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

Thanks Rob. Good morning, and welcome to Fluor's 2023 fourth 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 fourth 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 2023 Form 10-K, which was filed earlier today. During this 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. With that, 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. To get started today, let me highlight the impact that Fluor has made in local communities this past year. First, through Fluor Cares, that's our employee giving and volunteering program. We donated $4 million to worthy causes in 2023. That represents a 17% increase over 2022. In addition, the Fluor Foundation contributed $4.2 million to community initiatives and programs with much of that funding going to support underserved groups. Fluor employees donated more than 33,500 volunteer hours in 2023 and that's an increase of 49% over our efforts the previous year. We provided nearly 1 million hours of science, technology, engineering and math instruction to 237,000 students, and we provided 706,000 meals to those in need. As part of our commitment to sustainability, we planted 29,000 trees, including the reconstruction of a mangrove forest on the Philippines coast, plus a large scale multiyear tree planting effort across four continents. These are just a few examples in the past year of the generosity of our employees and the company, which has helped Fluor continue our honorable and long history of giving back. Please turn to Slide 4. It has now been three years since the launch of our new Building a Better Future strategy and the unveiling of our long term financial targets. 2023 was a pivotal year in which we achieved some significant milestones. Our continued focus on operational excellence has allowed us to move past the inflection point in our path to creating significant shareholder value. I'm extremely proud of the results we've achieved and very thankful for all the efforts put forth by our employees worldwide. We'll discuss more about our future view of Fluor, including our prospects and financial outlook…

Thanks, David, and good morning, everyone. I'd like to discuss an overview of our financial performance and provide an update on the progress we’ve made and strengthening our capital stature and share details on 2024 guidance. Please turn to Slide 10. For the full year, Fluor reported revenue of $15.5 billion and net income of $139 million or $0.54 per diluted share. Results for the year include a $93 million loss on the sale of Stork Latin America that was transacted in the fourth quarter. Segment profit for the year was $537 million and adjusted EBITDA was $613 million. On an adjusted basis, our 2023 results were $2.73 per diluted share. Corporate G&A expenses for the year were $232 million compared to $237 million a year ago. For the full year, we reported net interest income of $168 million as our cash management team invested in U.S. treasuries and other interest bearing assets to more than cover the $60 million in fixed rate interest expense on our outstanding debt. Please turn to Slide 11. Cash and cash equivalents combined with marketable securities were $2.5 billion which excludes the $118 billion in cash held by NuScale. Our operating cash flow for the year of $212 million was positively impacted by cash settlements in the fourth quarter from project claims and disputes as well as cash distributions from two of our largest proportionally consolidated joint ventures. Results for the year also reflect $129 million in funding of legacy projects. For 2024, we expect cash funding amounts between $100 million and $200 million. As it relates to our significantly improved capital structure, I wanted to recap the progress made during the year. Last January, we retired our outstanding 2023 euro notes. In February, we extended the maturity of our revolving committed credit facility by one year, thereby extending the maturity date to 2026. In August, we executed a very well received convertible debt offering to address our December 2024 senior notes. These notes were extinguished in late December. These transactions have reduced our stated interest rate on outstanding debt by 100 basis points to a weighted average rate of 2.7%. In addition, we have no debt maturing before September of 2028. In September, we converted our outstanding convertible preferred stock into common shares, which significantly simplified our capital structure. Finally, we also made considerable progress in divesting non-core businesses to allow greater focus on end markets with highest returns. Last year, we exited all AMECO equipment rental operations, sold Stork Latin America and reached an agreement to transact Stork's European operations, which is expected to close near the end of quarter one. We are currently marketing Stork's UK operations. Before we open the call to Q&A, David and I want to take a few moments to summarize our strategic outlook and provide details on what you can expect from us in 2024. David?

