Good morning, and welcome to Fluor's Fourth 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, Head of Investor Relations. Sir, go ahead Mr. Landkamer.

Thank you, Cynthia. Welcome to Fluor's 2021 fourth 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 views 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 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?

Thank you, Jason. Good morning, everyone and thank you for joining us today. Before we move into operational results and our outlook for 2022, I'd like to start by highlighting one of our employees Annie Lidge the Director of our Supplier Diversity program in Houston. Fluor’s Supplier diversity program aligns with corporate and client project goals and standards of US government regarding small minority and Women on businesses. In December Annie won the Corporate Champion of Diversity Awards at Houston, 2021 Diversity Summit. Mayor Turner also proclaimed December 9, 2021, as Annie Lidge Day in the City of Houston. So on behalf of the company, I'd like to congratulate Annie. This award honors both Annie's commitment to promote supplier diversity and the importance of making a positive social impact through the diversification of Fluor's global spend. Now please turn to Slide 3. It's been a little over 12 months since we launched our new strategy and 2024 EPS target. That strategy is centered around 4 strategic priorities. And just to recap, first, driving growth across the portfolio. At the onset, we said 2021 would be a bridging year. While that was clearly the case, we are now well positioned to meet our strategic goal of growing nontraditional oil and gas revenue to 70% of our portfolio. To better serve our customers and drive growth, we launched a key account management review process, focused on aligning our capabilities directly to our clients' needs. Strengthening our client relationships by communicating Fluor's value differentiators is a key focus area for us going forward. We've also improved our leadership push into professional and technical solutions with a robust front-end backlog and prospect pipeline. We are currently working on or recently completed over 400 feed-and-study packages, representing over $200 billion in total installed cost. Fluor…

Thanks, David, and good morning, everyone. The main topics I'll discuss today are: one, an overview of our 2021 financial performance; two, an update on our capital structure and financial position; three, an update on our initiatives, including Project Fit, our cost optimization program; and four, our outlook for 2022. Please turn to Slide 10. For 2021, Fluor reported a net loss from continuing operations of $144 million or a loss of $1.46 per diluted share. Excluding the Dutch pension settlement and certain other adjustments, we are reporting adjusted EPS of $0.94 for 2021. In our earnings release and in the appendix to today's presentation, we show a reconciliation of GAAP EPS to this adjusted number. Consolidated segment profit for the year was up 12% to $374 million compared to $333 million in 2020. Corporate G&A expense for 2021 was $216 million, up from $202 million a year ago. The increase is primarily due to the impact of performance and stock price-driven incentive compensation that was partially offset by a gain on sale of real estate. During the fourth quarter, we settled substantially all of our obligations for our largest defined benefit plan, which provided retirement benefits to certain employees in the Netherlands and recognized a pre-tax loss on settlement of $198 million, substantially all of which is non-cash. Over the past few years, we have now settled our pensions in the United States, the United Kingdom and the Netherlands. I'm pleased to say that we do not have any material pension obligations remaining. As David mentioned, we made significant progress towards improving our capital structure in 2021. Our balance sheet is stronger today, having reduced outstanding debt from $1.7 billion at the start of the year to $1.2 billion. Our strategic goal was to reduce our debt to capitalization…

[Operator Instructions] We will take our first question from Jamie Cook with Credit Suisse. Please go ahead.

Hi good morning. I guess two questions. One, how much was the reversal of the reserve in Energy Solutions? How much did that impact the profitability of the margins in ES, because the margins were pretty good. And obviously, that implies you're implying good margin performance in 2022. So just trying to understand the dynamic there. And then my second question is how much of the guide is dependent on sort of new awards? And to what degree are new awards being deferred because of just macro concerns, or is it more just a function of floor being more disciplined on the terms and conditions front? Thank you.

So I'll take the first question. Good morning, Jamie. On the reversal of the reserves, it was approximately $28 million in the fourth quarter and overall for the year, it was $60 million.

