Good morning, and welcome to Fluor's Second Quarter 2021 Earnings Conference Call. 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 10.30 AM Eastern Time today, accessible on Fluor's Web site 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 Web site at investor.fluor.com. At this time, for opening remarks, I would like to turn the call over to Jason Landkamer, Head of Investor Relations. Please go ahead, Mr. Landkamer.

Thank you, Hannah. Good morning. Welcome to Fluor's 2021 second 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 statement earlier this morning and we have posted a slide presentation on our Web site, 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 2020 10-K and in our Form 10-Q which was 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 Web site 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. Before we move into operational results, I want to acknowledge the passing of J. Robert Fluor, II. Bob was the great grandfather, founder and worked at Fluor for 42 years before retiring in 2009. For 27 years, he led the Fluor foundation, our charitable and community involvement organization that was established by his father and his uncle Si Fluor in 1952. Throughout his career, Bob brought meaning and value to the act of giving back, inspiring thousands of employees across the company and across the globe to commit time and resources to bettering their communities. The company will continue to build on Bob's legacy of supporting stronger, more sustainable communities around the world. In a few minutes, Joe will walk through the financials of our business and each of our segments. Let me first provide a high level overview of what we are seeing in each of our major end markets, starting with Urban Solutions. Please turn to Slide 3. In mining, work is tracking broadly to our expectations for the next 18 months. We have seen a few large projects shift to the right, as detailed estimate reviews and scrutiny of projects by our clients prior to an investment decision being taken is higher than we have seen in quite some time. In addition to those projects, we have a steady slate of FEED and limited notice to proceed work, where we have a high level of confidence in conversion to full prize awards in the next couple of years. Our prospect list is incredibly diverse, and we are not dependent on any one region or any one commodity to see significant growth in this business. Backlog for mining declined by approximately $1 billion in the quarter.…

Thanks, David, and good morning, everyone. Please turn to Slide 12. For the second quarter of 2021, we are reporting a diluted adjusted earnings per share amount of $0.32. In our press release and in the appendix to today's presentation, we show a reconciliation of GAAP EPS to this adjusted number, which excludes the following after tax items; $19 million of NuScale expenses, $14 million of [indiscernible] embedded derivatives and associated taxes, $23 million of currency exchange losses and $1 million of investigation costs. Our diluted share count was 156 million for the quarter, up from 140 million in the first quarter. This includes the additional shares from the convertible preferred offering we completed in May. In the third quarter, we expect our diluted share count to be approximately 170 million, as the effects of the issuance will be for a full quarter. For the quarter and the year-to-date, the offering is anti-dilutive under GAAP due to the net loss, so common EPS and diluted EPS results are the same. However, in terms of guidance and results, we will discuss EPS including the aforementioned adjustments as well as using the larger diluted share count going forward for comparison purposes. Our financial statements will continue to conform to GAAP and we will provide the required reconciliation. But we will use the larger diluted share count for all periods as appropriate. I will walk you through that a little more clearly when we talk about guidance. Turning to Slide 13. Specific to our convertible preferred offering, we saw it as a necessary and positive step towards reinforcing financial discipline for the company. This offering allowed us to make a significant change in our net debt profile and not have to wait for proceeds from outstanding transactions that do not have an established…

Thank you. [Operator Instructions]. And we'll go first to Steven Fisher with UBS.

Thanks. Good morning, guys. Just wondering if you could talk a little bit more about the inflation that you're seeing? How broad is it? Is it more labor or materials? And what are your customers telling you about what they would have to see to move some of these projects forward?

Good morning, Steve. Good to be with you. I think what we're seeing specifically in the mining group is just -- as I said, just some extra kicking of the tires on the estimates and making sure that the pricing is firm. And as we go out -- those are obviously very long-term projects and getting a good handle on any escalation in inflation on labor and material. So, on the current existing projects, I want to say that we're in very good shape. No problems obviously on reimbursable cost projects. But we've also scrubbed our remaining fixed price contracts in backlog and are in good shape there. So I think it's a matter of just making sure that what we've seen here recently due to COVID, and we're seeing it come back down actually lessening the inflationary impacts. And so I believe it's more of a timing challenge right now to some of these projects. It just needs a little more time to get that comfort. Joe, maybe I’ll ask you to comment as well on inflation.

