Fluor Corporation (FLR) Earnings Call Transcript & Summary

Good morning. And welcome to Fluor Corporation's Fourth Quarter 2019 Year-End Conference Call. Today's call is being recorded. [Operator Instructions] A replay of today's conference call will be available at approximately 10:30 a.m. Eastern Time today, accessible on Fluor's website at investor.fluor.com. The web replay will be available for 30 days. A telephone replay will also be available through 7:30 a.m. Eastern Time on February 25 through a registration link, also accessible on Fluor's website at investor.fluor.com. At this time, for opening remarks, I would like to turn the call over to Jason Landkamer, Director of Investor Relations. Please go ahead, Mr. Landkamer.

Thank you. Good morning. And welcome to Fluor's fourth quarter 2019 conference call. With us today are Alan Boeckmann, Fluor's Executive Chairman; Carlos Hernandez, Fluor's Chief Executive Officer; and Mike Steuert, Fluor's Chief Financial Officer. Our fourth quarter announcement was released earlier this morning. 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 2. During today's call and slide 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 the company's filings with the SEC. Given the company has not finalized and filed its full year financial results, the information provided today is preliminary and unaudited and could be affected by subsequent events or determinations. During this call, we may discuss certain forward-looking non-GAAP financial measures. Reconciliations of these amounts to the comparable GAAP measures are not practicable given the nature of the potential adjustments. For additional information, see our release from this morning. I'll now turn the call over to Alan Boeckmann, Fluor's Executive Chairman. Alan?

Thank you, Jason. And good morning to all of you. There are several important business updates we'd like to share with you this morning. I'll start by addressing the investigation that we reported in today's press release. As reported, the SEC is conducting an investigation of the company's past accounting and financial reporting and has requested documents and information related to projects for which the company recorded charges in the second quarter of 2019. In the course of responding to the SEC's data requests and conducting our own internal review, the company is looking at its prior revenue recognition charges and related control environment, focusing initially on the Radford contract. While we currently believe that the total dollar amount of the revenue and subsequent charges taken on this project was correct, we are reviewing whether the accounting and financial reporting, along with a limited number of additional projects, was recognized in the appropriate reporting period. Let me make a statement that we do not believe at this time that we have material errors that is the intent of the investigation. To accomplish this, a special committee of the Board of Directors has been formed and will complete a review with the assistance of external advisers. And we have informed the SEC of our actions. Given the ongoing internal review and the recent developments of 2 projects, we will not be able to complete and file our Form 10-K prior to the end of February. In addition, this means that any financial information we provide today is preliminary, unaudited and subject to change. While it is disappointing to delay the filing of our audited financial statements, we are confident that the company and our Board are on the right path to complete their review in a transparent and comprehensive manner. Looking forward, I believe our tireless efforts to put this company solidly on the path to profitability. Our strategic review led meaningful changes at Fluor, including significant organizational and management changes, Board refreshment and the establishment of a Risk Committee at the Board level. We will continue to selectively pursue lump-sum work, and we now feel better positioned in bidding with our revised pursuit criteria and more disciplined in execution with our enhanced Board and management oversight. I'd like to take a moment to reinforce my conviction in Fluor's plan for long-term success. We expect to work off the majority of our problem projects this year and have a backlog that consists mainly of projects bid under the proper conditions. Our cash position is strong, our commitment to risk management is unwavering, and we will remain vigilant and disciplined in our pursuit of projects. We firmly believe that Fluor will emerge from 2020 in a position of strength, poised to succeed for the next decade and beyond. And with that, Carlos will now talk about our end markets and what we expect to accomplish in 2020 to deliver value for our shareholders and customers. Carlos?

