Good morning and welcome to Fluor's Third 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. The 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'd like to turn the call over to Jason Landkamer, Head of Investor Relations. Please go ahead, Mr. Landkamer.

Thanks Jordan. Welcome to Fluor's 2023 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 website that we will reference while making prepared remarks. Before getting started, I would like to refer you to our Safe Harbor note regarding forward looking statements which is summarized on Slide 2. During today's presentation, we will 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 in our Form 10-Q, which was filed earlier today. During the call, we will discuss certain non-GAP 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. And thank you for joining us today. Please turn to Slide 3. In response to investor inquiries from our shareholders, I wanted to provide some insight into how Fluor is leveraging artificial intelligence technologies across the organization. As some of you may recall, in 2018 we had entered into an industry exclusive partnership with IBM to develop a predictive analytics solution for large projects. Based on a significant database of over 200 projects spanning 20 years, we continue to expand the use of this platform to supplement execution across our portfolio. At the same time, we launched a parallel effort to create an AI platform to provide predictive pricing on materials for our supply chain. Outside of these two major predictive solutions, Fluor is currently using over 60 AI-derived platforms across IT, tax, treasury, human resources, proposal development, and plant and facility services. This is in addition to a number of simulation and rule-based AI enabled systems that we have deployed to support project execution. These systems are helping Fluor reduce costs and drive a data-driven decision-making process that leads to better project management and quality control. Now let's turn to our operating review beginning on Slide 4. Revenue for the third quarter was $4 billion, representing our third straight quarter of 10% growth over the prior year. Our increase in revenue was led by Urban Solutions, as we ramp up execution activities on several recently awarded projects, including a large metals project in the U.S., two life sciences projects, and a semiconductor project. Consolidated new awards for the quarter were $5 billion, remaining on track relative to our full year plan of a book-to-burn ratio of greater than 1 times. New awards were 94% reimbursable, and our total backlog is now $26 billion,…

Thanks, David, and good morning, everyone. Today I will review our results for the third quarter, highlight some of the key capital structure activities that were recently executed, and go over financial outlook assumptions that support our revised guidance. Please turn to Slide 12. As David mentioned, for the third quarter of 2023, revenue was $4 billion, a 10% increase from last year. Revenue for the quarter was driven by the ramp up of execution activities on several recently awarded projects across all three segments. Our consolidated segment profit for the quarter was strong at $276 million. This performance was driven by higher execution activity, as well as the initial recognition of cost recovery entitlements on several fixed price contracts. Adjusted EBITDA for the third quarter was $216 million compared to $30 million a year ago. Our adjusted EPS was $1.02 compared to $0.07 in Q3 of 2022. Our adjusted results for the quarter exclude $47 million for the positive income effects of FX and the embedded derivative in Mexico. G&A expenses for the quarter were $56 million, up from $30 million a year ago. This was driven by higher performance-based compensation forecasts, including stock price influence compensation, which is expected to be paid in Q1 of 2024. Net interest income in the quarter was $42 million, compared to $37 million last quarter and $14 million a year ago. Our reinforced liquidity position will enable us to generate positive net interest income throughout the year with prevailing interest rates on our deposits and marketable securities. New awards of $5 billion in the quarter improved our ending backlog balance to $26 billion. Based on our prospect pipeline for Q4 and as David advised earlier, we anticipate a book-to-burn ratio in excess of 1 times for the full year. Moving on to…

Your first question comes from the line of Steven Fisher from UBS. Your line is live.

Great. Thanks. Good morning and good to see the backlog growth there with the cost-reimbursable mix. There were a lot of one-offs in the segment this quarter, though, related to older projects. And the language in the release said that you had initial recognition of cost recovery entitlements. So I guess I'm curious if that means there's going to be more of those benefits coming in? How consistent might the recognition be and what did you bake into the guidance for that?

Thanks, Steven. The -- principally what's driving some of the recognition relative to that is the activities in Mexico. And the way I'm looking at the recovery of those costs are really through the financial discipline and the execution as we drive to more positive conclusions on some of our lump sum projects. And it's a process. It clearly was part of our entitlement in our contract, but we had to work our way through it. So there's a portion of that. We always had it outlooked in Q4, but we were able to recognize it in Q3. So it was part of our guidance overall, but I think the majority of those projects now are close to 90% complete. So I do not expect to see that type of significant uptick in a recognition around these cost recoveries going forward.

