Good morning, and welcome to Fluor's First Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow management's presentation. A replay of today's conference 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 for seven days 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.

Thank you, Operator. Welcome to Fluor's 2021 first quarter conference call. With us today are David Constable, Fluor's Chief Executive Officer; and Joe Brennan, Fluor's Chief Financial Officer. We released our earnings announcement earlier this morning, and we are streaming 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 presentation, we'll 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 our Form 10-K filed earlier today. 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. I'll now turn the call over to David Constable, Fluor's Chief Executive Officer. David?

Thank you, Jason. Good morning, everyone. Thank you for joining us today. If you could please turn to Slide 3. Before we get started on operational results, one of the strategic priorities outlined during our Strategy Day was to foster a high performance culture with a purpose, and I'm pleased to announce that we have appointed to Lonnie Aziz a six-year Fluor with 20 years of EPC experience to lead our diversity, equity and inclusion efforts. Fluor is a vast and diverse company and with Lonny's leadership, she will help us retain, attract and cultivate a workforce that represents the world in which we live and operate. On a separate subject please note that earlier this week a favorable motion was granted as it relates to an outstanding securities class action lawsuit. This motion dismissed with prejudice all allegations except those relating to a single statement in 2015 about one gas-fired power project. While no assurance can be given as to the ultimate outcome of this remaining obligation, we do not believe it is probable that a loss will be incurred. Please turn to Slide 4. It's been great to see the vaccine rollout around the globe and I'm particularly encouraged at the speed of distribution here in the United States. Although there are still many regional challenges to deal with at the end of the pandemic seems to be insight which will be a relief to all of us. Currently well over 90% of our project sites and about 80% of our offices are operating at limited operations or better. One exception is our office in New Delhi. We're a surge in COVID cases has caused local officials to issue a lockdown and curfew order effective until May 10. The safety and well-being of all employees, is our top…

Thanks, David and good morning, everyone. Please turn to Slide 11. For the first quarter of 2021 we are reporting adjusted earnings per share of $0.07. As a reminder, we are adjusting our NuScale expenses, foreign exchange fluctuations, impairments and certain legal related costs. Our adjusted results also exclude in embedded foreign currency derivative for an Energy Solutions project in Mexico. This derivative is based on exchange rates between the US dollar and the Mexican peso and will fluctuate over the life of the contract or at least until the job has been fully procured. Our overall segment profit for the quarter was $60 million or 2% and includes the $29 million embedded derivative in Energy Solutions and quarterly NuScale expenses of $15 million. This compares favorably to $55 million in the first quarter of 2020. We're moving NuScale expenses and the effect of the embedded derivative would improve our total segment profit margin to 3.6%. Margins in Energy Solutions and urban solutions reflect reduced execution activity on certain projects and the lack of new awards to replace projects we are completing. We anticipate, project activities will accelerate as we move through 2020 and Mission Solutions margins were strong due to the increased execution activity on DOE projects as well as an increase in performance scores on several projects. As David mentioned we received a $40 million investment in NuScale from JGC this quarter and are anticipating other significant investments in the near future. Note here that even though partners are meeting new cash needs. We will continue to expense 100% of this investment on our income statement on a consolidated basis. Our G&A expense in the quarter was $66 million. This is higher than our expected run rate due to the increase in our stock price driven, driving up…

[Operator Instructions] We'll go ahead and take our first question from Andy Kaplowitz from Citigroup. Please go ahead.

Hey, good morning guys. David so book to bill at 1.25 in Q1, the Fluor actually grew backlog, even despite that billion dollar cancellation, you talked about. I know you talked last quarter and are pushing that one times book to bill only at the end of 2021. So it seems like you've seen an acceleration of awards or is your expectations, but maybe you could comment on that. And then whether you think you now could sustain backlog growth for the rest of the year.

