue, earnings, new awards and strong cash generation and with $2.1 billion in cash and securities and minimal debt, our balance sheet strength is substantial.
To start off, I’m going to start with slide three and cover some highlights of financial performance. As I said we announced record financial results for 2008.
Our net earnings rose 35% to $720 million that translated to $3.93 per diluted share and that compares with $533 million, or $2.93 per diluted share in 2007. Consolidated operating profit for the year was $1.3 billion, that’s up with full 61% from $802 million a year ago.
The total year results reflect very strong profit growth in all business segments and it was driven by 34% increase in revenue and higher operating margins, which improved from 4.8% to 5.8% in 2008. Our revenue rose to a record $22.3 billion, up from $16.7 billion in 2007.
As I move to slide four, full year new awards rose to a record $25.1 billion, up from $22.6 billion a year ago, which was a record at that time. It was driven by increases in oil and gas and industrial and infrastructure.
We booked a very healthy $4.2 billion in the fourth quarter that when combined with the $8.8 billion in the third quarter, kept us on our recent average of about $6.5 billion per quarter. This chart clearly demonstrates the kind of lumpiness that we will see going forward as prospects move further out though at this point, we are expecting fairly strong new awards in the first half of 2009.
With regard to our markets and prospects, the economic environment is creating uncertainty on a number our markets. But many of our key clients continue to invest in strategic long-term programs where Fluor excels.
And while we have seen delays on several backlog projects, the impact has been relatively minor. Year-end backlog was $33.2 billion, up 10% over the prior year.
Now that was down sequentially from the high mark of $36.5 billion at the end of the third quarter and that was due to several factors. Those are increase in the fourth quarter revenue burn rate.
We also noticed and recorded the impact of currency exchange on international project values as the dollar strengthened, and the timing of certain new awards, which closed earlier than expected, and went into the third quarter and are bookings a record book into that quarter. With respect to our view on backlog going forward, while we do expect as always, there will be a certain degree of lumpiness from quarter-to-quarter, we continue to believe that we can maintain backlog at the current levels through 2009.
Let’s talk a little about the market in each of our segments and let me start with the largest market, oil and gas. As you turn to slide five, you can see that oil and gas had a tremendous year in 2008, and it finished the year with record backlog and operating profits.
The year was particularly strong from a downstream perspective. But as we have predicted, U.S.
refinery awards have begun to slow. We in fact continue to see downstream prospects in the U.S.
they are smaller in size than what they have been. The market is clearly moving internationally to Europe, Middle East and Asia, where we are growing our presence.
As I mentioned, we’ve seen several projects delayed including the most recent announcement by Bolero. And with the cancellation of the construction portion of our two-hydrocracker contracts, we have approximately $750 million remaining in backlog, which will come out in the first quarter of 2009.
We are extremely busy executing our substantial downstream backlog and we continue to track and perform fleet services on some very large international prospects. In the Petrochemicals area, we still see a number of opportunities in chemicals and specialty chemicals in the Middle East, China and to a lesser extent, Europe.
On the polysilicon side, we are hearing about some delays in expansion projects as many of these projects do require financing. Having said that, we are making substantial progress on projects for REC and LDK and continue to be very well positioned to capture a significant share of this growing market.
Finally, in upstream, substantial investments are planned in the Middle East, Russia and Canada. A number of these relate to the development of gas resources as well as offshore and onshore production facilities and related top sides.
We are particularly focused on these large opportunities where we can bring our extensive program management capabilities to bear. And while in the very early stages, we were very pleased with the selection of our Fluor-led venture by the Denali Group for a pre-FEED contract on a proposed gas treatment plant in Alaska.
This gas plant would be the world’s largest but more importantly puts us in a great position to participate in the overall Alaskan pipelines program, once it receives the necessary approvals. We find that many clients today are hoping to benefit from the lower commodity costs and because of this we’ve actually seen some increase in FEED work, but unlike our experience in recent years, the timing of the releases for the full EPC is probably less predictable.
I’m on slide six now, and on the Power front, we grew backlog substantially during 2007. In 2008 we completed the 242-megawatt pulverized coal plant for Newmont Mining, which was named a Top Plant Award by Power Magazine.
We also made substantial progress in ’08 on the Oak Grove project, which is going extremely well and on pursuing new contracts for gas-fired plants, also for FTD and SCR emissions reduction projects. In addition to our traditional power generation markets, we are also positioning ourselves and see great promise in a number of renewable energy markets, including large-scale wind farms, solar power and biomass facilities.
We are hopeful that the new administration will quickly address the U.S. energy policy and provide some clarity around carbon legislation so that the substantial power market can start moving forward again.
As you look at Industrial and Infrastructure, our mining backlog is intact with the exception of one copper project, which we took out in the fourth quarter. As we go forward, most clients have scaled back on their near-term CapEx plans although one significant bright spot exists, where our one mining client who despite CapEx reductions is we moving forward with a rather significant program that has been awarded to Fluor.
In Infrastructure, we have several major road and light rail prospects. The availability of funding is clearly an issue, particularly with state DOTs but we’re hopeful that the financial picture will improve as we move through this year.
We are excited about the pace in which new opportunities in the offshore wind area are developing. In addition, the Scottish and Southern’s plans to develop a second phase at Greater Gabbard, we were recently granted exclusive rights to develop a wind farm at Bell Rock off Scotland’s Coast along with our partner Airtricity.
This market is continuing to develop and has a potential to be a substantial contributor for us. I’ll ask you to move to slide seven, for the Government segment.
With awards for both Savannah River and LOGCAP IV, this Group has made significant strides over the last year. In addition to being one of our more counter cyclical parts of Fluor, this Group has fashioned solid growth prospects.
