Good morning, and welcome to Fluor's Third 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 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, it is my pleasure to turn the call over to Mr. Jason Landkamer. Sir, please begin.

Thank you, Chelsea. Good morning, and welcome to Fluor's 2021 third quarter conference call. With us today are David Constable, Fluor's Chief Executive Officer; and Joe Brennan, Fluor's Chief Financial Officer. We issued our earnings release earlier this morning and we have posted a slide presentation on our website, which we will reference while making prepared remarks. Before getting started, I'd like to refer you to our Safe Harbor note regarding forward-looking statements, which is summarized on Slide 2. During today's 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 Form 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 website at investor.fluor.com. I'll now turn the call over to David Constable, Fluor's Chief Executive Officer. David?

Great. Thank you, Jason. Good morning, everyone. Thank you for joining us today. Before we move into operational results, I'd like to start by pointing out some of the more interesting events and notable items our employees are currently involved in. This quarter, I want to highlight, Melvina Stacey, our HSE Deputy Director in Canada. Two months ago, she started a series on social media where she showcases women in HSE roles at Fluor. In introduction to this series, she acknowledges the challenges of being seen, heard and recognized in what is traditionally a male dominated construction industry and how the company has positively responded. Fluor is committed to our DE&I program and ensuring that everyone could be seen, heard, and recognized for their hard work. And thank you to Melvina for your efforts and I encourage all of you to follow Fluor on LinkedIn for future installments of her series. Let's begin by providing some perspective on what we're seeing in each of our major end-markets starting with Mission Solutions. Please turn to Slide 03. In Mission Solutions, we experienced quite a bit of activity during the quarter. To begin with, margins for the quarter reflect increased execution activity on U.S. Department of Energy projects higher than forecasted performance-based fees and the release of COVID-19 cost reserves. This strong performance was somewhat offset by the LOGCAP IV Afghanistan program that was completed in July. New awards for the quarter were strong at $1.6 billion, our largest award in the segment with a $789 million 12-month extension to our management and operations contract for the DOEs Savannah River Site. Our other major award for the quarter was a contract with $495 million to provide humanitarian support at Holloman Air Force Base in New Mexico for Afghan evacuees as a part…

Yes. Thanks David, and good morning everyone. Please turn to Slide 13. For the third quarter of 2021, we are reporting a diluted adjusted earnings per share amount of $0.23. And our earnings release and in the appendix to today's presentation, we show a reconciliation of GAAP EPS for this adjusted number which excludes certain items such as FX and embedded derivative games as well as debt retirement costs. We continue to make significant improvements to our capital structure. Using the proceeds from the convertible preferred offering, we successfully tendered for our note maturing in 2023 and 2024. When you include the open market purchases in July, we are able to reduce outstanding debt by $509 million or 30% from the $1.7 billion in total debt outstanding at the end of June. When we laid up the company's strategic goals in 2024, we included a target debt to total capitalization ratio of 40%. I'm pleased to report that we were able to accelerate this process and we are now below that target at 37% which is a significant improvement from 55% back in January. Although we are ahead of our three year plan as it relates to our capital structure, we will continue to look at options for the remaining outstanding indebtedness under the 2023 and 2024 notes in a way that supports a longer-term credit facility. Please turn to Slide 14. Our overall segment profit for the quarter was $110 million or 3.5% and included the $18 million gain for embedded derivatives and Energy Solutions and quarterly NuScale expenses of $8 million. Excluding these items, our total segment profit margin is 3.2% in line with our guidance for the year. To get more perspective, year-to-date segment profit margin was 3.3% driven by Energy Solutions at 5.8% and Mission Solutions…

Thank you, sir. And at this time, we will open the floor for questions. [Operator Instructions] And our first question comes from Steven Fisher with UBS Capital Markets.

Great, thanks. Good morning. David, you mentioned that energy transition projects are on the drawing board at the moment. Can you maybe just more broadly discuss potential for energy bookings from here and what do you think the backlog trajectory could be? And then, how you see those energy transition potential prospects filling in the pipeline over the next couple of years?

