Good morning, and welcome to Fluor's Second Quarter 2023 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 website at investor.fluor.com. The web replay will be available for 30 days. A telephone replay will also be available for seven days through a registration link also accessible on Fluor's website at investor.fluor.com. At this time for opening remarks, I would like to turn the call over to Jason Landkamer, Head of Investor Relations. Please go ahead, Mr. Landkamer.

Thanks, Regina. Good morning, and welcome to Fluor's 2023 second 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 second quarter earnings release earlier this morning and a slide presentation is posted on our website that we'll 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 2022 Form 10-K, and 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 website 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 3. During the second quarter, I visited our New Delhi office and hosted a town hall meeting that was attended by over 1,100 of our Fluor colleagues. It was great to see the vibrancy and enthusiasm of our team, who will continue to play a critical role in supporting our current projects as well as our significant pipeline of growth opportunities worldwide. While in India, I also met with the CEO of Tech Mahindra, to sign a strategic partnership agreement. Tech Mahindra is a leading provider of digital transformation, consulting and business reengineering services. Under the partnership both Fluor and Tech Mahindra, will combine our respective expertise to help support the growing client demand for digital handovers. The seamless integration and interoperability of data is critical to support professional services teams in driving successful project delivery and optimizing life cycle operations and maintenance costs. I'm looking forward to providing updates on this strategic partnership in future quarters. Now let's turn to slide 4. Revenue for the second quarter was $3.9 billion, representing our second straight quarter of 20% growth over the prior year. Our increase in revenue was led by Energy Solutions as execution activities accelerate on refinery projects in Mexico mid-scale LNG projects and recently awarded chemicals projects in China. New awards for the quarter were $3.7 billion and on track relative to our full year plan of a book-to-burn ratio of one or greater. New awards were 70% reimbursable and our total backlog is now $25.5 billion, of which 64% is reimbursable. Margins on new awards continue to be strong, coming in over 200 basis points above our total backlog margin. Our optimism for the future of Fluor is further supported by…

Thanks, David, and good morning, everyone. Today, I will review our results for the second quarter, provide an update on divestitures and go over key financial outlook assumptions that support our guidance. Please turn to Slide 13. As David mentioned for the second quarter of 2023, revenue of $3.9 billion came in as expected and represented a 20% increase from last year. Revenue for the quarter was driven by the ramp-up of execution activities on several recently awarded projects in Energy Solutions, Urban Solutions and Mission Solutions. This was partially offset by declines in the volume of execution activities for projects, which were completed or nearing completion. Our consolidated segment profit for the quarter was $191 million. This performance was driven by higher execution activity on new projects as well as positive forecast adjustments on two energy solutions projects and a positive forecast adjustment on a legacy infrastructure project. Adjusted EBITDA for the second quarter was $181 million compared to $68 million a year ago. Our adjusted EPS was $0.76 compared to $0.15 in Q2 of 2022. Our adjusted results for the quarter exclude $52 million for the income effects of FX and the embedded derivative in Mexico. G&A expenses for the quarter were $60 million, up slightly from $45 million a year ago. This was driven higher -- by higher performance-based compensation that is expected to be paid in Q1 of 2024. Net interest income for the quarter was $37 million compared to $41 million last quarter and an expense of $1 million a year ago. Since our outstanding debt is at a fixed rate, I expect we will continue to generate positive net interest income throughout the year with prevailing interest rates on our deposits. New awards of $3.7 billion in the quarter drove our ending backlog balance…

[Operator Instructions] Our first question will come from the line of Jamie Cook with Credit Suisse. Please go ahead.

Hi. Good morning. I guess my first question David or Joe, as I think about your guidance the increase in guidance that you provided today what that implies for the back half of the year, I think it implies like at the high-end $0.75 a quarter. So let's say if you annualize that it's about $3 in earnings power. And if you annualize our your back half EBITDA -- adjusted EBITDA implies like $800 million in EBITDA. So I'm just trying to understand what that means for 2024. Is that a good base that we can think about, or are there projects rolling off in 2023 that would imply, but that's not a good sort of run rate to think about because that just implies the earnings power for 2024, $3 or $800 million in EBITDA is pretty substantial. And so just any color on that? Thank you. If I'm thinking about that incorrectly? Just the earnings power is greater I guess than I would have thought.

