TechnipFMC plc Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the TechnipFMC Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your first speaker today, Mr. Matthew Seinsheimer. Thank you. Please go ahead, sir.

Thank you, Mika. Good morning and good afternoon and welcome to TechnipFMC's fourth quarter 2020 earnings conference call. Our news release and financial statements issued yesterday can be found on our website. I'd like to caution you with respect to any forward-looking statements made during this call. Although these forward-looking statements are based on our current expectations, beliefs and assumptions regarding future developments and business conditions, they are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. Known material factors that could cause our actual results to differ from our projected results are described in our most recent 10-K, most recent 10-Q and other periodic filings with the U.S. Securities and Exchange Commission, the French AMF, and the UK Financial Conduct Authority. We wish to caution you not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. I will now turn the call over to Doug Pferdehirt, TechnipFMC's Chairman and Chief Executive Officer.

Thank you, Matt. Good morning and good afternoon. Thank you for participating in our fourth quarter earnings call. I'm delighted to be joined by Alf Melin, our Chief Financial Officer. Today, I'll start by highlighting the tremendous successes of our company over the course of 2020 in the face of one of the most challenging years on record. First, we protected our people. Our success has always been the result of the tireless efforts and unwavering commitment of the women and men of TechnipFMC. What they accomplished in 2020 was nothing short of exceptional, given the hardship and difficulties that occurred across the globe. Health and safety is our top priority, and drives every decision we make. We took the steps necessary to protect our workforce, as well as our fellow employees of our customers, contractors and suppliers. And these actions won praise from clients and ensured that their projects move forward safely. Second, the initial outlook we provided last February was clearly impacted by a multitude of events. But our teams quickly responded with a revised view that we provided in July. Our aggressive cost reduction plan focused on project execution, and resilient backlog provided us the confidence and visibility to issue guidance at a time when few others in the energy sector were willing to guide for the next quarter. We delivered on our revised plan with full-year revenue and adjusted EBITDA margin, meeting or exceeding guidance for all operating segments. And third, we protected our backlog. Importantly, this speaks more to the relationships we share than the contractual terms of any one project. We all face challenges, our suppliers, our customers and TechnipFMC. By working together, we found solutions that helped mitigate, if not eliminate, many of the obstacles we face together. While no projects were canceled from backlog, the more enduring impact to our company will be the strengthened relationships that have resulted from the collaborative engagements with our partners during this unpredictable operating environment. And beyond these successes were many other notable achievements with regards to our ongoing business transformation. First was our separation. Throughout 2020, we continued to work to separate TechnipFMC into two industry-leading pure play companies with the transaction now completed through the partial spin-off of Technip Energies. We took specific actions in response to investor feedback that were incorporated in the final spin process. We accelerated the spin timeline, closing the transaction just 40 days after announcement. We added an ADR that will trade over-the-counter in the U.S. broadening the base of eligible shareholders for Technip Energies, while also creating additional liquidity. And we addressed investor concerns regarding share flowback and capital structure with the addition of Bpifrance as a long-term reference shareholder, and our near-term retention of a minority stake in the new company. February 16th marked day one for an independent Technip Energies. But its real significance is the expanded opportunities and enhanced focus of management, resources and capital that will serve to benefit stakeholders of both organizations. Beyond the separation, we also accelerated our cost reduction efforts across the entire company in 2020. We announced targeted cost savings of more than $350 million, which we achieved on an annualized run rate basis well before the end of the year. Additionally, we delivered on our commitment to reduce capital expenditures for the full-year by one-third versus our original plan with the current spend at a