Fluor Corporation

Good morning and welcome to Floor's second quarter 2021 earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. The 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 Floor's website at investor.floor.com. The web replay will be available for 30 days. The telephone replay will also be available for seven days through a registration link, also accessible on Floor's website at investor.floor.com. At this time, for opening remarks, I would like to turn the call over to Jason Landkammer, Head of Investor Relations. Please go ahead, Mr. Landkammer.

Thank you, Hannah. Good morning, and welcome to Floor's 2021 Second Quarter Conference Call. With us today are David Constable, Floor's Chief Executive Officer, and Joe Brennan, Floor's Chief Financial Officer. We released our earnings statement earlier this morning, and we have posted a slide presentation on our website, which we'll 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 two. During today's presentation, we'll be making forward-looking statements which reflect our current analysis of existing trends and information. There's 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 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 website at investor.floor.com. I'll now turn the call over to David Constable, Floor's Chief Executive Officer. David?

Well, thank you, Jason, and good morning, everyone, and thank you for joining us today. Before we move into operational results, I want to acknowledge the passing of J. Robert Fleur II. Bob was the great-grandson of our founder and worked at Fleur for 42 years before retiring in 2009. For 27 years, he led the Fleur Foundation, our charitable and community involvement organization that was established by his father and his uncle, Cy Fleur, in 1952. Throughout his career Bob brought meaning and value to the act of giving back, inspiring thousands of employees across the company and across the globe to commit time and resources to bettering their communities. The company will continue to build on Bob's legacy of supporting stronger, more sustainable communities around the world. In a few minutes, Joe will walk through the financials of our business in each of our segments. But let me first provide a high-level overview of what we are seeing in each of our major end markets, starting with urban solutions. Please turn to slide three. In mining, work is tracking broadly to our expectations for the next 18 months. We've seen a few large projects shift to the right, as detailed estimate reviews, and scrutiny of projects by our clients prior to an investment decision being taken is higher than we have seen in quite some time. In addition to those projects, we have a steady slate of feed and limited notice to proceed work where we have a high level of confidence in conversion to full-priced awards in the next couple of years. Our prospect list is incredibly diverse. and we are not dependent on any one region or any one commodity to see significant growth in this business. Backlog for mining declined by approximately $1 billion in the quarter. That was due to the cancellation of a steel project in North America. Moving to infrastructure on slide four, the bipartisan bill continues to gain momentum and we are optimistic that it will focus on more traditional infrastructure projects, including roads and bridges, which we believe will provide some upside to Fluor, and more importantly, funding certainty to our clients in the coming years. Importantly, we are starting to see shifts in contract structures, and collaborative models are being applied to the infrastructure sector, as well as other sectors, that allow contractors to compete on capabilities and qualifications instead of solely on price. This is a positive development, and we are encouraged by this approach to risk mitigation. On a particularly promising note, we are seeing advisory institutions acknowledging the challenges encountered in executing public works projects. This has led to the development of more collaborative procurement models to support their public sector clients. Last week, we were notified by TxDOT that our co-led joint venture was selected to design, construct, and maintain the six and a half mile long I-35E phase two project here in Dallas. Our portion of the work will be booked in the third quarter. We're excited about this project and look forward to supporting TxDOT on this and other capital programs in the future. Regarding our legacy infrastructure portfolio, I want to provide an update on the Gordie Howe Bridge project and the $138 million charge we announced today. The project is experiencing significant COVID-related delays, as well as overruns due to procurement and subcontractor cost growth. This charge includes additional reserves for delays and disruptions in the schedule. Floor is not the lead operating partner on this contract. It's important to note that these cost growth factors may be at least partially recoverable under the contract. We expect that it will require several quarters to analyze recoverability and negotiate with our client before the accounting standards allow us to recognize incremental revenue for these amounts. While we are