Yeah. Thanks for the question, Jamie. I think what we've leaned into the last few quarters is that we have been making progress on some of our activities in our infrastructure, our legacy kind of businesses relative to how we recognize cost and then as we look to claw back some of our entitlements through the contract. Some of that is flowing through the Q2 numbers. But I would suggest that that run rate that we're posting on an adjusted EBITDA basis of $181 million is probably overstated slightly. If I were thinking about run rates, as we continue to onboard new backlog is in that $140 million to $160 million range. And with that we would expect to see a ramp-up from that as your baseline. So, I think I would think about it that way at least for 2023 and again, as we onboard the new backlog that we're forecasting for the back half of the year, we should start to see that trend in a more positive direction moving forward.

Okay. And then just my second question just it sounds like new award prospects for the back half of the year also seems pretty good. So, just Dave how are you thinking about backlog as we exit the year? And then can you give some color? I know the bookings are -- the margins in the bookings have been improving. Can you just talk about the terms and conditions of the projects that you're sort of looking at and how we should think about awards going into backlog -- the margins on awards going into backlog relative to where it sits today. Just again trying to understand what the margin power is for 2024? Thank you.

Good morning Jamie. Yes, we've been really pleased with our ability to increase booking margins on reimbursable work. I guess that's the kind of the headline is that all this -- the majority of our work, I think we've got 84% of our prospects right now are reimbursable and they are coming in higher than our expectations, higher than our planned target margins. As I said we've -- I think we put in the backlog at 200 basis points above what's in there now in second quarter. So, as we continue to do that the healthy backlog will continue to give us more certainty and predictability as we work that backlog off. And yes we hope to be at a book-to-burn through the year of one or slightly above and that will kind of gives you an idea of where we'll be at the end of the year for backlog. But not just on revenue, I think what's important here is that gross margin that's coming in higher than expected is also being executed. We are executing. We had this discussion with our risk committee at the Board meeting this week. Since 2020 those projects that have come into backlog are executing at 114% of outsource. So, we've got some great earnings power in our execution. It's all about execution excellence. And when you've got that behind you right? And we just really think that it's going to support that earnings power for us going forward and increase shareholder value for us.

Can I -- maybe if I can just add to that too Jamie. If you look at what we've done with our operating margin guidance for the quarter we have bumped our Energy Solutions and our Mission Solutions numbers for the period. So, we are starting to see that and it is starting to demonstrate in our quarterly postings here. So, we're starting to see that flow through the backlog in a very positive way which is considering us to readdress our margin guidance. Thanks Jamie.

Thank you.

Your next question comes from the line of Andy Wittmann with Baird. Please go ahead.

Great. Thank you for taking my question this morning. I guess I wanted to ask on the Urban Solutions, there was a positive adjustment on the legacy project. Good to see that you're recuperating some of those. And I do think that the balance on some of those legacy projects is substantial. So, I guess maybe my question is as it relates to your guidance for the rest of this year are you expecting more positive adjustments like the one you saw in the quarter to be in that guidance range? Or is the guidance that you're giving kind of clean of any of these claims resolution changes that you were able to accomplish this quarter. And maybe just to be a little more specific could you just talk about which project you're able to get this positive adjustment on during the quarter?

Yes. No, thank you for the question. For the year we have not factored in any additional activity relative to claims until we get closer to better assessment on that. So, what you're looking at relative to our guidance is based on Q2 -- Q1 and Q2 actuals and then our normal run rate from an outlook basis moving forward. So I think that's -- and your second question around--

Which project got the benefit?

Yes, I think we're going to hold off naming that client right now and we'll probably have some additional color for you in the next quarter.

Okay. And then Joe just kind of a follow-up on your last answer to Jamie, kind of, mentioned that the profit margins picked up in two of your segments. I guess some of -- you're giving annual guidance here and some of the performance in the second quarter was pretty good because of these positive change orders. I guess the question for me is on a prospective basis meaning for the rest of the second half of this year which margins are up versus prior expectations rather than the benefit from the performance in the second quarter just to make that a little bit more clear.

Well, I guess, maybe let me understand your question a little better. You’re talking about how we're upping our guidance within Energy Solutions from the 5.5% to 6% and what's driving that I guess is...