level that is sustainable over the middle-term. In November, we provided a comprehensive overview of our efforts around ESG. TechnipFMC was created with the vision to drive real and sustainable change in the energy industry. This included the introduction of a three-year sustainability roadmap that has resulted in a number of successes for our company. We have progressed well in reducing our own emissions of greenhouse gases, and are committed to helping our customers reduce their carbon footprint with innovative solutions and technologies like Subsea 2.0 and iProduction. We're driving inclusion in the workplace as demonstrated by our initiatives, advancing fair and diverse representation and ensuring equity of our rewards. We're supporting the development of the local communities in which we live and work through educational programs focused on science, technology, engineering and mathematics. And we'll continue to ensure that our actions are aligned with shareholders through executive compensation programs that are focused on driving behavior that creates sustainable shareholder value. We also established an extensive set of new commitments to be realized through 2023 that will have real impacts and will be measured using an annual scorecard to provide transparency on our progress. At the core of our environmental initiatives is 50 by 30, a board commitment to realize a 50% reduction in Scope 1 and 2 equivalent emissions by 2030. That's a 50% reduction before the end of this decade. Over this very same time period, we'll continue to deliver real solutions for the energy transition, including lower carbon alternatives, such as our all-electric production system for Subsea and iProduction for surface markets, both of which are available today. We'll also introduce zero carbon alternatives, such as our Deep Purple initiative, which I will discuss shortly. TechnipFMC has a strong history of challenging industry convention to develop, design and integrate new innovations, and Digital is a key enabler for continued success. We introduced elements of our digital transformation over the course of 2020, with a particular focus on Subsea Studio. Subsea Studio was initially developed solely for Subsea system design. We have since extended the platform beyond the front-end to incorporate the execution and field management phases of our project. Once fully implemented, we'll have a seamless digital thread from concept design, to tendering, manufacturing and delivery and continuing all the way through the life of the field. These digital initiatives improve economics, enhance performance, and reduce emissions, driving sustainable change that makes us the partner of choice for our customers. And once again, we're leveraging our Subsea expertise by bringing digital innovation into the surface arena that enhances the customer experience for both iComplete and iProduction. iComplete is a fully integrated, digitally enabled wellsite operations and control system. It creates a seamless digital experience with fully autonomous maintenance and remote data access initially from the completion phase, and ultimately extending through the production phase. iComplete significantly improves efficiency, with 50% faster rig-up and rig-down times and a 66% reduction in the personnel required on site and cost savings that exceed 30% for our traditional work scope. More importantly, it also increases safety by eliminating thousands of red zone interventions on a typical completions pad by using automation and control to engineer out risks and hazards. iComplete has already achieved significant market penetration since its introduction in the third quarter, with 10 customers utilizing the new integrated system. iComplete is a real example of business transformation and its early success supports our expectations for growth in our completions revenue in 2021 to outperform the overall market. Turning to the key drivers of our 2021 outlook for Surface Technologies. International revenue has grown to become an even more significant portion of our business mix. For the current year, we expect a gradual and steady recovery in well count to drive modest international market growth with spending increases led by National Oil companies, particularly in the Middle East. Our unique capabilities in this market, which demands higher specification equipment, global services, and local content provides a platform for us to extend our leadership positions. For North America, we anticipate full-year revenue will likely be flat to down modestly versus 2020. Overall, Surface Technologies continues to benefit from the adoption of our digital solutions and the broader market recovery. We remain levered to more resilient international markets, where we expect to source approximately 65% of our full-year revenue. Moving to the