Hey, good morning, Steven, and thanks for the question. The energy transition work has really started to gain momentum as we see our traditional clients moving forward with those activities. You see the big oil companies setting up specific business units, new energy, low-carbon energy businesses and - like Chevron and ExxonMobil putting in. I think Chevron has got $10 billion put in there through 2028 and ExxonMobil is similar numbers. So, I think energy transition is really going to pick up. As far as your question around backlog, I think we're about $21 billion right now overall. And we see Energy Solution started to gain momentum across not only just energy transition, but the entire Energy Solutions business segment. And we're tracking $45 billion in prospects greater than $50 million EP, EPC, EPCM projects over the next 12 months. And a good portion of that sits in – it’s sometimes difficult to break up because all of our clients are focused on energy transition. So, it’s not with the traditional customers, but it's across all 10 major business lines that we've got. So, when you think about it, when you got mine, we’re chasing $15 billion in mining projects in the next 12 months, a good portion of that is energy transition as is – it is in chemicals where we've got $5.5 billion that we're going after in the next 12 months. Energy transition itself, including NuScale and SMRs right now are the prospects in 2022, I read about $2.5 billion. So, we see the backlog. I think from a backlog perspective, we are turning a corner as a company. We're really excited about the first half of 2022, talking with our Head of Corporate Developments, Al Collins, who's been around the company for a long time. He says we haven’t seen this these types of numbers in a long, long time as list of prospects goes here in the first half. So, yes, turning a corner and really excited about starting to book a healthy backlog with good margins. Thanks, Steven.

Thank you for that color. And then, just maybe on LNG Canada. Can you talk about what the next steps are on any further change orders? And you mentioned inflation, mitigation, how should we think about the risk of labor inflation over the balance of the project?

Yes. I think really in good shape. As I said, we -- as we'd announced in second quarter, the first COVID agreement for engineering and procurement was successfully collaboratively signed with the customer. And we're also tracking now the fabrication and construction impacts of COVID and working again with the same team in place to make sure that we get to a fair and balanced position with the clients for the rest of the projects on that front. So, that's all coming along nicely and more on that in subsequent quarters. On the price itself, probably best to look to what the client is saying about the project. The client in their call recently at Shell feels the project itself is going very well. As I mentioned, we reached 50% complete. And they said that they were very pleased with the performance not only in Canada, but outside of Canada in terms of the supply chain. And within Canada, particularly during this pandemic, really pleased with the overall progress from their standpoint. So, that’s good to have the client weighing in on that front. So, I think all in all, it's going well and we continue to keep a close eye on it. On the escalation side, we feel we're in good shape on inflation. We've got well in hand, obviously, we're bought labor. The labor rates are taken care of and accounted for in our estimates. So, we don’t see any issues on that front either. So, yes, really good going with the modules being starting to ship over. And obviously, as I've said in the past calls, the focus is still on the mod yards and the progress there. And we're taking action and implementing good execution plans in the yards there to ensure schedule and progress and productivity continues in the right direction.

Thank you very much. I appreciate it.

All right. Thank you.

Thanks, Steven.

Our next question comes from Sean Eastman with KeyBanc Capital markets.

Hi, guys. Nice update here and thanks for taking my questions. Maybe it'll be helpful just to understand the bridge from the previous EPS guidance to the new EPS guidance, obviously, a very healthy raise. I just want to understand what we can extrapolate from that as we look into 2022, maybe part of that Mission Solutions upside is some fast burn work that's going to be contained this year. Maybe some of that is the write-ups or change orders, but maybe it doesn’t help us next year. Just trying to think of it - think through that, that'll be helpful.

Yes Sean, it’s Brennan.

Good morning, Sean, Joe is going to take this one.