Thanks, Alan, and good morning, everyone. There are 3 main topics I'd like to cover today. But before I begin, I want to briefly address the coronavirus. While we recognize the impact of the virus is widespread, our health, safety and environmental group has taken the lead in putting procedures in place to protect our employees and their families. To date, none of our employees or their families have contracted the virus. Our major offices in China are now open, and we expect to ramp up to normal staffing levels over the next several weeks. Our fabrication yard is also open, and most of the local staff in craft are returning to work. Workers from other provinces will be subject to a 14-day quarantine period before they commence work. We're currently assessing the impact that coronavirus has on our projects and have already made or submitted force majeure notices where appropriate. Now the 3 main topics I'd like to discuss today are: one, an update on the AMECO and Government businesses; two, our new risk profile and criteria; and three, a high-level review of our segments and prospects. If you would please turn to Slide 3. Last fall, as part of Fluor's strategic review to improve its financial position, the company announced that it was initiating plans to sell substantially all of the Government business. As we look through Q4 and realized some of the early benefits of the restructuring plan, we gained confidence in our solid liquidity position and our viable options for generating cash flow, such that we no longer deem it necessary or advisable to proceed with the sale of this important and attractive asset. As a result, we have decided to retain this business, which will cease to be reported as a discontinued operation in the first quarter of 2020. On the AMECO front, this transaction continues to progress, and our plan to sell this business remains unchanged. It is our intent to have made significant progress with one or more potential buyers by the end of the second quarter. Now turning to our risk profile. As Alan mentioned, risk imbalance has proven to be a challenge for our industry. As a result, we continue to take significant actions to enhance our risk profile and implement stronger controls. These risk-mitigating actions include a realignment of our engineering, procurement and project management disciplines, which now report directly into the business units, providing improved oversight. As an example of our new discipline around project pursuit, we recently participated in a bid proposal where the client wanted to proceed with unreasonable schedule and cost risks assigned to the contractor. Through negotiations and alignment with the client, we were able to conform the contract to meet our revised pursuit criteria, and we outlined -- that we outlined last year. The results benefited both the client and Fluor. Now please turn to Slide 5 for an update on our segments. In Energy & Chemicals, we booked new awards of $1.7 billion in the fourth quarter, and ending backlog is expected to be $14.1 billion. New awards include EPC phase for a manufacturing facility for a chemical used by -- to make nylon polymers, fibers and other specialty materials for INVISTA in China. We also booked the Polyols Petrochemicals project in India for Bharat Petroleum Corporation Limited. The contract includes the detailed design, engineering, procurement and construction management services intended to help reduce India's dependence on petrochemical imports. We recently won the EPFC for Canada Kuwait Petroleum Corporation's PDH Silo project, which we -- were booked in the first quarter of 2020. This bid was under our current guidelines, and we have built 3 PDH plants with the same technology. Our LNG Canada project in Kitimat is well underway. We started piling activities in the fourth quarter, which will continue into next year. Both fabrication yards recently celebrated the first steel cut for the OSBL and ISBL portions of the project. We continue to monitor our progress and are focused on achieving our next major milestones, completing the 90% model reviews. Moving to our offshore project. This project is staying relatively close to its revised forecast. New awards for 2020 will be led by the Mozambique Rovuma LNG project. We expect to book this project this year and are currently executing this project under a limited notice to proceed. Fluor, along with our partners, JGC and Technip, have assembled a strong team that is designed to execute this project on schedule and on budget. Last quarter, we talked about the Formosa Sunshine project in Louisiana and remain optimistic about this project moving forward. We now expect to see the various EPC packages of this project awarded in the second half of 2020 and into 2021. We also see a number of refinery and petrochemical projects in Europe, North America and Asia Pacific. Now turning to Mining & Industrial on Slide 6. We expect to end the year with a backlog of $5.4 billion, and fourth quarter new awards were about $0.5 billion. Fourth quarter awards were driven by EPC contracts for data centers in our Advanced Manufacturing and Technologies group. Mining awards have been light in 2019 as anticipated, but we expect to see the FEED work we have been completing convert into EPC awards in the back half of 2020. Our prospects continue to be led by copper, bauxite and lithium opportunities. Our market position remains very strong. We have great relationships with the industry leaders and are working with them to successfully execute complex projects around the world. For Infrastructure & Power, backlog at the end of the fourth quarter was $6.9 billion. New awards in the fourth quarter were modest. While we expect to have a lower level of new awards for infrastructure in 2020, we continue to see interest at the state level on improving infrastructure. We're confident that we are focusing on the right states where we have the right track record to win the right projects. Now please turn to Slide 7. In Government, we ended the year with an expected backlog of $3.8 billion. Last quarter, we were -- and our joint venture partners were selected to lead the Central Plateau Cleanup Contract at the Department of Energy's Hanford site near Richland, Washington. Fluor was previously at this site from 1996 to 2009. Fluor is also pursuing the Hanford Tank Closure Contract, and we expect to hear a decision towards the end of February. In Diversified Services, we expect to end the year with a backlog of $2.5 billion. Our historic restructuring is almost complete and well positioned for 2020. Now turning to Slide 8. The other segment includes our 2 fixed government projects, Radford and Warren, and our investment in NuScale. Both of the Radford and Warren projects are continuing to progress, and we do not expect to take any additional forecast additions in the fourth quarter. As for NuScale, it cleared a major milestone in December when the NRC concluded the Phase IV review of its design application with no open items. NuScale remains on track to receive its final design approval in September of this year. Funding in the second half of 2019 was provided by third-party investors. We're actively engaged in discussions with additional potential investors. Also earlier this month, the Department of Energy approved up to $350 million in cost-saving (sic) [ cost-sharing ] financial assistance. And now I'll turn the call over to Mike to provide a few highlights for 2019 and our outlook for 2020. Mike?

