Earnings Call Transcript - FLR Q4 2024

Operator, Operator

Good morning, and welcome to Fluor's Fourth Quarter and Full Year 2024 Results 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, Vice President, Investor Relations. Please go ahead, Mr. Landkamer.

Jason Landkamer, Vice President, Investor Relations

Thank you, operator, and welcome to Fluor's 2024 fourth quarter earnings call. David Constable, Fluor's Chairman and Chief Executive Officer; Joe Brennan, Fluor's Chief Financial Officer; Jim Breuer, our Chief Operating Officer; and John Regan, our current Chief Accounting Officer and soon to be CFO are here 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'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 2024 Form 10-K, 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?

David Constable, Chairman and Chief Executive Officer

Thank you, Jason. Good morning, everyone, and thank you for joining us today. Please turn to Slide 3. I would like to start by discussing the CEO transition announcement issued earlier this morning. It has been just over four years since we launched our building a better future strategy and set our long-term financial targets. In 2024, we achieved the goals under this strategy with strong cash flow and a robust capital structure, supporting a backlog that is not only majority reimbursable but one that reflects our portfolio approach to our end markets. Importantly, we have met and, in most cases, exceeded our strategic targets, bringing the fix and build portion of our strategy to a close. Consistent with our long-term succession plans and with the full support of Fluor's Board, it is now the right time for me to transition into the role of Executive Chairman and pass this Chief Executive Officer role on to Jim Brewer. Starting on May 1, in my new role, I will be supporting Jim as he builds upon his relationships with clients and engages more fully with our stakeholders. In Jim's new role, he will be focused on developing the storylines for the next chapter of our strategy, which is thematically focused on growth and execution. This will include revised growth targets and a laser focus on project delivery. We look forward to sharing our view of the markets over the next four years at our upcoming strategy update event on April 2 at one of our major ATLS sites. On a personal note, back in 1982, when I first started at Fluor as an engineer in our Calgary office, I had no idea of the incredible experiences and opportunities that awaited me and my family over the next five decades. I'm filled with gratitude for the experiences, traditions, and proud moments that defined my journey with the corporation, and I'm really looking forward to seeing our new management team build upon Fluor's legacy. Now please turn to Slide 4. Our revenue for the year was $16.3 billion, marking a 5.4% increase from 2023. In 2024, we recorded new awards totaling $15.1 billion, achieving a book-to-burn ratio of just under 1. New awards for the year were 150 basis points above new award margins last year and well support our established margin corridor of 4% to 6%. Importantly, our 2024 net gross margin book-to-burn ratio was a healthy 107%. Through our disciplined contract pursuits, 85% of new awards for 2024 were reimbursable. And our total ending backlog is now approximately 80% reimbursable. Moving to the new U.S. administration and the rapid pace of announcements that are coming out of the executive branch, we are tracking the executive orders closely. While it's still too early to be definitive about the long-term impacts, we are focusing on the broad economic themes of the administration's agenda, which are to promote capital investment and job creation. Considering the underlying themes of pro domestic energy, key minerals production, and AI infrastructure development in the executive orders, we see these directives as favorable to nuclear and thermal sources of energy, favorable to LNG exports and expedited permitting, favorable to increasing domestic mineral production, and favorable to significant data center buildouts. Therefore, we see positive elements across all of Fluor's business segments and stand ready, as we always have, to support our clients. Before I turn the call over to Jim, I want to thank Joe for partnering with me through this journey and for playing an instrumental role in strengthening our financial stability and positioning Fluor for long-term success. Jim will now take us through the fourth quarter highlights and prospects for 2025.