Thanks, Joe. Let's turn to Slide 13. In the fall of 2020, we began to think about a new strategy for the company. As we did that, we kept the aspirations of our core stakeholders in mind. These include building trust with our clients, creating a great place to work for our employees, becoming an attractive investment for shareholders and continuing our tradition of having a positive impact on society and on the communities in which we live and work. As part of the strategic development process, we evaluated the overarching market conditions, impacting the industries of our clients and the competitive environment. From that work, we identified four megatrends. To achieve our aspirations and take advantage of these trends, we developed our strategy, building a better future. With the strategic intent to be the preeminent leader in professional and technical solutions, while maintaining our global engineering and construction expertise. In order to achieve the strategy, we developed four strategic priorities. First, reinforcing financial discipline, which focuses on deleveraging the balance sheet. Second, pursuing fair and balanced contract terms, which is focused on de risking the backlog. Third, driving growth across the portfolio is about diversifying revenue into growth markets. And fourth, fostering a high performance culture with purpose is among other things about improving project execution. Taken together, these strategic priorities have delivered and will continue to deliver on our drive to maximize shareholder returns. Moving to Slide 14. This slide shows the results of executing against our strategic priorities. Starting with reinforcing financial discipline, the upper left chart shows our debt to capital ratio, which was 63% at year-end 2020. This ratio has significantly improved to 37% in 2023. We are already within the 2024 range as set out in 2021. Our 2026 target set last year is…

Thanks, David. Please turn to Slide 19. We are establishing our 2024 adjusted EBITDA guidance at $600 million to $700 million, or $2.50 to $3 per diluted share. Our guidance for 2024 fully meets our strategic plan expectations that we shared with the investment community in January 2021. In addition, we are reaffirming our 2026 adjusted EBITDA guidance of $800 million to $950 million. While the company sees a robust prospect pipeline to support our internal strategic plan, going forward, we intend to conform with accepted practices and only provide guidance on expected results for the current year. Our guidance for 2024 is based on our ability to successfully execute our strategic priorities on significant demand for our services across the end markets we serve and on achieving significant completion of our legacy projects over the next 12 months. To provide a bit more clarity on guidance for 2024, our assumptions include revenue growth of approximately 15%, net interest income of approximately $120 million, G&A expense of approximately $190 million and an effective tax rate of approximately 35%. We anticipate free cash flow plus divestiture proceeds of approximately $350 million to $450 million excluding cash funding for legacy projects. Our estimate for cash flow is based on the underlying performance we see from the portfolio. Receipt of cash from transacting remaining noncore businesses and the working capital needs required for reimbursable projects. Our expectations for 2024 segment margins are approximately 5% in Energy Solutions, approximately 3% to 4% in Urban Solutions, which reflects $600 million in revenue for zero margin legacy projects, and approximately 6% in Mission Solutions. Please turn to Slide 20. We are incredibly pleased with our progress over these past few years as we transform back into one of the leading engineering and construction firms. The entire…

[Operator Instructions] Your first question comes from the line of Steven Fisher from UBS.

Just looking at your full year EBITDA and EPS for 2023, how that came in and comparing that with your 2024 targets, the growth actually looks pretty modest, but of course your implied CAGR from ‘24 to ‘26 looks to be much faster in the double-digit area. So I guess to what extent is that just a slow ramp of projects in backlog that you've expected or something else? And what do you expect to contribute most to the acceleration in '25 and '26?

I think the way to level set how we view the kind of the growth and the trajectory between ‘23 and ‘24, there were a number of settlements that we were able to achieve during 2023 which created some lumpiness in the earnings flow for the year. The best way to look at that is if you go back and look at the original guidance that we provided in 2023 of $450 million to $600 million, if you take that midpoint relative to the $600 million to $700 million in guidance in 2024, I think that gives you the apples-to-apples comparison of how we're seeing growth. And we have talked about the lessening burden of some of those claims activities that arose during the pandemic. So from an apples-to-apples comparison, we're viewing that growth year-over-year in that way.

And then can you talk about the cadence of bookings that you expect in 2024? Do you think it's going to be more front weighted or back weighted? And kind of should we still expect double-digit growth in backlog in '24? It was nice to see that 76% ahead of schedule. I'm curious, how you see the kind of the mix evolving in '24 as well.

