Fluor Corporation

21 earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. A question and answer session will follow management's presentation. A replay of today's conference call will be available at approximately 10.30 a.m. Eastern Time today, accessible on Floor's website at investor.floor.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 Floor's website at investor.floor.com. At this time, for opening remarks, it is my pleasure to turn the call over to Mr. Jason Landkammer. Sir, please begin.

Thank you, Chelsea. Good morning, and welcome to Floor's 2021 Third Quarter Conference Call. With us today are David Constable, Floor's Chief Executive Officer, and Joe Brennan, Floor's Chief Financial Officer. We issued our earnings release earlier this morning, and we have posted a slide presentation on our website, 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 two. 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 website at investor.floor.com. I'll now turn the call over to David Constable, Floor's Chief Executive Officer. David?

Great. 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 FLUR. In her introduction to the series, She acknowledges the challenges of being seen, heard, and recognized in what is traditionally a male-dominated construction industry, and how the company has positively responded. Fleur is committed to our DE&I program in ensuring that everyone can be seen, heard, and recognized for their hard work. Thank you to Melvina for your efforts, and I encourage all of you to follow Fleur 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 three. In Mission Solutions, we experienced quite a bit of activity during the quarter.

To begin with, margins for the quarter reflect increased execution activity on U.S. Department of Energy projects, higher than forecasted performance-based fees, and the release of COVID-19 cost reserves. This strong performance was somewhat offset by the Log Cap for Afghanistan program that was completed in July. New awards for the quarter were strong at $1.6 billion. Our largest award in the segment was a $789 million 12-month extension to our management and operations contract for the DOE's Savannah River site. Our other major award for the quarter was a contract for $495 million to provide humanitarian support at Holloman Air Force Base in New Mexico for Afghan evacuees as a part of Operation Allies Welcome. This award was under the Air Force Contract Augmentation Program that FLUR has been a part of since 2020. Specific to this effort, we received a call from the Air Force in late August, and within a week, we had temporary housing, food, medical, and other critical humanitarian assistance for 1,000 evacuees, and then increased total capacity a few weeks later to 5,000. Currently, more than 4,000 men, women, and children call this newly created facility home. FLORA will continue to provide assistance until the operation concludes, likely next spring. And I want to personally 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 at up to $21 billion over the next 10 years. Work will 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 pursuit in 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 the next few months.

Now let's turn to our Urban Solutions Group on slide four.

In mining, we booked a copper project in Indonesia with a valued long-term client. In our 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 the same time, they are 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 slate of projects under limited notice to proceed contracts. Over the next four quarters, we expect to book opportunities that support a broad range of commodities, including copper, nickel, alumina, lithium, steel, and phosphates.

Please now turn to slide five.

In infrastructure, we've booked $316 million in revenue for our share of the I-35E Phase II expansion project in Dallas, for TxDOT. 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 forecast adjustments on a light rail project that has 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 costs to complete the remaining legacy infrastructure projects. And 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 six, 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 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 EPC contracts next year. Moving to energy solutions on slide seven, results for the quarter were more in line with our expectations, with segment margins of 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. New awards in the quarter totaled $644 million compared to $141 million in the third quarter of 2020, and included refining and LNG work in Mexico.

Turning to slide eight, Our work on Elegy Canada continues to advance positively.

During the third quarter, we crossed the 50% completion mark, and we continue to drive scheduled progress through 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 are centered 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 are operating 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 26, 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.

These are the first of 192 modules, weighing 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 eight.

Now please turn to slide nine. 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. 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 that our clients have resumed investing in sustaining capital and 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 signed MOUs with entities in Poland and the Ukraine, they're seeking to move forward with small modular reactor deployments. NuScale also reached an agreement at COP26 to advance clean energy development in Romania and Floresign and MOU with Bulgarian Energy Holding as they look for opportunities to convert their existing coal-fired fleet to SMRs. NuScale also announced the building out of its manufacturing supply chain with a key partner in Canada. Finally, FLUR 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 new scale technology facility to be built at the Idaho National Laboratory.