James Breuer, Chief Operating Officer

Thank you, David, and good morning, everyone. Let me start by saying that I'm very excited to assume the role of CEO in May and would like to thank the Board for entrusting me with this responsibility and honor. Over my 31 years at Fluor, I have learned to appreciate and share the values that define this great company. I've seen first-hand the amazing work that we do around the world to support our clients and the many communities where we work. Through David's leadership during these last four plus years, our company is healthier financially and poised to meet the demand-driven growth we see around the world. As Fluor embarks on the next chapter of our strategy, I look forward to working closely with our employees, partners, and other stakeholders to continue to serve our clients through excellence in project delivery. Now moving to the results of the quarter and full year. Please turn to Slide 6. Beginning with Urban Solutions. The segment reported a profit for the quarter of $81 million versus $147 million a year ago. New awards for the quarter totaled $1.4 billion, and ending backlog for the full year grew by 20% to $17.7 billion, up from $14.8 billion a year ago. Please turn to Slide 7. In ATLS, we received an incremental award of $243 million for our ongoing efforts at Lilly's LP1 project in Lebanon, Indiana. This project has grown from 200 to 1,000 personnel in 2024 and continues to progress with the installation of the facility's central utilities building along with steel and concrete placement at the peptides, small molecule, and tank farm areas of the facility. The workforce is expected to increase in size in the first half of 2025. On the semiconductor front, based upon our project performance, a major semiconductor manufacturer in Arizona has awarded for more tool installation work, growing our experience in tool installed scopes like this one positions us well for future semiconductor opportunities in the United States. For 2025, we see a robust slate of opportunities, including the next expansion phase of Lilly's Indiana project and another major peptide manufacturing facility in the U.S. In addition, we've recently signed a master agreement with a leading technology provider and have received initial data center work under this agreement. This builds upon our extensive data center project experience in Asia and Europe. Specific to the data center market, in addition to the opportunity I just mentioned, we're in conversations or have agreements with the top four data center developers. We continue to see this market as a significant contributor to the grow and execute phase of our strategy. Please turn to Slide 8. In Mining and Metals, we received an award for a poor debottlenecking project in Australia for a major mining company. This project will support increased production capacity across the client's mines, rail, and related port infrastructure assets. The expected completion date is 2028. For 2025, we see a continued focus by our clients on developing additional capacity for key resources, including copper, green steel, lithium, and iron ore. We're currently tracking mining and metals opportunities that represent tens of billions in awards over the next few years. Please turn to Slide 9. Our infrastructure business continues to make good progress on the Gordie Howe project. Construction is now 94% complete, and handover of the U.S. port of entry is in progress. Substantial completion is targeted for Q3 of 2025. Next, the LAX Automated People Mover project is now 93% complete, and the forecasted substantial completion date remains on track for Q4 of 2025. On the I-635 LBJ project, construction is now 70% complete. Substantial completion is forecasted for Q2 of 2026. For this business line, as legacy projects wrap up, we are selectively pursuing opportunities in markets where we have strong client relationships and an appropriate risk profile. These include Texas, North Carolina, and the Netherlands. Moving onto Slide 10. Energy Solutions reported a fourth quarter segment profit of $63 million, a significant increase from the $26 million recorded in 2023. Quarterly results from last year included $33 million of cost growth for the Penguins legacy project. In the fourth quarter, new awards totaled $406 million, which included additional scope on a revamp project in Sweden, full release on engineering for a regasification in power plant in Indonesia, and a front-end award for the Unit 3 and 4 at the Cernavoda Nuclear Power Plant in Romania. This award marks a significant milestone in Romania's efforts to enhance sustainability and energy security in the region. Ending backlog for Energy Solutions was $7.6 billion compared to $9.7 billion a year ago. During the quarter, we helped support key accomplishments for our clients, including the TCO project in Kazakhstan achieving first oil, the BASF project in China achieving 50 million hours without a lost time injury, and the recently completed lithium hydroxide project in China for Albemarle, which was named a 2024 Global Best Project by Engineering News Record. At LNG Canada, the project has surpassed the 95% completion mark overall, with 771 of 838 systems having achieved mechanical completion. Additionally, the main refrigeration compression systems on Train 1 are in final commissioning in preparation for cool down. The project is experiencing some challenges with the installation of insulation on piping and equipment. Additional skilled labor has been mobilized to site in order to expedite completion. However, we are on track to support the client's target to ship first cargoes by the middle of 2025. This project continues to track to management expectations. To date, our joint venture in decline have not yet fully resolved certain outstanding issues for COVID-related impacts to the project. We believe that the client and our joint venture will resolve these items fairly and equitably during 2025, similar to resolutions reached on previous changes on the project. Looking ahead to 2025, our Energy Solutions business will be focused on reloading with front-end engineering and design packages to support future EPCM work, including large chemicals facilities in the Middle East, carbon capture and decarbonization. We're seeing opportunities in the LNG space, including additional interest in mid-scale LNG facilities. On the power front, we are actively deploying our strategy in both nuclear and thermal solutions to support additional energy demand from data centers and other broad power needs. Lastly, on NuScale, we continue to negotiate with our strategic investor to reach an agreement on a long-term monetization and revenue stream to Fluor while moving NuScale closer to commercialization. We believe our current path is the best way to bring value to Fluor's shareholders and maximize our long-term investment in NuScale.

