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-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. 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 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, of which 70% is reimbursable. We continue to see strong demand for our services and the value we provide. Margins on new awards were 70 basis points above the margin profile of our existing backlog. The demand for our services is evident by our prospect pipeline. We continue to track a slate of prospects that is more than 15 times the size of our current backlog. This is led by opportunities in chemicals, closely followed by production in fuels, and mining and metals. As you will see over the next few slides, our financial discipline, combined with our focus on selectivity and project execution, are starting to drive consistent results. Moving to our business segments, please turn to Slide 6. Urban Solutions reported a $66 million profit in the third quarter. Results included an incentive fee earned on a large mining project that is nearing completion, as well as a favorable arbitration outcome on a separate mining project. New awards for the quarter were $1 billion, and ending backlog is now $11.1 billion and 59% reimbursable. Now please turn to Slide 7. In mining and metals, we continue to work on a number of front-end studies, including critical minerals production and green steel technologies. Although there have been no cancellations, the industry has been carefully monitoring inflation inputs and commodity pricing. We're now starting to see clients move forward with final investment decisions. Earlier today, we announced a multi-billion dollar reimbursable award from BHP for Stage 2 of their Jansen Potash Project in Canada. This award will be recognized into backlog in the fourth quarter. Looking ahead to the first half of 2024, we see significant opportunities in lithium, steel, and copper to bring into backlog. Moving to Slide 8, our Advanced Technologies and Life Sciences business line had another active quarter. Last month, we announced the completion of Bayer's first global cell therapy launch facility. This new state-of-the-art biopharmaceutical development and manufacturing facility will be used to produce cell therapies for neurological degenerative disorders, cardiovascular disease, and other current unmet medical needs. On the new awards front, ATLS was able to build off its successes in the second quarter. This includes an initial award for a semiconductor facility in the Pacific Northwest and an award north of $400 million for an expansion facility for a key strategic customer in Denmark. We were also awarded a feed package for Altris AB for the world's first industrial scale sodium ion battery production facility. We are excited about the pipeline of reimbursable opportunities in this business line. Over the next few quarters, we are positioned to win significant additional semiconductor work and multi-billion dollar opportunities in life sciences. In infrastructure, we continue to make significant progress on legacy and non-legacy projects during the quarter. On the Gordie Howe project, we had a very productive summer with great progress on the bridge and the U.S. and Canadian ports of entry. In August, the team celebrated the topping off of the U.S. tower at 722 feet. The project is now 65% complete. As we mentioned last quarter, Fluor, along with our partners, continues to have collaborative discussions with the Gordie Howe client with respect to cost and schedule relief. Our joint venture team is working to resolve these discussions in the next few months. Moving on to Slide 9. Mission Solutions reported a segment profit of $38 million for the third quarter compared to $29 million a year ago. Results for the quarter reflected increased execution activities for FEMA hurricane support. New awards for the quarter included the $175 million four-month extension at Portsmouth, a new award for AFRICOM under our LOGCAP V contract, and additional task order awards under our FEMA contract to support hurricane-related efforts in Florida and Georgia. Last month, we were also informed that our contract for the NNSA's Naval Nuclear Propulsion Program was extended for five years through 2028. Fees from this $8.5 billion extension will be recognized as equity income. During the quarter, our team submitted our bid package to the NNSA for the Pantex Management and Operations Contract. This contract includes a five-year base period with three five-year options valued up to $30 billion over 20 years. We expect to have an update on this contract next year. Moving to energy solutions, please turn to Slide 10. Segment profits significantly improved to $177 million from $59 million a year ago. Results reflect the initial recognition of cost recovery entitlements on several fixed-price projects, partially offset by cost growth on a large upstream legacy project and a charge for the expected net settlement of a long-standing claim. Results also included a $24 million gain on our embedded derivative in Mexico. New awards for the quarter totaled $3.3 billion and included a confidential reimbursable EPCM contract for a large chemicals project in North America. For the fourth quarter, we are anticipating some sizable reimbursable new awards. Prospects include a large battery chemical project and an isocrafter retrofit project, both in Europe and an LNG facility in Indonesia. Finally, I'd like to note that LNG Canada is now 88% complete and this project continues to meet management expectations. Before I turn the call over to Joe, I want to note that our results and accomplishments this quarter reflect notable progress against our corporate strategy and are indicative of our ongoing transformation into one of the leading engineering construction companies in the world. With that, let me turn the call over to Joe for the financial update. Joe?

