Fluor Corporation (FLR) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to Fluor's Third Quarter 2021 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 AM Eastern Time today, accessible on Fluor's Web site 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 Web site at investor.fluor.com. At this time, for opening remarks, it is my pleasure to turn the call over to Mr. Jason Landkamer. Sir, please begin.
Jason Landkamer: Thank you, Chelsea. Good morning. And welcome to Fluor's 2021 third quarter conference call. With us today are David Constable, Fluor's Chief Executive Officer; and Joe Brennan, Fluor's Chief Financial Officer. We issued our earnings release earlier this morning and we have posted a slide presentation on our Web site, which we will reference while making prepared remarks. Before getting started, I'd like to refer you to our Safe Harbor note regarding forward-looking statements, which is summarized on Slide 2. During today's presentation, we'll be making forward-looking statements, which reflect our current analysis of existing trends and information. There is an inherent risk that actual results and experience could differ materially. You can find a discussion of our risk factors, which could potentially contribute to such differences, in our 2020 Form 10-K and in our Form 10-Q which was filed earlier today. During this call, we may 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 Web site at investor.fluor.com. I'll now turn the call over to David Constable, Fluor's Chief Executive Officer. David?
David Constable: Thank you, Jason. Good morning, everyone. Thank you, for joining us today. Before we move into operational results, I'd like to start by pointing out some of the more interesting events and notable items our employees are currently involved in. this quarter I want to highlight, Melvina Stacey, our HSE Deputy Director in Canada. Two months ago, she started a series on social media where she showcases women in HSE roles at Fluor. In introduction to this series, she acknowledges the challenges of being seen paired and recognized in what is traditionally a male dominated construction industry and how the company has positively responded. Fluor is committed to our DE&I program and ensuring that everyone could be seen, heard, and recognized for their hard work. And thank you to Melvina for your efforts and I encourage all of you to follow Fluor on LinkedIn for future installments of her series. Let's begin by providing some perspective on what we're seeing in each of our major end-markets starting with Mission Solutions. Please turn to Slide 03. In Mission Solutions, we experienced quite a bit of activity during the quarter. In the U.S., margins for the quarter reflect increased execution activity on U.S. Department of Energy projects higher than forecasted performance basis and the release of COVID-19 cost reserves. This strong performance was somewhat offset by the LOGCAP for Afghanistan program that was completed in July. New awards for the quarter was strong at 1.6 billion, our largest award in the segment with a $789 million 12 month extension to our management and operations contract for the DOEs Savannah River site. Our other major award for the quarter was a contract with $495 million to provide humanitarian support at Holloman Air Force Base in New Mexico through Afghan evacuees as a part of Operation Allies Welcome. This award was under the Air Force contract augmentation program that Fluor has been a part of since 2020. Specific to this effort, we received the call from the Air Force in late August and within a week we are temporary housing, food, medical and other critical humanitarian assistance for 1000 evacuees and an increase total capacity a few weeks later to 5000. Currently, more than 4000 men, women, and children, call as newly created facility home. Fluor will continue to provide assistance until the operation concludes likely next spring. Now, I want to firstly thank all of our employees that mobilized so quickly to support this important effort. Last week, a joint venture including Fluor was awarded the Savannah River site integrated mission completion contract. This indefinite delivery, indefinite quantity award is valued up to $21 billion over the next 10 year. Both include liquid waste stabilization and disposition among other requirements. This is a great award that expands our presence on the Savannah River site in South Carolina. Our next major pursuits Mission Solutions is the Y12/Pantex management and operations contract in Tennessee and Texas. We anticipate hearing about potential selection for this multi-billion dollar award in next few months. Now let's turn to our Urban Solutions group on Slide 04. In mining, we booked a copper project in Indonesia with a valued long-term plan. We had conversations with mining clients, we continue to see a disciplined approach to project analysis and final investment decisions. Mining clients are aware of the critical role they play as the world focuses on energy transition and electrification. At same time, they're taking a fresh look at their own portfolio of assets and identifying how they can significantly reduce energy and water consumption with a specific focus on increased use of renewable power. Our FEED pipeline of future mining work, remains steady. And we continue to work on it, sleight of projects at a limited notice to pursuit contracts. Over the next four quarters, we expect to book opportunities that support a broad range of commodities including copper, nickel, aluminum, lithium, steel, and phosphates. We then turn to Slide 05. The infrastructure, we book $316 million in revenue for our share to the I-35E Phase 2 expansion project in Dallas, TX. This 6.5 mile long design build project includes full reconstruction and expansion of the existing general purpose lanes as well as the reconstruction of two managed lanes. Before talking about prospects in this segment, I want to provide a quick update on our legacy infrastructure portfolio. During the quarter, we recognized $19 million in forecasted adjustments on a light rail project that experienced schedule delays and productivity challenges. The project is approximately 90% complete and we anticipate project completion next summer. There are no significant changes in estimated cost to complete the remaining legacy infrastructure projects. Now, as