Yes, it looks like we'll continue on the track we've been on for the past couple of years. We have a lot of prospects in front of us across all the business segments. And I would expect when you think about book to burn, we've been messaging, I think last year we were messaging one or above. I think we'll continue to see that and we've been over performing on our go get factored numbers. So we're pretty comfortable that 2024 is going to be shaping similar or possibly better than '22 and '23. We looked at the results of our hit rates at the company in '23 and they were really strong. And I think that has a lot to do with our project pursuit criteria. We're going after projects. We hit 78% of the prospects we went after in 2023, just a phenomenal number. And note that, that is with bringing in 140 basis points above our backlog in margin. So not only hitting on a lot of them, but improving the margin as well. And I expect that to continue. It's a seller's market right now. Thanks, Steve.

Your next question comes from the line of Andy Wittmann from Baird.

I guess, Joe, I want to just dig in a little bit more on some of the comments you had around free cash flow. And if you could just maybe just drill into this a little bit more. I think you said $350 million, $450 million, before the cash burn on the legacy projects, but it does not include other cost recovery. So it looks like, you're just looking through the cadence, it looks like you're expecting a big tax settlement. Could you give us some kind of parameters around that? And do you expect any other kind of chunkier claim settlements to hit in '24? Like I don't know when the cash on your Gordie Howe bridge settlement, is coming in and that was obviously a pretty significant amount. Maybe you want to talk about how the joint ventures, the consolidated proportion joint venture cash is factoring into that look in particular considering that was a large balance? Those are just some of the things that come to mind for me. Maybe there are others, but maybe if you could give us a little bit more detail what's supporting that cash flow outlook?

I'll give you the range on the tax item itself is approximately $150 million to $160 million that's what we'll be popping in. In terms of claim settlements for 2024, I would expect less of those activities because we did clear off a significant portion of those activities through our legacy projects in 2023 but there still are other opportunities that we'll pursue during the year. And what we did see come in, in 2023 was some of the retained earnings through our proportionally consolidated joint venture but really the initial kind of push to repatriate those retained earnings back into the 2020 timeframe. So as we move into '24, we will see additional retained earnings flow in from those proportionally consolidated joint ventures, which will help to drive some of the upper end of the guidance that we provided around our cash flow.

And then David, you referenced it here the engineering services contract that you have in the Middle East here for liquids to chemicals. Some of the numbers being tossed around for that project for like total installed costs are pretty big numbers? I thought I'd just give you an opportunity to elaborate to the extent you could on this job a little bit. How meaningful can this job and what's the profitability attached to this job at Fluor for you today as you're sitting here today? And maybe more importantly, given that it's such a mega project, how much notice to proceed and visibility do you have in your backlog on it today? In other words, the confidence is going forward. We're seeing some signs, obviously, like Aramco didn't decide to increase its production outlook. I don't know if that's a total reflection of their capital spending or not, but I would be curious as to what you're hearing from the customers on these projects as to their confidence in moving forward.

So having recently traveled there, I think I was there in November talking with various clients, SABIC, Aramco, Modine on the mining side and very bullish right now in Saudi Arabia. We see this as a real growth engine for the company, and we are extremely well-positioned for not only the mining work with [indiscernible], but liquids to chemicals programs, where they are shifting obviously from a lower automotive fuel requirement to high margin chemicals. And we are getting started with customers over there. And you'll see it in a ramp up of massive amounts of home office engineering hours, which deliver a good margin for Fluor as we help them with our technical their technical solutions where they really look to us. That's the value we're adding here to get these projects off on the right track and then continue and help manage them through the completion. And they are, as you mentioned massive-massive programs. And that's what we're looking at getting kicked off right now. So confidence wise, I'd say we're very confident that the programs we're getting involved with are going to be going forward. There's a lot to say grace over these projects. So it's not going to be just one contractor, it will be multiple contractors supporting their business plans.

Your next question comes from the line of Sangita Jain from KeyBanc Capital Markets.

