Fluor Corporation (FLR) Earnings Call Transcript & Summary

So good morning, everyone. We're very pleased to have Fluor Corporation with us today. We have Joe Brennan, who's the Chief Financial Officer; as well as Jason Landkamer, who heads the Investor Relations efforts. In terms of the format today, we will be informal. So if anyone has a question, please just raise your hand and we can get a mic to you, and you can ask that question.

But I guess I'll kick it off, Joe, just trying to think about understanding you haven't guided for 2023. But as we think about the earnings implied in the back half of the year guidance, it's trending $125 million to $150 million per quarter, which means if I just take that by 4, if we think about that as the base of earnings for 2023, you're sitting with $500 million to $600 million EBITDA. excluding charges. So as you want, how would you frame the 2023 EBITDA potential for investors? And do you think that's sort of the right way to think about it?

Well, thanks, Jamie, and thanks for giving us the opportunity to have the discussion today. Really appreciate being here. The way I would look at it right now is we're very confident on our Q4 outlooks. We are in the middle of our strategic planning process and our operating plan. In fact, in 1.5 weeks when I get back, we're going to lock that down for 2023 at the end of the day. And we'll be communicating and discussing a bit more of that in the earnings call in Q4. But I would suggest that without going through that process, that things look like they're on a good positive trend bolstered and underpinned by a good Q2 new awards total, good, high reimbursable work, good margins, a very good Q3, and we don't see that pipeline of prospects slowing down. So without kind of divulging where we're going to be in 2023 relative to that run rate, and we'll do that as we get into the Q4 earnings call, we do feel very positive about where we are at this very moment.

And can you talk about the $15 billion of new awards in the margin profile of that business and how relative to the legacy business?

Well, yes, so when you talk about the legacy business, I think we're moving more into that shift to lump sum where we were 75% lump sum 25. On paper, when you bid as sold lump sum jobs, you can claim higher margins at the end of the day, but obviously, you take on a significant amount of additional risk. And the way I always look at lump sum work at the end of the day, if it's the predominant element of your backlog, 10 attaboys and 2 [ odd ] shocks don't do a real benefit to your margin profile moving forward at the end of the day. We have shifted to close to 60% by the end of Q4, we'll be more in the mid-60s, closer to 70% reimbursable at the end of the day, and we still would reaffirm our 4% to 6% margin range at that point. I guess what I would also say is that what we're seeing is a little bit industry-driven. If you look through some of the industries where our clients don't have that oversight organization, a PMC type organization, we're able to draw higher margins on those businesses. and in the more established with our IOCs that bring a very significant project management organization in terms of oversight, we would expect to see probably closer into that 4% and 6% range. So we have areas where we are getting higher margins relative to the clients' expertise in overseeing these projects. We're seeing others that are in that 4% to 6% range. But let's not forget, and one of the things that I think that's important for Fluor is that we have 1,000 projects in backlog today, 20% of those projects have a construction element, which would be somewhat dilutive over the course of how you would look at your margin profile, but 80% of the projects, just by count, are really technical services driven. And our expectations for margin on that are 3 to 4x what we would expect through a full-service EPC type offering.

And I guess, can you just expand on that? Because I think when investors think about Fluor, they think about construction. I mean like you're the biggest EPC player. Can you help investors frame as you think about technical solutions like what does that mean? And can you talk about what type of services are under that? And would you view them as higher value-add services and sort of the percent of the portfolio it really represents to Fluor?

Well, I've thought a little bit about this last night after we had a bit of a chat. If you look at construction at the end of the day, construction is not throwing a bunch of shovels at an individual or a group of individuals. It is really truly a technical art in order to be able to construct some of these facilities at the end of the day. A lot of workplace planning goes into play, a lot of schedule analysis, a lot of mitigation. So there's really a technical component of that. But a significant portion of what Fluor has always offered to our clients is that technical solution, be it on the front end through our process organization on the best technologies to use, but also the best execution approach in order to deliver the lowest possible TIC and the shortest possible duration is a technical skill set and a technical offering that I think our clients value at the end of the day. And I think if you look at the contraction over the course of a number of years, over the course of the last 4 or 5 years within the industry, there's probably 2 or 3 companies like ours that can really give you a cradle-to-grave solution at the end of the day. But again, the important point is 20% of our total projects by count have construction components in it, but 80% are truly just technical services related.