a reminder, we expect to receive the final settlement payment on the Purple Line project next month. Our infrastructure clients continue to express interest in the pending infrastructure bill. While we remain disciplined in our approach, we see some near-term opportunities in roads and bridges as well as project management only prospects. Turning to Slide 06. In Advanced Technologies and Life Sciences, we are starting to convert some of our initial enthusiasm around semiconductor manufacturing into new awards. During the quarter, we won the front end scope of a large semiconductor project in Arizona. This is the first of many awards that we were tracking for this facility over the next 12 months. We're also winning new work to support food packaging clients. Overall, momentum continues to build in Urban Solutions. While we expect to see lower new awards in the fourth quarter, we're well-positioned to convert our existing FEED pipeline into full VPC contracts next year. Moving to energy solutions on Slide 07. Results for the quarter was more in line with our expectations with segment margins at 5.3%. These positive segment margin results included an $18 million gain recognized on an embedded derivative inside of an equity method investment which is excluded from our adjusted EPS numbers. The awards in the quarter totaled $644 million compared to a $141 million in the third quarter of 2020. And included refining and LNG work in Mexico. Turning to Slide 08. Our work on LNG Canada continues to advance positively. During the third quarter, we crossed the 50% completion mark and we continue to drive schedule progress to fabrication and construction activities. On October 30th, we also celebrated a three year milestone from the receipt of the project’s Full Notice to Proceed. Engineering on the project is essentially complete and all major procurement has been awarded. Remaining procurement efforts were set at on top-ups of bulk materials such as pipe and cables. Accordingly, the project has mitigated inflation concerns on the equipment and materials for this project. We operate in a COVID restricted environment there. Last quarter, we announced an agreement with the client for COVID related delays and costs for engineering and procurement through February 26th, 2021. We continue to monitor our progress on our procurement fabrication and construction activities and are working with the client to mitigate any additional COVID related delays and costs. I'm pleased to say that our first 16 modules have shipped and we expect to receive them at our marine offloading facility starting next week. We see the first of a 192 modules bring a total of 256,000 tons that will be fabricated and shipped to the site. And finally, we began our heavy lift mechanical equipment program with the installation of two pre-coolers and the main cryogenic heat exchangers for train one. This reflects the site moving towards substantial above ground construction activities as you can see on Slide 08. Now, please turn to Slide 09. Our efforts to support the energy transition needs of our clients continues to accelerate. During the quarter, we received work to support renewable biodiesel and lithium production projects. The interest in our ability to decarbonize existing assets is coming primarily from Europe and the U.S. this includes Fluor's proprietary carbon capture technologies, renewable driven e-crackers, electric drive motors and increased demand for hydrogen based power. We also see increased activity in battery chemicals to support the expanding needs of the automotive industry. When you look at our opportunities across the energy solutions landscape, we see their clients have resumed investing and sustaining capital, a small capital projects. Larger projects other than what we see in chemicals remain on the drawing board. Although competition continues to be brisk, we remain disciplined in the projects and clients we pursue. Now, let's turn to NuScale on Slide 10. As we mentioned last quarter, we received considerable interest in our carbon-free nuclear power solution with $193 million received in outside investments this year. We continue to receive positive feedback from Guggenheim Securities which NuScale retained six months ago to accelerate the funding of its path to commercialization. During the third quarter, NuScale find MOUs with entities in Poland and the Ukraine. We are seeking to move forward with small modular reactor deployments. NuScale also reached an agreement at COP26 to advance clean energy development in Romania. And Fluor signed an MOU with Bulgarian Energy Holding as we look for opportunities to convert their existing coal-fired fleet to SMR's. NuScale also announced the building out of its manufacturing supply chain with a key partner in Canada. Finally, Fluor received additional work from Utah Associated Municipal Power Systems to develop the NRC combined construction and operating license application and the initial site-specific plant design for the NuScale technology facility to be built by the Idaho National Laboratory. Now, please turn to Slide 11. Till September, Fluor has been working to meet vaccine deadlines on government projects that are covered under President Biden's executive order. In Mission Solutions where a majority of our government contracts have received the mandate contract language, we will continue to work towards complying with the vaccine mandate and encourage our employees to meet the corresponding deadline. Our non-government business lines are also encountering vaccine mandates being issued by a few commercial clients. We will carefully consider such mandates to ensure they're properly addressed in contract modifications, are implemented in a legally compliant manner and keep our projects productive. Yesterday in addition, OSHA released the new Emergency Temporary Standard that will require companies with 100 or more employees to mandate that their staff be fully vaccinated or get weekly testing. Our clients and we're working closer together to ensure we respond accordingly. On the international front, we are starting to see clients and government sector moves in a similar direction. On, Slide 12. I want to share a few observations as we head into the final quarter 2021 and provide a look ahead into 2022. In the near term, we expect to see variability in new awards as clients continue to