Yes. In certain of our contracts too, specifically our largest award in quarter one, we have provisions in the contract for extraordinary inflation adjustments that are allowed to the contractor. So yes, I would concur with David. I think we've accounted for a significant portion of that in our current backlog. And clearly as we proceed and bid on work moving forward, we’ll make sure that we're working to account for any of those impacts.

Steve, we're not seeing projects being cancelled, I guess I'll put it that way as well. These prices -- again, just ensuring that the internal rate of return that the clients require before taking FID are solid, and they're doing that type of scenario planning right now.

Got it. Thanks.

To clarify, this is mainly just in mining. You're not seeing this broadly across the portfolio.

Yes, that's where it's most prominent right now. And, of course, as we talked in the past, mining is really in front -- as we look at our growth markets, mining and I guess I'd put chemicals right up there as well, but it’s primarily mining where the teams have been talking to me about that issue.

Okay. And just a quick follow up on Gordie Howe. I guess just how confident should investors be that there won't be more charges here? What's in the 15% of materials not bought out yet? It sounds like it's a lost project. So, how much room is there for error on construction? And I guess the bigger picture question is, it's a legacy project, but what would be different under the current system?

Well, under the current system, we would not have bid that project. It would not have gotten through our stringent pursuit criteria. So that's the first thing.

Okay.

This is a legacy project. It was awarded in September 2018. As you said, it's a zero margin project. So it's accounted for that way. We're not in the lead on the project. That's also CEO approval requirement that we take very seriously. That's not how we like to execute projects. So that would have changed as well. It's a design build project. Right now, we're 40% percent of the -- again, in a non-operating partner. Construction, it's both self performed [ph]. We're doing the bridge in Michigan Interchange. About 70% is self performed. And then the U.S. and Canadian port of entries, about 95% subcontracted. So as far as, are we in good shape? I think we are. I believe it's been scrubbed this second quarter where we found a significant increase in procurement and subcontractor cost growth. We've had our teams in there scrubbing hard and making sure that forecasts that came across from the partner is reasonable. And I think we've got a reasonable estimate at this point. And we do have, as I mentioned, some potential recovery of revenue recognition as we perfect our claims on the project. So if you think about the 1.2 billion in our backlog at zero margin projects, we've really done a good job of working off these fixed price contracts. And Gordie Howe is like -- I think its 968 million of 1.2 billion is Gordie Howe. So we're really working off all of those lost projects. And this is really the last major one that we do have a good estimate on. And design is 99% complete. Procurement, yes, there's not much left in that 15%. I think we're comfortable. We've scrubbed that as well to give comfort to your question. And so, overall, we're just about 20% complete overall on the project. So that's where we're at. I think Joe on guiding principles to forecasting that we're doing and maybe comment on cash flow impacts.

Yes. First of all, take the cash flow. We're sitting on a fairly robust advance on that project. So we would not see really any of the cash flow impacts from the current financial position until the '23 timeframe. What we've been able to kind of instill with the new kind of guiding principles that we've implemented within the company is we identified the costs first and are still in the process of identifying what our entitlements are under the contract, relative to COVID and client delays and what that may mean in terms of revenue and until we have that perfected and we feel comfortable in our position. We took the cost when we knew the cost and we'll look at the variable consideration. We have put a significant claims team together, and they're all around that project to develop that potential recovery. But until they do their work and until we receive their feedback, we won't know what that looks like.

I appreciate the color. Thanks very much.

Thanks, Steve.

We'll go next to Andrew Kaplowitz with Citi.

Good morning, guys.

Hi, Andy.

Good morning.

David, I just want to follow up on the project environment in the sense that in the past, you said book to bill could get closer to 1 by the end of the year. You just talked about mining customers taking their time. But given that 20 billion of mining prospects that you have, obviously commodity prices have gone through the roof on the metal side. Are discussions starting to heat up at this point? And then do you also see bigger energy solution projects starting again, at least discussions, so you get to that higher book to bill by the end of the year? Or is that really sort of pushed out to '22 now?