Yes. I mean you're giving annual segment margin guidance which is fine. But I just – I'm trying to understand, how much of the increase in margin guidance was from performance in the second quarter versus an improved outlook for the second half of the year versus your prior quarter?

Sorry, okay. I understand the question a little bit. I think there's symmetry in what we're laying out relative to how the performance within Energy Solutions and Mission Solutions. So I would expect this not to be a 2023 activity. I would see this having some impact into 2024 and beyond.

As we've discussed on many calls, our range for the planning period when we first came out with our strategy in 2021, our range on margins was 4% to 6% right? And we – it looks like we're going to be at that and near the higher end of that range through 2024 and then on into 2026 at the upper end.

Yes. And we're seeing – this is underpinned by the improved margins that we're putting into backlog relative to our plans. So I think that's all kind of playing into this improved margin outlook moving forward beyond the 2023 time frame.

And also that execution I talked about just a few minutes ago is that we're executing [indiscernible].

Yes, a lot of factors there.

Yes, okay, that’s clear. Thank you very much. Have a good day.

Thanks, Andy.

Thank you.

Your next question comes from the line of Michael Dudas with Vertical Research. Please go ahead.

Good morning, Jason, Joe, Dave.

Good morning, Michael.

Joe, maybe you could share with us your updated thoughts on financial profile on the balance sheet relative to the 2024 notes and maybe an update on new scale would be helpful.

Yes. Thanks, Mike. We're we have signaled over the last few quarters we're going to be addressing the 2024 that is something that we plan on doing here kicking off towards the last half of 2023 and into 2024. So we have – our plans are still to address the 2024s. And in terms of new scale we continue the discussions around the monetization. They are going well. We would expect to have additional information to share with this audience towards the end of the year December or January time frame.

Appreciate that. Thank you. And David, as you're looking at the $300 billion worth of front-end or FID a front-end design engineering and study work, can you maybe share a little bit of it is it across the board? What areas seem to be peaking your clients' interest more to get you involved? And is that – and I assume energy transition and we think of lithium even I guess the Dow project would fit into that. Is that – do you anticipate being a step function over the next couple of years of those types of projects coming in? And is that going to allow for maybe a possible better margin performance given what you guys are doing on the productivity in process?

Hey, good morning, Michael. Yes you're spot on energy transition, right? That $300 billion we think after analyzing it solid prospects are about $160 billion of that $300 billion. So we see $160 billion as very likely going forward. And a lot of it sits in the energy transition space. Just to give you an example of the Inflation Reduction Act and the carbon credits that flow through that the IRA, we're seeing significant activity in our carbon capture – in our Production & Fuels Energy Solutions business line. I think we've got 30 projects on the go or at some mostly front-end work, a few moving further on into EPC. So that's important like you said lithium as well. So energy transition is going to feature quite a bit. I think they are about 28%. If you look at the total work we're chasing, energy transition is about 28% of that. We're looking for about almost $3 billion in energy transition awards in Q3. And like you said Dow would feature because it is a path – Path To Zero program. But you also in those numbers see Mining & Metals feature significantly in the $160 billion. The downstream production of fuels again, a lot of it energy transition, LNG is in there. And the biggest portion, as I look at it here is chemicals. So we're seeing a lot of activity in chemicals with – across the board including recycling of plastics and the whole ethylene value chain. So pretty broad across those prospects and about like I said about $49 billion of full EPC, EPCM prospects that we'll be chasing in the next 18 months. And obviously, that gets supplemented by our Mission Solutions work which is the Department of Energy Department of Defense and the intelligence agencies all those budgets continue to either stay flat or grow year-on-year. So a lot of good growth coming at us in all of our business lines Michael. So thanks.

Your next question comes from the line of Brent Thielman with D.A. Davidson. Please go ahead.

Hey. Thank you. Good morning. Just a comment about margins on new awards. I think you said 200 basis points above the current backlog margin, which business line or lines or markets are you seeing sort of more meaningful improvement in terms of what's coming in the door now relative to what you have in the book today?

Yes. It's broad. It's across all three segments. Again I'm looking at the plan across the board. So it's pretty broad-based.

Okay. Okay. And then you mentioned continued expectations for modestly moving pieces I guess in particular, what could cause you to potentially outperform this year's expectation for cash flow in the second half?