Thank you, Carlos. Please turn to Slide 9. While we are unable to announce our final financial results, we can provide key preliminary unaudited highlights for 2019. Cash flow in the fourth quarter is expected to be strong, benefiting from a $150 million closeout of a completed project. Fluor's cash plus marketable securities at year-end was $2 billion, up slightly from a year ago. Our available domestic cash balance at year-end represents 40% of total cash. Corporate G&A expense for 2019 is expected to be $167 million, up from $118 million a year ago, primarily driven by foreign exchange losses as compared to gains a year ago. For the full year 2019, we paid $118 million in dividends, and given our announced dividend reduction, payments for 2020 would be approximately $56 million. Primary cost impacting our performance in 2020 are expected to be the following: restructuring and other exit costs of $202 million, $84 million of which is noncash; noncash write-off of our deferred tax assets of $668 million; noncash impairment charges of $305 million; and a noncash expense of $138 million associated with the settlement of the U.K. pension plan. Before I discuss our 2020 outlook, I want to provide an update on a few of the financial initiatives we addressed on our strategic review call in September. Please turn to Slide 10. For our P3 monetization initiative, we have seen significant interest in our assets, including those in Europe. We have also received indications of interest for our North American assets. We are continuing to make progress on reducing overhead expenses across the organization. In the past few months, we have started to reduce our real estate footprint and related overhead expenses. We expect to achieve the previously disclosed run rate of $100 million in annual savings by the fourth quarter of this year. We are in the process of examining other transactions that will, along with the sale of AMECO, continue to allow us to strengthen our balance sheet and our financial position through debt reduction and enhancing our cash position. Our goal remains to generate substantial cash from asset sales and other receivable collections, sufficient to maintain our investment-grade rating. I will conclude by commenting on our guidance for 2020, which is on Slide 11. We are establishing a 2020 adjusted earnings per share guidance range of $1.40 to $1.60 per share from continuing operations. We are excluding any restructuring expense or other special nonrecurring items from our guidance. We are also excluding NuScale expenses from our guidance as we expect additional funding will be provided by third-party investors. Our guidance also excludes any earnings from our AMECO business, which we expect to divest this year and we are reporting as discontinued operations. Our assumptions for 2020 include modest revenue growth over 2019; adjusted G&A expense of approximately $40 million to $50 million per quarter; a tax rate of approximately 28%; and approximately $60 million in restructuring costs. Reflecting on revised pursuit criteria, we expect a minor improvement in new awards in 2020 with year-end 2020 backlog modestly down compared to 2019. I also want to comment on cash flow in 2020. In the fourth quarter, we utilized approximately $100 million of cash to fund our previously announced Challenge Projects, below what we anticipated. We have approximately $500 million of cash requirements remaining related to our loss projects, 2/3 of which we expect to fund in 2020. A portion of this funding has already occurred so far in the first quarter. Moving to Slide 12. We anticipate full year margins in the Energy & Chemicals group of approximately 3% to 5%, improving as the year progresses; Mining & Industrial margins of approximately 2% to 3%; Infrastructure & Power margins of approximately 1%; and Government margins of approximately 2.5% to 3.5%; and finally, Diversified Services margins of 3% to 4%. Before we turn it over to G&A -- or Q&A, excuse me, we want to note that there's no additional information that we can share regarding the delay in our financial filings beyond what we provided today in our remarks and in our press release. While the SEC investigation may not be concluded in the near term, we anticipate filing our Form 10-K when our reviews are complete. With that, operator, we are ready to take questions.