Subsea outlook. The Subsea opportunity list has expanded since our last update, reflecting our view of renewed customer confidence, given the improved economic outlook, lower market volatility and higher oil price. Four new projects were added in the period, increasing the total estimated value of the opportunity list by more than 15%. Two of the projects came back on the list after being extended beyond our 24 month view, during the height of the pandemic. We experienced strong momentum in front-end activity in the second half of last year and we expect this to continue throughout 2021, creating an environment for a more sustainable deepwater recovery. Additionally, we expect at least 60% of the projects undergoing field studies in the current year to include an iEPCI solution, many of which will be directly awarded to our company. As we have said before, we're increasingly less dependent on the larger publicly tendered projects. In 2020, just over 25% of our inbound came from projects on the opportunity list, and in 2021, that number will likely be lower. Much of our 2021 inbound sits beyond the opportunity list. We expect we'll be awarded more iEPCI and more Subsea services and we expect we will see more direct awards to our company than in the prior year. This will include project work from our newest Alliance partner, Repsol Sinopec, where we have recently formed an exclusive five-year alliance to support oil and gas development in the United Kingdom, deploying both iFEED and iEPCI and leveraging our extensive installed base across the region. For 2021, we're very confident that orders will exceed the $4 billion achieved in 2020. We anticipate Brazil will be the most active region of the world for new projects driven by continued investment, and we see additional market growth potential coming from the North Sea, Asia Pacific and Africa. The strong front-end activity we're experiencing today should support a multi-year outlook, driving our expectation for continued Subsea order growth in 2022. Looking beyond the near-term Subsea outlook, we're excited for the role TechnipFMC will play in the energy transition with significant opportunities including novel wind, wave energy, carbon storage and green hydrogen. With over 70% of the world's surface covered by water, we view offshore, and more specifically, Subsea, as the next frontier for the energy transition. Offshore opportunities will require more technology innovation, involve an expanding list of players, and necessitate a higher level of collaboration. Our core competencies allow us to transform new technologies into commercially viable renewables projects. We're well positioned to serve as system architect from technology development to project delivery and life of field services for these large-scale renewables ventures. Last year, we introduced Deep Purple. Deep Purple is a collaborative effort between TechnipFMC, our clients and partners. Our common goal is to integrate offshore renewable electricity and Subsea hydrogen storage to provide power to Subsea infrastructure and win at scale to provide clean energy to consumers. We have made significant progress with the conceptual and technical phases of this project. This includes the optimization of a hydrogen flexible flowline and riser qualification. We have secured an innovation grant in Norway for a three-year pilot project, where we will lead the efforts to develop and optimize offshore wind, hydrogen and Advanced Energy Management. And we'll also develop a dynamic model in digital twin, further contributing to our overall digital strategy and Deep Purple is just the beginning for us. Further success in the energy transition will come from collaboration. Partnerships will be instrumental in this transformation. We recently partnered with Floating Power Plant, a clean technology company for an EU grant deal application to fund an offshore green hydrogen pilot for the Canary Islands. And we have also partnered with EDP Energias de Portugal on the beyond hydrogen project study Offshore Portugal. The ultimate path to commercialization for these and other opportunities will be driven by our ability to provide innovative and proprietary technologies that are unique to TechnipFMC. Partnering with our clients is the architect and integrator of the new energy system, and building new partner alliances that leverage our expertise in integrated project execution. Importantly, these are the same core capabilities that have driven our success in the traditional energy markets. And we'll also invest in early phase projects and solutions that accelerate the role of our technologies in the energy transition as we continue to redefine offshore energy. I'll turn the call over to Alf to discuss our financial results in more detail and provide you with our outlook for 2021.