Joseph Brennan, Chief Financial Officer

Thanks, Jim, and good morning, everyone. This morning, I'd like to discuss an overview of our financial performance and provide an update on the progress we have made in strengthening our capital structure. Please turn to Slide 13. For the full year, Fluor reported revenue of $16.3 billion and a net income of $2.1 billion or $12.30 per diluted share. Results for the year reflect the favorable impact of the NuScale deconsolidation and subsequent fair value accounting. During the quarter, we recognized a $116 million provision related to a jury verdict against a Flour joint venture on an infrastructure project completed over 12 years ago. The client sued over alleged incorrect designs performed by a subcontractor. We believe that the jury verdict does not accurately reflect the evidence at trial and we are evaluating all options that may eliminate most, if not all of the provision taken. The provision does not reflect any offsetting recoveries that we believe are owed to the joint venture. Our 2024 Form 10-K filed today contains additional discussion on this matter. Segment profit for the year was $635 million and adjusted EBITDA was $530 million. On an adjusted basis, our 2024 results were $2.32 per diluted share. Corporate G&A expenses for the year were $203 million compared to $232 million a year ago. The improvement over 2023 can be attributed to an ongoing focus on overhead optimization and a reduction in performance-based compensation. For the full year, we reported net interest income of $150 million, as our cash management team invested Fluor's cash in high-quality interest-bearing assets, which more than covered the $46 million in low-cost fixed-rate interest expense on our outstanding debt. Please turn to Slide 14. Cash and cash equivalents combined with marketable securities were $3 billion, representing a 14% increase from 2023. Our operating cash flow for the year of $828 million, including meaningful distributions from two large joint ventures and IRS refunds, reflects strong core cash generation. This was our best year for operating cash flow since 2015. During the year, legacy projects required $81 million in funding. We believe that these late-stage legacy projects will require up to $200 million of funding in 2025. Over the course of 2024, we communicated our intent to restart our capital allocation program. Based on our strong financial footing and confidence in sustained cash flow generation, we started our share repurchase program with $125 million or 2.3 million shares purchased in the fourth quarter. Under this initial phase of our share repurchase program, we are targeting an additional $300 million in repurchases during 2025. Changes to our plan for share repurchases will hinge on potential proceeds from further monetization activities. Our performance over the past four years provides flexibility on capital allocation, including reinvesting in the business organically, the size and timing of our share repurchases, reinstating a dividend, and the ability to make select bolt-on acquisitions to support the continued growth in the business. Before we discuss our guidance for 2025, I want to review a few additional items. Please turn to Slide 15. Last year, we purchased $57 million of our outstanding 2028 notes. We will continue to chip away at these notes opportunistically at or below par. Last month, we closed the sale of our Stork U.K. operations, which essentially completes our transition to an asset-light model. Led by our transaction of Stork and right-sizing our office in Houston, we have been able to reduce our real estate footprint by more than half to 3.7 million square feet. Next, our investment in NuScale was deconsolidated in October of 2024, resulting in a $1.6 billion pretax gain. Subsequent mark-to-market gains based on its prevailing stock price through 12/31 resulted in an additional pretax gain of $604 million for the fourth quarter of 2024. Since this will be my final earnings call, I wanted to introduce John Regan as my successor. John has worked side-by-side with me over the past four years and was a key part of the finance leadership team that led to the rebuilding of Fluor's capital structure. John, I'll turn the call over to you.

John Regan, Chief Accounting Officer

Thanks, Joe. What Fluor accomplished with the first chapter of our strategy has restored investor confidence and established the foundation for the next chapter. I'm excited to support the business as we pivot to the grow and execute phase. Back in December, I had the opportunity to speak with the analyst community, and I look forward to meeting our investors in the days ahead. Please turn to Slide 16. Looking to 2025, our EBITDA guidance is $575 million to $675 million, which lends itself to an operating cash flow range of $450 million to $500 million. Our estimated cash flow reflects the underlying operational performance and working capital needs under a largely reimbursable profile. We expect our full year EPS to range between $2.25 to $2.75 per diluted share. We currently don't see any material items that need normalizing from our GAAP earnings other than FX and NuScale, which is now mark-to-market to their screen price across our 126 million shares. These expectations are based on our ability to successfully execute our strategic priorities and capture the demand for our services across the end markets we serve. To provide a bit more granularity on the outlook for '25, our assumptions include a new awards book-to-burn ratio well above 1, revenue growth of approximately 15%. Net interest income of approximately $80 million, G&A expense of around $180 million, and despite a potentially wide range of outcomes, we also see an effective tax rate of approximately 30% to 35%. Our expectations for 2025 segment margins are approximately 4% to 5% in urban, 3.5% to 4.5% in energy, and 5% to 6% in mission. For 2025, we expect the normal shaping of quarterly cash flow. For EBITDA, we expect an acceleration in the second half of the year as we ramp up execution activities, particularly on our urban solutions portfolio. As a housekeeping matter, we'll file an S-3 later today solely to refresh our ability to capitalize on expedited financing opportunities in the future. Lastly, once NuScale files their 10-K, we will file an amended 10-K to incorporate their financial information into ours as required under the securities laws.