Okay. And then, I've been covering you a really long time. And like...

That's good and bad, right?

Yes, that's good and bad depending on what stock... But historically, Fluor always traded at a premium relative to the group. And now you're trading at a discount relative to the group. What do you think the path forward is to re-rate your stock? And what do you think investors underappreciate about your stock?

Yes. The way I look at it is I think we are carrying a bit of scar tissue. We're not that far off from what I would consider probably the darkest time in Fluor's company over the course of maybe the last 4 or 5 years. I do believe there's a bit of scar tissue that still remains, and I don't think we're getting that premium that we would expect. But if you start looking at what's flowing into our pipeline, at 90-plus percent reimbursable. And these are significant numbers, nominally or approximate $10 billion booking in Q3, close to a $4 billion booking in Q2. We're going to start seeing that flow through. And I think the other element of this is getting some of the infra challenges that we have in our rearview mirror, and I think we're starting to do that today. I believe that there's a bit of an overhang also from probably LNGC. I think LNGC is probably seen as a net negative in our backlog at the end of the day. We're 75% complete on a physical progress basis. The project is going well. We feel very comfortable in being able to deliver the actual profitability that we have on the books. I think it's just going to take a little bit of time. I think the last 4 or 5 years have been challenging for analysts and for shareholders. But I do believe they'll start to, if not already, well, obviously, I think our share price is starting to reflect a little bit of that. But I would suspect in the next 12 to 18 months, we'll start to get some of that premium back into our trading prices.

Okay. And does anyone in the audience have a question? If so, just raise your hand. If not, I'll keep going. Okay. So I don't think anyone does. So why don't we talk about the new award pipeline from here? Obviously, you've been very successful with the $9 billion, $10 billion in awards you had left third quarter, $4 billion a quarter before that, like I don't want to say a word, but has awards peaked? Or like where do you see the biggest opportunities for new awards in 2023? And how would you characterize an order expectation for 2023?

Yes. It's really kind of an amazing time. I've seen it once before at Fluor in my 32 -- 2005. Yes, we called it the perfect storm at that point in time where it was across all of our business lines and our industry focus areas, and we're seeing that again. We don't see mining, obviously, the timing of when these things will take off will be a little bit different at the end of the day, but we're seeing a lot of traction in chemicals, we're seeing a lot of traction in the mining and the metal side of it. When we say mining, I think we forget about the metal side of the business, there are a number of significant prospects and opportunities that we've begun to work on and that we will be communicating in terms of new additions to our backlog here in very short order. So I think those, the bio side of ATLS is really taking off, and we're doing a lot of work in the semiconductor space. So all of that is growing very strongly. Mission solutions, we'll continue to push forward and grow. And on the energy solutions side of the business, chemicals is obviously firing up first. We're doing a lot of work in the mid-scale LNG facility with NFE and we're into about 3 of their major programs. And production and fuels, the typical upstream, downstream side of the business. If you look in pockets geographically around the world for Fluor, ICA Fluor represents a significant chunk of that work, and Fluor's portion of it is $6 billion to $7 billion worth of new fresh backlog that's come in. So I think it's the first, again, I hate to call it a perfect storm, but it is across all of our businesses. And the opportunities are good, and they are the right types of opportunities that we would pursue under our pursuit criteria.

And can you just go a little deeper on the mining side because I think there's a lot of concerns out there with the macro. You know what I mean that mining awards could get deferred. But so where are you most opportunistic within mining in terms of the type of commodity or the geography? And do you think about it more as brownfield, any expansions versus greenfield? Just a little more color there. And which customers you're aligned with understanding probably your language of 50% of the market...