So, we had a good first quarter, a good upside surprise in Q1 for new awards. We’re a little light in Q2. I will say it was close. We could have had quite a Q2, but there were some that fell on the other side of the fence in Q3. So I can tell you that Q3 awards as of the end of July are equal to all of the full Q2 awards. So we've got two months to go in Q3, and we're already at the level we booked in Q2. So that's very positive. I just want to -- I think as we've been messaging for the past couple of times we've talked with you that the back half of 2021 should start to see new awards coming in at a higher level and definitely into 2022, and I still believe that. So I think Q3 is going to be better getting to book to bill 1 to 1, probably not quite there yet, but we'll be seeing that in the -- certainly in 2022, I believe we'll get to that level of booking. We just have -- just to give you some color, we talked about in the prepared remarks all the FEED and study work, about 160 billion in in-house right now of TIC and chasing another couple of hundred billion in the next six quarters of frontend work that we want to convert. And it's in -- the big chunks of that, chemicals right up in addition to mining, obviously, like you said, we got 20 billion in mining. Actually we’ve got 28 billion if you add in the additional study work that we're working on, and we're chasing 64 billion of FEED work in mining as well. But then you add in chemicals, we've…

Well, I was just going to add, Andy, to David's point, we're not seeing cancellations. We're just seeing a significant amount of additional due diligence being done relative to market conditions and COVID. So it may push from Q4 into Q1. But again, the positive thing is that we're not seeing those cancellations.

Very helpful color, guys. And then just can you give more color into the positive change orders and cost improvements that you recorded this quarter within Energy Solutions? I know you mentioned they were on numerous projects. So why all of a sudden did you record such a big positive revision this quarter? And then you mentioned you increased the underlying margin of the business. Is that a function of just LNG Canada ramping, better underlying execution, something else? Any more color there would be helpful?

Yes. There's a lot of puts and takes in there. I don't want to get into the specific projects necessarily, but there's been some additional scope that was added to a particular project. We have come to terms on a number of different COVID-related activities. And I think that's driving a significant portion of that offset by the embedded derivative. And then you include the fact that an age receivable from a client in Mexico that was nominally two and a half years old was received during the quarter are all very positive outcomes for us.

I appreciate it, guys.

Thanks, Andy.

We'll go next to Sean Eastman with KeyBanc Capital Markets.

Hi, guys. Thanks for taking my questions.

Hi, Sean.

Good morning, Sean.

Good morning. So, David, you're talking some big numbers in terms of the pursuit pipeline and pre-EPC activity levels. Historically, what percentage of pre-EPC work has translated to EPC bookings? I'm just struggling with those numbers relative to CapEx updates we've seen from the project sponsors. So I'm just trying to reconcile that. I understand how likely this pursuit pipeline is to hit.

Yes. Obviously, not everything in study and pre-FEED and even in FEED come all the way through the screens, right, because of product economics, Sean. So point taken. And that would be a tough question to answer specifically. When we're in a full FEED and working economics with the clients, then we could see upwards of 30%, 40% conversion of that. But I haven't broken the numbers down for you between study, pre-FEED and FEED. So that would be a more detailed analysis that we'd have to take a look at.

I was just going to add to that, Sean. I think if you look at it from an industry perspective, those conversion rates would look different. For example, clearly within the mining -- and mining is going to be more like 90%. But I was giving an average. That 20 billion that solid in mining is going to be based on our market position is a much higher conversion obviously. But again, I was giving you an average across all 11 business lines.

Okay, fair enough. And I just wanted to ask on Mission Solutions, a lot of moving parts there as well, just with LOGCAP transition, some projects completing, I feel like we've seen maybe one or two DOE prospects go to competitors. I could be wrong there. But is there kind of an air pocket over the next couple of quarters here? What's the revenue growth trajectory like in Mission Solutions?