disappointed in the performance of the project, we believe we have a solid estimate on the cost at this point. Design is essentially complete. and we have procured approximately 85% of the materials required. We have been revising the forecast along the way and this contract was previously included in our zero margin projects and backlog. As a non-controlling partner in this JV, we continue to work with our partners to help them get this project into the best possible position. We have just under $1 billion in backlog remaining for this project and anticipate substantial completion by the end of 2024. Our other infrastructure projects continue to make solid progress, including the LAX People Mover, which crossed a significant milestone in early July when the joint venture placed the first four trusses for the elevated pedestrian walkway. Turning to slide five. In advanced technologies and life sciences, we are successfully wrapping up some of our large data center projects in Europe. We also see opportunities for semiconductor manufacturing facilities both domestically and internationally. These projects are a mix of brownfield and greenfield and provide a lot of opportunity for add-on work as these facilities grow. In life sciences, we continue to see a good list of opportunities as our world-class technology capabilities support our strategy of getting front-end work. We have been awarded a few front-end projects this quarter with the goal of converting them into EPCM contracts. Overall, we still see the ATL-SN markets as an area for growth in our business, and we are focused on deploying our teams onto projects where we can grow our market share with contract terms and conditions that we find favorable. Please turn to slide six. In mission solutions, we experienced strong margins this quarter due to increased execution activity on DOE projects, higher than forecasted performance-based fees, and the release of COVID-19 cost reserves. This strong performance was somewhat offset by a decline in execution activity on Army logistics and life support programs in Afghanistan and Africa. In June, we fully demobilized our people and successfully completed our assignment in Afghanistan after 13 years. At its peak, Florida had 26,000 employees from 65 countries speaking 39 languages at 76 sites and supporting over 100,000 troops. This included 191,000 meals prepared per day and the establishment of the first ever biodiesel program for the U.S. military deployed overseas. Under this program, we produced over half a million gallons of fuels for the bases. It has been a great honor for Florida to support our troops in Afghanistan and I want to thank our employees for their great work on this assignment dating all the way back to 2009. We are now continuing to support the Army through our Law Cap 5 Task Order Award in Africa. Next, please note that on the Radford project we have moved into the warranty period. This project is now essentially complete. Our major pursuits for the second half of this year in this group include the Savannah River Management and Operations Contract Extension and the Y-12 Pantex Management and Operations Contract in Tennessee and Texas. Moving to energy solutions on slide seven, we had a particularly strong quarter due to certain favorable events driving up our gross margin. This reflects the negotiations of change orders, scope increases, and cost improvements across numerous projects. Furthermore, margins also benefited from the release of credit loss reserves after we received payment on a significant long-standing past due receivable. These positive segment margin results were partially offset by a $20 million loss recognized on an embedded derivative, which is excluded from our adjusted EPS numbers. Turning to slide eight, we remain pleased with the progress on our LNG Canada project in Kitimat. During the quarter, we saw a significant easing of public health orders that had slowed progress earlier this year and we are now fully staffed on site per our plan. In the second quarter, we achieved several major milestones. First, we drove the last of the phase one plant piles. This program started in January 2020 and included the installation of nearly 6,500 piles. If laid end to end, the piles would extend 130 miles. Secondly, the project's material offloading facility is now operational, receiving and unloading the first three major pieces of process equipment shipped via ocean-going vessel. These pieces of equipment for Train 1 include the 345-ton, 50-meter-long main cryogenic heat exchanger and two precooler units, each weighing over 280 tons. We are scheduled to erect these pieces this fall. The site has gone vertical with the steel erection of the non-processed building, including the central control and administration buildings. During the quarter, we completed the LNG storage tank wall pours. The LNG tank roof and suspended deck raising is scheduled for next week. Module fabrication is commenced for all facets of the project across the Asia and European module fabrication centers. Preparation and planning have commenced for the first module deliveries from Asia, which are on target for Q4 2021. We have formalized the term sheet with our