Thanks, Andy. Appreciate the question. Good morning. It was a good quarter obviously for new awards across all three business segments. Obviously with the great award in Mexico with PEMEX for three different packages totaling as I said $2.8 billion, just over $1.4 billion our share and then some good activity in Mission Solutions and the big Fuji biotech plant, which it like I said world scale over in Denmark and there'll be more where that came from as well down the road. So great to get started in the first quarter with those awards. I think you have to look at the book to bill in light of the lower revenue. I think because of the COVID impact on new awards in 2020 and the hangover in 2021 on revenue in the volumes we couldn't push through in on certain very large projects due to COVID that pulled down that revenue, lower than our plan number. So, I think that's the best way to look at Q1 saw that good book-to-bill but you can expect the revenues to be coming back up as we enter the second, third and fourth quarters and then we will probably get back to, hopefully get back to that 1.0 book-to-bill at the end of the year like we said in the last call. So that's how you should look at it.

Maybe I can ask you about the cadence then of EPS for the year based on the revenue comment you had suggested before, you done that it would ramp up maybe a bit back end loaded but given the slow revenue start. Is it more back-end loaded, even now and looking at maybe more of a moderate revenue decline versus the sort of slight revenue decline you guide us to for '21 versus '20. I could ask Joe to comment on how that's going to flow through the year.

The way I look at it where some of our major projects that are sitting in backlog today. I think had some additional impact in Q1 related to COVID that we had hoped during the planning process would have generated additional revenues. But we do believe as we get into Q2 that our backlog is really going to take out specifically LNGC as they ramp up their fabrication activities, our TCO project is getting back on site. I think also being able to add $3.7 billion of new awards at the beginning of the year, we'll be able to get significant burn on those projects. So I would suspect that we'll see a recovery within those revenues as we progress into Q2 and Q3.

And Joe just to clarify, ongoing negotiations. You have related to COVID even LNGC and elsewhere, you expect them to resolve at least favorably or not big cost creep for you guys. Any color you can give there.

So here the work that we've done with our clients. I would not expect a significant cost creep. I think they we kept it out of more of a kind of a litigation type discussion and we're working with our clients to get to the right resolution around change in law and force majeure and mitigation strategies. So I would expect that any type of gas that we have relative to positions between the two parties will be relatively minimal.

Thanks, guys.

And we'll go ahead and move on to our next question from Steven Fisher from UBS. Please go ahead.

Thanks, good morning. Just a follow up on Andy's question there, can you just give us an update on the timing of those negotiations. When do you think we could have that initial agreement resolved?

Steve you're specifically talking about LNGC I take it.

Yes. Sorry, LNG Canada.

Yes. So we're working very closely with the clients on that and obviously have put all of our notifications in place for the impact on the project to date, and as we said before, we have a weekly meeting very complex topic obviously based on you've got three engineering offices. You've got a massive site in Canada. You've got a couple of fabrication yards and then a number of suppliers and vendors supplying the project that all have to be, but all has to be rolled into the discussions and the path forward that we're, we're working on, with the client. I can tell you that it's a very good discussion, very positive good working relationship with them on the negotiations to put the COVID impact that took place in 2020 and into 2021, early '21. Here is what we're working on right now and I guess what I can tell you is that discussions are going very well and I would expect at least the first negotiation to be closed off impact to be closed off here in the relatively near-term.

Okay, that's great. And just to clarify, I think there was some discussion of some of the general supply chain challenges. What we're seeing in the overall market today, will that be incorporated in this type of resolution or will that just be kind of put off to some later time point?

Yes, I think on supply chain. We're in very good shape on the project. We're engineering almost basically complete, I would say and procurement is committed 93% of the equipment and materials and subcontractors are also I think over 80% committed. So we know all that pricing for commodities in bulks and equipment and materials and subcontractors, so there's not really not a lot of left on that front from an escalation perspective in some of the higher prices, you're seeing in commodities and materials currently, so very comfortable on that front. I think I can also comment on the PEMEX refinery work, we're in a very good place there as well. With respect to escalation, we've been working for decades in Mexico with our joint venture partner on PEMEX on very large PEMEX contracts primarily in the energy space and those are all following our stringent pursuit criteria open book process with the customer and engineering and equipment costs were clearly understood and from prior to converting those contracts and for bulk materials, we negotiated with the customer that are our price excludes any escalation in the actual escalation cost will be recovered through price adjustments. So really good contracts down there as well as union and union agreements that's any revision to a labor agreement entitles us to a price adjustment. So we're really protecting ourselves well and following our strategic priority of a fair and balanced contract terms as we talked about at Strategy Day. Joe has got a comment.