For the DOD, we are finally seeing a meaningful level of LOGCAP awards come our way, mainly for work in Afghanistan. And we also continue to be active under our CTAC contract in Iraq.
Also as you may know, our services contract for the DOE at Hanford has been extended which should also be a positive for the first half of this year. I’m very encouraged by this Group’s recent successes and we do look forward to a very strong 2009 from our Government Group.
Global Services, after four years of double-digit percentage EBIT growth continues to be very effective at renewing existing contracts, maintaining the presence on over 300 customer sites and expanding their services offerings globally. We also expect that we will see in this Group a pickup in refinery, outages and power turnaround work that our customers have been deferring.
We are also on the verge of signing up a number of new maintenance services relationships that have been in the development for sometime. Overall this segment is performing extremely well and should have a solid 2009.
So in summary, we remain optimistic that despite certain headwinds that are certainly out there for all of us, that our substantial backlog and a diversified business model will allow Fluor to deliver solid results in 2009. So with that let me turn the call over to Mike Steuert.
Mike will review additional details on our operating performance on our new awards and other financial information. Mike?
Michael Steuert
Thank you Alan and good afternoon. First, let me provide you with a brief recap of the results of each operating segment.
Please turn to slide eight of the presentation. Fluor’s Oil and Gas segment reported operating profit of $724 million, which is a 67% increase from 2007.
Revenue increased 55% to $12.9 billion. New awards in the fourth quarter totaled $2.7 billion including a petrochemical expansion project in China, a refinery conversion project in Portugal and additional scope on several downstream refining projects in the U.S.
Ending backlog rose 15% to $21.4 billion. Moving to slide nine, Fluor’s Industrial and Infrastructure segment reported operating profit of $208 million, a substantial increase from $101 million in 2007.
Improved results were mainly due to increased contributions from mining projects and $79 million pretax gain relating to Greater Gabbard. Revenue of $3.5 billion was modestly higher than last year.
New awards totaled $5 billion for the year, up 50% from last year. Year-end backlog rose to $6.7 billion, which is an 11% increase over 2007.
The Government segment posted operating profit of $52 million for the full year, up 78% from a year ago. Improved operating results reflect higher performance base fees from strong performance on contracts as well as improved profitability due to a shift away from fixed price contracts.
New awards totaled $1.4 billion for the year, including a Savannah River contract in past quarters and task orders under LOGCAP IV. Fourth quarter new awards totaled $271 million including about $100 million for LOGCAP IV task orders.
Backlog at year-end was $804 million, which is up modestly from $740 million a year ago. Turning to slide 10, the Global Services segment reported 14% increase in 2008 operating profit to $229 million.
Full-year revenue rose 9% to $2.7 billion. While all business lines generated strong results, the year-over-year improvement was mainly driven by increased performance from our Equipment Services unit.
Full year new awards totaled $2.1 billion, which brought our year-end backlog up to $2.6 billion. Fluor's Power segment reported a 98% increase in operating profit to $75 million, driven in large part by 64% increase in revenue.
New awards in 2008 totaled $1.3 billion including a 620-megawatt gas-fired combined cycle power plant that was booked in the fourth quarter. Ending backlog for the Power segment was $1.8 billion, which is down from $2.4 billion at the end of 2007, primarily due to progress on the Oak Grove project.
As Alan mentioned, Fluor's consolidated backlog at year-end now stands at $33.2 billion, approximately $1 billion of the decline from last quarter is due to the impact of currencies translation as U.S. dollar has strengthened, and another $217 million of the decline is due to the mining project cancellation that Alan also mentioned.
One quarter of the total backlog value is for fixed price contracts and the backlog is now evenly split between projects in the U.S. and those outside of the U.S.
Let me now move on to corporate items on slide 11. G&A expense for the year was $229 million, up from $194 million a year ago.
This was mainly due to higher compensation related expenses and $16 million provision associated with sale of our existing facilities in the U.K. We had net interest income of $55 million for the year compared with $41 million last year reflecting substantially higher cash balances throughout the year and lower interest expense.
The effective tax rate for the year was about 35%, which is an improvement from our expected 38% run rate. One driver in the quarter was $12 million tax reduction associated with capital loss in the U.K.
real estate transaction I’ve just mentioned. The remainder of the reduce tax expense primarily resulted from statute expirations and the reversal of certain valuation allowances.
By comparison, the fourth quarter of 2007 was affected by significant audit adjustment with the IRS that resulted in a very positive $122 million earnings impact. Shifting to the balance sheet, the solid cash and marketable securities balance went up to $2.1 billion throughout 2008, which compares with $1.7 billion at the end of 2007.
This $400 million increase is driven by strong cash flow from operations, which totaled over $900 million for the year. Our debt-to-total capital ratio was reduced to 5% compared with 13% a year ago, primarily as a result of the conversions by convertible note holders notable throughout 2008.
Capital expenditures for the year were $300 million, up from $284 million in 2007, with the majority of these expenditures attributable to our continued investment in our Equipment Services business and to investments associated with expansion of our workforce in our IT infrastructure. In the first quarter, we declared a normal quarterly dividend of $0.125 per share, which is payable April 2, 2009.
In conclusion, overall I’m very pleased to say that Fluor’s financial condition remains strong as it has ever been. Finally, let me address our guidance for 2009, which is shown on slide 12.
We are facing a challenging global economic environment, including declining demand for commodities and very tight credit markets. As a result, we are seeing evidence of a slowdown in certain new capital investment programs.
However the impact to Fluor's backlog has been relatively minor. Based on a review of our sizable backlog, a relatively robust prospect list and actions to improve overhead leverage, the company is maintaining 2009 EPS guidance at a previously issued range of $3.90 to $4.20 per share.