client, which outlines principles of cost and schedule relief related to delays, including COVID engineering and procurement impacts through February 26, 2021. We are targeting finalization of a formal variation this month. Please turn to slide 9. We continue to enhance our energy transition portfolio and believe that Fluor will be a vital contributor to a lower carbon future. We are seeing success in several markets such as renewable fuels, carbon capture, clean hydrogen, battery chemicals, and asset decarbonization. First, in the renewables fuel market, Fluor is focused on brownfield or revamp capabilities with a geographic focus in North America where low carbon fuel standard credits are available, demand for liquid fuels continue, and feedstock selection is broadly based. Next, in the carbon capture market, FLUR can perform projects with any technology globally. This includes our own proprietary technology for both pre-combustion and post-combustion, FLUR solvent and economy and FG plus, respectively. We're also seeing further opportunities for carbon capture on new and existing LNG facilities. Our clean hydrogen efforts include both green hydrogen and blue hydrogen. FLUR is relying on its 50 years at the forefront of the gasification industry and has executed more than 30 pre-feed and feed projects. FLUR can differentiate in this market with our ability to act as integrator and OSBL contractor. Another energy transition market we are exploring is battery chemicals. We are expanding our lithium capabilities and are pursuing the growing market of electric vehicle battery production. In asset decarbonization, Fluor is leveraging our design experience for refineries and petrochemical facilities, including steam and electrical systems. We have global execution capabilities for conceptual front-end design through EPC for both electrification and energy efficiency projects. Aside from these markets, we are also pursuing projects in green ammonia, chemical recycling, bio-based chemicals, long-duration energy storage, waste-to-energy conversion, and bio LNG. Most of our energy transition work is in the United States and Europe. And based on our differentiated technical position, we continue to view growth in this area as a driver for increased revenue and earnings in the coming years. Now let's turn to NuScale, a related energy transition offering on slide 10. For the first seven months of this year, NuScale has received $192 million in outside investments from JGC, GS Energy, Doosan, Samsung, and IHI, among others. These infusions not only eliminate the need for FLUR to provide additional funding, but also accelerate NuScale's path to commercialization and demonstrates third-party investor interest in NuScale's business prospects. Additionally, we continue to have positive and productive conversations around nuclear power as a necessary baseload clean energy source both in North America and abroad. We believe that our NuScale product will become a vital part of a cleaner energy future. Before handing the call over to Joe on slide 11, I want to share a few observations as we head into the second half of the year. First, we expect to see some inconsistency or lumpiness in new awards as the optimism in post-pandemic capital spending from clients is partially offset by concerns about cost growth for labor and materials. We're also keeping a close eye on the impacts of the Delta variant of COVID as it relates to our exposure to global supply chains. While these dynamics may shift certain projects out in time somewhat and impact the near term, there are longer term trends in our business that I view as very positive. First, as mentioned in my infrastructure remarks, we are starting to see a better balance of risk sharing in contract structures. Projects are increasingly structured as pre-development agreements. where clients and contractors work together to identify and mitigate risks before bids are finalized. These collaborative models are being considered because clients are seeing contractors declining to bid on large projects as terms and conditions have shifted risk allocation too far away from the owner. Also, we continue to see a robust pipeline of study, pre-feed, and feed work to support future growth. We are currently working on or have recently completed pre-EPC work that represents over $150 billion in total installed costs. Additionally, we are pursuing another 200 study and feed projects representing almost $200 billion in TIC over the next several years. So while we are seeing some near-term headwinds in 2021 with new ward lumpiness, we have considerable opportunity to capture projects that are in the pipeline and they're well suited for floor. Finally, regarding our cost savings initiative, we are making solid progress and have identified significant opportunities to improve processes and reduce costs and create an organization that is competitive and fit for growth. Our various work streams are taking specific actions to ensure that our resources are tailored to what we need today, and we are establishing new protocols so we can efficiently scale as our markets ebb and flow. And now I'll turn the call over to Joe for the financial update. Joe?