Thanks, Doug. Total company revenue was $3.4 billion in the quarter with adjusted EBITDA of $301 million. Total company inbound orders were $4.2 billion in the quarter, with Subsea meeting our expectation of approximately $4 billion in orders for the full-year. Backlog increased sequentially to $21.4 billion. Backlog for Subsea was $6.9 billion, of which $3.6 billion is scheduled for execution in 2021. Cash flow from operations was $555 million in the quarter. Capital expenditures were $41 million, resulting in free cash flow of $514 million. Net cash more than doubled sequentially to $854 million. Adjusted earnings per share were $0.05 in the quarter when excluding after-tax charges and credits of $0.14 per diluted share. Let me now discuss the segment highlights. Fourth quarter Subsea revenue decreased 10% versus the prior-year to $1.3 billion, primarily driven by lower project activity in the North Sea and Brazil. The revenue decrease was partially offset by increased activity in the Gulf of Mexico, Africa and Asia Pacific. Subsea services revenue was largely unchanged from prior-year quarter. Subsea adjusted EBITDA margin of 8.7% decreased 370 basis points driven by lower activity and COVID-19 related impact. Adjusted EBITDA for all operating segments included direct COVID-19 expenses in the current quarter. As a reminder, these expenses were excluded from adjusted results in previous quarters in 2020. In Technip Energies, revenue of $1.8 billion remained largely unchanged, versus the prior-year quarter, and benefited from the continued ramp-up of Arctic LNG and higher activity on projects in Africa and Asia Pacific, which largely offset the decline in revenue from Yamal LNG and lower activity on projects in the Middle East and North America. Adjusted EBITDA margin of 10.6% declined 360 basis points versus the prior-year quarter due to a reduced contribution from Yamal LNG partially offset by continued strong project execution. And in Surface Technologies, I'll focus on our sequential performance to demonstrate the underlying improvements in the quarter. Surface reported fourth quarter revenue of $262 million, a 16% sequential increase, driven by an expanded services offering and strong international backlog conversion, as well as increased drilling and completion activity in the United States. In the quarter, international represented more than 65% of total segment revenue. Surface acknowledged reported adjusted EBITDA margin of 11.8%, a 410 basis point increase versus the third quarter, with North America posting a positive contribution for both the quarter and the full-year. The significant improvement was driven by higher activity and the benefit of our cost reduction activities throughout 2020. Turning to cash flow. Operating cash flow improved sequentially to $555 million driven by a significant improvement in working capital. Capital expenditures were $41 million in the period. For the full-year, capital expenditures of $292 million were within our guidance of approximately $300 million. Free cash flow for the period was $514 million, with full-year free cash flow of $365 million exceeding the high-end of our guidance. Free cash flow in the quarter benefited favorably from timing of targeted collections and expenditures, including advances from recently awarded projects. We ended the period with cash and cash equivalents of $4.8 billion, net cash improved $470 million sequentially to $854 million. And finally, let me provide you with our 2021 outlook. Our guidance is based on continuing operations and excludes the impact of Technip Energies which will be reported as discontinued operations. In Subsea, we're guiding full-year revenue to be in the range of $5 billion to $5.4 billion. Backlog scheduled for execution in the current year is $3.6 billion. Subsea services revenue is expected to exceed $1 billion, the vast majority of which is not included in backlog today. Taken together, close to 90% of revenue at the mid-point of our guidance range is fully supported by services and scheduled backlog. We expect adjusted EBITDA margin to improve to a range of 10% to 11% driven by the execution of higher margin backlog, improving vessel utilization, and the benefits of cost reduction activities. For Surface Technologies, we expect revenue in the range of $1.05 billion to $1.25 billion, with international revenue representing around 65% of total segment revenue for the year. We expect adjusted EBITDA margin to improve to a range of 8% to 11% driven by the benefits of the lower operating cost base and a favorable revenue mix. Turning to the other guidance items. We expect corporate expense of $105 million to $115 million which includes depreciation and amortization of approximately $15 million. We expect net interest expense of $130 million to $135 million. We expect our reported tax provision for the full-year to be between $110 million and $120 million. The tax provision is impacted in the year by approximately $40 million of separation-related items and approximately $20 million of withholding taxes, which are taxes paid on revenue. We expect capital expenditures of approximately $250 million. Free cash flow which we define as cash flow from operations less capital expenditures is expected to be between $50 million and $150 million for the full-year. Importantly, I want to highlight that approximately $70 million of non-recurring separation-related expenses are included in this outlook. And this figure includes the $40 million in tax-related items just mentioned. Lastly, I want to provide further comments regarding the capital structure of TechnipFMC. In our filing made at the time of separation on February 16th, we indicated that our pro forma capital structure consisted of approximately $2.2 billion in net debt. Looking to the remainder of this year, we expect a reduction in net debt to be driven by the following: $200 million in proceeds from the sale of shares in Technip Energies to Bpifrance which we now have received. In early March, we will receive approximately $80 million in settlements associated with foreign exchange hedges related to debt repayments made at the time of the spin and free cash flow of approximately $200 million to be generated post separation when assuming the mid-point of free cash flow guidance for the year. Additionally, at the time of separation, and prior to the sale of shares to Bpifrance, we held a 49.9% stake in Technip Energies that is currently valued at approximately $1.2 billion, which we intend to monetize subsequent to the 60-day lockup period and continuing over the next 18 months.