[Operator Instructions] We'll now take our first question from Steven Fisher from UBS.

Great. I did have some further questions on the SEC investigation, but I guess I'll have to hold off on those. So maybe starting with, I guess, to what extent are you seeing your revenues being delayed relative to what you would have thought a few months ago? Because it seems like the Government business could be contributing something like $0.35 to $0.40 of earnings in 2020, which is now a meaningful part of the 2020 guidance, which could have been there before. And the margin for the E&C segment isn't too far off, but I think expectations were. So are the revenues in E&C now much lower than what we would have been thinking about a few months ago? I think you said they were going to be up a little bit, but maybe just talk a little bit of what you're seeing on the revenue front and how projects are proceeding.

Yes, Steve, let me -- thanks for that question. What happened, as you can tell from the new awards in 2019, is there had been several projects that have been canceled, a couple of methanol projects that had been canceled, a couple of projects that had moved into 2020, Rovuma being one of them. So that's, I think, probably the reason why the revenue is not as high. We do still expect a little bit modest growth in revenue for 2020, but the -- there has been a movement to the right on number of projects.

Okay. And then in the release, you talked about some recent developments on 2 projects. Can you just talk a little bit more? If I didn't miss it in what your prepared remarks were, what are those projects? What are the recent developments that you're talking about there? And then maybe the bigger picture is that, I mean, clearly, you're making progress on the turnaround, but the quarterly results still have some big negative surprises here. So I guess, to what extent now going forward do you have some more visibility to make sure your arms are around what's going on and clean our quarters?

Yes, let me answer that question in a few different parts. Because of the investigations, we're not able to file the Form 10-K. And as a result, our -- which remain open for subsequent events on various projects. And that's why we use of the word -- use the word expected in a lot of the financials and can't be a little bit more precise, really, it turns out. And that's in large part driven because of our percent complete -- incomplete accounting that requires us to adjust our estimates for subsequent events that occur prior to our filing date. That impacts all projects. There are a couple that we just indicated that are perhaps a little more sensitive to those changes than others. And that's why we made that comment that, that really impacts all of the projects for the year. Certainly, we had some unusual costs in the fourth quarter that were nonrecurring, the U.K. pension adjustment, which was a good thing for Fluor. That allowed us over the past year to really essentially cap and reduce our liabilities on future pension expenses. We've had some restructuring costs. And as I indicated, we expect those -- some of those restructuring costs to continue into 2020. We do expect the performance of the company to improve as we move through 2020. I made that comment in terms of E&C, and we think we'll see that in other sectors as well -- or segments as well as we move through the year. So it's operational. We are seeing improved performance that's going to be gradual throughout 2020.

Okay. That's helpful. But just, again, if I could. I know there's some sensitivity here. But the developments on the 2 projects, is this projects that are deteriorating in their performance? Or is this something different?

No, it's not a performance deterioration issue per se. It's that we've left those projects and all other projects open for subsequent adjustments. We'll have to see how that transpires as we move through the first quarter before we file our Form 10-K.