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-influenced 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 one time for the full year. Moving on to Slide 13. Our cash and marketable securities balance for the quarter was $2.4 billion. This excludes amounts held by NuScale. As it relates to operating cash flow, we expect to be positive for the full year. This includes additional distributions from our joint venture arrangements in Mexico and Canada, which more than covers the cash needs for legacy projects. Any potential client concessions on the Gordie Howe project are not currently included in our cash flow outlook. While we are not discussing 2024 guidance on this call, I do think it is important to note that we expect 2024 to be a significant year for cash flow generation as we start to see meaningful contributions from our growing non-legacy portfolio. During the quarter, we reached an agreement to sell Stork European businesses to Bilfinger. We have also launched an effort to transact Stork's remaining operations. At this point, we expect all transactions to close by Q2 next year. Now, please turn to Slide 14. In August, we completed a very successful convertible debt offering to address our December 2024 senior notes. As a result of our offering being oversubscribed by five times, we were able to lock in a coupon rate of 1.18% and a conversion premium of 32.5%. We also entered into cap call transactions that prevent any share dilution until our share price trades above $68. Including the cost of the cap call, our effective cost of this debt is approximately 3.47%, slightly lower than the 3.5% December 2024 notes we are retiring. If we had pursued a straight debt issuance, we estimate our cost of funds would have been more than double this market-leading effective rate. A simplified example of how the cap call transaction works can be found in the appendix section of our slide deck. I should note that in advance of retiring the 2024 notes, the proceeds from the offering have been primarily invested in securities yielding over 5%, outearning our maturing fixed-rate debt of 3.5% by over 150 basis points. Lastly, in September, we announced the full conversion of our convertible preferred stock, which further simplifies our capital structure. The cost of this conversion was $27 million, approximately $2 million less than the remaining undiscounted mandatory dividends. We will not have any change to our adjusted EPS estimated calculations as these shares were already reflected in our share count. And now that our 10-Q has been filed, our market cap will adjust upward by more than $1 billion. With these transactions, we have rebuilt a capital structure that was pressured over the past few years as we transition back into a lower-risk portfolio. Please turn to Slide 16. We are raising our full year 2023 adjusted earnings per share guidance to a range of $2.50 to $2.70 and increasing our adjusted EBITDA guidance to approximately $600 million. Our assumptions for the fourth quarter include: revenue of more than $4 billion; adjusted G&A expense of approximately $50 million, and an effective tax rate of approximately 40%. This may vary depending on the countries in which revenue is generated. We expect tax rates to moderate as revenue in our tax-advantage locations starts to increase. Our expectations for Q4 segment margins are: approximately 4% to 4.5% in energy solutions, approximately 4% in urban solutions, and approximately 6% in mission solutions. Finally, we also reaffirm our 2026 adjusted EBITDA guidance of $800 million to $950 million. Operator, we are now ready for our first question.

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. 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, we received an important award from BHP earlier this morning for their Potash plant in Saskatchewan. We have a strong, longstanding relationship with BHP thanks to our successful project execution. Currently, we have about $55 billion in front-end work in mining and metals, and we expect that to continue, with an additional $50 billion in potential front-end work in sight. Value engineering remains crucial across our client base to ensure we deliver optimal value and solutions. Mining clients are actively investing in energy transition minerals and metals, and we anticipate that trend to persist. While mid-tier clients are cautious about pursuing large multi-billion dollar projects, our quarterly tracking of their capital expenditure shows no signs of softening at this moment. Given the substantial front-end work, we are confident in our mining and metals business. Specifically, in the copper mining sector, we believe we are well-positioned for future growth.