Operator with that, Alan and I will be happy to respond to questions.
Operator
(Operator Instructions) We’ll go first to Michael Dudas with Jefferies.
Michael Dudas – Jefferies & Co.
Good afternoon everyone.
Alan Boeckmann
Hello Michael.
Michael Dudas – with Jefferies & Co.
Alan, could you characterize some of the discussions that you had with your clients across the Board and how different are they reacting relative to what maybe investors or the general media is reacting towards the economic slowdown and the expectations of much lower capital investment going forward?
Alan Boeckmann
Yeah Michael I think clearly every client out there and every company in America is being cautious, but is nowhere near the gloom and doom that is being predicted in the general marketplace. Everybody still has companies to run they have plans to maintain; they have capital expenditures that they are committed to and our planning to benefit their business.
We seen some slowdown, I had mentioned out we seen some that are waiting a quarter or two get better commodity prices, but if you see the announcements have been made by a number of the oil companies, they are still planning on major capital expansions and so, the gloom and doom that’s out there is a general prediction, we are not seen it specifically in our business we are having, we’ve had some cancellations and delays, but they have not been major and we have had very nice surprises. We counted on almost no LOGCAP work in fact our LOGCAP predictions when we put our plan together we are almost to zero and we’ve had very, very nice infusion there.
The government business is picking up additional work and we are tracking some of more significant number of feed projects then we were at this time last year.
Michael Dudas – Jefferies & Co.
What just one follow up, if I could what of the end market that you see, maybe away from energy and oil and gas which market do you think and surprise to the upside relative to new bookings and the ability for Fluor to generate nice returns and maybe if you look at the INI business what’s sliver might be continued to cause some issues relative to new bookings and returns and maybe you can also talk about the U.S. infrastructure opportunity that may present itself for Fluor going forward?
Alan Lee Boeckmann
Sure, I think clearly, I have already mentioned that the unit within Fluor that has the most upside potential right now is our government business I mean in terms of what we had been planning on for 2009. But secondly, I think in our oil and gas and chemicals area, we are still seeing significant strength and potential awards and new awards in our chemicals group and in our upstream business and continue on fairly substantial feed work in the downstream oil side.
So I think both those two units still have significant opportunities in front of them. Interestingly enough the unit that you would probably think is going to be the worst hit, the mining industry and I know you covered that Mike so, you appreciate that, we actually have been very fortunate because of our positioning in our client relations to be in a position to take some pretty significant projects yet in 2009.
So, even though that business is being hit hard we have good opportunity there and we are capitalizing on it. As for infrastructure, I think all of us were a bit disappointed in what the actual bill presented in infrastructure, its more specific projects that are out in different districts I think the DOTs will eventually get money that I think will then be an opportunity, but we didn’t seen a lot coming out of the – of that bill that helped very specifically on infrastructure opportunities.
We actually are seeing at more in the energy side and I think that’s where we’re going to see some more during 2009 that was not expected.
Michael Dudas – Jefferies & Co
Thank you, Alan.
Alan Lee Boeckmann
You bet.
Operator
We will go next to Jamie Cook with Credit Suisse.
Jamie Cook – Credit Suisse
Hi, good evening and congratulations.
Alan Lee Boeckmann
Thanks Jamie.
Michael Steuert
Thanks Jamie.
Jamie Cook – Credit Suisse
All right my first question, you will be surprised by when I look at your guidance of 390 to 420 for 2009 I guess, given the delays that we have been hearing about and cancellations that we’ve been hearing about. I am surprised were not a little more cautious on the outlook for 2009.
So can you just, is there any way you can quantify what Bolero or Marathon or any of those projects quantify the impact of earnings 2009 and then also you mentioned that you thought that you would get some benefit from you’re taking actions to improve overhead those any of that in your 2009 outlook. And then last Alan, I just wanted to clarify I thought you said in your prepared remarks that you thought flat backlog would be flat for 2009 and I want to make sure was total backlog or was it oil and gas if you could just clarify that statement for me.
Alan Lee Boeckmann
Sure let me start with that one Jamie then I will come to your other question.
Jamie Cook – Credit Suisse
Sure.
Alan Boeckmann
I was talking with our total backlog, clearly it will be lumpy quarter-to-quarter, but if you look across the quarters year-to-year we expect it to remain relatively flat.
Jamie Cook – Credit Suisse
So, by the end of 2009 we will still be at like $33 billion.
Alan L. Boeckmann
Will be the number will start with a 3 I believe, yes.
Jamie Cook – Credit Suisse
Wow.
Alan L. Boeckmann
Yes.
Jamie Cook – Credit Suisse
And its oil and gas you are still seeing the prospects, but government is picking up.
Alan L. Boeckmann
Government is definitely picking up…
Jamie Cook – Credit Suisse
In renewable.
Alan L. Boeckmann
And what we seen an opportunities in renewable on the both the power and infrastructure side, we are - we have got several very large prospects in oil and gas that we hope to close on during the year. So, all in all let me talk a little bit more about the overall perspective as I can on the….
Jamie Cook – Credit Suisse
Sure
Alan Boeckmann
We currently put the guidance together in the different world in terms of how put together on the other hand if you look at the counterbalancing forces clearly I mentioned headwinds we have several headwinds no doubt we have had projects that have been deferred or canceled, delayed, we have some new awards that have been delay or stretching out and we have had a strengthening of the U.S. dollar which has created definitely some headwind on our P&L for 2009, but if even when you consider those risks and the drag on earnings we’ve had really relatively little cancellations of backlog and I am feel actually very good about the executions and the risk management that’s going on within that backlog.