Can I ask about the nuclear opportunities that we've been reading about in Bulgaria and Romania and how close you may be to finalizing those maybe?

The nuclear space continues to be something we are supporting both in support of through the NuScale Small and Module Reactor Technology, but also on conventional nuclear facilities right now. And in fact, a good portion of our nuclear opportunities are in Eastern Europe as those countries Bulgaria, Romania, Poland looked towards energy independence, energy security in that part of the world. So we are busy on opportunities there in SMRs, for example, in Romania, that I believe right now is moving into a feed position for us, taking the lead there. And we're also, like I said, looking at a couple of conventional units in Romania actually on a reimbursable basis. So post COP28 nuclear the focus on nuclear is very high. And as we previously stated, we're really looking forward to supporting NuScale's commercialization efforts in the small modular reactor space and we're excited about our prospects there as they start to come to fruition both in the U.S. and overseas, particularly in Europe and Eastern Europe.

If I can ask on another end market, I didn't hear you guys address data centers in your prepared remarks. Can you share some color on what you're seeing there and if the momentum kind of helps you in booking more backlog this year?

Yes. We do have a position in data centers. Certainly in Asia right now where we're doing some big programs in data centers. And we see that continue. I think I did maybe quickly mention data centers as part of the advanced technologies and life sciences opportunities in my prepared remarks. So we definitely are focused on data centers. It's with everything going on in the world, data and data processing via data centers is going to be a big market for Fluor and also upstream of that the power generation required to drive those data centers. So, yes, definitely we'll start to feature more in our plans going forward.

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

Maybe David can continue your thoughts there on advanced facilities. Maybe state of your thoughts on the electronic semiconductor area, U.S. and abroad and certainly, the pharmaceutical life sciences been a lot of activity. You've ramped up some business there. Do you continue to see that momentum in bookings through 2024?

Yes, we do, right? So a key focus in addition to data centers, right, our semiconductor, the semiconductor space and in the pharma space. I think you probably, we've all seen yesterday's news about the CHIPS Act funding starting to flow. Right? I think it was put in place in 2022, but we're finally starting to see some good flow there. And, so we see that as very positive. And I think more than 170 companies have applied for grants and we've got some key clients that we're staying close to in that space and I think we're probably going to hear more, as you probably read, we hear more about money flowing into the chip -- into the semiconductor space and big awards coming out possibly before the state of the union address in March. So we're staying close to all those key clients. We've got current work in Asia. We've got work in semiconductors in the U.S. and so very bullish on that market. And pharmaceuticals, just really getting going on the diabetes drugs and the weight loss drugs with two very key clients that we have that we're working with right now. And those are just those, the size of those pharmaceutical projects are just dwarf what the market has, what that space has been used to. What that industry has been used to. These are multibillion-dollar efforts that require project execution, sales product management skills that Fluor can bring. So a great time to be in the pharmaceutical space as well. And we have a long history there, as you know.

I appreciate that, David. And my follow-up would be, you mentioned in your prepared remarks or maybe Joe, you've added 5,000 employees, to Fluor's professional staff in '23. What's that on a net basis, what type of growth do you see you need to achieve not only the backlog you've booked, the growth you anticipate given the opportunities in front of you? And maybe following on the LTC question in the Saudis. How you've been able to ramp up that with professionals and engineering staff to meet those needs because that's, I think, again, going to be a lot of demand stress in that market for something like you guys.

Well, you're definitely correct there, right? It is the number one focus area for the company, Michael, across the management team and across all the businesses is getting the right people at the right places at the right time. And like I think Joe said, we've hired about 5,000 people in '23. Net-net, it's not that much because we as projects come down in certain regions of the world, we'll have to let folks go. But overall, we're trying to redeploy as many as possible, to support this growth that we're seeing. So yes, I would expect to see probably another 5,000 hired this year or thereabouts. And that continuing on that track. So now with the sale of Stork, you'll see our numbers dropping, head count dropping somewhat. And, which is fine. But it's, with all the puts and takes of the projects, I'd say you'll start to see the head count ramping up again. But we're being very cost effective at the same time as far as overhead count goes. So I think on the Saudi Arabia specifically, on the work in the Middle East, the ramp-up is spread across various offices, not -- we need multiple -- we need to Fluor's global strength to be able to execute those types of programs for those clients. So you'll see work going into Amsterdam. You'll see work going into the U.K. You'll see work going into Texas and Houston, and into our execution centers in Delhi and the Philippines to be able to handle all of that. All those hours that are coming at us. So that's where we're at right now.