Thank you, Alf. Before we move to Q&A, I just want to close by expressing once again how much excitement has been generated by the creation of both Technip Energies and TechnipFMC. We're very optimistic about the future for TechnipFMC and uniquely positioned as an international company with over 90% of revenue generated outside North America. An industry pure play highly levered to the Subsea market, which we believe is poised for a multi-year recovery; a fully integrated technology and services provider, supporting both the traditional and renewable energy industries; and a company that is focused on providing innovative solutions to meet the world's demand for energy, with innovative low carbon offerings like iProduction and all-electric Subsea; as the partner of choice, leveraging our extensive references as an architect and integrator, as our customers look offshore and Subsea to achieve the scale required for the new energy system. And through investment in early phase projects and solutions that accelerate the role of our technologies in the energy transition. And we'll maintain an intense focus on capital discipline and cash flow generation to accelerate the improvement in our capital structure as we continue to drive material and sustainable change in the markets we serve. Operator, you may now open the line for questions.

Your first question comes from the line of George O'Leary from TPH & Co. Your line is now open.

Just wanted to start-off with the competitive landscape in the Subsea space and the acceleration you guys have seen in awards as of late as included in the press release and the presentation. You guys have clearly kind of changed the game in the Subsea space taking costs way down adding in more digital and kind of automated technologies. And it seems like the competitors have stagnated a bit there. So just curious if it's really mostly the international paradigm that's led to you guys taking share in that market and changing paradigm there or the competitors that just kind of dropped the ball. How do you view that competitive landscape overall in the Subsea side?

Thanks, George, for your question. I'm not going to comment on our competitors and their strategies. It's important to focus on our own approach. We have a clear vision, and what you're witnessing is the outcome of that vision. It starts with our people prioritizing health and wellbeing, providing them with the necessary tools to excel in their roles. Following that, it's about our partners. I refer to them as partners rather than clients because many of our clients engage with us as partners through Alliance or Frame agreements, which gives us a unique market position that others don’t have. This is all about realizing our vision. It began with FORCE at Subsea when we introduced the concept of an Integrated FEED study. The transition to forming the company on January 17, 2017, enabled us to deliver integrated projects as the only company capable of doing so independently, controlling all aspects of the process, which we call iEPCI. Throughout this time, we were also developing the next-generation Subsea Equipment, Subsea 2.0. I have provided updates in prior quarters on our progress with integrated FEED studies and the increasing integrated projects backlog. Despite some challenges, especially in 2018 when I had to explain our reluctance to chase market share purely for vessel utilization, we stuck to our vision and model. We consciously avoided creating a backlog filled with low-profit or no-profit contracts, particularly in vessel-only agreements where day rates were unacceptably low. This meant lower utilization in the short term, but we’re now seeing improvements in our margins and positioning ourselves for ongoing outperformance. This journey was complex and took years, but we are excited about our current position. We also believe there is an upcoming inflection point in the offshore and Subsea market that could provide a multi-year growth trajectory for us.

Thanks for the color there, Doug. And then just thinking about the Surface business, you guys provided the margin targets range for the 2021 timeframe. I assume through time, even the top end of the range, you want to get EBITDA margins above those levels? What's the long-term target from an EBITDA margin perspective for that business? And what's kind of the roadmap in your mind to get more there?

Yes, that's a great question. As I often mention when discussing the Surface business, there's a clear distinction between our international and North American markets. We are making strides in increasing our market share and presence internationally. Recently, we entered two significant markets in the Middle East, thanks to strategic contracts that capitalize on our established relationships and local operations in the region. This aspect of our business is performing well. Looking ahead, we anticipate stability with much higher margins because the equipment we supply internationally meets a higher standard, tailored to the specific demands of those markets, which differ greatly from U.S. requirements. There's also less competition, allowing us further differentiation. In North America, as noted in our prepared remarks, we're observing some recovery signs. Our iComplete offering is gaining traction, and we're pushing our iProduction initiative forward in that market too. As we aim to improve margins, we'll continue focusing on expanding in the international space. However, for meaningful growth in the U.S. market, we will need increased activities and capacity utilization before we see substantial expansion.

Your next question comes from the line of Amy Wong from UBS. Your line is now open.

Hi, good morning Doug. I had a few questions about the all-electric Subsea production systems. Firstly, I'd like to understand from a pricing perspective, or kind of more discussions with your clients. How different is the pricing of using an electric system versus more conventional traditional systems. And when you're discussing with your clients, what are some of the key kind of pressure points of getting them to adopt an electric Subsea production system?