We continued to see sizable prospects across the Board in a number of our business groups and we expect to have a fairly first strong first half in terms of new awards. You mentioned overhead we are, I think very responsibly taking a deliver and structured approach to overhead cost control, but again we were accounting on some overhead expenditures again based on a very different market, so, some of the cutbacks are very natural I would not labour any of our cutbacks to draconian.
We are still investing in a number of areas for improved competitiveness for trending of our personnel. So, we believe we can cutback on discretionary items that help balance that earnings projection and we’ll continue to evaluate that as, we go through the year.
Jamie Cook - Credit Suisse
All Right, great I’ll get back in queue congratulations.
Alan Boeckmann
Thank you Jamie.
Operator
We’ll go to Alex Rygiel with FBR Capital Markets.
Alex Rygiel – FBR Capital Markets
Thank you and good evening gentlemen.
Alan Boeckmann
Good evening Alex.
Michael Steuert
Good evening.
Alex Rygiel – FBR Capital Markets
Couple of quick question first Mike I believe you mentioned actions to improve overhead leverage what did you mean by that?
Michael Steuert
I’ll say just has what Alan explained we are responding to the changing economic environment and we’ve been very successful in leveraging overhead last couple of years and generating increased profitability to that and as we see these markets mature we want to keep leveraging our overheads and keep generating more EBIT per dollar overhead so we are taking a number of actions to ensure that and we continued to do that Alex.
Alex Rygiel – FBR Capital Markets
Okay are you seeing any increased competition that is leading to pricing erosion or lower margins on upcoming opportunities?
Alan Boeckmann
Alex, I think we have seen a little bit of that in particular markets. I think that may continues as we go through the year, but again we have got a fairly good and complex systems of selectivity that we use to make sure, that we were competed on projects were we have got a value added proposition.
So, I don’t foresee any significant margin erosion in our backlog.
Alex Rygiel - FBR Capital Markets
And one end market that was left out on the power side it was nuclear generation, could you comment on that right now?
Alan Boeckmann
I’m sure, Alex we are continuing to support Toshiba, as their sub contractor on the NRG south Texas project. I think you probably saw a press release this morning from them announced beside of their contract with their client.
We’re continuing to support them for the COL license application. We will be the engineering constructor of record for their entire plan but that probably won’t go into backlog for 2012.
That is an ABWR Advanced Boiling Water Reactor, which as opposed to the other Rectors technology in their fleet has been build and has proven. And I suspect given a lot of the uncertainty that's out in the market we will continue to see more ABWRs become reality in the future than some of the other technologies that are out there.
And I think we are very well positioned with that.
Alex Rygiel – FBR Capital Markets
All right, thank you very much.
Alan Boeckmann
Okay.
Operator
We’ll go next to Andy Kaplowitz with Barclay’s Capital.
Andy Kaplowitz – Barclay’s Capital
Good evening guys, nice quarter.
Alan Boeckmann
Thanks Andy, how are you today?
Andy Kaplowitz – Barclay’s Capital
Good, if we talk about margins in oil and gas and then in power, although margins, continued to be pretty high in oil and gas and, I know you talk generally about pricing but, if we look within backlog, can you sustain these margins in oil and gas in 2009 or do they need to come down a little bit?
Alan Boeckmann
I think we’ve, I think we’ve got a good track on 2009. I don’t expect any real degradation in those margins during the year.
You will noticed still that in the fourth quarter on Power our margin were down there was a charge there for a 12 year old dispute we actually were successful in the dispute, but collectibility became an issue.
Andy Kaplowitz – Barclay’s Capital
Alan, just beside that I mean I saw that charge in the case just seem on the side that it still was a little bit lower than the rest of the year, is there anything going on there is that just sort of normal fluctuation
Alan Boeckmann
Yeah normal on that, no that would be a timing issue it wasn’t significantly lower actually we really expect our margins to be much stronger than the second half of the year.
Andy Kaplowitz – Barclay's capital
Okay, great. If I could just push you a little bit sort of the maintaining backlogs for the year, obviously there is a level of reputation around what backlog would be in 2009, given those stock price movements in the last few weeks.
So, can you tell us sort of the level conviction you have and maybe give us example if you could of how we’re going to see big new awards in the first half of the year. Any color would be helpful?
Alan Boeckmann
You know that’s a very good question. We look at each business group that the prospects that are in front of us, we analyze very careful what we call our goal get percentage and we put a factored number in that.
Clearly that factor is either right or its wrong. And we can take the project in the backlog or we lose it so, it’s a process we use that served us well over the years.
It is one that gives us some confidence that we are going to be able to maintain at quarter-to-quarter. I think that quarter-to-quarter comment though needs to be moderated by the lumpiness issue that I mentioned on just timing.
We expect a very strong first half of the year, but actually there is, there are couple very significant projects that are find in the second quarter, that if we get those would be our significant addition to backlog. So, lumpiness is the watchword, but I think given the puts and the takes we really feel it will be in our backlog that’s start with the three.
Alex Rygiel – FBR Capital Market
That’s fair and then and just one final question. If you look at your cash obviously, you have been hoarding it over the last couple years, which is the good thing.
And, if you look at the public evaluation is coming down overtime and so what’s your current thinking on cash deployment any changes, any need to be more aggressive, and where are you guys in the process?
Alan Boeckmann
Well, we have not at all – we have mentioned in our last call, that we really are looking to take an opportunity during this market for acquisitions. We still mean we're still focused very heavily on that, we're doing a lot of work in that area, but actually in most a lot of cases the those may in fact the stock deal more than a cash deal.
We will be using cash for a number of purposes. We have still CapEx in our equipment business.