Operator, Operator

Thank you. The floor is now open for questions. Your first question comes from Michael Dudas with Vertical Research. Please go ahead.

Michael Dudas, Analyst

Good morning, gentlemen.

David Constable, Chairman and Chief Executive Officer

Good morning, Mike.

James Breuer, Chief Operating Officer

Good morning, Mike.

Joseph Brennan, Chief Financial Officer

Good morning.

Michael Dudas, Analyst

Congrats, Jim and well done David. First, maybe for David or Jim, as you've put together your outlook for 2025 and some of the cross currents that you highlighted in your prepared remarks, on the book-to-bill that could be well above 1, maybe a little bit more thought on timing and the areas. Certainly, highlighted Energy Solutions reloading. But in the urban side, which has really been a big driver in the last couple of years, maybe some more visibility on how that will be booked. And the margins that you're seeing on some of these opportunities in the Urban Solutions area relative to the mixture business?

David Constable, Chairman and Chief Executive Officer

Yeah. Good morning, Mike. Maybe I'll start and ask Jim to comment as well. As you look at the backlog at the end of the year, in '24, obviously, we've seen Urban Solutions kick up dramatically as we had laid out and planned for in our strategy to drive growth across the portfolio. So you see that backlog sitting at $17.7 billion. Our Energy Solutions coming down as we expected as well and Mission Solutions holding firm, so we expect that to continue. We do see a book-to-bill significantly above 1 in 2025, just to emphasize that. And the margins we guided, we're comfortable and certainly comfortable with. So where it's coming from, specifically, Jim, some comments on that, please?

James Breuer, Chief Operating Officer

Sure. Thanks, David, and thanks, Mike for the words there and looking forward to working with you on your colleagues going forward. Yeah. So the book-to-bill is significantly above 1. A lot of good opportunities in ATLS. If you look at pharma, and the market that we've been very successful on in previous years, it's going to continue to be a good growth market for us. If you look at what we call the Advanced Technologies projects that include semiconductors and data centers. Data centers is a market we're focusing on very strongly, and we've already had some recent success on that, in addition to building on our experience that we had in Europe and Asia. Mining has a significant slate of opportunities, some of them in front-end work, some of them converting to EPCM. And then, of course, in government, we have a very strong position with DOE, and we expect some of those significant awards to come from that client. So it's urban and its mission primarily with a lot of front-end work and energy preparing for subsequent years.

David Constable, Chairman and Chief Executive Officer

Yes, to provide a broader perspective in support of what Jim just mentioned, we have prospects in the larger EPC and PCM project sector worth approximately $46.5 billion over the next 12 months. Urban accounts for nearly $24 billion of that, with the remaining $22 billion divided evenly between energy solutions and mission. This underlines our expected bookings for the coming year.

Joseph Brennan, Chief Financial Officer

And Mike, to add to your question about timing, it’s encouraging to see some announcements from the mining group this early in the year and the data center activity we’re beginning to engage in. This should help support the burn curves as we progress through the year.

Michael Dudas, Analyst

Could you provide insight on the upcoming data center cycle in comparison to the life science or semiconductor cycles? Specifically, where do we stand in terms of timing, and what is the scale of what you plan to deliver? Additionally, what would the figures look like once these potential opportunities are converted into bookings?

James Breuer, Chief Operating Officer

Thanks, Mike. This is Jim. We're in the early phases. The projections from the major five data center hyperscalers in the United States indicate several hundred billion dollars in announced investments. Given the increasing size of these projects, they align well with Fluor's project delivery expertise. We will remain diligent and methodical as we take on this work. Based on our successful track record with recent data center projects in Europe and Asia, we believe we are well positioned for the upcoming surge of data centers anticipated in the United States. As mentioned in the prepared remarks, we recently signed a significant master agreement with a major data center company and have begun the first project under this agreement. This project is a colocation data center on a smaller scale, estimated between $0.5 billion and $1 billion. However, this agreement enables us to work on data centers of all sizes, including those worth several billion dollars. While these larger projects take longer to develop, the advantage of this agreement is that it fosters a long-term relationship with the client across multiple projects, allowing us to replicate efficiencies and apply lessons learned from previous projects. To specifically address your question, we are in the early stages of the cycle and will approach the market methodically and with disciplined project pursuits. We believe that data centers will serve as a significant growth engine in this next chapter of our strategy.

David Constable, Chairman and Chief Executive Officer

Yeah. And just adding to that, Mike, right, as Jim said, a significant contributor to our grow and execute phase not only for the facilities, data center facilities themselves, but also where Fluor can add value on the power demand side of the equation. Our expertise in power generation, both thermal and nuclear is going to play a key role in supporting our clients' needs, and we're already currently ramping up our capabilities further on the power side. The numbers are just astronomical for power demand for data centers. We’ve got 26,000 megawatts installed in the U.S. right now. That’s going to go to – they say 92,000 is required by the end of the decade. And then the numbers are even larger globally, but the U.S. is about 40% of the market so a big focus here on data centers combined with power generation, which is obviously in our wheelhouse.