Good afternoon, Amy. Thank you. Look, we're super excited. I think I said this last quarter, or maybe two quarters ago, we think this transformation could and should happen very quickly. First and foremost, we'll come to pricing; I'll answer your question. But first and foremost, the discussion with the client is around greenhouse gas emissions. And it's not just greenhouse gas emissions, but there are other emissions associated when you're using hydraulic power versus electric power. There's a lot more generation on the top side in terms of greenhouse gas emissions. And then there's also the reality of using a hydraulic fluid versus electric and the associated risks of such. Operationally, it's preferred because you remove the latency that you have with hydraulically operated systems. And from our point of view, where it gets really exciting, Amy, is we can increase a tieback distance up to four times, four times. So imagine the opportunity set when we have more than 50% of the world's infrastructure on the seabed today and growing as our market share continues to grow. Imagine the capacity that brings to our company for very high return projects for our clients to tie back satellite fields their own or others like in the recently announced alliance we formed with Repsol Sinopec back to their producing platform. So again, the discussion is around helping them reach their ambitions around the energy transition. This is a key enabler, allowing us to move forward and expand the opportunity in the market set, leveraging our installed base and helping our customers improve their returns, and then, finally, pricing. When you put it all together, you would expect that we would receive a higher level of pricing on these types of projects, because our customers are receiving significant benefit. So it's a win-win situation.

Very clear. Just a quick related follow-up, care to take a stab at, let's say by 2025, or some timeframe, you pick what your penetration is going to be and have the new system enrolled what's going to be electric versus non-electric?

You'll hear about some awards for sure during that timeframe. I won't go too far or ahead of myself here. However, you will definitely hear from us. We currently have electric systems in Subsea, including electrically operated controls. We have significantly more all-electric activated controls in Subsea than the rest of the industry combined. One aspect that we're very excited about is not only using all-electric systems to replace hydraulic controls but also incorporating robotics for actuation, which simplifies the infrastructure. We refer to this as our Subsea robotic manifold, which is currently operating on the seabed in Brazil for Petrobras. We're thrilled to announce that we have received another award to build more subsea robotic manifolds. We're advancing into Subsea 4.0, well ahead of 2.0, as we continue to grow and develop. You'll hear more about these awards and our level of penetration; there is a large installed base, so it's not something that can change overnight. However, anyone considering Greenfield projects or long-distance tiebacks today would benefit from our all-electric options, which our clients and partners are actively exploring.

Thank you, it's very, very exciting. I'll turn it over.

Your next question comes from the line of Sean Meakim from J.P. Morgan. Your line is now open.

Thank you. And congrats on getting the spin completed.

Good morning, Sean, and thank you very much. We're excited for ourselves. And we're excited for our friends at Technip Energies.

So maybe just to start on the guidance. One of the biggest investor pushbacks coming into this release was margin progression in 2021 after the challenges in 2020, so I think there has been a lot of skepticism regarding your ability to improve margins if revenue is down year-on-year. And so there are a lot of moving parts, we've got costs have been taken out, COVID impacts are hopefully receding as the year goes on, Subsea services mix can be a help, vessel calendar has been a challenge. So you maybe just help us unpack those pieces that drive the margin guidance, including the upside and downside of that range?

Sure, Sean. I won't repeat everything I said in response to George's earlier question, but the same strategy applies here. This demonstrates our vision and commitment to achieving it. As mentioned in Alf's prepared remarks, you've likely not heard before that our margins in backlog are improving. This improvement comes from a strong commitment to discipline—we're not pursuing projects at any expense and are willing to walk away when necessary. You can see this in the public tenders, where our typical standings are evident. With nearly 50% of our revenue awarded directly through our alliance partners, particularly in Subsea Services, we are converting integrated FEED studies to direct award iEPCI, which we've indicated will grow in 2021. This scenario is significantly different from competing for day rates in a market saturated with capacity. Back in 2018, we received some tough feedback regarding our shrinking surf market share, but we maintained our direction because we believed in achieving those iFEED study conversions to iEPCI projects, which ultimately would lead to higher margins and better returns. To accomplish that, we needed to protect our fleet's capacity and avoid filling it with low or zero-margin contracts, which we chose to pass on. Now, we’re witnessing the benefits of that decision. I appreciate your remarks, Sean; this truly reflects our unique approach. We are proactively improving revenue and margins, driven by discipline and our distinctive operating model, along with a supportive client and partner network that we value deeply.

Yes, I appreciate that. And I think it's certainly good to see the turn unfolding. Maybe just turning to cash flow, some one-time cash items are impacting free cash flow this year. But the CapEx guidance is 4% of revenue. Is that a good run rate for capital intensity for the business now? And how do we think about normalized free cash flow for this business? I mean, it could be a free cash flow margin of sales; it could be conversion of EBITDA, some type of metrics that you point us to think about what this business can look like when we get through the transition period here?