Okay. Thanks. And just what's implied in the guidance for 2022 ES margins? Because they continue to be at a -- I don't know, 5% is pretty good for Fluor on ES?

Well, from our perspective, I think we continue to see strength coming from LNGC. TCO continues to close out very strongly and positively. And I think David touched on it in his opening comments relative to the quality of earnings that we continue to put into backlog. In terms of where we are in the mix, right? As you look at the feed activity converting into detailed design, detailed engineering as these projects become to maturity and get into an EPC space, the margin profile is different through the segmentation of the activity around those projects. So we would continue to see that strong margin performance, I think, in Energy Solutions through the balance of 2022.

Jamie, on the new...

Yes, new awards. Sorry, go ahead.

Good morning, Jamie. Yes, so new awards. 2022 plan is strong, I'll say, even without Pantex. So we've got good line of sight on significant new awards that cut across -- in the top 15 awards, they cut across chemicals, production of fuels, mining, ATLS and government. So a very exciting significant prospects for us. And as far as -- when you think about inflation and supply chain and logistics, certainly, in the government sector, it's all about mission. The mission and mission solutions really somewhat separate from the inflationary challenges that we're looking at. Also in the consumer products area, ATLS where time to market is critical and they're being incentivized to manufacture in various countries, which helps them with their CapEx costs. That's going in a very good direction. So it depends on what business line you're looking at, as far as the effects of what we're seeing in the macro -- on the macro side. So I think it's more on the natural resources side that the new awards, obviously, are doing a little more due diligence to make sure the returns are going to be there, but we still see mining projects going forward in 2022 and a good chunk of them. So that's an update on new awards.

Okay. Thank you.

David, can I add a little bit?

Sorry. Yes. Go ahead.

Jamie, I just wanted to add a little bit too, to maybe give you a little sense of, our book-to-burn heading into the end of 2021 is below 1, and not suggesting that Pantex is not going to come into our backlog into 2022. But even without Pantex coming into 2022, we'll be well above 1 relative to our book-to-burn. So that will kind of give you a sense of the broad-based view of the award opportunities and prospect opportunities that we're pursuing today.

Okay. Thank you. That’s helpful. I’ll get back in queue.

We will take our next question from Michael Dudas with Vertical Research. Please, go ahead.

Good morning, gentlemen.

Good morning, Mike.

Good morning.

David, first, on mining. You highlighted in the past some notice proceed on some awards in that sector. Are the delays are pushed to the second half just driven by, what you mentioned before, recosting, refiguring things out because of inflation and such? Are there still issues in -- with some of the government and some of the legislation that could be happening in Latin America with some of these projects? And then, away from that, you highlighted on semis and intel. What type of opportunities and how involved in across the board on the different customers in the United States that are certainly are looking quite aggressively at some of this investment? Is Fluor involved in? And could we see some bookings out of area as we move through mid-2022? Thanks, David.

Thanks, Mike. Yes. Specifically on mining, as we talked about in past calls, the estimates and the accuracy around the cost and schedule delivery, obviously, very important to make sure the clients rate of returns are where they need to be going forward. So, they are definitely looking more closely at those that's driving, again, in -- with this -- with some uncertainty still around inflation and supply chain logistics, labor availability, they're doing a little more homework. And like I said, on the Natural Resources side, when host governments have the reserves and it's a little different than being incentivized by governments to come and manufacture in Ireland or the US. So, it's certainly quite a different dynamic that they are dealing with. So, that's part of it. But yes, to your point, I'd say the political challenges, political risk in Chile and Peru and even somewhat into Argentina is also giving the mining houses some pause. And that's also playing into their decision-making and how that will roll out. And so a bit of wait and see on some of the opportunities. Again, overall, when you think about the copper required and other minerals required to drive the low carbon economy these projects are going to be coming and not just in South America. So, with that pause, you can think about commodity prices going up even higher. So, that's mining. On semiconductors, again, we're very, very excited about what ATLS has been able to achieve with their customers in the advanced manufacturing -- advanced technology space and are building relations. We do have work with Intel now. I think we've got five projects with them. And we will continue to see -- to your question, continue to see awards not only with, I think, Intel but other chip manufacturers in the US and also abroad. So, yes, I guess I'll say stay tuned on that front, Mike. Thanks.

