Good morning and welcome to Fluor's Third Quarter 2022 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 a.m. 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 7 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 conference over to Jason Landkamer, Head of Investor Relations. Please go ahead, Mr. Landkamer.

Thank you, Julie. Welcome to Fluor's 2022 third quarter earnings call. David Constable, Fluor's Chairman and Chief Executive Officer; and Joe Brennan, Fluor's Chief Financial Officer are with us today. Fluor issued its third quarter earnings release earlier this morning and a slide presentation is posted on our Web site, that 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 the discussion of our risk factors, which could potentially contribute to such differences, in our 2021 Form 10-K and in our Form 10-Q, which was filed earlier today. During this call, we will 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 Chairman and Chief Executive Officer. David?

Thank you, Jason. Good morning, everyone. Thank you for joining us today. Please turn to Slide 4. Before we get started on operational results, I want to share insights from Fluor's Supply Chain Summit in Greenville, South Carolina on September 14. This high energy event brought together senior leadership from Fluor, our clients, suppliers and contractors across the globe. Ongoing industry trends, new business ideas and solutions to current supply chain challenges were discussed. And this event gave everyone an opportunity to meet and interact with Fluor clients and senior Fluor business line and supply chain leadership. Fluor committed the proceeds from the event to non-profit organizations, including the Carolinas Virginia Minority Supplier Development Council, the Houston Minority Supplier Development Council, the Greenville Chamber and Fluor Cares. The Councils and Chamber will use the donation funds to impart training and certification to minority owned businesses, helping them get ready for relationships with larger corporations. Please turn to Slide 5. I want to start by addressing the legacy infrastructure charges incurred in the quarter. Clearly, the impact of these projects weighed heavily on our otherwise great results in the quarter. The $107 million in charges include: $64 million for additional rework and scheduled delays on the I-635 LBJ East Freeway project, $22 million for cost growth and delay mitigation costs on the Gordie Howe project, and $21 million for subcontractor cost escalation and productivity estimates on the LAX Automated People Mover project. Over the past 21 months, Fluor's leadership team has taken action to improve the progress and execution of our legacy projects. Specifically in infrastructure, we have completed 6 of the 9 challenge projects in this timeframe. We continue to strengthen the leadership on the three remaining legacy infrastructure projects in support of our joint ventures. In the last 3…

Thanks, David, and good morning, everyone. I will review our results for the third quarter, provide an update on our divestitures and capital structure plans and go over the key financial outlook assumptions that support our 2022 guidance. Please turn to Slide 21. For the first -- for the third quarter of 2022, revenue of $3.6 billion increased from the ramp-up of execution activities on refinery projects in Mexico, a recently awarded reimbursable LNG project and the chemicals project David mentioned. Segment profit decreased to $31 million from $116 million a year ago. The decline stems from the $107 million in legacy infrastructure project charges previously discussed. Adjusted EBITDA for the third quarter was $26 million, and our diluted adjusted EPS for the quarter was $0.07. Results reflect a $16 million foreign exchange impact across a number of projects in Energy and Urban Solutions. Corporate G&A expense for the quarter was $30 million, down from $45 million last quarter. This improvement included $12 million of incentives reversals associated with the project charges taken in the quarter. Net interest income in the quarter was $14 million, compared to a $1 million expense last quarter. The increase in income is a result of the positive impact of rising rates on our global cash balances. As we anticipated new award revenue for the quarter was $9.7 billion. This improved our backlog to $25.4 billion, which also improved our reimbursable backlog to 58%. Our cash and marketable securities balances for the quarter was $2.6 billion, with 23% of this amount domestically available. Total cash includes $348 million held by NuScale. Please turn to Slide 22. Our operating cash flow for the quarter improved to $118 million as working capital levels remain stable. For the year, we expect our cash balance to be roughly flat…

Thank you. Your first question comes from Mike Dudas from Vertical Research. And we ask you that you limit yourself to one question and one follow-up. Please go ahead.

Thank you. Good Friday morning, everyone.

Hey, Mike.

Good morning, Mike.