Now please turn to slide 11. Since September, FLUR 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 deadlines. Our non-government business lines are also encountering vaccine mandates being issued by a few commercial clients. We are carefully considering such mandates to ensure they are 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 teams will be working closely together to ensure we respond accordingly. On the international front, we are starting to see clients and government signal moves in a similar direction. On slide 12, I want to share a few observations as we head into the final quarter of 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 have recently completed several hundred study and feed projects, representing over $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 $150 billion in TIC across the markets we serve. Overall, I'm very pleased with the speed and the direction we are moving the company. We are 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 that is coupled with our efforts to improve our processes and permanently reduce costs throughout the organization. During the quarter, we finalized our path forward that includes overhead savings of over $150 million annually when fully implemented. For more details on these savings and our financial results for the third quarter, I'll turn the call over to Joe.

Joe? 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 23 cents. In our earnings release and in the appendix to today's presentation, we show a reconciliation of GAAP EPS to this adjusted number, which excludes certain items such as FX and embedded derivative gains, 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 notes maturing in 2023 and 2024. When you include the open market purchases in July, we were 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 out 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 new scale expenses of $8 million. Excluding these items, our total segment profit margin is 3.2%, in line with our guidance for the year. To give 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 lost position, $900 million of which is related to the Gordie Howe project. We anticipate cash contributions to these lost projects in the fourth quarter to be more than offset by the final settlement payment for PurpleLine. Moving to asset divestitures. In our last call, we shared that we had a high interest in STORC with over 50 parties signing an NDA and receiving an information memorandum. Since then, non-binding offers have been received, and due to this high level of interest, the divestitures divestiture team worked through two steps of selection since late September. We are pleased to have down selected to a few strong bidders who are doing their due diligence and submitting binding offers later this month. We remain on schedule and are planning to close the sale by end of Q1 2022. As it relates to Amico 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 has 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 are expecting overhead savings of $100 million in 2022. As part of FLOR's focus on managing internal costs, 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 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 derivatives. approximately 4.5% in urban solutions, and 3.5% to 4% in mission solutions. Our guidance for the remainder of the year assumes modest revenue increases in mission and urban solutions, full-year corporate G&A expenses of $185 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 plans and some of our prior compensation plans that are no longer active. Operator, we are now ready for our first question.

Thank you, sir. And at this time, we will open the floor for questions. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. And our first question comes from Stephen Fisher with UBS Capital Markets.

Great, 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 you think the backlog trajectory could be and then how you see those energy transition potential prospects filling in the pipeline over the next couple of years?

Good morning, Stephen, and thanks for the question. The energy transition project work is really starting to gain momentum as we see our traditional clients moving forward with those activities. You see the big oil companies setting up specific business units, new energy, low-carbon energy businesses, and likes of Chevron and Exxon mobile putting in. Chevron's got $10 billion put in there through 2028, and ExxonMobil with similar numbers. So I think energy transition is really going to pick up. As far as your question around backlog, I think we're about $21 billion right now overall. And we see energy solutions start to gain momentum across not only just energy transition, but the entire energy solutions business segment. And, you know, 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 sits in, it's sometimes difficult to break up because all of our clients are focused on energy transition. So it's just not with the traditional customers, but it's across all 10 major business lines that we've got. So when you think about it, we're chasing $15 billion in mining projects in the next 12 months. A good portion of that is energy transition, as 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 new scale and SMRs Right now, the prospects in 2022 are at about $2.5 billion. So we see the backlog. I think from a backlog perspective, we are turning a corner at the company. We're really excited about the first half of 2022. Talking with our head of corporate development, Al Collins, who's been around the company for a long time, He says we haven't seen these types of numbers in a long, long time as a list of prospects goes here in the first half. So, yeah, turning a corner and really excited about starting to book a healthy backlog with good margins. Thanks, Stephen.

Thank you for that, Culler. 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?