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 with 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 is that 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% 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, for the full year, we're at 6.5%. This is more of a reset after recognizing the cost recoveries in Mexico. It's just a bit of settling, reflecting some of the fluctuations we're experiencing. We look forward to providing guidance for 2024, but we do not anticipate that 4% to 4.5% will be the ongoing rate for energy solutions at this time.

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 legacy activities moving to sort of late stages here, you're ramping up more profitable new work. I just want to get a sense, are you more confident that the sort of typical 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 the only thing I would add is that we're beginning to see some financial discipline regarding cost recognition and the hard work that has been put in over the last 12 to 18 months to achieve very positive outcomes with our clients. I believe all of this is 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. Sorry.

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, the $20 billion we achieved in 2022 showcases strong margins, and we are on track to repeat that success this year. While we might not reach the full $20 billion, we expect to come close with a similar margin profile. By year-end, we anticipate being at or near 75% reimbursement. Our execution is excellent; we are performing above expectations, which positively impacts the company's future trajectory. We have projects running through 2026 and 2027, indicating significant volume and hours to utilize in the coming years, providing us with good visibility ahead. We will conduct operating plan reviews for 2024 in mid-December, which will inform our guidance regarding margins and growth for that year.

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 will inject more capital into the JV?

Yes, we are in discussions with a strategic investor for the monetization of NuScale. Those discussions are proceeding well, and we have a term sheet with our strategic investor. If everything aligns, we should be able to provide more information about that at the end of the year or early next year. This is our current focus. NuScale has a strong offering in the industry and is ahead of any other small modular reactor technology by at least five years. We are very excited about supporting NuScale's commercialization moving forward. They have an earnings call next Wednesday where they will provide more insights, particularly regarding cash and their financial outlook.

Appreciate the color.

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.

Good morning again, Michael. Right now, we are focused on staffing our important projects and ensuring we have the right talent in the appropriate roles at the right time to achieve successful execution for all our clients. We have a very structured process for determining whether to proceed with bids, and we only move forward if we have the right teams assembled. This is the first question we address before diving into other details. The entire management team is dedicated to resource management and attracting talent to the company. Over the past couple of years, we've successfully brought in more than 6,500 people, with over 30% of them being rehires. People are eager to return to the Fluor family as we continue our growth. Therefore, we dedicate a significant amount of our time to ensure we don’t take on projects that we cannot execute. In terms of resource allocation, we are fortunate in that our business allows us to move talent between different divisions as needed. For instance, as the HLS business escalates from $400 million to $500 million projects to multi-billion dollar projects, we have effectively transitioned project execution, management, and control skills from our energy solutions sector into HLS. This flexibility is enabled by our established processes that allow movement within the company. Our efforts are ongoing, and we have a talent task force in operation since early 2022, which has been very beneficial for us.

Considering your increasing capacity and the demand for your services, can we expect that over the next several quarters, as you mentioned, booking margins have risen by 70 basis points from your current backlog? Is that a trend likely to continue in this environment for the foreseeable future? It seems we can anticipate an improvement in margins within your booked backlog.

I would say there are a few pockets in our markets or a few specific customers facing challenges. For instance, if you're a chemical client in Europe, you might be dealing with issues related to feedstock and may need to scale back a bit. However, overall, we have a key account management process that helps us stay informed about our clients. We review client capital expenditures and track quarterly invoices to gain visibility on future developments. Additionally, we shouldn't overlook our government business, which tends to see increasing budgets. The capital expenditures among our clients are not weakening; they are either stable or increasing, especially with the added focus on energy transition. Given the current competitive landscape for talent and resources, it is a seller's market, and I anticipate margins will remain strong for reimbursable work, which is encouraging. Moving forward, I believe we can continue to enhance both margin and backlog. It is crucial to note that the type of work—whether front-end services or full EPC—plays a significant role in influencing the margin level. I see a positive outlook ahead, and we will work to improve those margins as we progress.

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 in 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.