First question, David, maybe you could share a little bit more detail your thoughts on three areas of prospective award potential over the next several quarters. One, progress on semiconductors in the United States and your international exposure with Intel? Secondly, the timing and pace of some of the mining notes to proceed that we may see. And third, from a -- from an energy standpoint, there's a lot of momentum, obviously get some big projects in China, but in that U.S that large chemical project, is that a near-term, medium-term type opportunity? Are there any ones behind that, that could hit in 2023?

Thanks, Mike, and yes, good morning, again. So semiconductors, talking about specifically with Intel, where we've built up a great relationship with them and you know you've probably been hearing about what they're up to as far as CapEx. They had $27 billion outlined for this year, drop that down last quarter to '23 and now at $21 billion for 2022, but jumping back up to over $28 billion in 2023. So like I said, on the -- in the prepared remarks they’re reprioritizing and looking at their plans and how to proceed and continue to award us incremental work to make sure they're putting on the effort in all of their assets appropriately, including in the U.S. and internationally. So that's what we're working on. Now we see with that type of CapEx coming -- going forward, we see that work coming on, and they're keeping us busy. But it'll be a little further out in '23 and '24 for the larger events, if you will. And that kind of lines up with, say the likes of Samsung, who have seen a bit of a slowdown, but going forward, they see -- their CapEx is at no change in 2022, and is at $38 billion going up to $39 billion in '23. And their feeling is that they see the -- their demand picking up in the second half of '23 for high performance computing and in the automotive sector. So yes, it's -- it seems like it's just a bit of a pause here. And then a pick back up in second half of '23 as the way classify that. And I'd also say that it is like you said U.S and international, both in Asia, for us and into Europe is what they're looking at. Mining, we've…

Yes.

Okay. Yes, thanks, Mike. Thank you.

Yes, excellent. And can I just follow-up quickly with -- on NuScale. And is there any indication or thoughts on given the monetization of such a large state, any private investors, private equity, other vendors, or other folks that are or a government there may be looking where could possibly take an -- take a position from you guys in that transaction? Thank you.

Yes. Thanks, Mike. Yes, just a great spot for us to be in right now with different optionality that we're looking at. And I'll ask Joe to comment.

Yes, Mike, good morning. We have kicked off kind of a parallel path here relative to looking at strategic and looking at maybe some public activity. We do see a significant amount of value and in terms of bringing in a strategic. In a lot of cases those strategic has a vested interest, not only in the technology, but in some cases looking to apply that technology. So they become a very critical and important partner as we look at the valuations of NuScale moving forward. But at the same time, we are also looking at some public opportunity for transaction. What I will say is that we're going to do it in a very measured way, such that we maintain not only the integrity and the valuations that are in NuScale, but also the required liquidity that Fluor will need as we move out into '23 and into '24.

Thanks, gentlemen.

Thanks, Mike.

Thank you, Mike.

Your next question comes from Andy Wittmann from Baird. Please go ahead.

Yes. Great, thanks. Good morning. I just thought we'd check in on the three infrastructure projects here. Maybe, David, you could or Joe, you could give us the updated POC and completion dates on those three projects to get us going?

Maybe I'll take the detailed question on that. And then we can talk a little bit higher level relative to how we're addressing the challenge as we move forward. With the caveat to, Andy, when you think about this, what we've had in our prepared remarks relative to the development of claims and other things that are really right in front of us as we get into Q4. But in terms of LBJ, we are 50% complete as of Q3, Gordie is 41% complete and LAX is 73% complete. And so with that, maybe, David, if you wanted to …?

Yes, Andy, good morning. So just following on those percent complete, it looks like, right now we're forecasting LBJ 635 completing in the second quarter of '25. Gordie completing in the second half of 2025 and LAX further along, as Joe said, 73% completing at the end of the second quarter of 2024.

Andy, if I could just add and kind of reinforce where we are relative to the development of claims and other entitlements as we move forward based on understanding cost and the cost impacts within these projects, we are recording those when they are made available and known to project teams, and it takes time to develop your claim positions and potential variable consideration around that. That is all starting to come to ahead as we get into Q4 and into Q1 of next year. So I would expect, as we move out, you'll start to hear a little bit of the flip side of what has been a difficult story to not only present but to hear, but I think you'll begin to understand some of our positions as Fluor in terms of how we support our overall EACs going forward.