And now we'll take our next question from Jamie Cook from Crédit Suisse.

I guess my first question, Mike, is on the cash flow side. Understanding, you said the $500 million of cash flow drag, of which 2/3 is in 2020. But what's your expectation in terms of cash generation, if any, for the year and how we think about first half versus second half? And then I guess, my second question is, I guess, on the asset sales. Do you -- do we know -- do we have an updated proceeds number given we're just selling AMECO now? And then it sounds like there's other assets that could potentially be up for sale. I'm just trying to understand how big, how material that is and what are the decisions driving other potential asset sales, if I'm reading it right. Is it to reduce cyclicality? Is it we still want to get to the $1 billion in proceeds? I'm just trying to understand the thought process there given Government is now off the table.

Okay. Let me address cash flow. Seasonally, our first quarter cash flow is somewhat negative. It strengthens as we move through the year. But as you've seen in the past, our cash flow can be very -- can be substantially variable. It's up and down quite a bit as you move through the year and even as you move from month to month, depending on advances on projects and then how we burn through the advances that we receive as well. But we do expect our cash flow to strengthen as we move through 2020. And we do expect our cash flow generation from operations to fund a substantial portion of the cash that we were going to need to fund the loss projects that we've talked about in the second quarter of 2019. So we expect to see our -- right now, per our plan, our cash flow generation should fund the major part of the losses on those projects in 2020.

Let me just add one more comment to that. I think Mike is exactly right. But -- and you look at the comment, as Carlos said, to keep the Government group, I'm really pleased with the swift implementation of this team on all the actions that came out of our strategic and operational review. So that -- and maintaining our investment-grade credit rating, if you'll recall, is a primary objective. And we believe now that we have strengthened our financial position, and we see additional means to generate cash to make this possible. I'm extremely pleased with where we're at in this regard.

Yes, let me just add something to that because we've always known the Government business to be a very valuable business. It's got reliable earnings and cash flow and substantially reimbursable. And for that reason, we had very strong interest from many well-funded buyers, both strategic and financial kind. Most of the buyers has approached us when we announced that we were going to divest the business. But as Alan stated, we're so pleased that we're going to be able to keep this significant contributor for -- of earnings and cash flow. And the reasons that we're able to keep, Government is a credit to our organization. Our efforts and our people have been very focused on cash conservation and generation. As a result, as of the end of 2019, we had $2.0 billion in the bank, which is more than we had anticipated. We have been successful in monetizing a number of claims and expect to do more of the same this year and next year. We're encouraged by the interest in our P3 investment and our excess real estate. And we've reduced the annual dividend by more than half. The cost savings -- or the cost reduction efforts will be resulting in cash savings. And of course, we're proceeding with the AMECO sale, which will raise significant cash and relieve us of the associated capital expenditures of that business. So the combination of these factors really drove our decision to keep Government. And as Mike stated, we're going to maintain a strong balance sheet to support our objective of maintaining an investment-grade rating and obviously keep the benefits of the Government and its very talented people.

But do we have an updated how to think about it range for the AMECO business, if you're willing to provide one, just because you provided a range before when Government and AMECO were together? And then the other assets that you're contemplating, is it just real estate and the P3 investments? As I'm thinking about Fluor's, what will remain strategic to Fluor's portfolio?

Jamie, we haven't -- we're not going to give ranges on individual transactions on this, but we do think that the combination of sale of AMECO, the sale of real estate, sale of some of our P3 investments will give us the amount of cash necessary to maintain our investment-grade rating to modestly reduce our debt and enhance our domestic cash position.

And now, we'll take our next question from Andrew Kaplowitz from Citi.

It's Andy Lee on for Andy Kaplowitz. So just the first question in terms of your 2020 outlook for margins for the different segments, comparing that to our 2019 Q4 guidance, the margins seemed a little bit lower in our E&C, Infrastructure & Power and Diversified Services. So can you just talk a little bit about the difference there? I mean, is it just seasonality? Or is it the lower-than-expected revenue, like, versus a few months ago? Or is there anything else that's driving that?