Well, yes, I know, Stephen. The only thing I was going to add in terms of impacts relative we placed the POS were bought out, but there obviously there is some fabrication going on around the world relative to being able to supply.

Goes back on LNGC.

Back on LNGC for providing the fabrication yards. Those are all inclusive of our force majeure and change in law claims. So they would be a result of COVID impacts as well. So they've been built into the discussions that we've been having relative to schedule delays and additional costs associated with supplying and feeding the fab yards to get, to get the progress they need.

Great. And then just from a business development perspective, I know you guys want to be very selective. But to what extent are you increasingly kind of going on offense as the economy recovers and commodity prices are up here. Are you can have increasingly pushing sales pursuits or are you still more focused on kind of riding the ship and working through what you have to get through?

It's a great question. Thanks, Steve. Really focused on key account management with our sales executives and our wholesales operations technology teams that the go to market for us. And so that's got a real externally we've got this external push on right now to get to a relationship-based. We are relationship based in many of our business lines, but across the board. We want to really push relationship-based approach to our clients and that's well underway and we are definitely on offense. Our first strategic priorities to drive growth right across the business lines including non-traditional oil and gas, so I think that's the key area, I've been spending a lot of time. I think most of my time recently has been with the client base and talking with them about all of the, the expected CapEx, if you will, the taking the lid off post pandemic and the pent-up demand, it's coming out us. So we really are working in all the growth markets. We've talked about in Chemicals, in the advanced technology life sciences in mining obviously and in infrastructure. So that's definitely the plan is to push that first strategic priority of driving growth. We've got great prospects I talked last time about all of our feed work, feed in study work-in-house. We've got, we're currently working on over 150 front end design programs totaling over $110 billion in total installed cost, that's in-house right now all early work early phases of course and they don't all go to FID. But it gives you a good indication of how much front-end work is out there and then we're chasing another about $140 billion in early front end design and study work in '21 and 2022. So definitely on offense Steven.

Terrific, thanks so much.

We'll go ahead and take our next question from Jamie Cook from Credit Suisse. Please go ahead.

Hi, good morning. I guess two questions, one just with commodity prices where you are. I understand your focus more on energy transition or green energy, but is there any green shoots that you're starting to see in your traditional oil and gas business. It sounds like Chemicals is positive, and I'm just wondering how, what you're seeing in terms of terms and conditions as the economy starts to improve, and you have less players committed to the EPC market or have walked away from it. I'm wondering what that means for potential terms and conditions as we come out of this. And then my second question on the divestitures, I guess, in particular stork with some of the cost cutting, you've done and things start the economy starting to improve. I'm just wondering if that, if the earnings for that business is potentially under-appreciated, and sort of how we think about the conversations with customers in terms of potential valuations that you could fetch for some of these divestitures. Thanks.

Thanks, Jamie. And good morning. I'll have Joe answer the divestiture of stork here and talk about valuations and well at least give us some thoughts on what we're seeing it stork right now. Yes, with commodity prices and what's iron ore $200 a ton or something right, since as just one example, copper also there, Brent oil, all these things are driving our clients in the right direction from our perspective, like I said, we're talking to a lot of chemical clients right now, a lot of downstream clients on traditional downstream work in addition to the energy transition that they've got to spend. They're starting to throw billions of dollars of energy transition obviously very early days, but we've got a lot of energy transition work-in-house with them as well to look at how they might attack that challenge that we've all got to move to a lower carbon future. So, but yes, I'd say chemicals downstream traditional as you just saw in Mexico, there is more of that internationally for us a life sciences and manufacturing definitely going to be picking up based on the challenges with supply across that sector and you got infrastructure obviously where we're expecting to see a lot of growth. So yes, green shoots definitely. If I look at those feed package, I just was talking about Chemicals features prominently. LNG is featuring prominently in front-end work for us and downstream. And then in addition the ATLS in the mining, the mining front-end work is one of the standouts as well.

The terms and conditions stated, are they potentially more favorable as there's less players? You guys have stayed committed to EETC and a lot players have not. I'm just wondering if that ends up being a positive for you guys at some point.