Yes, Mission is -- we're excited about Mission Solutions and moving up the value chain at Mission Solutions and doing management and operation contracts. I think some of the prospects -- we do have a dip, as I talked about, coming off LOGCAP IV in Afghanistan, obviously, was a huge program to fill that bucket back up. And that's what the team's focused on by moving up the value chain. When I say that Q3 has already reached full Q2 new award levels, it's due in large part to very large Mission Solutions awards that you'll be hearing about very soon. And we're also chasing massive progress for the DoD that could really put Mission Solutions way up on the revenue burn curve. And so we're pretty excited about the trajectory of Mission Solutions revenue and earnings through the planning period. I think that's how you should look at it. You also saw that we had a nice award with the navy on a multi-contract award. They're going to be spending 5 billion a year here for the next several years that we'll be able to participate in that. That also is more of a value-adding up technical solutions program, engineering program management that we can help support the navy as well. So I'm pretty bullish on Mission Solutions right now.

I was just going to add that it's hard to replace a LOGCAP at the end of the day and the revenue that's flowing through that. But the notable award that's coming in, in q3 and there are some very significant awards that we're expecting to have announced at the end of this year. And as you know, in the DOE space, these awards are $15 billion to $20 billion type awards that we feel like we have very good opportunities, and we're very well positioned. So it will see a bit of a smile relative to revenue recognition. But we believe that you'll see a fairly significant growth in backlog.

You look at the spending, right? The DOE, Sean, is -- they've got -- through our planning period anyways, DOE spent 43 billion -- will be spending over 40 billion annually and DoD is way above that, I don’t know, 750 billion or so. There’s lots of support, lots of value we can add to both of those agencies and others.

Okay. All right, thanks. I'll turn it over.

We’ll go next to Jamie Cook with Credit Suisse.

Hi. Good morning. I guess two questions. One, can you just comment on sort of what you're seeing from Stork with the economy starting to improve and getting somewhat back to normal? Whether you're starting to see -- whether we should start to see any acceleration in business? And just wondering if that's the case, how that impacts the timing or valuation associated with the divestiture there? And then my other two questions just on the implied guide in the back half of the year. For Mission Solutions, is there anything -- do we just take the first half to get to your guide in the back half because if so, it implies the margins in that business are falling in the back half of the year. So I'm just wondering if I'm missing something. And then as well on Energy Solutions, I know we're adding back the embedded derivative. But if we again take the first half run rate relative to your guide for the full year, it implies margins to I think are in like the 2% range or so. So I just want to make sure I'm adjusting for the add backs or lack of correctly. Thank you.

Thanks, Jamie. Good morning. I'll ask Joe to comment on Mission Solutions margins in the back half and also Energy Solutions in the embedded derivative question. On Stork, the process is coming along nicely. We've got a lot of interest, I think over 50 different interested parties signed up on NDAs. So really good interest on Stork. To the business itself, I think from an awards perspective, they're seeing challenges with respect to COVID uncertainty. You need to think about Stork being internationally located and obviously COVID is impacting the rest of the world much more significantly than it is in the U.S. right now. So they still are seeing some softness due to COVID uncertainty, but there's -- from what the President of Stork tells me, they're looking to stronger performance on new awards later this year. So with that, I think, as I said, the process is running well and we're excited about that transaction later in the year.

Yes. I can add to Stork. There's a surprisingly large amount of folks that are in the data room today. So there's a fair amount of interest there. On Mission Solutions, we -- after the LOGCAP and some of the one-off events that we saw in Q2 relative to some COVID releases and some incentives that were earned, we would expect that range to get back to its historical norms between 2.5% to 3% moving forward. And I think what you're referring to in Energy Solutions is if you kind of take out all the noise for the quarter, we would have been on a normalized basis about 3.7% for Energy Solutions. And going forward, we're upping the range from 3% to 4%.

Okay, that's helpful. And then just one last question. I guess with a lot of people making strategic decisions to sort of exit sort of the EPC business and understanding you have good prospects ahead, even though they're slightly delayed. Do you think your win rate potentially in some of these markets would be higher than what we would see in a normal cycle just with you staying committed to the business and a lot of your peers walking away? And is that reflected in your sort of long-term EPS targets, a higher potential win rate?