weigh the timing of capital expenditures against the impacts of supply chain disruptions, labor availability and inflation. Currently, we are working on or recently completed several hundred Study and FEED projects representing over a $170 billion in estimated total installed cost. Looking ahead, we are tracking over 200 study and FEED prospects in the next 18 months, representing over a $150 billion in TIC across the markets we serve. Overall, I'm very pleased with the speed and the direction we're moving the company. We're well into creating an organization that aligns with the needs of our clients and the expectations of consistent returns for our stakeholders. This includes a healthier backlog and coupled with our efforts to improve our processes and permanently reduced cost throughout the organization. During the quarter, we finalized our path forward that includes overhead savings of over $150 million annually when fully implemented. Some more details on these savings and our financial results for the third quarter, I'll turn the call over to Joe. Joe?
Joe Brennan: Yes. Thanks David, and good morning everyone. Please turn to Slide 13. For the third quarter of 2021, we are reporting a diluted adjusted earnings per share amount of $0.23. And our earnings release and in the appendix to today's presentation, we show a reconciliation of GAAP EPS for this adjusted number which excludes certain items such as FX and embedded derivative games as well as debt retirement costs. We continue to make significant improvements to our capital structure. Using the proceeds from the convertible preferred offering, we successfully tendered for our note maturing in 2023 and 2024. When you include the open market purchases in July, we are able to reduce outstanding debt by $509 million or 30% from the $1.7 billion in total debt outstanding at the end of June. When we laid up the company's strategic goals in 2024, we included a target debt to total capitalization ratio of 40%. I'm pleased to report that we were able to accelerate this process and we are now below that target at 37% which is a significant improvement from 55% back in January. Although we are ahead of our three year plan as it relates to our capital structure, we will continue to look at options for the remaining outstanding indebtedness under the 2023 and 2024 notes in a way that supports a longer-term credit facility. Please turn to Slide 14. Our overall segment profit for the quarter was $110 million or 3.5% and included the $18 million gain for embedded derivatives and Energy Solutions and quarterly NuScale expenses of $8 million. Excluding these items, our total segment profit margin is 3.2% in line with our guidance for the year. To get more perspective, year-to-date segment profit margin was 3.3% driven by Energy Solutions at 5.8% and Mission Solutions at 5.3%. Our ending cash and marketable securities balance was $2.2 billion and reflects cash deployed from the convertible offering to reduce outstanding debt. Despite the incremental cash demands on legacy projects, we've been able to keep our cash balance at these levels for the past three years. Our operating cash flow for the quarter was an outflow of $66 million. This outflow was driven by the timing of cash inflows. We expect full-year operating cash flow to be neutral to slightly positive. Our G&A expense was $42 million compared to $31 million last quarter. This increase is due primarily to ongoing investigation costs. Please turn to Slide 15. At the end of the quarter, our backlog contained $1.1 billion in legacy projects that are in a loss position. $900 million of which is related to the Gordie Howe project. We anticipate cash contributions to these loss projects in the fourth quarter to be more than offset by the final settlement payment for Purple Line. Moving to asset divestitures. In our last call, we shared that we had a high interest in Stork with over 50 party signing an NDA and receiving an information memorandum. Since then, nonbinding offers have been received and due to this high level of interest the divestiture team work through two steps of selections since late September. We are pleased to have down selected to a few strong bidders who are doing their due diligence in submitting binding offers later this month. We remain on schedule and are planning to close this sale by end of Q1, 2022. As it relates to AMECO South America reported in discontinue operations. We are holding productive conversations that support our strategy of transacting this business in the next few months as well. On the P3 front, we are making progress on transacting our interest in a completed infrastructure project in North America. We expect to receive additional proceeds early next year. As David mentioned, our cost reduction initiative have started to accelerate. We now identified over $150 million in annual savings and have started to implement our plan to fully realize this run rate savings by 2024. While we're not prepared to discuss specifics on this call, we're expecting overhead savings of $100 million in 2022. As part of Fluor's focus on managing internal cost, the company has implemented a plan to right size our global real-estate footprint. When fully realized in 2024, this represents an additional $20 million in annual savings. Please turn to Slide 16. Based on current trends, we are raising our adjusted EPS guidance from $0.60 to $0.80 up to $0.85 to $1.00 per diluted share. We are also adjusting our Q4 segment level guidance and expect margins to be approximately 4% in Energy Solutions which excludes currency exchange fluctuations and the embedded foreign currency derivative; approximately 4.5% in Urban Solutions and 3.5% to 4.0% in Mission Solutions. Our guidance for the remainder of the year remains modest -- assumes modest revenue increases in Mission and Urban Solutions. Full-year corporate G&A expenses of $185 million to $195 million and a tax rate of approximately 35%. Finally, I want to point out a little administrative housekeeping that you will see in our SEC filings over the next few days. We will be filing an S-8 to register the CEO equity awards granted in December and separately we will file several amendments to deregister shares under S-8s related to our 401K plan and some of our prior compensation plans that are no longer active. Operator, we are now ready for our first question.