Okay. That's very helpful. And just, I guess, bigger picture macro. I think, David, when you were talking about the mining activity, you mentioned there was no cancellations and things moving forward. I guess I'm just curious about related to the stronger for longer interest rate environment. But what do you hear from your customers about the impact of that? Does that kind of create opportunities for you to do more value engineering? Are there any delays? Is your project set pipeline looking more insulated? What do you think about sort of that big picture macro topic? Thank you.

Good morning, Steven. It's David. From a mining and metals perspective, as you just saw, we had a great award here from BHP earlier this morning up in Saskatchewan for their Potash plant. A great client with a long relationship with BHP due to our project execution performance with them. So, it was great to see that. More generally, we've got about $55 billion of front-end work ongoing in mining and metals right now. We see that continuing and have another line of sight on about another $50 billion of front-end work. Obviously, value engineering is also always important across our client base to make sure we can drive the best value and the right solutions for our customers. Mining clients are, big picture, investing in energy transition minerals and metals. We see that continuing. Some of the mid-tier clients are not going after the big multi-billion dollar projects, but their CapEx levels, we track our clients' CapEx levels quarterly, and we don't see that softening at all right at this point. And with all that front end work, we continue to remain confident in our mining and metals business and especially being such -- on copper specifically, being the leader in the copper mining space, we feel we're in a really good position going forward.

Terrific. Thank you very much.

Thank you.

Your next question comes from the line of Andrew J. Wittmann from Baird. Your line is live.

Great. Good morning. I thought I would ask here, Joe, to cut through the noise as much as we would all love to hear and quantify the claim settlement, the upstream charge, and the various other things that ran through your income statement this quarter. I know that you're not going to do that for us. So I'm going to ask that question in aggregate a different way. And so your adjusted EBITDA for the quarter was $216 million. You previously talked about your run rate of EBITDA and have demonstrated, in fact, the last several quarters of around $150 million of EBITDA. Was the quarter's results, if you would look at it, kind of ex the big items that you called out in your release in that $150 million run rate range, or was it different from that?

Andy, thanks for the question. What's happened is, we had anticipated the work that needed to be done in order to get to the position where we could recognize those cost recoveries with our client to occur in quarter four. It got pulled forward into quarter three. So you're seeing a little bit of the distortion of that $150 million run rate over the Q3-Q4 period that we had laid out in the last call. So some of that is being recognized earlier. But I think we're still feeling comfortable in that $140 million to $160 million range going into quarter four as well.

Okay, that's helpful. And then I just wanted to drill in on your commentary. You've previously been a little reluctant to talk about cash flow in 2024. I think that made a lot of sense. Is it just that we're closer to 2024 now that gives you confidence to say that there could be significant free cash flow next year? Or is there something in the business that you're seeing more confidently today in terms of the business's performance that gave you the confidence to make that general comment?

Yeah, Andy, I appreciate the question. I think this is the result of a lot of hard work in clearing out the legacy challenges. You can see some of those settlements flowing through the books today. We're getting significantly more comfortable where we are in that position. We continue to add very high quality backlog at very good rates, as experienced in Q3 relative to $5 billion in new award and then coming out next quarter. So it's really a combination of all those things. The other thing that's underpinning our comfort levels around kind of highlighting cash generation moving not only into Q4 of this year but into 2024 as we're starting to see some of the repatriation of the dividends that we have been communicating to the market over the last two, three quarters. And in Q4 you'll start to see the ramp up of the return of the liquidity to Fluor.

Great. Thanks a lot, guys.

Your next question comes from the line of Brent Thielman from D.A. Davidson. Your line is live.

Hey, thank you. Congrats on a great quarter. Just looking at the slide deck, the expectations for energy segment margins for 4Q, that 4% to 4.5% percent would be below what you've seen year to date. I understand there were some outstanding benefits here in the third quarter. I'm just wondering if there's some specific influences in the fourth quarter in that business group we should consider just sort of trying to be prudent given that the moving pieces of the business.