Okay. So that's where I wanted to go next. I just want to be a little bit more clear on that because you actually mentioned some of this in the 10-Q as well that in the fourth quarter, you're having some of these discussions around them. So I guess -- are you saying, Joe, that like you've taken reserves on some of these, and you're trying to reclaim that? Or is the 215 million balance of unapproved change orders that's in your 10-Q? Is that what's being discussed. So I just want to understand which way any outcomes from these discussions could go as they get recognized on your income statement here. I wanted to be just clear about that, if possible.

Yes. Let me suggest that in terms of what we've recorded in cost and then potential recovery of variable consideration is a smaller component of the overall claims that we will be putting on the table. And those claims are significantly larger than our current positions, not only as it relates to variable consideration, but we have recorded 100% of the cost associated with that. So what you're seeing in our Q3 presentation today is really what we consider to be the downside pending all of these additional claims and discussions that will occur. And I will suggest to you it's not across just LAX and it's not across Gordie, it's across a significant portion of the infra portfolio. Nominally [indiscernible] forward.

All right. That's helpful context. Thanks, guys.

Thanks, Andy.

Your next question comes from Andy Kaplowitz with Citigroup. Please go ahead.

Good morning, everyone.

Good morning.

Good morning.

David, obviously, you reported a really strong quarter of bookings. You gave us good color, I think, regarding individual end markets with a lot of possible potential bookings coming up. Given some of the concerns you mentioned from some of your customers, can you continue your recent bookings momentum? And ultimately, do you see backlog continuing to rise from here, call it, in the near to medium-term?

Hey, good morning, Andy, and thanks for the question. I think we've talked about it a little bit before. We've got some recessionary pressures and inflation that we're seeing in the marketplace. However, even with the mild recession that we are expecting in the U.S. and maybe more so in Europe, the global recession is probably going to be -- I think the GDP forecast right now is for 2.7% to 2.9%. On average, you throw in what China may or may not do as far as how they get back on track after their zero COVID policy gets finished up. So that could rapidly give a lift to the global economy. But having said all that, from our perspective and talking to our clients and looking at their CapEx plans, they're generally speaking, if you take kind of a sample of some of our key clients across the three business segments, the CapEx plans are generally heading up from 117 take the top 10 clients $175 billion in '22, up to $195 billion in 2023. And a lot of -- well, a good piece of that, let's call it $30 billion is energy transition. So these are decade-long decisions on the projects we work on and not really impacted by a temporary slowdown or recession, economic activity might -- our Head of Strategy was telling us that a recent conference board, CEO survey, 136 CEOs, 98% of them are planning on a recession in the next 12 to 18 months, but 86% of them said that they're maintaining or increasing capital spending. So the money is there. It's coming. We obviously have to be really sharp on our estimates. And fortunately, the supply chain forecast or for softening of prices, generally speaking, and that will help with our estimates and our rate of returns for our clients. So yes, I think we will continue -- we said last quarter that we feel that we're at an inflection point for backlog. And thinking that our book-to-burn ratios can stay at or above one for certainly. And based on the [indiscernible] plans we've just gone through, we've got this -- these headwinds on new awards and backlog continuing across our business lines. Joe?

No, maybe I would just add that the pipeline that we were communicating over the previous quarters was pushed to the right slightly. But as we start to see this inflection point and our new award ramp what I would suggest to you is that pipeline that we were looking at that's driving to some of the release of this capital into some of the project activity that we've been able to put into backlog has not fundamentally changed as we look forward. That those opportunities still exist. It will be a little bit chunky because some of these opportunities are multibillion. And others are more strategic, but the pipeline itself has not fundamentally changed in terms of what we are looking at and how we are viewing our business moving forward.

I think, Andy, the really good news is that we are the new strategy has us really pushing on reimbursable work and that has not slowed or cut us out of opportunities. In fact, it's -- we are seeing improving margins as we've talked about the last several quarters. We've been talking about improved margins since Q4, so -- Q4 of '21. So yes, we are quite bullish on the markets in front of us.