I think the [indiscernible] obviously, it plays in our favor to work towards fair and balanced terms with the right customers and we are firmly on that track. I think the PREMEX [ph] contracts that were signed, were just a great example where we improved our position there as well. I would say that we will be seeing this fair and balanced contract terms and if not, then we'll go work on something else. That's just the way we're going forward and with all this this front-end work, there is no lack of prospects for us. It's not if, but when the full FIDs on this CapEx is pulled is let go for us. So, we will be very, very selective on our terms and conditions, but to your point, I do think we will be able to do better based on the smaller pool of contractors out there that can bring full-service rate from these early solutions and convert all the way into EPC, EPCM. So that's how we're seeing, Joe.

Yes, Jamie. In regards to how we're viewing Stork, I think we've always viewed Stork in terms of the pre-COVID valuations. During the COVID period, and I think we talked about it may be on one of the previous calls, a lot of the refineries have put off operations, maintenance, turnaround activities due to capital constraints and as we start seeing those come back into the market and the requirement to perform those activities. That's how we're looking at our quality of earnings analysis. We're looking more towards the future what Stork is going to look like in terms of how we're discussing it with potential buyers at the end of the day, in terms of what valuations I would see, I don't really necessarily have a range yet as we're still in the process of finishing the [indiscernible] and we'll have the data room open here in the next 2 to 4 weeks. Then we'll start getting some real feedback relative to how the market is viewing what Stork's potential valuation is.

Okay, thank you. I'll get back in queue.

Thanks, Jamie.

We'll move on to our next question from Sean Eastman from KeyBanc Capital Markets. Please go ahead.

Hi, guys. Thanks for taking my questions. On the $20 billion in mining scope that you guys are in process on the FEEDS, I'm just curious, historically, how much of that is translated EPC for Fluor? Just trying to get a realistic idea of how much Fluor could win and execute out of that number and how that number translates into Fluor revenue? It would be helpful to get that detail.

Thanks, Sean. Good morning and thanks for the question. When you think about just straight prospects out there, the straight prospect list in the total TAC in revenue we think about a probably 30% to 40% win rate there about historically on prospects, but this over $20 billion work is actually in-house with front-end contracts in place. Obviously, it's much, much higher than that conversion rate because it's more a matter of does the project get to full FID based on the market, the internal rates of return for the client, the cost schedule CapEx and so on. Assuming that all goes forward, then we've got a very high likelihood of converting a lot of this work. Let's ask Joe if he's got any exact percentage. I don't think we track that exactly.

No, we don't necessarily track it, but I would reiterate what David is saying relative to we are essentially in a sole force position during the FEEDS, working with the clients in order to get the right return on investment and through value engineering and relationship. So, it is a much higher percentage in the position that we're in in terms of our win rates typically.

Sean, the way to think about that. If you've already got Fluor in place on your project, you can have a much lower project lifecycle cost if you convert the FEED into the EPC, EPCM, because you're shortening your schedule and getting to market sooner. So that's a real obviously value for the clients and going back to strategy, that's what we're trying to do. We're trying to get front-end solutions with all of our customers bring solutions to the table and then converting continue on.

Okay, terrific. That's helpful. Maybe shifting over to the cash flow. You guys have talked about kind of maintaining this cash balance at around $2 billion. There's a lot of moving parts in there. I'd just like to try and flush out what the underlying free cash flow outlook is for this year, whether that's fully intact? Just isolating that around sort of the debt pay down and funding for lost projects and whatever it is included in there for asset sales. If we could just kind of get that bridge, it would be helpful?

Yes, it was a low operating cash flow quarter and Joe has got—

Yes, we can talk about the first quarter. There were a number of non-recurring events that occurred in the first quarter. Executive comp payouts. We had the CFHI payment to finalize our investment and CFHI, we had the provisions for the challenge projects, which will ultimately be a recurring impact. We had typically our project working capital adjustments flow from Q4 into Q1. So, we have significant amount of AP. But we do see based on the back of backlog and the strong bookings in quarter one that we will maintain and slightly grow our cash flow. What's not included yet is the AMECO divestitures, the $73 million. What's not included in that number are 2P3 divestitures, nominally between $40 to $50 million and then ultimately our ability to divest Stork during the year, which will have a significant impact to that number as well as the overhead reduction initiatives that we're putting in place, which will have a real cash positive impact. We're saying flat to slightly up, but it does not include a number of those moving pieces that I just outlined at this point.