Operator: Thank you, Sir. And our first question comes from Steven Fisher with UBS Capital Markets.
Steven Fisher: Hey, thanks. Good morning. David, you mentioned that energy transition projects are on the drawing board at the moment. Can you maybe just more broadly discuss potential for energy bookings from here and what do you think the backlog trajectory could be. And then, how you see those energy transition potential prospects chilling in the pipeline over the next couple of years?
David Constable: Hey, good morning, Steven. And thanks for the question. The energy transition work has is really started to gain momentum as we see our traditional clients move forward with those activities. You see the big oil companies setting up specific business units, new energy low carbon energy businesses and likes Chevron, ExxonMobil putting in. Chevron's got $10 billion put in there through 2028 and ExxonMobil is similar numbers. So, I think energy transition is really going to pick up for as far as your question around backlog. I think we're about $21 billion right now overall. And we see Energy Solution start to gain momentum across not only just energy transition but the entire Energy Solutions business segment. And we're tracking $45 billion in prospects, greater than $50 million EP, EPC, EPCM projects over the next 12 months. And a good portion of that is in its sometimes difficult to break up because all of our clients are focused on energy transition. So, this is not with the traditional customers but it's across all 10 major business lines that we've got. So, when you think about it, when you got mine, we take this $15 billion in mining projects in the next 12 months. A good portion of that is energy transition as is. It is in chemicals where we've got $5.5 billion that we're going after in the next 12 months. Energy transition itself including NuScale and SMRs right now are the prospects in 2022, I read about $2.5 billion. So, we see the backlog, I think from a backlog perspective we are turning a corner as a company. We're really excited about the first half of 2022, talking with our Head of Corporate Developments, Al Collins, who's been around the company for a long time. He says we haven’t seen this these types of numbers in a long time as list of prospects goes here in the first half. So, yes, turning a corner and really excited about starting to book a healthy backlog with good margins. Thanks, Steven.
Steven Fisher: Thank you, for that color. And then, just maybe on LNG Canada. Can you talk about what the next steps are on any further change orders? And you mentioned inflation, mitigation, how should we think about the risk of labor inflation over the balance of the project?
David Constable: Yes. I think really in good shape. Now as I said we -- as we'd announced in second quarter, the first COVID agreement for engineering and procurement was successfully collaboratively signed with the customer. And we're also tracking now the fabrication and construction impacts of COVID and working again with the same team in place to make sure that we get to a fair and balanced position with the clients for the rest of the projects on that front. So, that's all coming along nicely and more on that in subsequent quarters. On the price itself, probably best to look to what the client's saying about the project. The client in their call, recently had showed. It feels that probably this sounds going very well. As I mentioned we reached 50% complete and they said they were very pleased with the performance not only in Canada but outside of Canada in terms of the supply chain. And within Canada particularly during this pandemic, really pleased with the overall progress from their standpoint. So, it's good to have the client weighing in on that front. So, I think all-in-all it's going well and we continue to keep a close eye on it. On the escalation side, we feel we're in good shape on inflation. We've got well in hand obviously we're bought labor. The labor rates are taken care of and accounted for in our estimates. So, we don’t see any issues on that front either. So, yes, really good going with the modules being starting to ship over and obviously as I've said in the past calls, where focus is still on the Mod Yards and in the progress there. And we're taking action and implementing good execution plans in the yards there to ensure schedule and progress and productivity continues in the right direction.
Steven Fisher: Thank you, very much. I appreciate it.
David Constable: Thanks, Steven.
