Fluor Corporation

Good morning and welcome to Floor's second quarter 2025 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 1030 a.m. Eastern time today. Accessible on Floor's website at .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 .floor.com. At this time, for opening remarks, I would like to turn the call over to Jason Lenkamer, Vice President, Investor Relations. Please go ahead, Mr. Lenkamer.

Thank you, Tiffany. Welcome to Floor's 2025 second quarter earnings call. Jim Brewer, Floor's Chief Executive Officer, and John Regan, Floor's Chief Financial Officer, are with us today. Floor issued its second quarter earnings release earlier this morning, and a slide presentation is posted on our website that we will reference for making prepared remarks. Before getting started, I would like to refer to our safe harbor note regarding forward-looking statements, which are summarized on slide two. During today's presentation, we will be making forward-looking statements which reflect our current analysis of existing trends and information. There is an inherent risk that actual results and experience could differ materially. You can find a discussion of our risk factors, which could potentially contribute to such differences in our 2024 Form 10-K and our Form 10-Q, which was filed earlier today. During this call, we will discuss certain non-GAP financial measures, reconciliations of these amounts to the comparable GAP measures are reflected in our earnings release and posted in the Investor Relations section of our website at .floor.com. With that, I'll now turn the call over to Jim Brewer, Floor's Chief Executive Officer. Jim?

Thank you, Jason, and good morning, everyone. Thank you for joining today. Please turn to slide three. To start, I wanted to provide an update on our ownership of New Scale Class B shares. In the next few weeks, New Scale will convert 15 million shares into Class A securities. We see this as a positive step in returning value to our shareholders. As New Scale's largest shareholder and the only firm with New Scale EPC expertise, we continue to be excited about our investments and the opportunities to deploy New Scale technology in the power market. John will provide additional details in his remarks. Now, let's turn to our operating review, beginning on slide four. Revenue for the second quarter was $4 billion. Consolidated new awards for the second quarter were $1.8 billion and 72% reimbursable. In addition to these awards, we recognize $1.7 billion in positive backlog adjustments for scope changes on existing reimbursable work. For the first half of 2025, new awards were $7.6 billion with a Book to Burn PGM above one. Total backlog remains around $28 billion, of which 80% is reimbursable. Moving to our business segments, please turn to slide six. Urban Solutions reported a profit of $29 million in the second quarter. Results in this segment reflect a $54 million net impact of cost growth and expected recoveries on three infrastructure projects. I'll provide details on these charges in a moment. We also had lower take-up in the quarter on a couple of mining and metals projects as timelines were extended, and we saw a slower than expected ramp up in revenue on a large life sciences project. New awards for the quarter were $856 million compared to $2.4 billion a year ago. This includes the full release for the Rico Dick Copper and Gold Mining Project in Pakistan and an incremental award for a life sciences project in the US. As a note, the Rico Dick Award is a services-only contract, and therefore, it excludes the typical CFM associated with similar large mining projects. Ending backlog in urban, now at $20.6 billion, represents 73% of Newark's total backlog. Now please turn to slide seven. During the quarter, we substantially completed the HCM scope on two innovative co-location data centers in India for an important but confidential client. Prospects for the ATLS business in the second half of 2025 include a pharmaceutical facility and additional data center work under our MSA with a major technology provider. We remain excited about the opportunities in the semiconductor and data center markets over the longer term. Near term in semiconductors, our clients' investment intentions have not yet translated into meaningful new awards. In the data center market, clients are refining their capital spending plans to solve for short-term demand in addition to addressing power and water needs for the ever-increasing scale of projects. Having said that, we continue to deepen our relationships with data center clients as they express a need for our capabilities, large-scale project acumen, and modularization expertise. In mining and metals, while the fundamentals for capital spending by our clients remain very strong, the immediate enthusiasm for major capital deployment is currently tempered by the potential impact of global trade uncertainty. During the quarter, we built upon our relationships with our traditional clients, including Anglo-American, Barrick, BHP, Freeport-MacMahon, Madden, and Rio Tinto. We