Jamie, from a win rate perspective, we did not adjust that upward for our earnings power through the period. I will say we've talked about these contracting models coming to us favorably, coming more favorably to us in the different businesses. Our pursuits right now, we took a look at it with the Board this week, 85% of our pursuits are now reimbursable contracts with incentives, so really much better place to be as far as their strategy to go after fair and balanced contract terms and commercial terms. So, I think that's telling. And the thing we need to be careful of is as these markets all come back and really pick up that we need to be very disciplined that we don't jump all over the first few and make sure that we keep our margins where they need to be. So we’re just cautioning the teams to be very measured and just follow our processes that we’ve put in place and drive Fluor value and getting paid for the value that we're bringing to all these projects. So, I guess, I'd say there's potential upside to what we're looking at as far as win rates, because we are differentiated. We bring all that frontend capability that I talked about, for example, in energy transition that you can just stay with us and we can design and build and commission your plants for all of these customers that all are focused on net zero across our 11 business lines.

Okay. Thank you. That's very helpful. I appreciate it.

Thanks, Jamie.

And our last question comes from Michael Dudas with Vertical Research.

Hi. Good morning, everybody.

Hi, Michael.

Good morning, Michael.

David, maybe you could share some further thoughts on NuScale? Certainly a lot of progress first half on investment and project and development opportunities. What are some of the milestones we can look forward to during the second half of the year? And all the various funding and hopes and proposals out of Washington with regard to nuclear and clean energy, et cetera, early on is there -- this could be helpful for SMR for Fluor or is it so far down the road, you still have just the opportunities because of your lead in having to design approval from the NRC?

Yes. NuScale’s very exciting and it continues to heat up, Mike. Good morning. We've had a great first half and through July with all the third party investments. We've got Guggenheim on board looking at our different options to sell down Fluor’s equity and extract value for Fluor shareholders. So everything's on track, I can tell you that and we're looking at some interesting activity in that space as far as getting to -- ultimately to a minority ownership where we still have exclusive rights to execute and program manage all of the projects, small modular reactor projects domestically and internationally. I must say internationally, the activity has really picked up and could surpass the U.S. in terms of timing. And that NRC approval from last year really has everyone focused on NuScale leading the way in small modular reactor technology. And it's getting a lot of attention globally from governments and from customers outside the U.S. So that's also very positive. So that's where we're at. With respect to DOE, good discussion with Secretary Granholm a couple of weeks ago with her. And you're seeing the numbers coming out of Washington. I think last night talked about the legislative package targeting new small modular reactors. I think they've got about 6 billion set aside on nuclear facilities to be shut down and trying to figure out how to go forward with small modular reactors there. And then another 6 billion for SMRs themselves. So that's to me very positive. And from what we're hearing out of Washington, full support, full steam ahead with NuScale and starting to deploy to the lower carbon future that is being required globally. So that's what I had on NuScale, Mike.

Yes. Just one follow up on that. Is there any additional investment expected or what needs to be triggered in the next several weeks, months or quarters for your NuScale to get to the level where monetization could happen, or there's a breakout and some new business development opportunities are accelerating some of the potential that NuScale? Is there anything that we should think about here as we move through the second half of the year?

I think these are very long projects. We’re certainly working with U.S. very closely on the standard design of their facility, right, and that's moving along. As well as we're in discussions with very confidential customers in deployment of multiple SMRs to support their low carbon initiatives, again, domestically and internationally. So I think that's something to keep an eye on. In fact, some of those confidential projects feature in Guggenheim’s financial modeling and analysis to take NuScale forward with respect to valuation. And so that's I think a very positive development. So just more to come and stay tuned I guess I'd say.

Excellent. Thank you, David.

Thanks, Mike.

And that concludes today's question-and-answer session. At this time, I'd like to turn the conference back to David Constable for closing remarks.

Thanks, operator, and many thanks to all of you for participating on the call today. I'll say the Fluor management team remains focused on achieving our strategic goals and continues to have positive conversations with all of our stakeholders, especially our customers, and as we continue to improve our financial and operational position. So until next time, we appreciate your interest in Fluor Corporation. Thanks again for your time today and please stay safe.

And that concludes today's conference. Thank you for your participation. You may now disconnect.