Operator: Fine, thank you. Our next question comes from Sean Eastman with KeyBanc Capital markets.
Sean Eastman: Hi, guys. Nice update here and thanks for taking my questions. Maybe it'll be helpful just to understand the bridge from the previous EPS guidance to the new EPS guidance, obviously a very healthy raise. I just want to understand what we can extrapolate from that as we look into 2022, maybe part of that Mission Solutions upside is some facts that didn’t work that's going to be contained this year. Maybe some of that is the write offs or change orders but maybe it doesn’t help us next year. Just trying to think of it think through that, that'll be helpful.
Joe Brennan: Yes Sean, its Brennan.
David Constable: Sean, Joe's going to take this one?
Joe Brennan: Yes, thanks Sean for the question. What we're really seeing is I think the first step of this is we are starting to get the challenge projects behind us. Although we have had some noise and some friction this year with principally Gordie but as we continue to progress that we feel like we're going to get on top of it. But I think what I'm -- what we're seeing in through a lot of hard work this year is we're starting to really reap the benefits of the new strategy in terms of improved performance and discipline around our investments in our project execution group. We've implemented a very rigorous overhead reduction program which were starting to reach some of the benefits of that in 2021 and we'll repay significant portion of that in 2022. Our new awards that were booking in, I would suggest you that they're leaning towards a significantly higher quality of earnings as we look forward on how those will burn. And I think it's also important to note that if we look at the backlog and how it's performing and we compare that to where we are from a challenged last project perspective. And I said this on previous calls, it represents less than 5% the challenged projects of our overall backlog. And clearly, with the bidding principles and the diligence with which we're putting work into backlog, we would expect to see higher returns and better performance moving forward. So, it's a combination of a number of different things both on the cost front and how we're performing projects and then, and clearly what we're putting in the backlog.
Sean Eastman: Okay, helpful. And just a higher level kind of theoretical question here. But obviously the results are good. I just wanted to understand, how we get comfortable in the broader fixed priced project portfolio. That floor is kind of protected from this sort of unprecedented volatility and inflation and input costs and there have been wage inflation. Maybe we can just level set on that and just kind of understand how that portfolio of projects behaves in this operating environment. That'll be very helpful.
David Constable: Sure, Sean. Yes, we're very comfortable. Obviously we've got all the right processes and procedures in place through we're operating system requirements and with a pursuit criteria. Yes, going forward we're very comfortable with how we're bidding work and the again the government since screening of those prospects and what we're bidding and who we'll be working with going forward. So, and from a go for and including the risk committee at the board level which provides oversight and on all the risk projects that we're considering. So, going forward are very comfortable. Currently, all contracts in-house right now are well-protected through the contract and escalation clause as an indexing for inflation and including the lump sum work down in Mexico. And we're in good shape up at LNGC and Canada. So, I think from that standpoint we're in good shape and we've been able to make sure the contract protects us going forward. Just looking at the prospects I talked about that $45 billion of work that we're again in not study or feed, we're not anywhere, just real projects the $45 billion next year. 91% of those are reimbursable cost prospects. And 9% fixed price. But again of a size and with customers and locations that we feel very comfortable going forward. And our supply chain group is all over to your comments on volatility and inflation. We got not only our supply chain covering that but our Head of Industrial Relations keeping a close tabs on labor inflation, wage inflation volatility. So, I think we're in really good shape.
Sean Eastman: Okay, terrific. Thanks, a lot.
David Constable: Thanks, Sean.
Joe Brennan: Thank you.
Operator: Thank you. Our next question comes from Michael Dudas with Vertical Research Partners.
Michael Dudas: Good morning, gentlemen.
David Constable: Good morning, Michael.
Joe Brennan: Good morning, Michael.
Michael Dudas: My first. When you're -- I was just thinking about getting on top of following-up on Sean's question on supply chain et cetera. What are your customers coming to ask you to do even with the contracts that you have, are you or if solution is fairly verily available, do you get the sense that these trends and it's a little bit more less than transitory going forward. And how that plays into your ability to secure some of the $45 billion of work that you have on the board over the next 12 months to secure your fair enough better share of project bookings?