Yes. Thanks, Sean, for the question. What we're really seeing is, I think, the first step of this is we are starting to get the challenge projects behind us. Although we have had some noise and some friction this year with principally Gordie, but as we continue to progress that, we feel like we're going to get on top of it. But I think what I'm -- what we're seeing in through a lot of hard work this year is we're starting to really reap the benefits of the new strategy in terms of improved performance and discipline around our investments in our project execution group. We've implemented a very rigorous overhead reduction program, which we’re starting to reap some of the benefits of that in 2021 and we'll repay significant portion of that in 2022. Our new awards that we’re booking in, I would suggest you that they're leaning towards a significantly higher quality of earnings as we look forward on how those will burn. And I think it's also important to note that if we look at the backlog and how it's performing and we compare that to where we are from a challenged last project perspective, and I’ve said this on previous calls, it represents less than 5% the challenged projects of our overall backlog. And clearly, with the bidding principles and the diligence with which we're putting work into backlog, we would expect to see higher returns and better performance moving forward. So, it's a combination of a number of different things both on the cost front and how we're performing projects and then - and clearly what we're putting in the backlog.

Okay, helpful. And just a higher level kind of theoretical question here. But obviously the results are good. I just wanted to understand, how we get comfortable in the broader fixed priced project portfolio. That floor is kind of protected from this sort of unprecedented volatility and inflation and input costs and there have been wage inflation. Maybe we can just level set on that and just kind of understand how that portfolio of projects behaves in this operating environment. That'll be very helpful.

Sure, Sean. Yes, we're very comfortable. Obviously we've got all the right processes and procedures in place through we're operating system requirements and with a pursuit criteria. Yes, going forward we're very comfortable with how we're bidding work and the again the government since screening of those prospects and what we're bidding and who we'll be working with going forward. So, and from a go for and including the risk committee at the board level which provides oversight and on all the risk projects that we're considering. So, going forward are very comfortable. Currently, all contracts in-house right now are well-protected through the contract and escalation clause as an indexing for inflation and including the lump sum work down in Mexico. And we're in good shape up at LNGC and Canada. So, I think from that standpoint we're in good shape and we've been able to make sure the contract protects us going forward. Just looking at the prospects I talked about that $45 billion of work that we're again in not study or feed, we're not anywhere, just real projects the $45 billion next year. 91% of those are reimbursable cost prospects. And 9% fixed price. But again of a size and with customers and locations that we feel very comfortable going forward. And our supply chain group is all over to your comments on volatility and inflation. We got not only our supply chain covering that but our Head of Industrial Relations keeping a close tabs on labor inflation, wage inflation volatility. So, I think we're in really good shape.

Okay, terrific. Thanks, a lot.

Thanks, Sean.

Thank you.

Thank you. Our next question comes from Michael Dudas with Vertical Research Partners.

Good morning, gentlemen.

Good morning, Michael.

Good morning, Michael.

My first. When you're -- I was just thinking about getting on top of following-up on Sean's question on supply chain et cetera. What are your customers coming to ask you to do even with the contracts that you have, are you or if solution is fairly verily available, do you get the sense that these trends and it's a little bit more less than transitory going forward. And how that plays into your ability to secure some of the $45 billion of work that you have on the board over the next 12 months to secure your fair enough better share of project bookings?

Yes. I think certainly on that on the current work and else were, like I said we're in good shape, Michael, and working with customers to make sure that we continue that baseline re-baseline estimates and schedules as we see impacts on supply chain and on labor. So, that's collaborative process and continue to work through those. Going forward, we do see just a lot of I guess I call it a pause or more scrutiny across our client base right now. Obviously optimism, you see all the CapEx numbers coming out, I can rehearse them for you if you like. But there's CapEx growth across our client base into '22 and further out in time. So, that's very --. That's why I feel so positive about next year and the new awards in the direction we're going in and as I said turning a corner. But to your point, this more project analysis and review to ensure that whether it's transitory or long-term these issues that we're facing right now. And working with the clients to make sure they're comfortable that when they pull the FID triggers that we have a most likely a P-85 type of probability in place on and again most of these over 90% reimbursable class projects that we're chasing. So, that's how I see it and it started mining but we're seeing it in chemicals and the other big business lines that have from it the lion share, the new awards coming right now.

So, it sounds like demand's increasing but the supply the issue we just think it's the customer has to go through but everything seems to be especially with regard to commodity prices in the marketplace. I mean, these projects are being the market tell them where they have to go through. So, I'm assuming that gives you some additional confidence in booking some these are like mining projects tuned in the next several quarters.