Thank you, David. Thanks a lot.

Thank you.

We will take our next question from Sean Eastman with KeyBanc Capital Markets. Please go ahead.

Hi team. Thanks for taking my questions. I just wanted to go back to Jamie's question. So, it sounds like there's line of sight on a lot of new award activity, but I'm just curious, how much backlog coverage do we have on this 10% revenue growth guidance for the full year today? I just want to understand exactly what kind of new award activity we need to be seeing coming out over the next couple of quarters to hit that number.

Well, thanks, Sean. Maybe David and I will tag team it. But the way I view it is it's so broad based. As we look at -- here's one of the key indicators that I look at when I'm viewing a plan, an operating plan in general is how much of your work is identified and how much of it is somewhat unidentified relative to the development of a plan? And I would suggest to you this year as we look at 2022, that amount of unidentified prospect and it is a very, very, very small percentage of the overall operating plan, and it's across all of our business lines, obviously, across all of our segments at the end of the day. So I get a very good level of comfort even at Pantex Y-12, and we believe Pantex Y12 is going forward. Let's be realistic there. But even taking that out, there is a significant amount of growth that we're seeing across the ATLS, that we're seeing across the mining side of the business, that we're seeing across other aspects and areas of Mission Solutions and into Energy Solutions, specifically in the chemical side of the market. So I -- like I said, I think my key indicator is I'm developing an operating plan, how much uncertainty through an unidentified view of how you build a plan is a very, very small component of that. I think timing will -- the timing and the pace of these awards will probably be the one risk factor that that we'll have to kind of marry into this calculus of what our guidance is for 2022.

Yes, Sean, just to your question, just -- if it hasn't been mentioned, we're looking at burning about 50% of our ending backlog at the end of 2021. So 50% of that will be burned in 2022. And then that can give you an idea of what we'll be doing to get to our 10% revenue growth on top of -- well on top of that, obviously.

Okay. Fantastic. Thanks. And then moving over to Pantex Y-12. What exactly is in the outlook for 2022? I'm just trying to figure out when you've assumed that starts to kick in, how much tailwind is implied there going into 2023 at a full annual run rate? And perhaps just what the next step on the protest is? And whether there's a good chance that's going to go into backlog in the first quarter?

So Sean, no, it's a good question. The plan is built on a Q3 resolution to the protest, a favorable resolution. So when I say favorable, we're looking at Pantex being in at a 100, 100 probabilistic view. The actual impact, because of the transition period and when the award is assumed, is very small in terms of its bottom line impact to the 2022 numbers, both from a top line and from an earnings perspective, and will really begin to ramp up into 2023. I don't know, Dave, if you want to comment on the status of the protest.

No, I think we're talking with the business segment. We're in pretty good shape. We're looking to transition here when we get the green light. So looks good, but we'll have to wait for the NNSA to give us the final go ahead.

And I think one of the -- Sean, one other thing that I would add, too, to give you a little bit better perspective on how our guidance that we've laid out, the 115 to 140 [ph] would assume whether Pantex gets pushed a little bit to the right based on the protest or it doesn't go forward, which, again, we don't believe that to be the case. But we've -- I think we've accounted for that in our guidance in either respect.

Okay. Super helpful. I’ll turn it over there.

[Operator Instructions] We will take our next question from Andy Kaplowitz with Citi. Please go ahead.

Good morning, everyone.

Hey, Andy.

Good morning, Andy.

David, I just wanted to follow up on your guidance for 2022 for 1 second. I mean, can you just give us a little more color where the revenue growth is coming from? I assume it's -- because if you look at Q4, you're down still a little bit. Is it LNG Canada continuing to ramp up? I know you just talked about Y12 and Pantex. And is the year back-end loaded if we think about EPS?