David Constable: Yes. I think certainly on that on the current work and else were, like I said we're in good shape, Michael, and working with customers to make sure that we continue that baseline re-baseline estimates and schedules as we see impacts on supply chain and on labor. So, that's collaborative process and continue to work through those. Going forward, we do see just a lot of I guess I call it a pause or more scrutiny across our client base right now. Obviously optimism, you see all the CapEx numbers coming out, I can rehearse them for you if you like. But there's CapEx growth across our client base into '22 and further out in time. So, that's very --. That's why I feel so positive about next year and the new awards in the direction we're going in and as I said turning a corner. But to your point, this more project analysis and review to ensure that whether it's transitory or long-term these issues that we're facing right now. And working with the clients to make sure they're comfortable that when they pull the FID triggers that we have a most likely a P-85 type of probability in place on and again most of these over 90% reimbursable class projects that we're chasing. So, that's how I see it and it started mining but we're seeing it in chemicals and the other big business lines that have from it the lion share, the new awards coming right now.
Michael Dudas: So, it sounds like demand's increasing but the supply the issue we just think it's the customer has to go through but everything seems to be especially with regard to commodity prices in the marketplace. I mean, these projects are being the market tell them where they have to go through. So, I'm assuming that gives you some additional confidence in booking some these are like mining projects tuned in the next several quarters.
David Constable: No, most definitely, they are coming. Again the CapEx numbers are pushing up very nicely and then we got all the FEED work as well. We've got the I think it’s a $177 billion that we just as I said on the prepared remarks, $170 -- from rather $70 billion of front-end work that we've completed and $39 billion of that was mining. And so, yes and we're chasing 42 -- $42 billion in front-end work from mining projects in the next 18 months in the rolling forecasts. So, it's there's a lot of work sheets. And it's not just mining and chemicals obviously as well and energy transition within the Energy Solutions business. So, again it's coming and just it's a little more scrutiny and we'll done on the analysis of the cost and schedules.
Michael Dudas: I appreciate that. And just finally on the you're encouraging news on the semiconductor opportunities on Arizona. And how significant can that be going forward. And on semi's, electronics, life science, is that a market that still has bludgeoning opportunities for so for you guys to gain some share in booking there?
David Constable: Yes. It's very pleased with the progress in Arizona and has a very large program that we just this tip of the iceberg right now and getting in and working with client there. And obviously a long-term build out of the major operation. So, we see good things happening in ATLS not only in the U.S. in that space but over a nearer period opening a new technology hub for ATLS in Copenhagen on December 2nd and the clients they're very excited to have us working locally working with them in Europe as well on these similar types of project datacenters as well as semiconductor work back to you, so. In ATLS, see about in the next 12 months about over $3 billion in prospects that they're looking at.
Michael Dudas: Excellent. David, thank you very much.
David Constable: Thanks, Michael.
Operator: Thank you. Our next question comes from Jamie Cook with Credit Suisse.
Jamie Cook: Hey, good morning. I guess, David, one question for you and then Joe two for you. Given the amount of work that's out there in the competitive environment, David. Are we getting to a point where customers are coming to you to sort of you to feed on a sole feet versus like a dual feet, so that your potential wind rate this cycle could be higher just because of the lack of competition or players that have exited the market. I'm just wondering if those dynamics are more favorable. And then, and particular as people are worried about labor. And then my second question, Joe, I'm going to push you on the margins a little to imply margins in the fourth quarter are probably better. And then, what I would have expected and I'm just wondering if like we can think about that is a good base for how to think about 2022. And then my last question is you made good progress on the debt reduction this quarter but you did say you're exploring options to reduce you get further on the 2023, 2024 notes. If you could elaborate on that, is that can we pay that down through cash flow from operations or are we exploring any potential for equity. Thanks.
David Constable: Hi, good morning Jamie. So, yes. On the all of front-end work is feasibility and FEED work, source versus all the way up to dual FEED competitions like you mentioned. It's still competitive out there. And we're going up against contracts, assuming I have the same resume in that space as far as subject matter experts are concerned and all of the value that we add from evaluating technologies for our customers at the front-end and coming up with the best solution. But they're out there and they're making runs at it with quite low pricing. And so, we got to battle that effectively. And so that I'd say that's the main issue right now on that front. So, we're still seeing a lot of competition in. We got to put our best foot forward and the way we do that is in fact we had a recent example on a renewable diesel project where it was going in one direction because of -- because of pricing. And we went in and added value with that technical capabilities and pull that right back to floor. So, a great win. So, we love to see that because getting paid for values is what we expect. So, it's a bit of a mix but still very competitive but. Like I said, we're chasing about a $150 billion in TIC over the next 18 months in this type of front-end work and we will definitely pull in a good portion of that but still competitive and have to put our best foot forward. And convertibility, I've looked at that. And I'd say in the non-government businesses conversion of these front-end jobs are in the anywhere between 40% and 50% for Energy Solutions and Urban Solutions. Mission Solutions is a much higher convertibility rate up almost a 75% conversion of prospects based on repeatability and repeat clients, repeat agency clients at the government. So, Joe, turn it over to you on the other questions.