Very helpful guys. And maybe kind of a similar question on the earnings side. You talked about revenue ramp up to over $4 billion in Q4. You guys know that you have the '24 targets out there. I think you talked about maybe in the EBITDA target in [indiscernible] to 900, which would require a pretty big step up next year. So again, without saying probably too much about '23, how is your visibility toward that step up? Do we -- is it more back-end loaded to get to '24 do we see sort of a ratable step up here in '23 as we go through, given the higher revenue in Q4?

No. It's something we are looking at right now, like I said, in our strategic plans, and we are doing our operating plan for '23 here. Second week of December, Joe, any kind of additional comments on guidance and how we are going to be handling that?

I think my general guidance is that we had signaled to the market that we were probably closer to maybe two quarters earlier into these types of backlog improvements. So that two quarter impact in terms of how it flows into the overall burn for the P&L will have a little bit of an impact on where we are in '24. We haven't finalized all those numbers, but we are not seeing a drastic departure at this point. It does support what we've laid out back at the beginning of 2021. I think the delay is going to be what we are working our way through in discussion right now. But certainly not the quantum of new awards to support a robust growth trajectory into the outward years.

Helpful guys. Thank you.

Thank you.

Your next question comes from Jamie Cook from Credit Suisse. Please go ahead.

Hi. Good morning. First question, just trying to understand what drives the sequential revenue increase from Q4 to Q3, the $4 billion plus and what's implied in the operating margin in Urban Solutions just because that market has -- the margins in that business have been challenged. So what do we need to get to that, I think, 4.5% margin or so? And then my other question, Joe, obviously, the run rate in the fourth quarter, I mean, in EBITDA, you're saying $125 million to $150 million. Is that a good base, quarterly base to think about as we're going into 2023, assuming we don't have execution issues? So the 125 times 4, I'm just trying to frame 2023 with that earnings base and just with some of the success you had on the recent bookings. Thank you.

Yes. Thank you, Jamie. The growth that we are seeing in revenue is the fact that -- and we had led into this over multiple previous quarters that when we were taking these projects into backlog as new awards. They weren't -- they were projects that were issued through an ITB, not all of them, a majority of them we had been working on and we had a percentage of progress on those projects that now that they're in the backlog, they will be generating higher revenue at a quicker rate just based on percentage of progress and completion. So I think that's why you're seeing an uptick in Q3, and we would expect that to grow. And your second question, Jamie …

The margins in Urban Solutions, just given what we've seen the challenges so far this year?

Yes. I think what will -- sorry, go ahead, Jamie.

Yes, go ahead. I was just like the fourth quarter margin on Urban Solutions confidence level there.

We are very confident in the 4% that we've laid out relative to Q4.

But what's driving it?

What's driving it? Well, clearly, we are not having the challenged projects that we are having. If we strip out the challenged projects, I can get back to a normalized run rate that is in that 4% range just based on the backlog that's flowing through the segment.

Okay. And then my last question was what can I -- for 2023, can I sort of say your fourth quarter EBITDA is $125 million to $150 million is that a good base quarterly base to think about as we are going into 2023?

I believe, Jamie, that is a good launching point to think about a very simplified linear run rate moving forward as we go through the operating plan over the next couple of weeks and are able to provide you significant -- significantly additional color in the Q4 earnings call. But I don't see the $125 million being the bottom of our run rate moving forward. I see it as more of a launching point and starting point as we begin to put in. You got to remember too, Jamie, we just put in $15 billion nominally a good, high-quality backlog, and that is going to start flowing through the books.

Okay. That’s very helpful. Thank you.

Thanks, Jamie.

Your next question comes from Steven Fisher from UBS. Please go ahead.

Thanks. Good morning. I just wanted to follow-up on the Urban Solutions margins and performance and really ask about the expectations that you want to set for the segment. Obviously, you just talked about Q4 in some detail, but more curious about the next couple of years as you go through the completion process on those projects. I mean, should we assume that there's just going to be some noise on more charges going forward. I know typically, once you get in these positions, it kind of gets hard to fully have no charges into completion. So I'm just kind of curious what expectations you want to set. I know you said that we might start thinking about flipping it the other way and getting some claims recovery. But just curious how you want to set the expectation over the next couple of years and how this may influence sort of clean quarters or not?