Yeah, I think, you know, we're really in good shape. As I said, as we announced in the 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 project on that front. So that's all coming along nicely. And more on that in subsequent quarters. On the project itself, you know, probably best to look to what the client's saying about the project. You know, the client in their call recently at Shell feels the project itself is going very well. You know, I mentioned that we've reached 50% complete. And they said that they were very pleased with the performance, not only in Canada, but outside of Canada in terms of the supply chain. And within Canada, 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 it well in hand. Obviously, we're bought out. The labor rates are taken care of and accounted for in our estimates, so we don't see any issues on that front either. Really good going with the modules starting to ship over. Obviously, as I've said in past calls, the focus is still on the mod yards and 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.

Thank you very much. Appreciate it.

All right, thank you. Our next question comes from Sean Eastman with KeyBank Capital Markets.

Hi, guys. Nice update here, and thanks for taking my questions. Maybe it would 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 fast burn work that's going to be contained this year. You know, maybe some of that is, you know, the write-ups or change orders that, you know, maybe doesn't help us next year. Just trying to think through that. That would be helpful.

Yes, Sean.

Good morning, Sean. Joe's going to take this one.

Yeah, thanks, Sean, for the question. What we're really seeing is, you know, I think the first step of this is we are starting to get the challenge projects behind us. Although, you know, we have had some noise and some friction this year with principally Gordy, but as we continue to progress that, we feel like we're going to get on top of it. But I think what we're seeing and 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 and discipline around our investments and our project execution group. We've implemented a very rigorous overhead reduction program, which we're starting to reap some of the benefits of that in 2021, and we'll reap a significant portion of that in 2022. Our new awards that we're booking in, I would suggest to 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 challenge loss project perspective, and I've said this on previous calls, it represents less than 5% the challenge projects of our overall backlog. And clearly, with the bidding principles and 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 clearly what we're putting into backlog.

Okay, helpful. And just a higher-level kind of theoretical question here. but you know obviously the results are good um i just wanted to understand uh you know how we get comfortable you know in the broader you know fixed priced um project portfolio that floor is kind of protected from this you know sort of unprecedented volatility and inflation and input costs and ramping 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 would be really helpful.

Sure, Sean. Yeah, we're very comfortable. Obviously, we've got all the right processes and procedures in place through our operating system requirements. with our pursuit criteria. Going forward, we're very comfortable with how we are bidding work and, again, the governance and screening of those prospects and what we're bidding and who we'll be working with going forward, including the risk committee at the board level, which provides oversight on all the risk projects that we are considering. So going forward, very comfortable. Currently, all contracts in-house right now are well protected through the contract and escalation clauses and indexing for inflation, including the lump sum work down in Mexico, and we're in good shape up at LNGC in 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 that I talked about, you know, that $45 billion of work that we're, again, not study or feed work, not funding work, 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 And our supply chain group is all over to your comments on volatility and inflation. We've got not only our supply chain covering that, but our head of industrial relations keeping close tabs on labor, labor inflation, wage inflation, and volatility. So I think we're in really good shape.

Okay, terrific. Thanks a lot.

Thanks, Sean.

Thank you.

Thank you. Our next question comes from Michael Dudas with Vertical Research Partners.

Good morning, gentlemen.

Good morning, Michael. Good morning, Michael.

First, when you're just thinking about, again, 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 solutions fairly readily available? Do you get the sense that these trends and, you know, there's a little bit 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, if not better, share of project bookings?

Yeah, I think... Certainly on the current working house, like I said, we're in good shape, Michael, and working with customers to make sure that we continue to baseline, re-baseline estimates and schedules as we see impacts on supply chain and on labor. So that's a collaborative process and continue to work through those. Going forward, we do see, I guess I'd 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 why I feel so positive about next year and the new awards and the direction we're going and, as I said, turning a corner. But to your point, there's more project analysis and review to ensure that, whether it's transitory or long-term, these issues that we're facing right now, working with the clients to to make sure they're comfortable that when they pull the FID triggers that we have a most likely P85 type of probability in place on, again, most of these over 90% reimbursable cost projects that we're chasing. So that's how I see it, and it started in mining, but we're seeing it in chemicals and the other big projects big business lines that have the line share the new awards coming right now.