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

David the book of business in Urban Solutions, obviously really picked up here in the last year. Can you talk about the composition or mix of things in your backlog in that business segment, I guess, between ATLS, Mining, Infrastructure, maybe how does that inform your sort of profit margin outlook for the group into 2024? And I guess, in particular, is that mix between the different practice area is more attractive than in years past?

It's been, it's been so gratifying to see that driving growth across the portfolio strategic priority, over delivering, right? We wanted to make sure that we didn't have all our eggs in the traditional and gas basket back in late 2020 when we set the strategy. Not that we don't want traditional oil and gas to continue, we know it is, and we are right there supporting it and doing very well on the traditional side and now, obviously, in an energy transition across the company. But, what we said was we really wanted to grow in the markets, based on those megatrends that we saw in front of us, urbanization and energy transition and big data, Industry 4.0, everything was really being -- really leaning into the Urban Solutions space. And we've seen that through Mining & Metals with obviously copper being a big play in those megatrends but also ATLS as well. So if you think about the backlog right now, it's, these are approximate numbers, right? We've got $10 billion in Energy Solutions, about $15 billion in Urban Solutions now, right? So, and then the remainder $4 billion or so is in Mission Solutions to get up to your $29 billion. And that Mining is $7.5 billion of that backlog, ATLS is about $3 billion. Infra is at $4 billion. And we're starting to come along in plant and facility services as well, where we're starting to bring a higher level of service including digital solutions to our operations and maintenance offering. And we've got some good prospects on the horizon there. So, as far as margins go, maybe Joe can comment on Urban Solutions margins with that type of backlog and what we're expecting. As you know, our guidance that we're putting out there right now is the 3% to 4%. But it's, as you mentioned, it's the Infrastructure that we've got to work through that as well.

Yes. I think, Brent, if you look at kind of normalizing out the $600 million of zero margin revenue and where we're heading, we would expect the 3% to 4% that we're laying out today as we move forward and progress through the backlog and what we've taken into our pipeline that we would be in that 4% to 6% corridor. And we would feel comfortable towards the end of the year, we'll probably be looking at what that guidance looks like. But as we move out into 2025, squarely within the 4% to 6% corridor that we've laid out.

And I guess, maybe on Mission Solutions, as you mentioned, kind of a lower level of backlog relative to the other two business groups. But any update on the timing of Pantex decisions and any other opportunities outside of that to build up the backlog in that business group. Obviously, that one is a bit lower here this quarter.

Yes. Mission Solutions can be very lumpy with these massive long-term 10, 20-year contracts, of course, we hit one in late 2022 with Savannah River that was a very large program. So that's, again, that was a lumpy year because of '22, but those will continue to come around. I think on Pantex to your question, we're expecting an award I'd say second quarter to third quarter 2024, but before the election. So maybe that's the best timing I can give you there. But we're really excited about Mission Solutions and the future that we've got being such a strong Department of Energy contractor and picking up speed in the defense space and our LOGCAP work in Africa and supporting the troops out of Germany, we see really great opportunities in DOE and DOD. And of course, FEMA comes along. We've just been awarded that Eastern U.S. East Coast FEMA contract as well, which will continue to, as things occur, drive revenue. So I think that's where we're at with Mission Solutions. And like I said, very positive, and we've moved towards national security and brought in some new management capabilities in national security in the defense and intelligence space, where we're pretty excited about some prospects there as well. Those are prospects we don't talk about publicly, but they are very exciting and quite sizable. So that's where we're heading in Mission Solutions.