We have still a very strong dividend policy for our industry. And we will be using some for what I call niche acquisitions.
We haven’t said all of that I still think we wind up with a very significant cash balance during the year.
Alex Rygiel – FBR Capital Market
Thank you very much.
Operator
We’ll go next to Will Gabrielski with Broadpoint Amtech
Will Gabrielski – Broadpoint Amtech
Hi, good afternoon and thanks for taking my questions. So, a couple of that the burn rate in the fourth quarter was obviously above trend lines to some extent that helped you what status we were looking for going forward when you look at backlog, what do you think that the burn rate will look like is similar up or down in 2009.
Alan Boeckmann
I think it will be fairly similar, maybe up a bit. What do you think Mike?
Michael Steuert
It’s going to be up a bit I think as we go to 2009 it’s going to kind of it will flatten out throughout the year. We won’t see the growth that we saw in the 2008.
Andy Kaplowitz - Barclay 's Capital
That’s very true
Michael Steuert
On a long quarter basis.
Andy Kaplowitz – Barclay's Capital
Okay can you add some color and your commentary there was one comment about the first half of ’09 and some sizable projects. Is there any color you can add by end marketer or geography that we should be paying attention to.
Alan Boeckmann
Probably not because I think it would point specifically to a project we're not really at liberty to mention. It I think it will actually be fairly broad based.
We’re going to see I thin some good awards in I&I and E&C and in government.
Andy Kaplowitz – Barclay's Capital
Okay fair enough. And one of the questions just a followup on, on the acquisition path I think there is some pretty big opportunities coming from the transportation or probably that, that more up Fluor’s alley of working on high speed rail project and bigger highways, bridges projects is that a market you guys are keen on making acquisitions and right now your opportunities?
Alan Boeckmann
Yes it is, as I have stated there was – I think the last couple quarters. Our priorities for acquisitions are in the area of infrastructure design in the area of new build power, new build nuclear power generation and in the area of offshore oil and gas.
Andy Kaplowitz – Barclay's Capital
Okay one last one and it's maybe a one word answer or not, but there was some chatter here on BP whiting are you guys seeing any slow down there or is there anything meaningful to report in terms of what you’re counting on for 2009 relative to what you were expecting when you booked the project?
Alan Boeckmann
No that’s the simple answer.
Andy Kaplowitz - Barclay 's Capital.
Okay, great, thank you very much. Good job.
Alan Boeckmann
You bet, thank you.
Operator
We will go next to Graham Mattison with Lazard Capital Markets.
Graham Mattison – Lazard Capital Markets
Hi, good afternoon guys.
Alan Boeckmann
Good afternoon Graham.
Graham Mattison – Lazard Capital Markets
I just quickly looking at your of fixed price projects versus costs reimbursable do you see any change in that going forward, given the sort of change in economic environment.
Alan Boeckmann
Yeah, I actually think we will probably trend up a bit on the fixed cost part particularly towards the end of the year. And again that’s based on the prospects that we see that we have in our line of sight.
The good news again is that almost of those were doing the front end on and in almost all cases it will be a negotiated on some where we have a significant part of the equipment purchased and even have the index on things like labor. So, even though their fixed costs I don’t see it adding significantly to our risk equation.
Graham Mattison – Lazard Capital Markets
All right, great, thanks. And also in the global services division, you mentioned refinery outage and turnaround expected to increase, just getting a sense of timing is that more going to second half or is there in a time of the year during that and that's going to be impacted all by the lower commodity demand prices and also tight credit markets
Alan Boeckmann
Well, I think it’s been impacted that's why I’m saying what I’m we saw a slowdown in the fourth quarter and then in the first part of this quarter, the current quarter. But we expect that that will then start to come back into play as we get in probably more into the third – into the second quarter, into the third quarter.
Graham Mattison – Lazard Capital Markets
Hi, guys. Jump back in queue.
Thank you very much
Alan Boeckmann
Thank you.
Operator
We will go next to Barry Bannister with Stifel Nicolaus.
Barry Bannister – Stifel Nicolaus
Thanks for the quarter guys bless you. Quick question, your G&A was $229 million it popped up from 210 to 220 guidance and I noticed you didn’t breakout the FX effect on your backlog. Could you talk about currency how it may have affected G&A and backlog?
Alan Boeckmann
We didn’t because of very, because it was one of the material impacts that, that the two larger impacts that we did break out, was increase in compensation related expense and the one time charge we took for relocating our similar U.K. facilities.
So, it was smaller than those why we didn’t break it out.
Michael Steuert
And you will be looking at returning to around the 229 plus inflation in ’09.
Alan Boeckmann
229, Steuert to higher run rate.
Barry Bannister – Stifel Nicolaus
But that’s with inflation?
Alan Boeckmann
I would say in ’09 probably to 200 and 220 range is reasonable for 2009.
Barry Bannister – Stifel Nicolaus
Now when I look at the power operating margin that had a big drop. And when I look at the tax rate, it was also very low.
Could you describe, what the tax rate is going into ’09 and power’s margin as well?
Michael Steuert
Sure let me start with the tax rate Barry. Both in 2008 and 2007, we are very successful with reducing our tax rate, had big settlement in 2007 and this year, we had some positive tax rate adjustments due to some statute expiration and valuation allowances.
The other thing that impact of tax rate was $12 million credit, we got our tax benefit we got as part of their U.K. relocation we purposely structured that transaction so that the cost of the transaction the write off on the transfer the building would be to a large extent offset by the tax benefit.
Barry Bannister – Stifel Nicolaus
Right
Michael Stuart
So tax are kind of complicated to look at but if you nip those two together and take it - that out of the tax rate. And just look at the difference, normalized tax rate and what was reported, we come in about $0.02 or $0.03 over guidance for the quarter in the year, kind of complex.