So from -- Andy, I'll kick it off. I think maybe David and I can tag team a little bit. There is growth across Energy Solutions, I think underpinned by some of the activity that we're seeing on the front end of the year relative to chemicals and some of those investments getting to market sooner. Mission Solutions has booked a significant amount of work and extensions. And so there's a good baseload of activity that's moving into some of the larger awards, Pantex obviously being the elephant in the room here as we move into the tail end of the year. And then Urban Solutions, I think David laid it out relative to what's going on in the semiconductor chip side of the business through mining; and ultimately, the infrastructure bill and how it's supporting additional investment in the markets where we're really focused, which are the DOT through Texas, South Carolina and Florida, we're starting to see that that investment in that capital spend probably to market quicker than it has been because of the infrastructure bill itself. So again, it's broad-based. But if I broke it down, there is -- there's growth across Energy Solutions, Urban Solutions. And although there's a little bit of a reset in Mission Solutions as OAWs come out and we've concluded our activities there, we would certainly expect that to start -- if you look at the trajectory of Mission Solutions, it would start to ramp up in Q4 and then as we move into 2023 with the kickoff of Pantex/Y12.

Yeah, Andy, I'm just looking at the 2022 plan here. It really is -- as Joe mentioned, really broad-based. So you can roll the 10% across all the segments. And it isn't back-end loaded. It's pretty constant across all four quarters for Energy Solutions and Urban Solutions and picks up a little bit in Mission Solutions in Q3, Q4. So it's not back-end loaded this year.

That's very helpful, guys. And then on LNGC, David, I think you mentioned you're working collaboratively with your client on the Omicron related delays. Could you give us a little more color on what you're seeing there? It seems like you've been able to resolve delays and issues in the past related to the virus, but does the overall project time line slipped at all? Should we expect to see an update from you on how these negotiations are going with the client? How does this sort of keep going here?

Yeah. We're really good relationship with the clients, as was demonstrated with the first agreement that we came to for the engineering and procurement services through February of 2021. That was successfully concluded and did give us some relief on the schedule that we are working to and driving hard to improve schedule and productivity as much as possible to reduce the impacts of COVID on the project. And so that's, I think, a good sign, signaling that on the impacts for fabrication and construction from February 2021 onward, that we will again come together and come to an agreement that is fair and drives the successful conclusion of the project to the timeline that the client is looking for. So yes, I'm pleased with the progress and the modules coming to site and we've got great productivity on the construction site right now and just ready for all that steel and equipment to come in and get erected. So yes, we're looking pretty good right now.

Appreciate it guys.

Thanks.

We will take our next question from Andrew Wittmann with Baird. Please go ahead.

Great. Thanks for taking my question guys. Joe, I thought I would start with you and ask about the cash flow. We heard in your prepared remarks that you're expecting roughly $250 million to $300 million in Stork and AMECO and the 1, 2, 3 [ph] aspect and that looks to a bit more than offset the cash headwinds from the legacy projects. I guess that's associated with the $1.1 billion backlog that you talked about. Yet you guys kind of suggested that your cash position will be unchanged today. So I guess the implication is that the underlying business, everything besides legacy projects, are not going to be delivering a lot of cash flow this year. And I was hoping you could just talk about some of the puts and takes as to why that's the conclusion that there isn't more cash coming out of the rest of the business?

Good question, Andrew. Thanks. Where we're looking at, as we transitioned from '21 into '22, when we book these projects, we are in a phase of the project, which is driven principally through engineering and the timeline of getting into some of the higher dollar activities relative to procurement and into fabrication. And then construction, where you start to see that the numbers ramp up is where you'll start to see some of that much more significant cash flow generation. We feel like with - what's going on here, we have signaled the $200 million that we're servicing from legacy projects within the 300 to – or $250 million to $300 million is – are good numbers. We're showing a slight improvement in cash for the year. But really, as we book and we get the awards into 2022, I would suspect we're going to see a nice bump in backlog. As we move forward, the cash generation does trail 8 -- 6 to 8 months behind that as we get into the progress on each one of the projects at the end of the day. I think the key that I'm looking at is when – as we move forward is that, backlog number and the quality – and understanding the bidding principles and how we're putting backlog in, I'm very optimistic that in 2022, we're going to see an appreciable growth in our backlog number, which will then generate that cash flow that we're talking about here, Andrew, towards the tail end of '22 and into '23.