So it sounds like demand's increasing, but the supply is the issue. You just can't get the customers to come through, but everything seems to be, especially with regard to commodity prices in the marketplace, I mean, these projects are being, the market's telling them that they have to go through, so I'm assuming that gives you some additional confidence in booking some of these mining projects here in the next several quarters.

No, most definitely. I mean, they are coming. Again, the CapEx numbers are pushing up very nicely, and then we've got all the feed work as well. We've got, I think it's $177 billion that we've just, as I said on the prepared remarks, $177 billion. over $170 billion of front-end work that we've completed. And $39 billion of that was mining. And we're chasing $42 billion in front-end work for mining projects in the next 18 months in the rolling forecast. So there's a lot of work chasing. And it's not just mining. Chemicals, obviously, as well. And energy transition within the energy solutions business. So... Again, it's coming, and just with a little more scrutiny involved on the analysis of the costs and schedules.

I appreciate that. Just finally, on the encouraging news on the semiconductor opportunities in Arizona, how significant can that be going forward? And on semis, electronics, life science, is that a market that still has burgeoning opportunities for you guys to gain some share in bookings there?

Yeah, we're very pleased with the progress in Arizona and as a very, very large program that we're just at the tip of the iceberg right now and getting in and working with the client there and obviously a long-term build-out of a major operation. So we see good things happening in Arizona. In ATLS, not only in the US in that space, but over in Europe, we're opening a new technology hub for ATLS in Copenhagen on December 2nd, and the clients are very excited to have us working locally with them in Europe as well on these similar types of project data centers as well as semiconductor work back here. So in ATLS, you know, see about in the next 12 months about over $3 billion in prospects that they're looking at.

Excellent, David. Thank you very much.

Thanks, Michael.

Thank you.

Our next question comes from Jamie Cook with Credit Suisse. Hey, good morning. I guess, David, one question for you and then, Joe, two for you. You know, 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 do the feed on, you know, a sole fee versus like a dual feed so that, you know, your, your potential, um, you know, win rate, um, this cycle could be higher, um, 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 in particular, as people are worried about labor. And then my second question, um, Joe, the employee, I'm going to push you on the margins a little, the implied margins in the fourth quarter are probably better. And then what I would have expected, and I'm just wondering if we can think about that as 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 your debt further on the 2023-2024 notes. If you could elaborate on that, can we pay that down through cash flow from operations, or are we exploring... Any potential for equity? Thanks.

Good morning, Jamie.

So, yes, on all the front-end work, feasibility and feed work, sole 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 contractors who may not 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 you know making runs at it with quite low pricing and so we've got to battle that effectively and so I'd say that's the the main issue right now on, on that front. So we're, we're still seeing a lot of competition and, you know, we've got to put our best foot forward. And the way we do that is, uh, in fact, we had a recent example on a renewable diesel project where, uh, uh, it was going in one direction, uh, because of cost, because of pricing. And we, uh, we, uh, went in and added value with our, with our technical capabilities and pulled that right, right back to floor. So a great win, uh, So we love to see that because getting paid for value is what we expect. So it's a bit of a mix, but still very competitive. But, you know, like I said, we're chasing about $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... and have to put our best foot forward. And convertibility, you know, I've looked at that, and I'd say in the non-government businesses, conversion of these front-end jobs are anywhere between 40% and 50% for energy solutions and urban solutions. Mission Solutions has a much higher convertibility rate, up almost to 75% conversion of jobs. prospects based on repeatability and repeat clients, repeat agency clients at the government. So, Joe, turn it over to you on the other questions.

Yeah, thanks, Jamie. On the margin guidance, we had signaled in previous calls that we were looking for that corridor of 4% to 6%. I think you can expect margins 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, very closely aligned with the release of the new awards. And what we're up against a little bit is our credit facility renegotiation. But whether we do that through cash on credit on hand or some other view of it, but we are not at this point in time contemplating any additional equity raise.