Joe Brennan: Yes, thanks Jamie. On the margin guidance, we had signaled in previous calls that we were looking for that quote or 4% to 6%. I think you can expect margin similar to the Q3 margins for Energy and Mission, slightly normalized but within reach of what we had achieved in the quarter. And I think as we start to execute out the challenge projects through Urban Solutions, we will be well within that 4% to 6% range as we would look to Q4 and beyond. And on the debt side. No, we're not, at this point we believe that there is strength within the cash flow generation within the business. The timing of that is obviously very closely aligned with the release of the new awards. And what we're up against a little bit as our credit facility renegotiation but whether we do that through cash on hand or some other view of it. But we are not at this point-in-time contemplating any additional equity raise.
Jamie Cook: Okay. That's helpful, thank you.
David Constable: Thanks, Jamie.
Operator: And the next question comes from Andy Kaplowitz with Citi Group.
Andy Kaplowitz: Hey, good morning guys.
David Constable: Good morning, Andy.
Joe Brennan: Good morning, Andy.
Andy Kaplowitz: David, so it doesn’t seem like you received additional outside investment for NuScale over the last couple of months. But obviously you may've received it before, the $190 million before that. Could you update us on your progress though with Guggenheim, maybe what is the thought process at this point around your new scale investment or whether it has changed at all given perception regarding nuclear power, seems to be improving globally? And then, could you remind us what the remaining percent stake in the company you have left?
David Constable: Good morning, Andy. Thank you. And thank you, for asking about NuScale because we're very excited about NuScale going forward. And Guggenheim as I mentioned has been working with NuScale and ourselves for the past six months and doing a great job for us putting all the options on the table. And we're making really good progress in how to move forward and get the commercialization and the right financing options for the organization. So, I'd say we're getting closer to a final outcome on that and this really near-term I think will be able to talk to you more about that. About how we plan to extract value for the floored shareholders based on the new scale offering and what you were seeing in the marketplace and extreme interest. And the fact that we're getting started on getting further into the Utah AMPS or the UAMPS project with the standard design in the collar. The operating license. Yes, going in a great direction and yes like you said a $193 million this were was a very strong and more to come on that front as well. So, I think I'll leave it at that and just like you know that we're making really good progress.
Andy Kaplowitz: Okay, and then maybe like, sort of a big picture question, David, you've been in the seed now COC for a few quarters obviously raised EPS this quarter. And you've got those 2024 goals still out there. So, it seems like you're pretty enthusiastic about ‘22. But you do need a nice step up to stand track. Where does that step up potentially come from within your segment? Is it all of them? Is it one in particular in the confidence level that you're still on that 24 trajectory?
David Constable: Yes. I'm very comfortable with what we've put out there for the earnings power in 2024. I think we're ahead of schedule not only on our performance, which is driving better earnings through the segments, but also the getting fit for purpose, as Joe said on the cost overhead reductions. These are permanent, sustainable reduction, structural reductions that we're making. So, we're comfortable that those run rates will continue into the future So, we're managing everything. It was a bridging year as we discussed at the start of the year that we've been really able to get things within our control in a much better place to get ready for the upturn which is I think I just say it's coming a little later. We actually we actually are going to beat our gross margin plan for the year by several percentage points. So, that's also encouraging from a new word standpoint. So, we're ahead of plan on that, as well. And like I said what we see in the first half of ‘22 these are major project prospects that we'll be going after. And so I'd say, again, we're comfortable with the targets right now. I think it's a little too early to adjust what the earnings power could look like in 2040. We will stick with what we've guided for now. But we'll be taking a look at that next year during our strategic planning process and update as required on that.
Joe Brennan: David the only thing I was going to add is if we kind of look back over the last six to nine months I feel extremely excited about the quality of earnings and the new awards in the markets that we're chasing. So, David has laid out a fairly significant robust pipeline of work that we're pursuing. But it does fit our bidding principles and criteria and therefore we believe it'll be reflected in truly what flows through our pipeline and becomes our quality of earnings moving forward.
David Constable: Yes. And as far as where's it coming from its coming from like we said on strategy day we've really focused on the 10 business lines that we're going to drive growth across and we see growth in pretty well every single business line. And so with, I'd say mining, leading the charge and government as well leading the charge with chemicals right behind it, and obviously infrastructure a lot of opportunity there coming down the pipe and followed up by energy transition and energy solution. So, it really is including HELS as well. So, really, it's right, in all those business lines that we talked about at the start of the year. And that's what we're going to see it across the board, which is a good thing in a cyclical with all the different cycles we take on.