Okay. That's helpful. Great. I guess just my follow-up question, I guess, would just be on the operations update that you gave here with the $97 million of run rate that you're expecting versus the $52 million. Does that suggest, Joe, that you're going to see a $45 million drop-through on a year-over basis, the difference between those 2 numbers, or is that really what needs to happen to resize the business for the revenue base that you're expecting here in '22? And so, it's really just -- it's something that needs to happen, but it's not really going to be incremental to your margins. I'm just trying to understand kind of the puts and takes underneath the margins that you've given here.

It's a great question, Andrew. And one of the things that -- and I'll give -- here's my history lesson. We've -- our tempted overhead in the past have been somewhat top down and somewhat imposed. We've actually taken a more bottoms-up view of the world. And what we're trying to do is eliminate activities that really aren't generating any real value to the company, taking a look at systems that have been brought into the overhead mix. This in no way should be a reflection of a reduced volume moving forward. It should be viewed in the sense of an optimized platform in order to service the projects without any impediment to being able to service those projects with the same quality that we've done so in the past. It was time to go back and take a house-cleaning look at what we had been actually spending our money on and make sure that it was appropriate and supported the growth and the investment in the business as we move forward. So I would look at it differently. This is not overhead cutting for cutting sake to drive a lower overhead structure. This is an optimization program that we're implementing.

Okay.

Yes. Just adding on to that, Andrew, we called it project fit for a reason, right? It's a Fluor in transition, and it's also talks about being fit for purpose and being lean and streamlined. And to Joe's point, these are sustainable, permanent overhead reductions through structural and decentralized changes in the company and to eliminate busy work and non-value-added activities in the company. So we're well on our way. Our target was 100%, but we're going to go well past that by 2024 on our project fit.

Very helpful. Thank you very much. Have a good day, guys. Thanks.

Yes, thank you.

We will take our next question from Michael Feniger with Bank of America. Please go ahead.

Hey, guys. Thanks for taking my questions. Just on LNG Canada, is -- if we separate that business out, is it driving revenue growth above 10% and profitability above that 5% margin target, since it's such an important project to be helpful to understand how much of that's embedded in this outlook. And based on what you were referring to with Andy, just is there a specific date or time we can look for this next agreement on fabrication construction? Is that 2022, or is that actually going to happen more in 2023?

So I'll take the first question, Michael. I don't want to get into the specific margin on a particular project. But I would suggest that if you look at the risk associated with that project, it would be a logical conclusion that we would expect a higher return associated with the risk profile of the project, without getting into specific details. I think, what you're seeing is, also, as we ramp up fabrication through our percentage of completion accounting, we're also recognizing more revenue and we're recognizing more of that risk-based profitability assumption that sits in our forecast today.

Yes. And on the second question around timing, the team is working on it now and obviously very complex discussions with all the different impacts across the project. But it's -- the project would like to get this second agreement in place in 2022, right? The sooner, the better. But it's going to take some time to pull it all together. So I guess I'd say for now, 2022 is what we'd be looking at.

Anything further, Mr. Feniger?

Yes. Thanks. And just in terms of capital allocation guidance, I'm just curious, you mentioned investing in intelligence and space. I'm just curious of where the cash position is. What are the priorities right now? Would the cash position likely staying where it is as you guys think throughout 2022 and what you guys just extended with your maturities? I'm just curious if you could kind of walk through where the priorities are? And if M&A is kind of on the table? And what areas we would kind of look at -- look to see that you guys explore? Thank you.