Steven, yes, I will take that question. We believe, as of today, we've captured with the facts and circumstances as we know them in the forecast. Obviously, it's difficult to say that we guarantee there will not be additional challenges on projects that have a couple of years of execution to complete. But as of today, we believe we are starting to make enough progress to where we are getting more comfortable with Gordie and with LAX. And I think we've ring-fenced LBJ. We had talked about Penguins in the past, and we feel very comfortable we've got a deal to get the conclusion on it. So as time passes, we will obviously get more assurances on our deliverability within the framework of the forecast that we've laid out today. But as of today, we believe we've captured the appropriate forecast to get to conclusion. As we work some of what we are talking about in terms of variable consideration and change orders and claims that are rolling out in the fourth quarter, we will be on a public nature. So you will hear some of that coming through news releases and others as we issue some of these claims. But I don't want to get out in front of exactly what all the moving pieces of that, but it does apply to about five projects across the infra business line. And we will be able to provide a lot more transparency around that as we get into the Q4 earnings call.

Yes, Steven, I will just add to help us along here. Joe talked earlier about the percent complete when you're in the 50% to 75% complete range like we are 45% to 75%, say, right now, since we are in Q4 that were almost bought out completely on these products over 90% bought out from an equipment and a supply standpoint. So also very helpful that that's behind us.

And I guess maybe I will add one other thing because these are the challenges that we are dealing with we've marshaled a significant amount of the resources around the company, the best that we have relative to -- a number of changes have been made through the project management side, the construction management side, we continue to shift resources across -- through estimating through procurement, through prime contract administration, very key roles on all of these jobs and so we have -- we are laser-focused on being able to deliver these projects. They are significantly challenged projects and not to be repetitive, they clearly would not have made it through our pursuit criteria and backlog today. But we are laser-focused on getting these projects to conclusion and completion.

Great. And then I guess just a follow-up, similar sort of question specifically related to LNG Canada. How is the ongoing inflation in the marketplace affecting that project in particular? I know obviously, you have some discussions going on, on that one as well. But I think that's more related to COVID impacts, but maybe the inflation gets baked under that umbrella. How should we think about inflation on that project?

Yes, I think that's -- procurement is complete, all bought out. Really, we are putting basically in fabrication and construction mode, Steven. So that's all behind us. And as you said, it's more of a COVID and scheduled discussion that we are working on right now.

Any additional inflation exposure that you're going to have is around the labor, but they're covered off with PLA agreements, project labor agreements. So for the most part, we have some containment within what we would -- what we potentially could see in that labor escalation. But as David said, most of that risk has been cleared off. And most of that risk would run through your material and equipment accounts and to the extent that we are bought out, and all of those pieces of equipment are either at site or in our fab yards in China, and we feel like we've limited substantially our exposure to any type of price escalation to get to completion on this project.

Yes. It was mostly about the labor, but you have addressed that. So thank you very much.

Thanks, Steven.

Your next question comes from Sean Eastman from KeyBanc Capital Markets. Please go ahead.

Hi, guys. Thanks for taking my questions. Joe, when you're talking about being diligent around known uses of cash, obviously, the 2023 notes that you'll pay down is defined. But what else are you talking about there? And in particular, I'm curious beyond the $100 million of cost to fund loss projects you highlighted for the fourth quarter. What's that number going to be for 2023?

In 2023, we are looking, Sean, at a number that hasn't been affected by the variable consideration in the claims and how we view those. If I look at it on trade up without considering the variable consideration and our discussion around claims, it's probably a little higher number than we would expect it to be at this point in the $200 million to $250 million range in 2023. But again, we have not layered in all of these discussions as we start submitting claims and looking at potential [indiscernible]. So at this point, there's going to be a fair amount. I don't see upside variability in that, but I do see some downside variability as we mature some of these discussions with the clients. So really, it's running through the maturities in the 2023s and 2024s and challenged projects as we see them today.