We are going to continue to aggressively pursue tax benefits throughout 2009 as well scenario, I think that we have done a good job adding value by trying that value of time to driver tax rate down. We do plan normally for 38%, but certainly strive to achieve rates below that.
And then just lastly the LOGCAP IV and incumbent has challenged in court the other LOGCAP IV party that besides U.S. pursuing business.
If you had any sort of delays like you’ve seen in the past with surround Savannah River and other nuclear that involve legal action or as everything proceeding on the orders, you’ve been awarded.
Alan Boeckmann
We – as you well know we were awarded LOGCAP almost 18 months before we actually got our first task order because of all the protests that occurred during that. So, yeah, the incumbent shows us a significant willingness to protest, which has been in the past delayed some of the awards, but I think that clock has run out, I know that’s why we are starting to get the award, we are.
Barry Bannister – Stifel Nicolaus
Great, thank you great quarter.
Alan Boeckmann
You bet, thank you.
Operator
We will go next to Andrew Obin with Bank of America Securities.
Andrew Obin – Bank of America Securities
Hi, yes its Bank of America and Merrill Lynch. Just a question in terms of the comments you made for margin in ’09.
Do you expect any specific margin pattern for the year, which would reflect the fact that the environment is getting more, concerning more competitive or as just the environment not getting more competitive and you’re still able to book contracts that have margin that has very much comparable to what you’ve shown us in ’08?
Alan Boeckmann
Well, I think there is no doubt and but I predict the market will become more competitive. I think, we are starting to see signs of that as I mentioned but a lot of the work that we are doing has been contracted and it is backlog.
And it varies dramatically, I think, we expect to see from a burn rate standpoint, some fairly positive margins in our power group towards the end of the year. I expect oil and gas to stay pretty constant as well global services and government and INI.
So, I don’t expect any degradation of margin as we go through 2009.
Andrew Obin – Bank of America Securities
So, we are going to see at all I mean is the quality of the contracts so, good right now that I mean just how long will it take for the stuff that's being booked right now to show up on your P&L.
Alan Boeckmann
Well, it depends on the nature of the contract and what’s stage its in when we’re awarded but typically the front end of the project, it’s a fairly good margin, while we’re in a services side of that. Then it gets drop a bit during construction and when we start to see a significant amount of CFM and reimbursable project.
And then typically because of execution, it goes up rather significantly at the end project, when we are able to release reserves and contingencies. So, you have to track each project on its own cycle and look at the dynamics of each one.
Andrew Obin – Bank of America Securities
But, I should expect margin deteriorations through the - for the company, right.
Alan Boeckmann
That’s that's correct.
Andrew Obin – Bank of America Securities
And just and I apologize if I missed it, you said that some contracts were booked in 3Q. It was suppose to be book in Q4.
Could you quantify, what Q4 awards would have been if that didn’t happens, just what’s the normalized run rates, for new awards now going forward?
Alan Boeckmann
Well, we made a comment in our prepared remarks. I think, I would refer you to.
If you look at the average of the two that was pretty much, our expectation for 3 and 4 and so.
Andrew Obin – Bank of America Securities
I missed that, thank you.
Alan Boeckmann
Yeah.
Andrew Obin – Bank of America Securities
Thanks a lot.
Operator
(Operator Instructions) We’ll go next to Steven Fisher with UBS.
Steven Fisher – UBS
Hi, good evening.
Alan Boeckmann
Hi.
Steven Fisher – UBS
Just going back to the maintaining backlog it sounds like it’s going to be mostly organic with these big booking and potentially you have later in the year. But is that all organic or how would M&A activity be factored into the equation?
Alan Boeckmann
I have not factored any M&A activity into the equation.
Steven Fisher – UBS
Okay, that would all be up.
Alan Boeckmann
It doesn’t mean we won’t have M&A and that will but that’s not my response wasn’t based on accounting on M&A.
Steven Fisher – UBS
Okay, great. And then you mentioned that you expect to do some negotiated lump sum more with that include oil and gas as well.
Alan Boeckmann
Very little in oil and gas, that’s directly negotiated. Although I will say to the extent that we do lump sum oil and gas.
We do the front end on those projects as well, so we’re extremely well positioned, very knowledgeable to costs.
Steven Fisher – UBS
Okay and then, can you venture a guess or an estimate that what do you expect overtime and your percentage of the LOGCAP IV wins would be?
Alan Boeckmann
That’s that is the almost too difficult to predict, because the government can changes its priorities on which are the expense and that that I would there was three contractors and I think you can pretty much count on it, again fairly even split as you look forward.
Steven Fisher - UBS
Okay and then lastly, related to nuclear. Are you planning to be involved in any AP 1000 projects?
Alan Boeckmann
We are not directly involved in AP 1000 projects today.
Steven Fisher – UBS
And would you see any possibility of that over the course of the build out?
Alan Boeckmann
I would think that we would. I think there is an opportunity for us particularly, outside the U.S.
so, it work on AP 1000.
Steven Fisher – UBS
Okay, great. Thanks.
Operator
We will go next to John Rogers with D.A. Davidson.
John Rogers – D.A. Davidson
Hi good afternoon.
Michael Stuart
Hi, John.
Alan Boeckmann
Hi, John.
John Rogers – D.A. Davidson
Just a couple of quick follow ups Alan or Mike I can’t remember which when you are talking about the wind project, are you implying that you would – that you are looking at putting some equity into the some of these projects?
Alan Boeckmann
Yes, we would as you recall. We were the developer, a co-developer with Airtricity, on the greater Gabbard project and had an equity position on that project that when Airtricity was bought out, we sold our equity….