Michael Dudas, Analyst

Excellent. Thanks, gentlemen.

David Constable, Chairman and Chief Executive Officer

Thanks, Mike.

Sangita Jain, Analyst

Good. Thank you so much for taking my question. If I can ask one on NuScale. I believe that there was a due date to execute a true sheet to the strategic buyers. So I'm just wondering if that is still the case. Is there a change in your thinking on the timing of the monetization?

David Constable, Chairman and Chief Executive Officer

Good morning, Sangita. Thank you for your question. As Jim noted earlier, we are currently engaged in detailed negotiations with our strategic investor to finalize a long-term monetization agreement that benefits Fluor while also advancing NuScale towards commercialization. We remain confident that our current strategy is the best approach for creating value for Fluor shareholders, the strategic investor, and NuScale. For this strategy to succeed, it is essential that all three parties benefit. While the timeline for monetization has been slower than we anticipated, it is important to understand that developments in the nuclear sector, especially in the start-up phase, require patience. We aim to ensure long-term success, not just for the immediate future. Our primary goals are threefold: first, to achieve successful commercialization of NuScale technology with our strategic investor; second, to maximize value for Fluor shareholders through monetization; and third, to offer Fluor's project execution services for NuScale projects globally wherever possible. Additionally, Fluor is currently working on front-end design for RoPower’s small modular reactor project in Romania, utilizing NuScale’s leading technology. Jim also mentioned our conventional nuclear power initiatives, which have gained media attention recently, as we have started new front-end design work with our joint venture partners. Our efforts in this area are on a reimbursable basis. We remain optimistic about NuScale’s monetization and I will be attending a meeting later this week to further this discussion. We will provide more updates as they become available.

Sangita Jain, Analyst

Great. I appreciate that. And I know you guys mentioned in your prepared remarks regarding the new administration of the EU, but there's also been a lot of confusing news regarding spending freezes. So maybe you can give us an update on where you stand with your federal government contracts, whether it's FEMA or NNSA or the Department of Defense and if you're seeing any movement there?

David Constable, Chairman and Chief Executive Officer

I'll ask Jim to provide additional insights. Based on our position in the mission solutions sector, particularly with the Department of Defense, Department of Energy, and FEMA, we have strong ties in place. Our work focuses on national security, energy, nuclear cleanup, and nuclear deterrence. This mission-critical work is a top priority, and we have indications that it will continue given its importance to the country. Jim, do you have anything to add?

James Breuer, Chief Operating Officer

No. You're right, David. I think we believe that the project work we do and the support work we do for the government is tied to their very critical missions on these respective missions. So we expect the work to continue out. There has been a lot of news coming out of Washington, Sangita, but it seems like a lot of it's been updated and refreshed soon thereafter. So I think when it's all said and done, these programs are going to continue because they are mission critical, and we feel good about continuity to them. And we feel good about our future opportunities and mission also with these two big departments with FEMA and other civil agencies that we're pursuing work for.

Sangita Jain, Analyst

Appreciate that. Thank you so much.

Operator, Operator

Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.

Jamie Cook, Analyst

Hi. Good morning, and congrats, Jim, David, and Joe. I guess my first question, just on LNGC, JGC announced cost increases, I think last week in conjunction with their earnings, and you mentioned some stuff in your prepared remarks. So can you just give us more color there? Were there any cost increases that you guys incurred in the quarter associated with that project? And your margins for ES next year are 3.5% to 4.5%. So at the low end, the margins are lower than what you're expecting this year at the low end of the range, so does that reflect LNGC? And then just my second question on the guide for the year. I think you mentioned that it would be more back-end loaded. If you could just help us how we think about first half versus second half, just so the Street calibrates estimates correctly. Thank you.

David Constable, Chairman and Chief Executive Officer

Good morning, Jamie. Thanks for the questions.

Jamie Cook, Analyst

Good morning.

David Constable, Chairman and Chief Executive Officer

I'll turn it over to Jim, who has been leading our discussions at LNGC, to share his insights. Then Joe can provide comments on the ES margins, and Regan will discuss the back-end load and our expectations for the ramp-up throughout the year.