No, most definitely, they are coming. Again the CapEx numbers are pushing up very nicely and then we got all the FEED work as well. We've got the I think it’s a $177 billion that we just as I said on the prepared remarks, $170 -- from rather $70 billion of front-end work that we've completed and $39 billion of that was mining. And so, yes and we're chasing 42 -- $42 billion in front-end work from mining projects in the next 18 months in the rolling forecasts. So, it's there's a lot of work sheets. And it's not just mining and chemicals obviously as well and energy transition within the Energy Solutions business. So, again it's coming and just it's a little more scrutiny and we'll done on the analysis of the cost and schedules.

I appreciate that. And just finally on the you're encouraging news on the semiconductor opportunities on Arizona. And how significant can that be going forward. And on semi's, electronics, life science, is that a market that still has bludgeoning opportunities for so for you guys to gain some share in booking there?

Yes. It's very pleased with the progress in Arizona and has a very large program that we just this tip of the iceberg right now and getting in and working with client there. And obviously a long-term build out of the major operation. So, we see good things happening in ATLS not only in the U.S. in that space but over a nearer period opening a new technology hub for ATLS in Copenhagen on December 2nd and the clients they're very excited to have us working locally working with them in Europe as well on these similar types of project datacenters as well as semiconductor work back to you, so. In ATLS, see about in the next 12 months about over $3 billion in prospects that they're looking at.

Excellent. David, thank you very much.

Thanks, Michael.

Thank you. Our next question comes from Jamie Cook with Credit Suisse.

Hey, good morning. I guess, David, one question for you and then Joe two for you. Given the amount of work that's out there in the competitive environment, David. Are we getting to a point where customers are coming to you to sort of you to feed on a sole feet versus like a dual feet, so that your potential wind rate this cycle could be higher just because of the lack of competition or players that have exited the market. I'm just wondering if those dynamics are more favorable. And then, and particular as people are worried about labor. And then my second question, Joe, I'm going to push you on the margins a little to imply margins in the fourth quarter are probably better. And then, what I would have expected and I'm just wondering if like we can think about that is a good base for how to think about 2022. And then my last question is you made good progress on the debt reduction this quarter but you did say you're exploring options to reduce you get further on the 2023, 2024 notes. If you could elaborate on that, is that can we pay that down through cash flow from operations or are we exploring any potential for equity. Thanks.

Hi, good morning Jamie. So, yes. On the all of front-end work is feasibility and FEED work, source versus all the way up to dual FEED competitions like you mentioned. It's still competitive out there. And we're going up against contracts, assuming I have the same resume in that space as far as subject matter experts are concerned and all of the value that we add from evaluating technologies for our customers at the front-end and coming up with the best solution. But they're out there and they're making runs at it with quite low pricing. And so, we got to battle that effectively. And so that I'd say that's the main issue right now on that front. So, we're still seeing a lot of competition in. We got to put our best foot forward and the way we do that is in fact we had a recent example on a renewable diesel project where it was going in one direction because of -- because of pricing. And we went in and added value with that technical capabilities and pull that right back to floor. So, a great win. So, we love to see that because getting paid for values is what we expect. So, it's a bit of a mix but still very competitive but. Like I said, we're chasing about a $150 billion in TIC over the next 18 months in this type of front-end work and we will definitely pull in a good portion of that but still competitive and have to put our best foot forward. And convertibility, I've looked at that. And I'd say in the non-government businesses conversion of these front-end jobs are in the anywhere between 40% and 50% for Energy Solutions and Urban Solutions. Mission Solutions is a much higher convertibility rate up almost a 75% conversion of prospects based on repeatability and repeat clients, repeat agency clients at the government. So, Joe, turn it over to you on the other questions.

Yes, thanks Jamie. On the margin guidance, we had signaled in previous calls that we were looking for that quote or 4% to 6%. I think you can expect margin similar to the Q3 margins for Energy and Mission, slightly normalized but within reach of what we had achieved in the quarter. And I think as we start to execute out the challenge projects through Urban Solutions, we will be well within that 4% to 6% range as we would look to Q4 and beyond. And on the debt side. No, we're not, at this point we believe that there is strength within the cash flow generation within the business. The timing of that is obviously very closely aligned with the release of the new awards. And what we're up against a little bit as our credit facility renegotiation but whether we do that through cash on hand or some other view of it. But we are not at this point-in-time contemplating any additional equity raise.