also maintain our strong focus on execution and are leveraging our global capabilities from our traditional energy solutions offices to deliver high-quality results on ongoing projects. For the next few quarters, our opportunities include additional scope on the Rico-Dick project, copper work in Canada, green steel production in Europe, and aluminum recycling in the Middle East. We're also very excited about opportunities in the United States, where we're already providing support and working on early engineering. These include several significant copper developments and a rare earth project in Wyoming. During the quarter, there were a number of announcements about the investment and development of mining projects in the U.S., including rare earth and critical minerals, such as aluminum, aluminum, and aluminum. We're also seeing interest in steel production. We have strong relationships with many of these companies and believe that this market will be a source of opportunity in the next few quarters. Moving to slide 8. As I mentioned, infrastructure experienced cost growth on three projects during the quarter. On Gordie Howe, cost increase in the second quarter as we experienced rework and additional efforts required to hand over both ports of entry. This project is now 97% complete and we expect substantial completion this fall. The 635LBJ project experienced cost increases in construction materials, as well as labor productivity impacts. This project is 78% complete with an expected substantial completion date in Q2 of 2026. Finally, on I-35 Phase 2, the project experienced increased costs due to a subcontractor default, third-party utility delays, and mitigation costs related to these delays. This project is 58% complete and targeting substantial completion in Q4 of 2026. To address the issues across these projects, we have increased operations oversight and strengthened the execution teams. We're also taking action against certain subcontractors, including designers, for recovery of costs caused by their poor performance. Other projects in the infrastructure portfolio continue to perform to management expectations. For example, we are pleased to report that the Chicago Transit Authority Red Purple Line project opened up four stations and celebrated its first rider on July 19th. And the Oak Hill Parkway project in Austin successfully completed a traffic switch to newly constructed roadways and bridges. Moving to energy solutions, please turn to slide 9. Segment profit was $15 million, compared to $75 million a year ago. Results reflect reduced contributions due to projects nearing completion and the recognition of an unexpected $31 million arbitration ruling for a fabrication project completed by our Mexico Joint Venture in 2021. This impact is not reflected in our adjusted results. New awards for the quarter total $549 million. Prospects for the next few quarters are expected to be modest, as the reload we discussed for 2025 is taking longer than expected. This is due to a number of factors, including reduced capex budgets, trade uncertainty, and soft battery and chemicals markets. We continue to engage in multiple power opportunities for the medium term that are aligned with our proven pursuit principles of fair and balanced risk allocation. This includes the improved market and policy environment surrounding nuclear power investments, as well as selective opportunities in the gas-fired power generation market. Turning to slide 10. We are extremely proud of the multiple accomplishments on LNG Canada in recent months. We achieved RFSU on train one in the quarter, and the clients shipped the first cargo of LNG meeting their announced timeline. This milestone marks a significant achievement for the LNG Canada organization, and for our joint venture responsible for EPC execution. I congratulate the project team and the thousands of workers who helped build this facility. Most importantly, this is a watershed moment for Canada, who is now becoming a significant player in the increasingly important LNG market. Our team is now focused on achieving RFSU on train two. And in line with our previous comments regarding timing of resolution, I am pleased to report that our joint venture has recently reached a settlement agreement covering our COVID claims and other matters. And finally, this morning we announced an award to our joint venture to update the feed package for a proposed phase two expansion. If built, this expansion would potentially double the size of the facility. We look forward to supporting LNG Canada as they work towards a final investment decision. Moving on to slide 11. Mission Solutions reported a segment profit of $35 million for the second quarter. Compared to $41 million a year ago. Profits slightly declined due to a temporary stop work order for an existing project on Tinnion Island. We look forward to the restart of the work in the near future. New awards of $363 million included short-term expansions at two DOE sites and additional funding for hurricane relief efforts. Ending backlog for the quarter was $2 