John Rogers – D.A. Davidson
Right
Alan Boeckmann
It was in the second quarter and so the Bell Rock project, we looking at, we would be developer and an equity participant.
Michael Steuert
John, that $79 million gain I referenced in industrial infrastructure in second quarter. What was the gain on the solid equity?
But our equity positions were relatively modest.
John Rogers – D.A. Davidson
Okay, I mean can you put any brackets how big investments these would entail...
Michael Steuert
You know, all right, we would how much should risk.
John Rogers – D.A. Davidson
Well, yes, let me see if I can…
Alan Boeckmann
I got to go back a little bit and talk about our whole business model for infrastructure by and enlarge, we do a tremendously on the development work in infrastructure and then do that follow on EPC. There is very few projects and infrastructure that we don’t take an equity position, but to Mike’s point there are typically very small and oftentimes are only during the construction and then in the initial operation basis of the commercial project.
We don’t take equity to get the EPC. We take equity only if it’s a good business prospects on its own right.
And then we have been – have EPC and then oftentimes remain us that’s a model that served us very well.
John Rogers – D.A. Davidson
And then I mean size of this potential investments?
Michael Steuert
All right, we would take positions ranging from 5 or 10% of the equity up to 50% on different transactions but you are talking generally double digit million that are very modest and certainly and material to our balance sheet.
John Rogers – D.A. Davidson
Okay, that’s final and to confirm. Great, thank you.
Alan Boeckmann
You bet.
Operator
We will go next to Brian Chin with Citi.
Brian Chin - Citigroup
Hi, thanks a lot. When just to clarify couple of questions on guidance, do you have any margin degradation in your guidance?
Alan Boeckmann
Say that again…
Brian Chin - Citigroup
Do you have any assumed margin degradation in ’09 versus ’08 embedded?
Alan Boeckmann
Brian I think, I have answered that question at least twice now on in fact that we don’t – we’re counting on consistent margins as we through ‘09
Brian Chin – Citigroup
Okay, I just, sorry I’m beating a dead horse here a little bit, just one more clarifying question on that. When you say that that includes both margins on new orders do you expect to win in ’09 or does that only include the projects you’ve got in backlog right now, do you expect to…
Alan Boeckmann
Well obviously it’s a mix of projects that are in backlog, plus projects that we win during the year that we execute portions of them during ’09.
Brian Chin – Citigroup
Gotcha. Okay, and when you said that the backlog is going to be flat in ’09 you said it will start with the three handle basically we should be thinking of a $30 billion backlog by the end of ’09 not a flat as in $33.4 billion backlog at the end of ’09?
Alan Boeckmann
I said, well, it’s hard for me to be that precise, three quarters out Brain, that’s why I said relatively flat.
Brian Chin – Citigroup
Okay.
Alan Boeckmann
I mean, there is envelope there that I would even want to guess that, it’s hard to say we are taking statistical analysis and given our best guess that where we think it will be.
Brian Chin – Citigroup
Fair enough, fair enough and then one question on M&A, you said that you’re looking at new software new infrastructure you said that in the past, when you’re looking at what you are looking at, is your methodology really gear towards, what segments you’re looking at or are you going to be thinking of things like accretion valuation metrics like EBITDA, do the acquisition EBITDA accretive or EPS accretive does that enter you’re your thinking as well?
Alan Boeckmann
It definitely does, we look at both aspects first of all, the acquisition has to be one that is strategic and fits our strategic initiatives for the corporation to look at long-term growth, but then secondly it has to make sense from an accretion standpoint. It also has to make sense from an ability to match cultures and to integrate the acquisition.
Brian Chin – Citigroup
Great, thanks a lot for the clarification appreciate it.
Alan Boeckmann
You bet.
Operator
Go next to Joe Ritchie with Goldman Sachs.
Joseph Ritchie – Goldman Sachs
Hey everyone. Thanks for taking my questions.
Alan Boeckmann
Okay.
Joseph Ritchie – Goldman Sachs
The first question, is Alan you made a comment earlier regarding not many cancellations, but can you give us little bit more color regarding what percentage of your backlog is delayed today?
Alan Boeckmann
That’s hard to say, we’ve got, we catch up about $270 million out in the - on one project in the fourth quarter and we will be taking out the $700 million on the Bolero project in the first quarter. But delays are hard because, it’s just hard to put a number on.
We’ve got projects that are delayed we have some that actually accelerate.
Michael Steuert
Yeah, I mean our cancellations are one two percent of backlog and I think delays are low single digits.
Alan Boeckmann
Right. Okay, it’s not significant, I think that’s what we’ve said all along it’s not the gloom and doom scenario that many people have predicted.
Joseph Ritchie – Goldman Sachs
Okay, and when you talk about the low single digit delays, can you get some kind of timeframe or are we talking you know?
Alan Boeckmann
It varies, I think for the most part the delays that we are looking at are stemming from a back that our clients are expecting to get a savings on their capital costs for commodity goods that go into the construction of other projects. And so that's been the main driver for the delays today.
Joseph Ritchie – Goldman Sachs
Okay and then you made a comment earlier about the first half of '09 being a potentially strong booking quarter, and we've kind of beating the dead horse little bit on the flat backlog guidance, but you would have to guess assume a run rate of approximately 5.5 to $6 billion in new awards in order to get to a flat backlog for 2009. Is your comment on the first half of '09 is that just think you ask that your run rate in the first half of '09 could actually be better than that?
Alan Boeckmann
Again, we are basing it and looking at over the whole year, quarter-to-quarter, it's hard to say, In Q3, we had several very significant projects, actually occur early, where we have forecasted them in the fourth quarter and that happened. So within a week of a close - quarter close and it can make a significant difference on the numbers.