Okay. That's helpful, thank you.

Thanks, Jamie.

[Operator Instructions] And the next question comes from Andy Kaplowitz with Citi Group.

Hey, good morning guys.

Good morning, Andy.

Good morning, Andy.

David, so it doesn’t seem like you received additional outside investment for NuScale over the last couple of months. But obviously you may've received it before, the $190 million before that. Could you update us on your progress though with Guggenheim, maybe what is the thought process at this point around your new scale investment or whether it has changed at all given perception regarding nuclear power, seems to be improving globally? And then, could you remind us what the remaining percent stake in the company you have left?

Good morning, Andy. Thank you. And thank you, for asking about NuScale because we're very excited about NuScale going forward. And Guggenheim as I mentioned has been working with NuScale and ourselves for the past six months and doing a great job for us putting all the options on the table. And we're making really good progress in how to move forward and get the commercialization and the right financing options for the organization. So, I'd say we're getting closer to a final outcome on that and this really near-term I think will be able to talk to you more about that. About how we plan to extract value for the floored shareholders based on the new scale offering and what you were seeing in the marketplace and extreme interest. And the fact that we're getting started on getting further into the Utah AMPS or the UAMPS project with the standard design in the collar. The operating license. Yes, going in a great direction and yes like you said a $193 million this were was a very strong and more to come on that front as well. So, I think I'll leave it at that and just like you know that we're making really good progress.

Okay, and then maybe like, sort of a big picture question, David, you've been in the seed now COC for a few quarters obviously raised EPS this quarter. And you've got those 2024 goals still out there. So, it seems like you're pretty enthusiastic about ‘22. But you do need a nice step up to stand track. Where does that step up potentially come from within your segment? Is it all of them? Is it one in particular in the confidence level that you're still on that 24 trajectory?

Yes. I'm very comfortable with what we've put out there for the earnings power in 2024. I think we're ahead of schedule not only on our performance, which is driving better earnings through the segments, but also the getting fit for purpose, as Joe said on the cost overhead reductions. These are permanent, sustainable reduction, structural reductions that we're making. So, we're comfortable that those run rates will continue into the future So, we're managing everything. It was a bridging year as we discussed at the start of the year that we've been really able to get things within our control in a much better place to get ready for the upturn which is I think I just say it's coming a little later. We actually we actually are going to beat our gross margin plan for the year by several percentage points. So, that's also encouraging from a new word standpoint. So, we're ahead of plan on that, as well. And like I said what we see in the first half of ‘22 these are major project prospects that we'll be going after. And so I'd say, again, we're comfortable with the targets right now. I think it's a little too early to adjust what the earnings power could look like in 2040. We will stick with what we've guided for now. But we'll be taking a look at that next year during our strategic planning process and update as required on that.

David the only thing I was going to add is if we kind of look back over the last six to nine months I feel extremely excited about the quality of earnings and the new awards in the markets that we're chasing. So, David has laid out a fairly significant robust pipeline of work that we're pursuing. But it does fit our bidding principles and criteria and therefore we believe it'll be reflected in truly what flows through our pipeline and becomes our quality of earnings moving forward.

Yes. And as far as where's it coming from its coming from like we said on strategy day we've really focused on the 10 business lines that we're going to drive growth across and we see growth in pretty well every single business line. And so with, I'd say mining, leading the charge and government as well leading the charge with chemicals right behind it, and obviously infrastructure a lot of opportunity there coming down the pipe and followed up by energy transition and energy solution. So, it really is including HELS as well. So, really, it's right, in all those business lines that we talked about at the start of the year. And that's what we're going to see it across the board, which is a good thing in a cyclical with all the different cycles we take on.