Okay.

That's helpful. Thank you.

Thanks, Jamie. All right.

Thank you. Again, if you would like to ask a question, you may do so by pressing star 1 on your telephone keypad. And our next question comes from Andy Kaplowitz with Say Group.

Good morning, guys. Good morning, Andy. David, so it doesn't seem like you've received additional outside investment for NuScale over the last couple of months, but obviously you may have received it before, you know, 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 NuScale investment and 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?

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 and get to commercialization and the right financing options for the organization. So I'd say we're getting closer to a final outcome on that, and in the fairly near term, I think we'll be able to talk to you more about that, about how we plan to extract value for the floor shareholders based on the new scale offering and what we're seeing in the marketplace and the extreme interest and the fact that we're getting started on, you know, getting further into the Utah AMPS or the UAMPS project with the standard design and the COLA, the operating license. So, yeah, all going in a great direction. And, yeah, like I said, $193 million this year was – was very strong and more to come on that front as well. So I think I'll leave it at that and just let you know that we're making really good progress.

Okay. And then maybe like sort of a big picture question, David, you've been in the seat now, a CEO seat for a few quarters, obviously you've 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 stay on track. Where does that step up potentially come from within your segments? Is it all of them? Is it one in particular in the confidence level that you're still on that 24 trajectory?

Yeah, I'm, I'm very comfortable, uh, with, with what we've put out there for the earnings power in 2024. Uh, I think we're ahead of schedule. Uh, 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 reductions, structural reductions that we're making, so we're comfortable that those run rates will continue into the future. You know, 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'd just say it's coming a little later. 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 award 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, major 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 to adjust what the earnings power could look like in 24. We'll 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.

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 and the markets that we're chasing. 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.

Yeah, and as far as where is it coming from, it's coming from the, like we said on Strategy Day, you know, 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 solutions. So it really is, including ATLS 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 where 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.

And then maybe just a quick clarification for Joe. Is it true, I mean, Mission Solutions revenue was up despite getting out of Afghanistan. So does OEW work, increased DOE, does that sort of fill the gap, Joe, so that revenue stays at these levels that you're seeing in Q3 now, despite you being out of Afghanistan?

Yeah, 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.

Appreciate it.

Thanks very much, Andy.

All right. Thank you. Our last question will come from Michael Fenninger with Bank of America Merrill Lynch.

Hey, guys. Yeah, thanks for squeezing me in. I was just hoping to 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 changes kind of buckets of what maybe pushed that back from in the positive range to neutral to positive?

No, 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 lost projects. And as we move into Q4, I am very, very confident that we'll see those cash balances snap back to the positive range, and we will end the year in a positive cash flow position.

Good to hear. Just on LNG Canada, you mentioned how Shell, in the last result, sounded very pleased on the overall progress. They did 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. Just like big picture, how do you 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?

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, Yeah, you're right. On that, that's the coastal gas link feed gas pipeline being developed by TransCanada. 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, do you want to talk about cash flow on that?

We've 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 for dividends or cash inflows at this point from from LNGC, but 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 is being generated relative to our floor's 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.

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-led target that you guys were kind of, you know, that you laid out at your strategy day. Is the $2 billion cash figure, is that going to, I know that was a goal to have for 2021. You know, is that still the goal to maintain that level of cash? You know, do you see that maintaining that level throughout 2022 as well?

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 will become a timing issue. Even though we may book a $20 billion award, under a single performance obligation, the generation of that cash through 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 markets as we see them today.

Great. Thanks, guys.

Thanks, Michael.

Thank you. I would now like to turn the call back over to Mr. David Constable for closing remarks.

Thank you, Operator. Many thanks to all of you for participating on the call today. 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 Flora. In the meantime, we appreciate your interest in Fluor Corporation, and thank you again for your time today.

Thank you, ladies and gentlemen. This concludes today's teleconference, and we thank you for your participation. You may now disconnect.