Well, I'll tell you, copper is going to be a big play principally in Latin America. We're seeing a lot of the lithium opportunities come through. We look forward to announcing some additional work in the lithium side of the business here. So across the mining spectrum, we're seeing a lot of metals activities through steel, through aluminum. It is broad-based. Iron ore is coming back in Australia. So we're not seeing really a slowdown. In fact, what has happened, and I'll tell you what the slowdown looks like for us, we've been working on LNTPs throughout this process, getting to the point of an FID, but none of that is slowing down. And these types of LNTPs that we're talking about are long lead, they're purchasing long-lead equipment items and when you start to get into the procurement aspects of an LNTP, you're into the hundreds of millions of dollars' worth of committed capital going into these projects. So I would suggest that this has just been a bit of a delay but they're certainly keeping us very well involved in the projects and the development. So I don't see a huge impediment to getting to FID. And I think we've gone through that cycle of the LNTPs. And I think a lot of that will start to convert into backlog here shortly.

And I think on the last call, you talked about $5 billion in new awards that were [indiscernible]. Are they still on track?

Q4, Q1.

Okay. Any questions in the audience? Okay. Let's keep moving. So just talking about the backlog. I mean, you talked about this a little, but I think we still have like $1.3 billion of legacy infrastructure projects that are in loss positions, what do you think the risks are going forward to these infrastructure projects? And how are you going to manage the business differently within infrastructure, so we don't have some of the same issues?

Well, I'll start with the second question. We have really narrowed the aperture as to what we'll take in, in the infrastructure business. Our stated strategy was to shrink that to the DOTs and get very specific around Texas and South Carolina as our stated goal. I would suspect that we will continue to be involved in the infra business, but it will be on somewhat of a very cautious way, I'll give you an example, in the Texas DOT side of the business, the contracts have gotten a little bit more onerous even today. And the ability to shape the deal with political organizations like a DOT at the end of the day, it is a little bit more complicated. So to the extent that we can't get to a fair and balanced contract term, we're just not going to enter into those types of contracts. And Infra is a bit of a challenging business. We're taking on a lot more risk for even on an absolute basis, a smaller return. So we're going to be very prescriptive about what we do and what we add into the infrastructure business.

Okay. And then if we shift over to energy solutions, I know you said that you were fairly positive on the award prospects for chemicals. But can you talk about what you're seeing sort of in more of the energy transition type opportunity for Fluor? And how should investors think about your competitive positioning there? Because historically, you've been more your traditional energies we thought about it like downstream, et cetera.

Yes, it's kind of interesting because when you actually kind of go back over the decades, we've been in energy transition before it was called that, right? So all the way back to the polysilicon facilities we manufactured in China to some of the carbon fiber facilities that make the wind turbine blades and then we've done solar and wind installations, right? When you look at the energy transition effort at Fluor, it's kind of interesting because it actually comes across all 3 of our groups. So energy solutions, urban solutions and mission solutions. And what we're seeing a lot of opportunity in is there's quite a bit of demand for our subject matter experts. We've got a very strong engineering core that actually know how to apply the technology as it relates to say, green ammonia production, carbon capture and sequestration with our own proprietary process or other technologies, but also in the battery space. We're seeing a lot of interest in really that full value chain. Joe mentioned earlier, a lithium mine, and we booked one lithium refinery in China in the second quarter, and then there's another lithium mine opportunity here in North America. But it also goes all the way down that value chain to starting to manufacture the facilities required to make EV battery packs. So it's a really exciting time for us because it's leveraging that engineering core. And then at some point, it flips over to really that full project management construction knowledge and supply chain expertise that we have.

Okay. And then shifting over just to cash flow and capital allocation. Cash flow has been tough because it's been masked by some of the legacy issues. So can you sort of back that out first and frame for investors how to think about sort of normalized cash flow for Fluor? Or cash flow conversion relative to net income or however you want to define it, if we excluded some of the legacy issues that we've had.