No, we are -- for the full year, we're at 6.5%. And this is more just a reset after the culmination of getting to the recognition of the cost recoveries in Mexico. It's just a bit of a settling of that, a bit of the lumpiness that's flowing through, but 6.5%, and we look forward to giving you the guide for 2024, but we do not see 4% to 4.5% being the run rate moving forward for energy solutions at this point.

Okay. Appreciate that. And I guess just taking a step back, I mean, look, you're still facing some cost growth on some legacy projects that's more than offset by kind of positive items in the business, core execution, recovery. Is some of these legacies activities moving to sort of late stages here, you're ramping up more profitable in new work. I just want to get a sense, are you more confident that the sort of typical kind of quarter-to-quarter risk associated with these legacy projects is diminishing? Company is in a better position now to sort of more than offset that, even if we do see some more cost growth ahead?

I'll start, Joe. You can chime in as well. I'd say we're getting much more confident with the remaining legacy work. There are only a few projects remaining that are well along. In fact, the large offshore projects that we're looking to finish off is 100% complete and 75% complete commissioned. And hopefully by the end of January that it will be handed over to the client. So that's well along. As I mentioned, Gordie Howe is 65% complete and we're getting great progress there and having good discussions with the client on revenue recovery and well along on the LAX People Mover project out in Los Angeles. I think it's 88% complete as we speak. So these projects are in a very good place now and with good discussions with the clients where there is revenue recovery required. So that allows us to have good confidence going forward and as we continue to execute right now, well above our as-sold margins on the much healthier backlog that we brought in. As we said, we've hit and passed an inflection point at the company now that gives us a lot of confidence in our numbers and that cash that Joe talked about, the year of cash in 2024.

No, I think that's -- the only thing maybe I would add is, you're starting to see some of the financial discipline relative to the recognition of cost and the hard work that's gone in over the last 12 to 18 months to bring some of these claims to very positive conclusions with our clients. So I think all that is kind of contributing to the positive outlooks here.

Great. Thank you.

Thank you.

Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is live.

You got it right. Good morning, everyone.

Close enough, Andy. [indiscernible].

Close enough, close enough. David or Joe, I think you said that these positive cost recoveries are part of your guides, but they just moved earlier into Q3. But you still raised your EPS guide significantly for the year. So what else is going right to lead to that raise? And then without giving us an EPS guide for 2024, is it fair to say that with the significant backlog growth you have and expect an underlying margin improvement, you would still expect significant EPS growth off of 2023's higher base?

Well, I don't want to guide into 2024 yet. I think what David touched on, we're having the resolution of the challenge projects and we're coming to the conclusions that we expected through a lot of hard work. That's one element of it. And I think David's leaned into and we're seeing it is just this higher quality, better than existing backlog margin intake. And we're starting to burn that, to burn those higher quality awards through the P&L. So it's just a combination of all that, and you're going to start seeing that higher quality margin backlog kind of be the headline story next year as we get back to a lot more consistency around how we're reporting out in the cash flow generation around contracts that have much better terms and conditions. So I think it's a combination of a few things that are giving us that level of confidence.

Yes, that $20 billion we booked in -- Andy, the $20 billion we booked in 2022 is really strong margin in there, and we're doing it again this year. We may not get quite to the $20 billion, but we'll be getting close to that this year as well with that same type of margin profile. We expect to be at or near 75% reimbursable by the end of the year. And we've got execution excellence on, as I said earlier, we're executing above as sold. So that all plays so well into the future and the trajectory -- positive trajectory for the company here. Over several years, right? These jobs will run, right now we've got jobs running out to 2026, 2027 because they are -- there's a lot of volume, a lot of hours to burn over the next several years. And so that gives us pretty good line of sight going forward. We'll be looking at the operating plan reviews for 2024 in mid-December and that will certainly lead to our guidance in 2024 around margins and growth.

That's helpful. And then David, can you give us an update on how you're thinking about Nuscale? I know you said you would look to monetize it at some point maybe by the end of the year, but how are you thinking about the funding needs of Nuscale moving forward? Is there any possibility that Florida to inject more capital into the JV?