Your next question comes from the line of Michael Feniger from Bank of America.

Just your debt to cap is in your range, you have your target for 2026. It seems like you guys are really making progress on the targets you laid out positive cash from Ops in Q4, you're guiding for good 2024 free cash flow. So just with the mega trends you're seeing out there, are you starting to reinvest in the business? Should we see you guys maybe kind of look organic investment, but even M&A wise, just curious how we should think about that since we're starting to see that -- where we're seeing the cash flow move?

Yes. Maybe I'll take the kind of the cash flow movement up to M&A. What you're seeing in 2024 is not only a servicing of some of the legacy, it's the tail, the cash flow tail of the P&L at the end of the day, but you're also seeing in there an organic investment in our business as resources have become the number one criteria in order to kind of support this growth trend that we see in front of us, there's an investment in the infrastructure. And there's an investment in talent development and onboarding of individuals and training. So that is the organic investment that we're making happily into the business as we see the kind of the demand curve increase for our services. So there is some of that, but we believe that, that will become the baseline to support the growth into '25 and to '26. And also when you get into a 75-plus reimbursable environment, we're not working off of mobilization payments or big advances that you find through maybe the lump sum more risk more risk profile. So there will be some costs to continue to kind of ramp up the reimbursable activities. But it's all done relative to supporting the infrastructure to appropriately address and execute the projects that are coming our way.

So I'll just add to that, Michael. And again, yes, as Joe said, organically, we're just investing in our people, right? And attracting training and developing, but also our systems and by way of example, offices, this growth, we're going to be opening a Delhi satellite office. We've got three new offices in Houston. And so that will continue. On the M&A side, really just think about it as niche bolt-ons to further the business as appropriate, potentially in Mission Solutions as a first wave. So, that's where we're at right now. And as things continue to go in the right direction, as we've been seeing here, then we start, of course, talking to the Board about dividends and share buybacks and things like that.

And just thematically, there's always a worry with rates still kind of high that some projects will get pushed out to the right. It doesn't seem like that's what you're seeing based on what your backlog is? Do you need to see rates come down for that robust pipeline to convert, or do you feel like a great stay here, you guys saw visibility on really some of those bookings that you're expecting to play out through the year?

Yes. The projects that we work on other than maybe some energy transition developers that would need some financing, which they've been somewhat successful at. But our key client base, if you will, that we deal with use their balance sheet. So, and our clients look through the short-term challenges of economic and geopolitical challenges. And they play the long game, right? So, as I look at the client CapEx across just a sampling of Fluor's, say, 10 clients that I took a look at here a couple of weeks ago, their CapEx for 2024 is holding strong, up. Some of them are up. But just those tenants are going to spend about $110 billion in CapEx. I think they expect to spend $125 billion in annually, $125 billion in the out years. So with quite a bit of that $20 billion in energy transition, where, again, we are well-positioned and are, as I said, working on over 200 projects in energy transition. So I think we're in a very good space. You take BHP this morning that came out and said, well, the Nickels not doing well for them. So they're pivoting to copper and iron ore and potash, which is right in our wheelhouse. So, and they didn't change their CapEx guidance. So I just think that interest rates are less of a concern for Fluor and our prospects. And then you've got, of course, the Mission Solutions clients that are spending in our space in DOD, DOE and say, TxDOT, one of our key infrastructure customers, they've spent $279 billion last year and $292 billion in 2024. So there's so much to say grace over. We just need to be careful that we don't bring too much work in. We have to make sure we've got the resources, the A teams to execute these projects and be very selective, and get paid for the value that we bring and the best opportunities.

This ends our question-and-answer session. I will now turn the call back over to CEO, David Constable for some closing remarks.

All right. Thank you, operator. Many thanks to all of you for participating on the call today. Based on our performance, it's evident that we are well-positioned to leverage the progress we've made over the past three years, and we expect that this will drive significant value for Fluor shareholders for years to come. So again, we appreciate your interest in Fluor Corporation, and thank you again for your time.

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