Yes. Well, just to give you an example for 2023, we're going to have about $200 million worth of challenged projects that we're going to have to fund at the end of the day. And I would suspect that our cash flow is going to be flat to positively up for the year, as these new awards come in, we will begin to generate free operating cash flow that will be a lot more tangible and a lot more visible. It does get masked with the puts and takes that are flowing through the P&L at this point in time. But as we continue to progress the infra jobs, we'll start to see that settle out. I think that's been kind of a positive, and on top of that, we're addressing our '23s organically, and we're doing other things. And we're still showing net neutral to slightly positive in our cash flow generation. So I think as we move forward, what you'll find, we did go to some EBITDA guidance. We changed our methodology here a quarter or 2 ago. I would suspect as we move to a 75% reimbursable model to a 25% lump sum that you'll be able to track EBITDA more closely to our free operating cash flow generation. It will get a lot simpler to look at our business.

The $15 billion in new awards year-to-date really is a phenomenal platform to build what Joe and I have discussed with investors is that quality of earnings profile. So you're going to see a lot of that in 2023 as cash flow starts to accelerate and match that.

Okay. And then as cash flow and quality of earnings should improve to your and Jason's point, given just the $15 billion in new cost plus largely new awards that you've had, how do we think about capital allocation priorities for Fluor going forward? Like what levers can you pull to pay down the debt? Or how are you thinking about share repurchase versus M&A? Like what are the big priorities...

I'll start with the levers and then we can talk a little bit about capital allocation moving forward because I think that gets further out on the spectrum of when we want to start pulling some of those levers at the end of the day. But we've got a number of things that we're in the process of monetizing today. We've had a couple of land purchases that have gone through the sales transaction that are going to post in Q4, not huge dollars, but certainly helpful in the process. We have a number of other assets that we're currently monetizing through Stork and through AMECO, and we would expect to see some cash generation here towards the end of the year and to the beginning of next year. Obviously, new scale is the elephant in the room. What are we going to do with new scale? How are we going to monetize it, when are we going to monetize it? We've got a couple of parallel paths. And the way we need to look at new scale at the end of the day, it's a great asset. We own 57% of it. But we've got to be a little bit careful in the process of killing the golden goose. If I go out and try and issue a public offering of $300 million, $400 million, I'm going to potentially kill the golden goose at the end of the day, and that's not what I want to do. So we're running a parallel path through looking at strategics that have an end use for the project as well, which will become market makers, so we can bolster new scale stock, maybe even give it a little bump at the end of the day and also issue some public float to provide some additional excitement within the investing community. So I think if we look at all those together, they need to run in parallel, and we want to do this in a measured and metered way so that we do maintain the valuations that we see with it.

Do we think that this new scale, this is a catalyst or opportunity for 2023? Or is it for...

It's going to be 2023. We will begin that process, well, we started, but getting a strategic to an investment decision may take a little bit longer than going through just a simple wall cross on a public transaction. But we want to make sure that we understand what both sides of that equation would look like prior to making a snap decision. Let's put it this way. I don't need to go out for a public transaction for $50 million or $70 million or $80 million to potentially dilute additional or add additional public float to the mix, putting downward pressure on the stock because I do have financial flexibility to work my way through that process and do it in the most efficient way.

Okay. And let's assume we're on the other side of this, and we successfully monetize new scale and the legacy problem projects are largely behind us. What are you going to do with your cash?

Well, what we're going to do with... We certainly... So we've said -- so our benchmarks, we've said about $500 million in debt is where we would like to land and we need really about $1 billion worth of free operating cash flow in order to meet the ongoing working capital requirements on our project at the end of the day. So that's kind of the benchmark that we've set. Converting the preferreds, I think, is one thing that we're going to be looking at very strongly as the stock price goes up, our actual make-whole at this point is less than the dividends owed. So there is some consideration to do that. We certainly would be going down that path. We've always historically been a company that pays a dividend. We certainly would like to get back to that trajectory again. And then we would look at repurchase of shares because we went from about 141 million shares and really truly on a fully diluted basis. Today, we're about 170-plus million shares. So all of those things are in play, but the timing of when that occurs is, I would guess, 3 to 4 quarters out to where we start. But yes, we're trying to get the company back to that asset-light, very flexible, very liquid company that can go out and look at other investments that augment the services that we provide that provide us areas of additional growth that we don't currently have today. But all of those things are plugged into kind of the considerations that we're working our way through today.