James Breuer, Chief Operating Officer

Yeah. Thanks, David. Hello, Jamie. So as everyone knows, LNG Canada is obviously an important project for us, and we're working closely with our JV partner and our client in this final stretch. The commissioning efforts, as I said are progressing well and are very advanced. And as I indicated, Train 1 is in advanced stages of commissioning and preparation for cool down. Now despite the fact that we have had to expend additional resources on the insulation work, we are still on track to meet the client's objective of first cargo middle of this year. The project continues to perform, Jamie, tracking to management expectations. And we expect it to be a very successful project when it's all said and done. We continue our conversations with the client on the final commercial resolution. We've had some good fruitful discussions in recent weeks and days. And again, we're confident this is going to be a successful project at the end of the day, tracking to our expectations.

David Constable, Chairman and Chief Executive Officer

So Joe, do you want to comment on how that weaves into margin guide for Energy Solutions?

Joseph Brennan, Chief Financial Officer

Yeah. Jamie, thanks for the question. Yeah. If we look at kind of the burn-off of some major programs flowing into kind of a reload situation for Energy Solutions around FEED work. What you're seeing is kind of the pivot of a lot of those resources as we move over to the demand-driven growth side of the model. So you'll see a little bit of a drag in the beginning of the year, and I think you'll see better strength in that margin performance as we get to the end of the year. But really, this is kind of the pivot as we shift over to the Urban Solutions side of the model in terms of where we see the demand-driven growth and the types of teams that we need in order to support that and open the aperture to that opportunity within our backlog growth. So that's really where it's at right now. It's kind of the trail off of the projects that we're executing and as we pivot into pivot some of those resources over to the Urban Solutions side of the business.

John Regan, Chief Accounting Officer

And I think a little bit of a testimony to the portfolio approach is that as you're coming off these big projects in ES, you really see a ramp in the urban side in the back half of the year. So I'm not going to give you too much color on the shaping, but I'll say we'll see a really high exit velocity from an EBITDA as we get into the second half of the year.

Jamie Cook, Analyst

Thank you.

David Constable, Chairman and Chief Executive Officer

Thanks, Jamie.

Andrew Wittmann, Analyst

Thank you for taking my questions. Joe, I would like to ask about the cash flow guidance of $450 million to $500 million, which aligns closely with the net income guidance, indicating a positive outcome. I'm particularly concerned about the $237 million in burn from legacy projects, yet the operating cash flow seems strong. My question has a couple of parts: what are the factors helping to offset the legacy burn? Are there additional joint venture cash distributions contributing to the operating cash flow guidance? Also, did you expect to have a larger burn on legacy projects in 2024, but found some relief during the year, such as with Gordie and LAX projects, which helped mitigate the cash burn? Are you anticipating similar offsets in 2025 to achieve this guidance, or could you elaborate on the various elements at play? Thank you.

Joseph Brennan, Chief Financial Officer

No, I believe you described it quite accurately. As we evaluate the benchmark we established concerning the funding of legacy projects at the start of the year, we had a comparable figure for 2024, and we successfully reduced that figure. This aligns with our planning framework. The cash flow guidance of $450 million to $500 million that we are sharing includes that $200 million in the discussion. We will, of course, strive, as we did in 2024, to minimize that number as much as possible. I would estimate that about 20% to 30% of that guidance pertains to some of the additional dividends we are bringing in, primarily from our operations in Canada rather than Mexico. So yes, there is a component there, although it is likely a smaller portion, around 20% to 30%. I would argue that the $450 million to $500 million is a more accurate reflection of what the ongoing business will yield and produce over the upcoming planning period.

Andrew Wittmann, Analyst

Thank you for that. David, I have a question for you. You mentioned the potential for integrating power generation, including thermal solutions, with the data center, which seems logical. Regarding the thermal aspect, your company has a long history in this area, but it was previously sidelined due to its fixed pricing model. I can imagine that some of the experts who worked in this field may no longer be with the company. How do you plan to rebuild the team for this business, and I assume you would only proceed on a reimbursable basis? Additionally, could you provide an update on any discussions related to power generation on the thermal side? Thank you.

David Constable, Chairman and Chief Executive Officer

Thanks, Andy. Good morning. I appreciate the question. It's an exciting time in the power generation sector. Utilities are actively seeking ways to generate power, including transitioning from coal to gas-fired small modular reactors and thermal power. I previously led our power business in the mid-2000s, where we had significant success with the thermal power expansion and the development of clean coal facilities. We have the experience to execute effectively. While past projects were fixed price, we aim to strategically enter this sector and follow our risk management processes as we expand power generation to meet future energy demands. We are enhancing our capabilities. Notably, our traditional clients, such as Chevron and ExxonMobil, have recently announced their plans to develop power solutions for U.S. data centers, which strengthens our relationships and involvement in these projects. However, we need to consider deal structures that are either reimbursable or hybrid, ensuring that risk is allocated appropriately among the generators. I'll have Jim elaborate further since he is closely involved in these efforts as Chief Operating Officer, particularly with Energy Solutions and their preparations.