Thanks. Yes. Obviously, continue to deleverage is first and foremost in a healthy balance sheet, but we do want to look selectively at bolt-ons for the business when it makes sense, and we'll be very selective. We've -- we backed away from quite a few opportunities rightfully so. But yes, in Mission Solutions, we're looking at primarily in the defense, the intelligence community focus, services margins, business services margins that we can see there very favorable. And so that's where we're at. That's the -- I'd say, the key area that we'll be looking at for M& A going forward. And that will play in timing-wise as appropriate. Joe's probably got the best handle on timing there.

Yes. timing, I think we had laid out in one of the previous questions relative to cash generation, I think the underlying message that I'd like to share with the listening audience is that we have to get through this financial discipline program that we're currently progressing nicely against. But we're not looking to go out through any type of additional issuance for an acquisition at this point in time, and that we would like to do that through our own organic operating cash flow generation. So, that kind of frames I think the -- a little bit better sense of the timing of when we would be looking at any type of niche acquisition moving forward.

We will take our next question from Zane Karimi with D. A. Davidson. Please go ahead.

Hey good morning gentlemen.

Good morning.

Hey Zane.

Could you talk about the impact of the energy transition projects on the bookings this quarter and the pipeline overall? And then maybe a little bit more as well around the momentum in mining projects? And if you're seeing a movement from fee to full EPC?

Great. Thanks Zane. Yes, I'm glad you asked about energy transition. As I talked about in the remarks, we're excited about it and we're focused on it. And I think we -- I believe that we're a leader in this space. We won 76 projects in 2021 in energy transition, and we've got over 100 prospects on the horizon in energy transition, worth approximately $30 billion in TIC. And to put that in perspective -- and that's front-end work. Put that in perspective, we are looking at on full projects, EP, EPC, PCM, over $50 million. We're looking at about $57 billion in projects over the next 18 months, led by chemicals, downstream, energy transition, mining and metals, ATLS and infrastructure and then government. So ET is right there. It's really picking up speed with real customers versus developers and decarbonization, real hotspot right now in Europe and in the US, right? For example, in the US, those 45Q tax credits that requires construction to start by 2025. So that's driving a lot of work right now into our house. So I think it's -- and it's pretty broad-based. When you think about the business line, it's not just in our Energy Solutions business, but it is across -- it's certainly in chemicals and LNG and production and fuels, both downstream and upstream. But you're also seeing energy transition in our Mission Solutions business segment and in ATLS with battery, chemicals and in mining and metals with copper and green steel production, lithium production and so on. So it's great to see it kind of across all the business lines. And right now, we're -- we've got a lot to go after and get in early with our technical solutions and stay late for the full project. So I think energy transition is really going to be -- it actually became a hotter market sooner than we expected. So that's really encouraging. The other question was momentum in mining. And I think we've got, again, great opportunities. When you think about the front-end work that we've talked about in the past, right? Just to give you a feel, currently in in-house that we've worked on, okay, we've done pre-feed or feed work. And the sales teams are telling me that there's about $50 billion of TIC that is available in that current work we've done, and so that they'll be chasing that. And then just on future front-end work in mining and metals, there's another -- and this is in the next 18 months. There's another $42 billion of front-end work we're going after, and we expect to get a fair share -- more than our fair share of that to put into, again, getting in early and staying late. So a lot to go after in mining and a lot of it being driven by low carbon economy and electrification.

Great. Appreciate the color.

Thanks Zane.

At this time, there are no further questions. I would now like to turn the call back over to David Constable for any additional or closing remarks.

Thanks, operator. Thanks, Cynthia, and thanks to all of you for participating on our call today. 2021 was a turning point. And today, we're closer to our goal of becoming, as we talked about before, the preeminent leader of professional and technical solutions for our clients, as well as continuing to be a global front-runner in the engineering and construction industry. We appreciate your interest in Fluor Corporation, and thank you again for your time today.

This concludes today's call. Thank you for your participation. You may now disconnect.