billion. As a reminder, this excludes work reported under the equity method. For the balance of the year, we have the Portsmouth Recompete and key prospects for projects that are supporting HALU nuclear fuel efforts. We now expect the full release of work at the Savannah River Plutonium project in the first half of 2026. While we continue to work at full speed to progress engineering, long-lead procurement, and early site work. Before I turn the call over to John, I want to provide an update on our view of the overall business environment. Please turn to slide 12. In our last call, I mentioned that some clients were forging ahead with their time to market prospects while others were exercising caution as their businesses are more sensitive to economic factors. Over the past couple of months, we've seen more clients continue to take a -and-see approach due to a variety of reasons, including ongoing trade policy discussions and developments, cost escalation, and interest rates. In a few cases, we've seen project cancellations or extended deferrals. So what does that mean for Fluor? It means that we are at a point in the cycle of short-term hesitation on our way to longer-term opportunity. We believe that the hesitation to release full EPC investments will subside once there is certainty in trade agreements and on their impact on client end markets, project costs, and importantly, the rebalancing of the supply chain. Furthermore, and specifically in the U.S., once the effects of the recently enacted pro-growth policies materialize, we expect clients to accelerate domestic investment in many of our end markets, such as manufacturing, semiconductors, data centers, power, mining, metals, and national security. With that, let me turn the call over to John for the financial update. John? Thanks, Jim, and good morning, everyone. Today, I'll cover our results for the second quarter and go over the revised guidance for the balance of the year. Please turn to slide 14 in the financial highlights. Jim already referenced revenue and new awards in the quarter, but as you can see, our consolidated segment profit for Q2 was $78 million. Our gap results notably reflect a $3.2 billion CRETAX -to-market gain for new scale, with a related tax impact of $757 million. It also includes a $31 million unfavorable arbitration ruling related to our JV in Mexico for a job completed long ago. It includes a $13 million deferral of PGM associated with the $1.7 billion in backlog adjustments that Jim described. And from a cash flow perspective, the cash payment for settlement of the NTT matter that we accrued in Q4, which amounted to $33 million. With respect to the $13 million deferral of PGM, I'd remind you in Q1, we saw an acceleration of PGM associated with some D scopes. The $13 million this quarter represents the inverse of that, but is unrelated to the same projects impacting Q1. Adjusted EBITDA for Q2 was $96 million, compared to $165 million a year ago. Our adjusted EPS was $0.43, compared to $0.85 and $0.24. The reconciliation to gap figures can be found in our earnings release, but adjusted EBITDA includes the infrastructure charges, but not the Energy Solutions arbitration matter. G&A for the quarter was $52 million, similar to the $50 million reported a year ago. However, results for this quarter reflect lower performance plans based compensation, offset by the recognition of some severance costs and a slight increase in our reserve for legacy legal claims. The restructuring activities principally relate to reductions in headcount in several non-US Energy Solutions offices. Although we accrued the expected costs in Q2, the funding of the underlying obligations will occur across the back-up of 25. We continue to actively review our overhead footprint in light of our needs and scale of operations. This year, for example, we right-sized our efforts in global sustainability compliance and reporting as a result of the CSRD deferral. On another note, weakness in the dollar contributed to an FX impact of $41 million in the quarter. This was uncharacteristically large, but irrespective of its size, was also excluded from our adjusted results. Net interest income in Q2 is unchanged from the last quarter at $17 million, but compares to $38 million a year ago. This reduction results from lower cash balances for projects nearing completion, particularly at LNGC. Our share repurchases also impact the -over-year decrease, as did the slowdown at our JV in Mexico. As a reminder, at the JV in Mexico, we have some unique credit protection features, including an ability to ramp down execution activities and to novate subcontractor obligations in the event of non-payment. With delays in payment, we unfortunately had to invoke some of those rights this quarter, which impacted the quarter from both PGM and interest income, and does trickle into the additional effects in the back half of 2025 that are embedded within the revised guidance. Moving to slide 15, at June 30th, we had $2.3 billion of cash in marketable securities, compared to $2.5 billion at March 31st. The