Yes, we're -- as we said, we're in discussions with a strategic investor for the monetization of Nuscale. Those discussions are proceeding well. And we do have a term sheet with our strategic investor. And if all things line up correctly, we'll be able to talk more about that at the end of the year or early in the new year on that monetization. So that's where we're focused right now. Nuscale has a great offering in the industry. They're well ahead of any other SMR technology, I'd say, by five years easily. And so we're very excited about supporting the commercialization of Nuscale going forward. And I believe they have an earnings call next Wednesday where they can talk, obviously, more about your comments around cash and how they look at that.

Appreciate the color.

Thank you.

Your next question comes from the line of Michael Dudas from Vertical Research. Your line is live.

Good morning, gentlemen.

Hey, Michael.

Hey, Michael. How are you?

Congrats on that World Series victory.

Go Rangers. Go Rangers.

I'm glad you guys even know there's a baseball team in Dallas. That's good news. David, you talked -- you’ve mentioned in the prepared remarks the extraordinary pipeline that you guys are working on relative to your current backlog. Can you maybe share how you guys are set up or how difficult it could be, because there is such demand for your services, how you're going about allocating, either through sectors, industry clients, and certainly what metrics you're thinking about? And how's your labor and your capacity to execute not only what you have now, but what seems to be a pretty strong steep opportunity in the future.

Good morning again Michael. And right that's where we -- that's where we spend most of our time right now is staffing these great projects and getting the right talent, the right people in the right places at the right time so we can have execution success for all of our clients. We have a very structured pursuit process, bid-no-bid process, where we will only move forward if we have the right teams in place. That's, I guess, the first question we ask before we get into all the other details. So the whole management team is just laser focused on resources and hiring -- attraction and hiring of talent into the company. We done a great job over the last couple of years. Brought in over 6,500 people. Over 30% of those folks are rehires. People want to come back to the Fluor family as we continue to grow again. So that really is where we spend a lot of our time and make sure that we're not bringing in projects that we can't execute. As far as allocation goes, it's -- we do -- fortunately, it's a business where we can cross-pollinate into different businesses as required. For example, with the HLS business ramping up dramatically from doing $400 million, $500 million projects to multi-billion dollar projects. We've successfully inserted project execution skills, project management skills, project control skills into HLS from our energy solutions business. So there's always that going on and we're fortunate that our processes and procedures which all of us follow allow us to move people around the company and give us more flexibility in that regard. So it's -- yes, it's non-stop. We've got a talent task force in place. We've had it in place since early 2022 and that's really working well for us.

And given the -- your capacity and even growing as you mentioned, but also the demand for your services, can we anticipate as we look over the next several quarters that as you indicated, booking margins were up 70 bits from your current backlog. Is that a trend that should continue in this environment for the foreseeable future? Not varying degrees but certainly see that show up and improve margins into your booked backlog?

You know, it is -- I would say, maybe there's a few pockets in our markets or a few customers specifically who run into challenging times. If you're a chemical client in Europe, you are challenged with feedstock and you may have to pull back a bit. But everything we're seeing -- we've got a key account management process that keeps our finger on the pulse. Along with a client CapEx, we look at quarterly, invoice of the customer, all that front end work that we track to see -- to give us line of sight on what's coming down the pipeline. And I must say, including our government -- don't forget our government business where the budgets always are growing. But the CapEx across our client base is not softening at all. It's either flat, up, or up, and then you lay an energy transition on top of that. So with all the war for talent and resources, it's a bit of a seller's market right now, and margins, I expect, will stay strong on reimbursable work, which is great to see. And I guess that's how I look at it. And I think we'll be able to continue to drive that margin and backlog in the right direction. And it's very dependent on whether you're just doing front-end services work or the full EPC, obviously, and how that comes into backlog definitely affects the level of margin as well. So I think it's positive going forward, Michael, and we're going to burn it off above those as-sold margins as well. So that's helpful.

Excellent, David. Thank you.

Thanks, Mike.

There are no further questions at this time. I would like to turn the call back over to the presenters for closing remarks.

All right. Thank you, operator. Many thanks to all of you for participating on our call today. I'm very pleased with our performance this quarter as it further supports our belief that we are really past our inflection point now. And with a strong capital structure and high demand for our services, we're well positioned to deliver increased value to our shareholders. So we appreciate your interest in Fluor and thank you again for your time today. Thanks.

That concludes today's conference. You may now disconnect.