And then just as you think about your mission solutions business, a lot of your peers, or we'll call it government because that's really what it sort of is. But a lot of your peers have strategically tried to sort of move up the food chain within the government business and become more of a higher value-add service providers, cybersecurity space, intel, be more of a government IT solutions company like do you think that's an opportunity for Fluor ahead as you think about strategically how you want to position the business...

Absolutely. During strategy day, we rolled out a couple of acquisitions that we would be looking at, not specific to any names of companies, but through the ATLS organization, specifically around semiconductors, I think is what we talked about there. And then on the mission solutions side of the business, where we can get into more white collar more of the security type work. And those are all things that we really want to do today, but we understand there are things that need to be fixed within the capital structure of the company before we can actually go out and do that. And I think the other thing that if you look at the history of our M&A activity and our acquisitions, we haven't had a real stellar, we've struggled with our acquisitions...

As the whole industry has.

For sure. But we don't want to make that mistake again. So we're going to do it in a way that we're in the best possible position that we can be in to have it be a successful completion...

It's a little bit interesting on the government side of the business, too, because your reputation precedes you. So when you think about all of the work we do right now with the DOE and a lot of the nuclear remediation projects, the scores we're getting on those puts us in a position some of the DoD stuff and the secure services work. We actually have a really great portfolio there. And I had a lot of really interesting conversations just recently about how we're getting invited to bid on that based on the performance on our other government projects. So it's absolutely one to where that makes sense because you're really looking at, do we have enough people with top secret or above top secret clearance to go and execute those jobs? So it's a great opportunity for us. But again, from an M&A standpoint, we're going to be selective.

Okay. And then I know you touched on LNG Canada in the beginning when you were thinking about valuation weighing on the stock to some degree. But like what milestones should investors be looking at to get themselves more comfortable with LNG Canada. And there's some noise around the pipeline around there, like what's the risk to Fluor from that basis. And LNG Canada, the second phase, Like can you talk about your positioning there, whether or not...

Yes. So I don't think there's a significant impact from the delay in the pipeline necessarily for us, certainly for the client without feedstock, LNG gets more challenging to produce. So I think what it does is it probably creates a little bit of noise within the client organization relative to the amount of funds that they're having to inject in the pipeline project to get it online. So obviously, discussions around where we are with deal 1 and deal 2, we'll have to consider some of the other challenges that the client organization is having. And what is that impact on us, that's yet to be determined. So we're going to have to work our way through that...

Milestones that investors should...

Milestones. I would go module shipment in mid 2023. And we are slated to have all 215 of those modules off the key side in the middle of 2023 and at site in Kitimat, those are big. And then we had another milestone, which was to have the site fully developed by the end of 2023. So those last 2 kind of remaining critical milestones are on track to be met.

Okay. And interest level and opportunity, I know what the second phase of LNG Canada...

I'm high as long as we can get it in.

The right terms.

Yes, the right terms for sure. Yes. It's going to be hard, I think, for an LNGC to completely change horses at this point in time. But at the same time, I think LNGC would tell you that they still have a successful project on their hands. And right now, I think fundamentally, the economics of the market around LNG and what's going on within Europe have probably made that project even more critical in terms of time to market. So I believe that we will be in a position to have a very good and reasonable conversation with them about how to make that successful project.

And are there any opportunities outside of the second phase of LNG Canada you're looking right now? And are there opportunities like you just won Fast LNG, which I believe was like a cost. You won a cost-plus contract, KBR is a cost plus, Plaquemine, it's like I never thought I hear this in LNG But...

Their feed there.

Yes, they're doing the front end...but like just what opportunities is Fluor tracking out there on the LNG side besides LNG, the second phase of LNG Canada...