operating cash flow for the quarter fell short of our expectations, with an outflow of $21 million compared to cash generation of $282 million a year ago. This shortfall versus expectation was a result of a number of factors. One increases in working capital on several large projects for a variety of factors, funding of some of the cost growth in the infrastructure space, and the timing of AR collections and mission solutions, and at our JV in Mexico. As a reminder, the 24 cash flow number reflected the resumption of dividends from LMGC and significant mobilization receipts for two then early stage projects. As an update on our legacy projects, in Q2, we provided $44 million of funding. Our original expectation of funding about $200 million on legacy projects for all of 25 holds true, although we now anticipate some more funding in 26, based on the revised project estimates. Also, some of the claims associated with the recovery for these jobs will likely extend into 26, which has a bearing on our OCF for this year. On the capital allocation front, we bought 4 million shares in the second quarter, spending $153 million. In light of our revised operating cash flow guidance, we are expecting to slow the repurchase cadence in the second half of 25. Based on current projections, we expect total repurchases to be between $450 million to $500 million versus the $600 million for all of the 25 communicated after Q1. At our investor day, we implied roughly $1 billion of stock repurchases across the planning cycle. Even at this reduced tempo, we still outpaced the straight-line effect of that target, and we are not revising that figure. As a reminder, all of these repurchase expectations come on the back of our base operations, not through any SMR monetization. More on that in the outlook. That said, there are a number of important milestones in the next 90 days, which will address the contingency wedge of my cash forecast wheel from investor day, which itself subsumes several items such as litigation, taxes feuds, and other matters. The final outcome of these matters over the next quarter will influence where we land within that repurchase range. Coming back to LNGC, the JV remains focused on the completion of train two and the remaining open punch list items, with future releases of dividends to the JV partners tied to the completion of train two and the normal progression of the warranty period. The COVID settlement agreement largely mirrors the expectations we had embedded in earlier forecasts, but it does provide more insight into when the JV will be able to collect for such items and make future dividends to its partners. For several quarters, we've described our efforts to monetize our ownership of New Scale. Within the strategic sale pursuit, most of the discussions centered around how to convey the fee shares without converting them into the registered securities. With New Scale stock performance in the last few months, we see it as increasingly difficult for the strategic buying community to consummate a transaction at fair value. Accordingly, we are more embracing of a stock market-facing solution, which can be better accomplished with the conversion into A shares. As Jim mentioned, we expect to complete a 15 million share conversion of New Scale shares this month. We further expect to unveil our monetization plan over the next quarter, but I don't want to be too specific on how or when at this juncture. In the meantime, the conversion will go a long way to utilizing the tax credits that I've mentioned before. In any event, we still expect to use New Scale to contribute to our capital return objectives across the planning cycle. Moving to the outlook on slide 16, we are revising our 25 adjusted EBITDA guidance to $475 to $525 million, and our adjusted EPS guidance to $1.95 to $2.15. As you think about this revised guidance, the big factors causing the decrease are the hesitancy prevailing in the market and the related impact to book and burn, plus the decrease associated with infra and slowdown in Mexico, roughly with similarly equivalent weighting. Our expectations for operating cash flow now range from $200 to $250 million for the full year, or $500 to $550 million for the second half of the year. This reflects the lower guidance range for EBITDA and the timing of expected claims recovery for the infrastructure projects, but excludes the effects, if any, on legal settlements. Key assumptions and expectations for 2025 include a new awards outlook of $13 to $15 billion, as we now expect the release for SRPPF, our largest prospect for 2025, will extend into the half of 2026. New awards are also expected to be impacted by the economic observations that Jim made earlier. We see revenue growth of approximately 5 to 10 percent, compared against 24, alongside the other guidance listed on the slide. Our expectations for Cal 25 segment margins are unchanged, except for urban, where we now expect a range of approximately 2.5 to 3.5 percent, largely reflective of Q2 results. And with that, Tiffany, we're now ready for our first question.