Okay. Thanks for that, Joe. And then along similar lines, I mean, the -- a key turning point for the story here is sort of marking this material improvement in operating cash flow generation. Is the message still that that's a 2023 event?

Yes, I believe, Sean, you will begin to see improved cash flow, slightly improved cash flow as we still -- the '23s are coming out. So we will have some headwind there. You're going to have some challenged projects, but there are other sources of cash that we will be able to access as we get further progressed on a couple of key projects that have an opportunity to be pulling cash back in, in the form of dividends. But I don't want to get into too much of the specifics around that, but there are sources of cash that as we pick up some of these risk items will allow us to begin to repatriate some of that back into Fluor's banks [ph].

Okay. Thanks a lot. I will turn it over.

Your next question comes from Brent Thielman from D.A. Davidson. Please go ahead.

Hey, great. Thank you. On Urban Solutions, when you think about where the award opportunities are coming from and then also sort of this deliberate transition in the segment portfolio over the next few years, how do you think about what the end market exposure could look like sort of between call it, mining and metals, advanced technologies and then the traditional sort of infrastructure projects. I guess I'm just wondering, is the infrastructure stuff ultimately become a much smaller piece of that pie.

Yes. Good morning, Brent. Again, as I've mentioned here a few times, we've just gone through the strategic planning process that's taken us through 2026. And I'd also mention that Mining and Metals is really just -- we couldn't have a better market right now for Mining and Metals. And also for ATLS with all the opportunities they have in front of it both domestically and internationally. Those are two really strong growth engines for the company going forward and based on what we are seeing in. Actually line of sight on prospects quite far out in time, actually, as you will have with mining. So looking at it and to your specific question, we see infra being about probably 10% of the Urban Solutions portfolio going forward into the planning period that we're looking at through 2026 and sooner. And then between mining ATLS and you can think about it probably like I said, because it is so powerful in mining. Right now, you'll probably see mining at 65% of the business segment and ATLS, about 20% and then we've got other, we've got the TRS, our agency staffing company and we are just building up the plant facility services business as well. So that will sit in other -- in the near-term about 5%. So 65% mining, 20% ATLS, 10% in infra and 5% other. I think that's about right.

That's really helpful. I appreciate that. And then on Mission Solutions, and particularly the strong awards, how much was associated with Savannah River this quarter versus some of the other activities in the segment? And then any update on Pantex? I know customers may be deliberating splitting that up but potential -- any potential timing to get back involved with that?

So yes, $4.5 billion of that award -- of the new award totals for mission roll through the Savannah project. And as it relates to Pantex and Y-12, we know that we've split those two contracts. Pantex will come out towards the middle end of 2023 in the form of a bid and we will go through that process. We've done a lot of internal work to reposition our pursuit criteria and strategy around how we're going to attack the Pantex opportunity and then how we will pursue and attack the Y-12. The Y-12 will be further out into the strategic planning cycle more into the end of -- mid to end of 2025 before we have an understanding of -- but we will be pursuing both of those opportunities as they are split. But the construct of how we will be pursuing them, the strategy around those pursuits will look slightly different.

Okay. I appreciate it. And any other sort of meaningful opportunities along the way in that segment beyond those two?

Yes. We've got lots of recompetes ongoing in the nuclear and civil space and DOE -- DoD and DOE, actually. So yes, we just see that continuing on a good trajectory like we've had and then feather in, obviously, the larger Pantex and Y-12 opportunities in the '24, '25 time frame.

Okay, great. Thank you.

Thanks, Brent.

This is all the time that we have for today's questions. I will turn the call back over to David for closing remarks.

Thank you, operator, and thanks to everyone for participating on the call today. And just to conclude, we are very pleased with the pace and timing of new awards in today's economic environment. Fluor is a great company with exceptional people, and we are well-positioned to meet the ever-growing needs of our clients. And finally, be assured that these two legacy project challenges the company is working through this quarter is no way -- are in no way a reflection on the overall health in a very positive direction of Fluor Corporation is heading in. So we appreciate your interest in the company today, and thank you again for your time.

This concludes today's conference call. You may now disconnect.