Helpful. Thanks for the time.

[Operator Instructions] We'll go ahead and take our next question from Michael Dudas from Vertical Research. Please go ahead.

Good morning, gentlemen. Maybe in the urban solutions area, certainly mining is going to be a big positive going forward. Maybe you can elaborate a little bit more. You touched on vaccine, just mentioned there are others to come. You talked about semiconductor. Maybe you can flush out some more on scope timing in your pipeline or the funnel opportunities? Do you expect acceleration because of what we've been seeing on the supply chain front in domestically in the United States or worldwide? Is that something that can actually provide meaningful booking opportunities later this year? Is that something that's more looking into 2022 on those projects?

Thanks, Mike. Good morning. The HLS business is doing extremely well. Their offices are full. Home office engineering talent doing lots of work around the world and actually bringing in personnel from other business lines to support them. So, they are very, very busy and they're busy in data centers, they're busy in manufacturing. Looking at quite a number of, as I mentioned earlier, semiconductor chip plants primarily here in the United States some massive facilities and then obviously, life sciences, where they continue to make progress. There are new awards will be spread across 2021 and just continuing to grow. I don't think we would disclose the exact prospect list or the expected new award values to you, but you can really look at it that way is that they're going to be picking up as you go through 21 and into 2022. They are in very good space right now and again they're a faster book and burn as well. Their projects come up fairly quickly and burn fairly quick quickly. They don't have, like mining and metals or energy, a lot of long-term projects. But they come up fast in they burn fast, do you want to add anything Joe?

No, I think it's appropriate.

Thank you. My follow-up is regarding your announcement on NuScale today. You characterize that as quicker than expected what you had thought of the timing and structure of the financing is [indiscernible] NuScale, but also there a monetization opportunity for you and the other partners? Maybe you can flush that out and what do you think about the timing and the structure that certainly early indications that you're seeing with regard to accelerating net zero carbon power opportunity, which should be well received in the marketplace once people understand it?

Yes and people are starting to understand it. We've got great partners, the DOE, DOD certainly get it and the utilities coming along and it's very exciting times, not just in the US but internationally. Canada obviously is a nuclear country as is Japan and many others that we're getting a lot of incoming interest coming into NuScale and seeing how that, as I said, industry-leading technology because of its certification by the NRC. The only SMR, small modular reactor, to have that certification. So placed extremely well in the market and seeing just a lot interest and we're pleased with the additional money is coming in JGC, the $40 million, that Joe talked about and we believe it's the appropriate time to explore how to unlock more value from NuScale for Fluor shareholders and we've got the Guggenheim engagement now and are going to be exploring opportunities to monetize the investment and as we said in January at the Strategy Day, overarching goal is to start to monetize Fluor's investment in 2021. We've got renewed interest from existing investors that we've got and add new investors post the JGC announcement, so generating significant interest to come in and bring equity to support the commercialization. Partners supporting engineering procurement, fabrication, and construction of the of the program and again a couple of that with Guggenheim driving financing options. All options are focused on monetizing Fluor's equity downward and driving shareholder value starting in 2021 to your timing question and then take it from there. But it's early days with Guggenheim and we're looking for good things to come, and a highly valued company in NuScale based on their value proposition for carbon free base load energy.

Excellent. Thanks, David. Appreciate it.

With that, we conclude our question-and-answer session for today. I would now like to turn the call back over to David Constable for our closing remarks.

Thank you, operator. Many thanks to all of you for participating on the call today. Today's results are beginning to show the Fluor is strategically shifting to align with our priorities outlined in January at our Strategy Day. Please stay safe and hopefully we'll be meeting in person relatively soon. In the meantime, we appreciate your interest in Fluor Corporation and thanks again for your time today. Thank you.

With that, that does conclude today's call. Thank you for your participation. You may now disconnect.