Let me start with that -- answer part of that, Andy, and maybe I'll ask Mike to follow up. Look, we have -- we've said in the past that 2020 is going to be a transition year for us. And we are still working off some of the problem projects. And so when we gave guidance, we're trying to regain our credibility in the marketplace. So we are giving a guidance that we believe we're going to make it, understanding that there's a lot of unknowns still in 2020. But we are going to be seeing progress through the year as we go. Mike, do you want to add something?

We often have commented with the charges we took last year on the infrastructure projects that we will have a number of -- lower 0 margin projects, and that's impacting the outlook for margins in infrastructure through this year.

Okay. Got it. And then secondly, on the -- on NuScale. I think you guys mentioned you just hope to find new investors for -- to fund the NuScale. But how likely is it to find the necessary investors versus funding ourselves ultimately?

This is Alan. Let me respond to that. We are in discussions with potential investors right now that give us significant confidence in our statement that the third-party investors will be -- will provide the funding to cover the overhead cost of NuScale. Carlos mentioned the coming through the NRC approval of gate 4. That is probably the most critical gate in that entire process. The rest is fairly rote process to get through it into September. We actually think that this may be improved. It's that milestone, plus the opportunity for several projects, that is starting to attract investors. And we're seeing a significant response. So yes, we -- it's a very good question. I'm glad you asked it. We do believe that this entity is well on its way to commercial realization.

We'll now take our next question from Andrew Wittmann from Baird.

Mike, I just wanted to clarify on the restructuring charges here. It looks like you've got $118 million of cash that are planned to go into restructuring actions. I just want to understand a little bit more about what that is. And is that extra $118 million needed to accomplish the $100 million run rate savings that you previously talked about and talked about on the call today? Or should we expect that, that extra cash that you're putting into restructuring delivers incremental savings -- cost savings to the bottom line?

So some of the restructuring costs are to reduce our real estate footprint and generate savings going forward. Some other restructuring costs are to clearly reduce headcount and also reduce savings. They'll contribute to the $100 million run rate improvement in overhead. And as we mentioned before, the majority of that overhead savings is going to occur in the business units as opposed to corporate. And even the ones that result in corporate will be, in part, reflected in lower allocations to the business units. So you won't see it all. You won't even see that much of it in the corporate numbers going forward but rather in the business margins. It's a wide range of things. Some of it is cash and noncash, and it's a wide range of actions just taken to improve our cost structure across the company.

So -- okay. But are you expecting that you'll be able to exceed the previous targets that you outlined, though, on your cost synergies?

Yes, we do. We said we expected to see our $100 million in cost savings in the business by the fourth quarter of this year. A lot of that will be in the business units -- in the business unit margins as opposed to in the corporate G&A expense.

Right. Of course. Okay. And then I guess, my second question was just on the awards. So I guess in the quarter, it seemed like one of the large awards, and I don't know this, but maybe if you could comment on the Chinese EPC job here for the petchem job for nylon as the product here. That seems like one of the large awards in the quarter, if not the largest award. And I just wanted to understand, is that one a fixed-price lump-sum job? And how are you going to manage the risk? I know that you've been in China. And obviously, the fabrication yard, you're in China. I can't recall seeing an EPC job of particularly this size for a while and just wanted to get a sense of how you're going to execute that on the risk terms on that job, in particular.

Yes. And thanks for that question. That project, as all our projects, now meets our criteria. And one of the ways that we can get comfortable with lump-sum projects is for us to do a reimbursable FEED and development phase, and then at some point when we're comfortable that we have defined the scope adequately and have adequate information with respect to the procurement and the vendor information, convert it to a lump sum. And that's exactly what's happened with this one. We have been executing that project on a reimbursable basis. And at some point, we will convert it to lump sum.

Got it. And then just kind of a clerical question here. The $150 million closeout is a very nice closeout. I was wondering, Mike, if you could just give us a little bit more detail on that. What job was that?

We are not disclosing that.