James Breuer, Chief Operating Officer

Thanks, David. Yeah, Andy. You brought on some interesting points in your question, stuff that we are discussing internally to make sure we are approaching this the right way. Let me just first say, we've not forgotten the lessons of the past. And when we pursue power work, we're going to be very deliberate in our approach to the market. I think there are great opportunities out there driven by data centers, but in general, just driven by greater demand for power for a variety of reasons. Today, we are currently involved selectively in several power projects, both nuclear and natural gas. We've entered these projects early at the front end, working closely with our clients, looking for the best technical solutions. And during the front end, we're shaping the EPC, EPCM phases to a commercial profile that makes sense for everyone. So we are doing that today, both like I said, nuclear and thermal And we're going to follow the same process for future opportunities. As David said, we're in discussions with several utilities about their project needs. And we believe we have a lot to add there in terms of our execution and project management capabilities. And let me add our expertise in supply chain. So much of the success of a project today is driven by supply chain, not just the main equipment, but all the other ancillary equipment and making sure all that gets delivered on time, both for engineering and for the construction. So I think there's a lot that Fluor can add value in this market without having to go to a competitive lump-sum bidding process, late conversions, partially reimbursable hybrids. There's a lot of models we can implement, and the clients today are more amenable to follow these more innovative, creative models, given that they know there's limited capacity out there and that project delivery certainty is what they need.

David Constable, Chairman and Chief Executive Officer

There are many existing power EPC service providers currently overwhelmed by their execution capabilities. This situation presents an opportunity for Fluor. As Jim mentioned, we need to approach this with great care and patience. One of the major challenges in this sector is that turbine OEMs are booked through 2028. Therefore, we need to ensure that we manage our supply chain and timing effectively, and we will proceed cautiously and methodically in this area.

Andrew Wittmann, Analyst

Thank you.

David Constable, Chairman and Chief Executive Officer

Thanks, Andy.

Steven Fisher, Analyst

Thanks. Good morning and congratulations to all with the new roles. Just wanted to follow up on the NuScale discussion. I'm just curious, David, I mean, has anything changed in terms of the negotiations? I mean are you actually making progress? I know investors are kind of sitting a little bit anxiously hoping you're able to lock in some of the value in the marketplace. So I understand it's probably hard to discuss negotiations that are ongoing, but I'm just wondering if there's any other comfort you can offer investors that you are actually making tangible progress towards some monetization.

David Constable, Chairman and Chief Executive Officer

Good morning, Steve. As you've mentioned, since we're in negotiations, there's not much I can share except that these discussions are detailed. I will be involved later this week. It takes patience in the nuclear field, and we are at the very beginning regarding small modular reactors and the commercialization of NuScale technology. However, the demand and interest in this type of business model are extremely high. Once we finalize some power purchase agreements, I believe we will see significant activity. I am very optimistic about the opportunities for Fluor, our strategic investor, and NuScale with their technology. We are in detailed discussions and hope to have some updates for you soon.

Steven Fisher, Analyst

Okay, that's helpful. I have a follow-up on Jamie's question regarding the Energy Solutions margins. I'm still a bit unclear why the margins are relatively low in the first half, considering the mix should be skewed more towards engineering services, which typically have higher margins. Is it simply that there is an underutilization of your project management resources and staffing, which is offsetting the increased engineering mix? Additionally, David, throughout your tenure, the focus has been on improving margins in the backlog. Has there been any change in that approach?

Joseph Brennan, Chief Financial Officer

Yeah. I'll talk a little bit about ES. Maybe what I'm trying to describe is the pivot as we came off the back end of some of these bigger programs, we have a significant amount of infrastructure that was in place to support those big programs. And as they start to trail off and we pivot to demand-driven growth, there is a little bit of friction in that process as we get the right people in place in order to open the aperture into what we see as a fairly robust opportunity slate within Urban Solutions. So it's just a bit of the friction that's going to occur in the beginning of the year through the first quarter into a portion of the second quarter. But as that starts to shift, you'll start to see better leverages coming through Energy Solutions, and you'll start to see better backlog growth into Urban Solutions. And that will help normalize your margin profile across the spectrum of the segments that we have.

David Constable, Chairman and Chief Executive Officer

Right. And then on higher margins and the focus on higher margins and a healthier backlog going forward and moving to a primarily reimbursable backlog as part of that. Our strategic priorities, which we'll talk about in April with you, have not changed. We've got a little more focus on project delivery because we're growing, and we have to make sure we cover all our bases and execute with excellence as we grow and not get stretched. So the strategic priorities are pretty well the same that you'll hear about. And when we talk about fair and balanced contract terms and getting paid properly for the value we provide, that is still firmly in place going forward. And again, that's what you'll be hearing more about here in April. So I guess I should turn it to Jim and Regan because you asked them the question as well. Jim?