And then maybe just a quick clarification for Joe. Is it true mission solutions revenue was up despite getting out of Afghanistan? So, does OEW work increase DOE? Does that sort of fill the gap, Joe so that revenue stays at these levels that you're seeing Q3 now despite you being out of Afghanistan?

Yes. It is a significant portion of the replacement for Afghanistan work moving forward. But I think as David laid out there are some very significant awards that we feel will drop here in the beginning of 2022, which will continue to help not only fill whatever gap exists from Afghanistan, but in essence grow the overall mission solutions backlog as we move forward.

I appreciate it.

Thanks.

Thanks very much, Andy.

Thank you. Our last question will come from Michael Feniger with Bank of America Merrill Lynch.

Hey guys, thanks for squeezing me in. I was just hoping to under understand Joe on it's great that the EPS guidance is revised up notably. I was just curious on the cash flow from ops. I think you guys are guiding that to be positive for the full year. Now it's neutral to positive. Just help us understand maybe if there's been any kind of buckets of what maybe push that back from in the positive range to positive, to neutral positive.

Thanks, Michael. Let me first what we had been signaling quarter-over-quarter is that we were going to be neutral to slightly positive. We will end the year in that positive, slightly positive range. What is impacting Q3 are really timing issues. If I take a look at that $66 million there's a very small portion of that that's in there that is to service last projects and as we move into Q4, I am very-very confident that we'll see that cash, those cash balances snap back to the positive range and we will end the year in a in a positive cash flow position.

Good to hear. And just on analogy can you mentioned how sell in the last result sounded very pleased on the overall progress. You didn't mention some issue with the pipeline construction. Now I believe that's clearly separate from you guys and the discussions there. I was curious if that had any impact on the overall project and just like big picture how do you kind of ramp up now of the construction side of LNG Canada? How do we think about that as it flows through on revenue recognition, margin and cash from ops in 2022?

I'll let Joe talk about cash from operations as we pass the 50% mark and how that looks from a cash perspective on the project. On the pipeline yes, you're right on that they that's the coastal gas link, feed gas pipeline being developed by Trans Canada. So, it doesn't have any impact on what we're doing. Obviously we'd have to direct you to the customer for more color on that but Joe you want to talk about cash flow.

We have historically been extremely conservative in our VIE cash as it'll be distributed through the form of dividends back to the owners of the joint venture. At this stage of the project as we are kicking off fabrication we are not looking forward dividends or cash inflows at this point from LNGC but as we as we get closer towards the third and fourth quarter of 2022 we will probably begin to open up more dialogue around that. There is cash flow that has been generated relative to our floors relationship to the joint venture and a significant portion of cash flow being generated. But in terms of dividend not only with LNGC but with all of our VIEs we've always been very conservative relative to the cash that remains in the joint venture to service the project.

That makes sense, and maybe on that conservatism, I'm just curious, like the cash balance of $2 billion, kind of going forward you already reached your debt level target, that you guys were kind of that you laid out at strategy day. Is the $2 billion cash figure is that going to -- I know that was a goal to have for 2021? Is that still the goal to maintain that level of cash? Do you see that maintaining that level throughout 2022 as well?

I believe that we will start as we book in well, a couple of things. One is we work our way through the challenge projects. And we begin to book these opportunities that David has laid out today. We will start and begin to see those cash balances increase over time. It'll become a timing issue. Even though we may book a $20 billion award under a single performance obligation, the generation of that task, their engineering, and really into procurement and construction look different over the continuum of the project. So, I don't expect us to see any negative impact to cash flow, but I think it'll begin to ramp up in 2022 with a significant ramp up in 2023 as we start to grow our backlog with the market as we see them today.

Great, thanks guys.

Thanks, Michael.

Thank you. I would now like to turn the call back over to Mr. David Constable for closing remarks.

Thank you, operator. And many thanks to all of you for participating on the call today. And we remain diligent and focused on achieving our strategic goals and continue to have positive conversations with all of our clients and stakeholders as we continue to improve our financial and operational performance here at Fluor. In the meantime, we appreciate your interest in Fluor Corporation and thank you again for your time today.

Thank you. Ladies and gentlemen this concludes today's teleconference and we thank you for your participation. You may now disconnect.