So, I'd hate to give you a prediction quarter-by-quarter, but I do see some significant prospects that will – we believe occur and come into our backlog during the first half of the year. We actually that the biggest project that could possibly come into our backlog, is really in the second half of the year.
So, it's just is a mix bag, it's hard to predict with any exactness, what quarters some of these might occur.
Joseph Ritchie – Goldman Sachs
Okay, thanks for taking my questions.
Alan Boeckmann
No problem at all. Thank you.
Operator
And we will take a follow up question from Will Gabreski from Broadpoint Amtech.
Will Gabrielski – Broadpoint AmTech
Fair, thanks guys. I wanted to ask you a question on the wind market and I think it's been a – you guys have been in a early move or what are you bringing to table there and how are those contracts priced?
And can you just give a little bit more color on how you're developing that business internally and how big from a man hour standpoint each project and look like are there some sort of quantitative number around that that can help us understand the size of some of these new opportunities?
Alan Boeckmann
The offshore market tends to be much more expensive on a per kilowatt basis just because of the environment, that you are building in. The greater Gabbard project was a 500 megawatts and our contract was just under $2 billion.
So they are sizable. I don’t have – and it’s too early for us to put an number on Bell Rock.
We’re just now, we just got the license on that so we’re going to be into doing some, some feed work and some early analysis of execution and cost, but there is sizable projects and that’s why we have a significant advantage in that area because of our ability to handle not just the technical nature but the logistics and the financial requirements.
Will Gabrielski – Broadpoint AmTech
Okay and then I’m sorry to go back to project specifics here, but back in the third quarter on the call I think you just gotten back from Kuwait and you are talking about Al Zour and obviously there has been a lot of noise on that project. I’m just curious how that’s proceeding and if you can add any value to what we are seeing news about that right now?
Alan Boeckmann
Well there was a lot of news in the fourth quarter actually.
Will Gabrielski – Broadpoint AmTech
Yeah.
Alan Boeckmann
And that was about the time of our conference call. I think that has settled down dramatically.
There was a lot of political and lot of news in the press around that project. It’s moving now I think very smartly.
We’ve got a lot of people on the project and it’s progressing rather well.
Will Gabrielski – Broadpoint AmTech
Great, thank you guys again.
Operator
And we’ll take another followup from Barry Bannister of Stifel Nicolaus.
Barry Bannister – Stifel Nicolaus
Gentlemen I looked at your quarterly operating margin by division and the standard deviation of the margin for the last eight years quarterly just a minute ago and power is the most volatile business by far as it's margin standard deviations two times since average margins and it's very hard for us to predict that business. Its probably a business to gets progress payments and occasional bonuses, and could you give us some insight into 2009 quarterly is there anything on the radar that would lead to one quarter being particularly more opportunistic for such award fees than others that might help us model that margin.
Alan Boeckmann
Yeah Barry you as always our right on with your analysis the power market is marked by lump sum projects. Lump sum projects in the power markets wherein a lot of projects in other industries we will go to mechanical completion in power we go into delivering energy on to the grid for our completion.
That last month or two of that project is critical because if just a slightest problem in the process or operations can cause delay in the energization of those projects. So, we typically and I think all contractors do hold a fairly significant reserve that contingency for that potential.
So, when your successful as we are on our tremendous number of our projects we are able to release those reserves those contingencies as that project completes, and that’s when you see the big uptick in margin, that’s dermatically bigger than what it would have been during the run rate. That occurred to us in '03 and '04 if you look at the number that your data there when we were completing a lot of projects in that in the previous cycle.
Barry Bannister – Stifel Nicolaus
In Iraq.
Alan Boeckmann
Well I am talking about in the last power cycle in gas cycles here in the U.S.
Barry Bannister – Stifel Nicolaus
All right.
Alan Boeckmann
But we also had the same thing in Iraq. So, we are on the fairly significant project growth which one of the units is scheduled for completion again as to right on end of one quarter and beginning of another so, timing may move from one quarter to the other but its in this year.
Barry Bannister – Stifel Nicolaus
Back half, front half.
Alan Boeckmann
Second half of the year.
Barry Bannister – Stifel Nicolaus
Okay, and the margin in oil and gas and global services is steady as Iraq moves with revenue and they do a great job there. I’m not going to beat the dead horse on margins again, but it looks like your tracking right on what revenue would say your margin would be?
No mix of feed in there that might have boosted oil and gas temporarily no reversion down as you move into the field pretty much expect that to be more the same.
Alan Boeckmann
No, I expected to be fairly standard as pretty much on the pattern that you seeing.
Barry Bannister – Stifel Nicolaus
Thank you, very much.
Operator
And that does conclude our question and answer session. I would now like to turn the call back over to Alan Boeckmann for any additional or closing remarks.
Alan Boeckmann
Thank you, operator. And I want to thank all of you who have participated on the call this afternoon.
While, there is a clearly a level of uncertainty in the global economy and we certainly acknowledge that we have not seen the kind of fall-off that many pundits have expected. Our backlog is strong and it substantial and we do expect major awards in 2009.
We have plenty of work to do and we want to continue to see that the robust list of prospects in front of us. I'd like paraphrase, one of our major clients Tony Hayward CEO of BP, who was quoted as saying the future has been canceled.
So, in fact we continue to maintain high expectations for our company and we will take all the actions within our control to deliver the best results we can in 2009. We greatly appreciate your interest in Fluor and your confidence in our company.
Good day.
Operator
And again that does conclude today’s call. We do appreciate everyone’s participation.
You may disconnect at this time.