Well, I'll talk a little bit the NFE relationship is a real true outstanding example of a partnership where we're in the process of designing and building 3 of their jacket. Basically, it's a compressed mid-scale LNG facility that produce about 1.2 million metric tons per annum. We are in the process of designing and building those 3 facilities, and they have plans for a number more, a number of additional mid-scale LNG. So we will play in that business. I'll give you the one example. I can't tell you where we're going to go pursue other full-scale LNG type opportunities. But let's put an example out there like Mozambique. Would I go do lump sum in Mozambique? No. So as we look at LNG, we got to make sure that what we're looking at is something that is repeatable or at least executable and deliverable at the end of the day. So the LNG business itself, when you get into the greenfield side of it and the full scale is still very, very set on a lump sum risk shift to the EPC contractor that's untenable for us.

Okay. And then the other thing that's been topical over the past couple of days, it's just a lot of excitement around the semi CapEx build out. So can you talk about like sort of Fluor's positions there, which companies you're aligned with and the opportunity set for Fluor?

Yes. So you heard a lot of talk about Fluor helping support Intel and their semi build-out. And that's still a great relationship for us. We're engaged with them on some projects in Arizona and also another one in Malaysia. When you look at the CHIPS Act, now that it finally passed, although funding is a bit slow to be led out from that, we are still getting quite a bit of interest from other semiconductor companies primarily in the U.S. that they're looking to expand. So no names we can drop just yet, but it really is still a very interesting space for us because when you look at this build out, they're needing companies that can offer that full solution. So particularly on the project management side. And that's why you're seeing, I think, a lot of interest in bringing Fluor in to help provide those solutions.

Okay. And then a lot of companies are understanding you're going to be more targeted as you think about infrastructure, right? But a lot of companies over the past 2 days have been talking about IIJA and they're starting to see something the funding flow through. Can you talk about like what you guys are seeing? And is that an opportunity for you?

Yes. We have not seen a lot of the IIJ funds come into the opportunities that we're pursuing at this point in time. There is a, for example, we're very focused on the DOTs in Texas and South Carolina and others. There has been a consistent and steady flow of opportunities regardless of the funding that's coming in through the Infrastructure Act, so much so that we've turned down $28 billion worth of work. And so that I'll tell you. I don't know what impact yet the infrastructure bill has really had on increasing the number of projects that we would be out pursuing, considering that we've turned down $28 billion worth of work. There is plenty of opportunity if we wanted to get into contracts within Infra that did not meet our bidding pursuit criteria, and we're just unwilling to do that. We're not going to bend.

Okay. And then, I guess, well, first of all, does anyone else have a question? We have got like less than 2 minutes. So I guess, if no one does, 2024 is not that far away anymore. And you guys laid out your 2024 targets, a couple of years ago, the 250 to 290, 20% return on invested capital, cost plus fixed price mix, like can you talk about your confidence level in achieving the different metrics that you laid out for 2024, where you think you're ahead of schedule or where you think you're behind?

Well, I'd tell you it's interesting. We said add-in projects fit our overhead reduction. We said we'd have $100 million. We're going to be in excess of that in 2022. So we're a couple of years ahead of that. And this is nonrecurring overhead that we're taking out of the model. Our debt to cap, we said we would be somewhere between 20% to 40% by 2024. We're going to be about 36% at the end of the year. So I think we've made tremendous progress on those 2 fronts. In terms of reimbursable to lump sum, I would suggest to you, by the end of this year, we're going to be in the 60%, and we will be right on the precipice of the 75% as we end '23 and move into '24. And in terms of overall guidance, we don't see anything that -- some of the delay...

The EPS guidance you're talking about. It's about $2.50 to $2.90.

Yes, some of that has probably been impacted slightly by the push to the right, but it has not taken us out of what we would expect or at least being able to achieve that $2.50 to $2.90 range.

I think just to kind of summarize, we're over 3 years into that revised pursuit criteria that Joe talked about. When you look at our strategic priorities that we established 2 years ago. Our investors are going to start to see that in '23. And in terms of quality of earnings, cash flow, getting the capital structure fine-tuned. So it's been a long time coming, and now you're going to see that inflection. It's here and it's now.

Okay. Great. Well, thank you so much. I appreciate your continued support of the Credit Suisse Industrials Conference. Thank you.

Thank you, Jamie.

Thanks, Jamie.