Andy Kaplowitz: And then maybe just a quick clarification for Joe. Is it true mission solutions revenue was up despite getting out of Afghanistan? So, does OEW work increase DOE? Does that sort of fill the gap, Joe so that revenue stays at these levels that you're seeing Q3 now despite you being out of Afghanistan?
Joe Brennan: Yes. It is a significant portion of the replacement for Afghanistan work moving forward. But I think as David laid out there are some very significant awards that we feel will drop here in the beginning of 2022, which will continue to help not only fill whatever gap exists from Afghanistan, but in essence grow the overall mission solutions backlog as we move forward.
Andy Kaplowitz: I appreciate it.
David Constable: Thanks.
Joe Brennan: Thanks very much, Andy.
Operator: Thank you. Our last question will come from Michael Feniger with Bank of America Merrill Lynch.
Michael Feniger: Hey guys, thanks for squeezing me in. I was just hoping to under understand Joe on it's great that the EPS guidance is revised up notably. I was just curious on the cash flow from ops. I think you guys are guiding that to be positive for the full year. Now it's neutral to positive. Just help us understand maybe if there's been any kind of buckets of what maybe push that back from in the positive range to positive, to neutral positive.
Joe Brennan: Thanks, Michael. Let me first what we had been signaling quarter-over-quarter is that we were going to be neutral to slightly positive. We will end the year in that positive, slightly positive range. What is impacting Q3 are really timing issues. If I take a look at that $66 million there's a very small portion of that that's in there that is to service last projects and as we move into Q4, I am very-very confident that we'll see that cash, those cash balances snap back to the positive range and we will end the year in a in a positive cash flow position.
Michael Feniger: Good to hear. And just on analogy can you mentioned how sell in the last result sounded very pleased on the overall progress. You didn't mention some issue with the pipeline construction. Now I believe that's clearly separate from you guys and the discussions there. I was curious if that had any impact on the overall project and just like big picture how do you kind of ramp up now of the construction side of LNG Canada? How do we think about that as it flows through on revenue recognition, margin and cash from ops in 2022?
David Constable: I'll let Joe talk about cash from operations as we pass the 50% mark and how that looks from a cash perspective on the project. On the pipeline yes, you're right on that they that's the coastal gas link, feed gas pipeline being developed by Trans Canada. So, it doesn't have any impact on what we're doing. Obviously we'd have to direct you to the customer for more color on that but Joe you want to talk about cash flow.
Joe Brennan: We have historically been extremely conservative in our VIE cash as it'll be distributed through the form of dividends back to the owners of the joint venture. At this stage of the project as we are kicking off fabrication we are not looking forward dividends or cash inflows at this point from LNGC but as we as we get closer towards the third and fourth quarter of 2022 we will probably begin to open up more dialogue around that. There is cash flow that has been generated relative to our floors relationship to the joint venture and a significant portion of cash flow being generated. But in terms of dividend not only with LNGC but with all of our VIEs we've always been very conservative relative to the cash that remains in the joint venture to service the project.
Michael Feniger: That makes sense, and maybe on that conservatism, I'm just curious, like the cash balance of $2 billion, kind of going forward you already reached your debt level target, that you guys were kind of that you laid out at strategy day. Is the $2 billion cash figure is that going to -- I know that was a goal to have for 2021? Is that still the goal to maintain that level of cash? Do you see that maintaining that level throughout 2022 as well?
Joe Brennan: I believe that we will start as we book in well, a couple of things. One is we work our way through the challenge projects. And we begin to book these opportunities that David has laid out today. We will start and begin to see those cash balances increase over time. It'll become a timing issue. Even though we may book a $20 billion award under a single performance obligation, the generation of that task, their engineering, and really into procurement and construction look different over the continuum of the project. So, I don't expect us to see any negative impact to cash flow, but I think it'll begin to ramp up in 2022 with a significant ramp up in 2023 as we start to grow our backlog with the market as we see them today.
Michael Feniger: Great, thanks guys.
David Constable: Thanks, Michael.
Operator: Thank you. I would now like to turn the call back over to Mr. David Constable for closing remarks.
David Constable: Thank you, operator. And many thanks to all of you for participating on the call today. And we remain diligent and focused on achieving our strategic goals and continue to have positive conversations with all of our clients and stakeholders as we continue to improve our financial and operational performance here at Fluor. In the meantime, we appreciate your interest in Fluor Corporation and thank you again for your time today.
Operator: Thank you. Ladies and gentlemen this concludes today's teleconference and we thank you for your participation. You may now disconnect.