Yes, reconfirming and that we do see positive trends for the back half of the year, and I think what's going to drive maybe some improvement within that is continued execution in our projects in Mexico and Canada will be a big contributor to that as we repatriate dividends back into Fluor's treasury. So I think both those will underpin a fairly positive cash trajectory moving forward.

Okay. Great. Thank you.

Your next question comes from the line of Sean Eastman with KeyBanc. Please go ahead.

Hi, team. Nice update here. I just wanted to understand the revenue guidance for this year stepping up from 10% to 10% to 15%. Is that just accelerated schedules on stuff that was in the backlog already? And then second part of the revenue question perhaps is just relative to the one or slightly above one times book-to-bill expectation for the full year this year. What should we take away from that relative to revenue -- or revenue assumptions for next year?

Yeah. Thanks, Sean. I think from the revenue guidance we would continue to see that growth. We feel very confident based on not only the bookings this year bookings in previous years. And then also what we're seeing in the back half of 2023. A lot of some of the opportunities -- a significant amount of the opportunities that we're seeing are coming from maybe our nontraditional energy solutions side it's flowing through our ATLS business and there are some big chunky awards. So we feel reasonably good about the trajectory of kind of revenue moving forward. And then we're also seeing a lot of the projects that we booked two, three years ago Sean really starting to get into production as they move into procurement and into construction activity. So I think we really see a revenue growth trajectory within that 10% to 15% that's supported by solid fundamentals at this point.

Okay. Got it. And then relative to the second half new award visibility I mean it's encouraging to see some specific prospects specific larger prospects being called out. I mean how would you describe the line of sight on that implied second half new awards outlook? I mean, are these projects FID-ed just teed up ready to go in the backlog. Any comments on that would be helpful?

Hi, Sean. Good morning. Yeah, looking at the third quarter and fourth quarter prospects and the go gets most of the goes are between 90 to 100, 80 to 100. And so the ones, I spoke to are definitely cleared for takeoff so to speak in the chemicals work and it's at ICA Fluor. And in Urban Solutions in the semiconductor space, we've got some big reimbursable programs that are also ready to move forward. So generally, speaking, the line of sight all emission solutions projects are going ahead as well. So yes, I'd like to give you a high degree of comfort on our second half new awards and getting to that book-to-burn of one or slightly above.

All right. Gentlemen, thanks very much. I’ll turn it over.

Thanks.

Thanks, Sean.

You next question comes from the line of [indiscernible] with Citigroup. Please go ahead.

Hi. This is [indiscernible], good morning. Just a quick one for me. You guys mentioned the Fluor was recently awarded a chemicals project in China. Can you give us some more color on what customer conversations you're hearing out in the region? We've heard from some of our industrial companies that the environment is still a bit of a mixed bag, but curious on your take and your outlook for the region.

Yes. Great strategic question. As we roll in China, the China scenarios into our strategies for each of the business segments and what could happen and the risk involved not only on the execution side, but more importantly for -- our clients are multinationals that we follow into the region. And I think what we're -- at a big picture level, it may not be a derisking with China, but there's definitely a decoupling and not wanting to put all eggs in one basket. So I think the China Plus one strategy for our clients is taking hold and we're seeing work flowing either near-shoring to North America and Europe or friends shoring in countries where value-based globalization if you will and India's featuring prominently Mexico, I think we'll see an uptick as well for manufacturing. So it's real. Yes, there are certain clients that have like you say the chemicals client has moved in there. They are obviously having trouble with very high cost feedstock in Europe and they moved into China. But I think, it's something to watch. But I see it as an opportunity. We're putting together -- and we've got an India task force put together, India plus Asia task force being put together to just see -- just be ready for this shift of manufacturing away from China to make sure we're ready for -- to support our clients elsewhere in the region to be ready for that possibility. So, that's how we're looking at it right now.

Awesome. Thank you for the color. I’ll turn it back over.

Thank you.

And with that, I'll turn the call back over to David for any closing remarks.

Thank you, operator, and many thanks to all of you for participating on our call today. We're really pleased with our performance and the diverse slate of opportunities in our prospect pipeline, primarily reimbursable. And based on the continued strong performance of our services, we're well on our way to delivering increased shareholder value. So, we appreciate your interest in Fluor, and thank you again for your time today.

That will conclude today's conference call. Thank you all for joining. You may now disconnect.