James Breuer, Chief Operating Officer

No. That's right, David. There's going to be a focus on the proper returns on a risk-adjusted basis. The fact that the portfolio is majority reimbursable helps with that. Yes, there is a pivot in Energy Solutions, and that's a market I know well because I ran that business for several years. And we're reloading with a lot of significant work, including the power discussion we had a minute ago, but there are other opportunities, LNG and decarbonization in downstream and chemicals. So we expect that market, probably in the '26 time frame, to start picking up. In the meantime, urban is going to be our primary engine of growth. So yes, there is a lot of focus on margin, but there's also a lot of focus on risk and making sure the margins we are getting are proper for the risk profile. So the priority is going to be the same in a methodical and a rigorous manner. John, anything you'd like to add?

John Regan, Chief Accounting Officer

I'd just echo that. It will continue to be a focus. I think the phenomenon of the absorption issue that you raised is real. I think as Jim pointed out, that will normalize as we get closer to 2026. And we'll see some of the leverage to the margins in ES as we get into that latter half of the year. So your question was intuitive and a bit leading, but I think you've heard us all echo the continued focus on the margins coming into the backlog.

Steven Fisher, Analyst

Sure. Thank you very much.

Operator, Operator

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

Brent Thielman, Analyst

Hey, thanks. Good morning and congrats as well to everyone. I just had a question on the financial guidance inputs and specifically just around the interest income expectation of $80 million in 2025. I think you realized $150 million in 2024. Just can you bridge the difference there? Are there any other cash outflows you need to be aware of? Understand you're going to have some share repurchases in there, but just wanted to understand that.

John Regan, Chief Accounting Officer

Yeah. Good morning. Thanks for the question, Brent. So as you think about it, your intuition is again spot on. You are seeing a little bit of the impact of the share repo, which kicked off and will remain in progress in earnest across all of '25. The biggest thing that maybe you're not thinking about is the cash that we've held at a couple of our significant joint ventures, notably in Canada and in Mexico. And so we had significant repatriation of those dollars back into Fluor Corp. and out of the JV. And so you wouldn't have necessarily seen that cash, but it has now come back into the corporate portfolio. And so we were kind of generating interest on cash you couldn't see because of the nature of the JV accounting. So the biggest difference there in addition to a little lower interest rates across the balance of the year. But the biggest thing is really the JV cash that has now been redeployed back to the JV partners.

Joseph Brennan, Chief Financial Officer

And we're returning shareholder value and we're buying back shares too, right? So...

Brent Thielman, Analyst

Understood. Yeah. And I guess just a follow-up and all the conversation around the stronger book-to-burn, I think well understood, Urban Solutions is going to continue to be a nice driver here. I guess I'm more curious on the timing in Energy Solutions as we advance through 2025. Are you cautiously optimistic or optimistic we might see an inflection in this kind of downward trend in backlog that's developed more recently? I'm just trying to get a sense of when you think some of these opportunities start to accelerate there.

James Breuer, Chief Operating Officer

Yeah, Brent. This is Jim. 2025 is the year we are reloading. We don’t always control when awards are given. We prepare for projects by developing teams, proposals, and execution plans. Sometimes these early efforts are delayed because of clients. Interestingly, clients in the energy market have been more cautious in launching their final investment decisions compared to clients in other markets who are quicker to proceed. When you ask about the timing of an upward shift, it largely depends on these final investment decisions. I would say there is a greater likelihood of this happening in 2026 than in 2025, possibly even in the second half of 2026. We are doing everything we can to ensure project success by focusing on quality preliminary work, assisting clients with supply chain challenges, and navigating potential tariffs and other issues. A lot of important groundwork is done upfront to set these projects up for success, but the precise timing is ultimately determined by the clients. Specifically addressing your question, I am looking at a timeframe of 2026.

Brent Thielman, Analyst

Very good. Thank you.

David Constable, Chairman and Chief Executive Officer

Thanks, Brent.

Operator, Operator

Due to time constraints, this concludes our Q&A session. I will now turn the call back to David Constable, Chief Executive Officer for closing remarks.

David Constable, Chairman and Chief Executive Officer

Thank you, operator, and many thanks to everyone for participating in our call today. As we close out the 2024 financial year, really pleased with our cash generation trajectory and our ability to return capital to shareholders. In addition, we have significant near-term prospects that will support further revenue growth and broad-based industry diversification for the company. So we appreciate your interest in Fluor Corporation, and thanks again for your time today.

Operator, Operator

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