This is Alf here. So let me start with I think the capital expenditure question, as you mentioned. I think it's a fair level that you're seeing a data $250 million right now, where we can sustain our business model as we see it. And you don't expect significant growth CapEx above that as we go-forward. In terms of cash flow, I don't know that I can commit to a certain level as a ratio. But clearly, what we are embarking on as a company, given our profile of our balance sheet et cetera is that we are going to be committed to generating cash. So, as you see us operating from this year and onwards, we're going to be intensely focused on generating cash. And in that, we obviously expect to drive up these ratios over time as we progress.

Your next question comes from the line of Marc Bianchi from Cowen. Your line is now open.

Thank you. Sticking with cash, the bridge from the old, the pro forma capital structure to what was most recently announced you talked about now you've got an expectation for $200 million of free cash flow post-close. And I'm just wondering if you could square that with the guidance for the year of $50 million to $100 million or $150 million excuse me, $50 million to $150 million for the year?

Yes. Let me simplify this. First, without discussing all the details I mentioned earlier, we are transitioning from our current capital structure with the Bpi funds. Additionally, we are utilizing some of the proceeds from the previously discussed foreign exchange hedges. In reality, we experienced about $100 million in outflows during the year, and we anticipate receiving $200 million in the latter half of the year. This is how we aim to restore our capital structure.

Got it, got it. That's very helpful. Thank you. And then the other question relates to Surface and the margin that you're guiding to here down from fourth quarter as the range is down from where you were in the fourth quarter. And Doug, I know your commentary about the international being better margin, it looks like international is going to be higher mix for you in 2021. So I'm just curious, I would have expected that margin to be improving from where you were. So maybe you could provide some commentary around that?

In the fourth quarter, especially in our international business, we experienced some very favorable settlements and milestones, which allowed us to recognize those benefits in the quarter. We are confident in our position and believe we are in the right locations, which is proving effective. Our long-term relationships and high levels of local content are expanding in key countries. It's important to note that a surface tree is not the same everywhere; they vary significantly based on location and technical requirements. For our Surface Technologies division, we are nearly fully vertically integrated, relying less on third parties and distancing ourselves from the commoditized market prevalent in much of North America. We view Q4 as an exceptional quarter and do not expect to replicate that performance consistently throughout the year, although we've made significant progress compared to the previous year. We are proud of our team’s accomplishments in Surface Technologies, not only in the international market but also in integrating digital solutions and transforming the North American market.

Your next question comes from the line of Waqar Syed from ATB Capital Markets. Your line is now open.

Good morning, and Doug, congrats on a successful spin-off. So, my first question is with respect to Brazil looks like in the Subsea side in new orders, Brazil is going to be a big part of the new orders. So as you look forward over the next 12 to 18 months, do you think that if you win some awards there, would that be dilutive to overall Subsea kind of margins, Brazil are neutral or additive? How do you think about that?

Thank you for your question, Waqar. To clarify, Brazil is indeed a key focus for us within South America. Over the next decade, our efforts will heavily center on Brazil, Guyana, Suriname, and other South American nations. Our unique positioning in Brazil and Guyana is something we're very proud of, providing us with advantages not available to others. We have remarkable capabilities in Brazil, having installed more Subsea equipment for Petrobras than our competitors. Our services team is outstanding, supporting top-of-the-line manufacturing of Subsea equipment, as well as rigid and flexible flowlines. This positions us well within the market, and we have established strong, long-term relationships with Petrobras, who has been an early adopter of our technology. We're actively working on innovative projects, including Subsea compact robotic actuated all-electric manifolds and CO2 reinjection solutions, which are pivotal for future production. Our hybrid flexible pipe is also progressing well in addressing industry challenges. Petrobras respects our commitment to delivering for our shareholders, and this has not hindered our performance. Additionally, we engage with two other tiers of customers in Brazil. The international oil companies (IOCs) have heavily invested in subsurface assets and are moving forward with their development plans. We've successfully completed all Subsea projects with the IOCs thus far, leading to valuable relationships as we transition from pre-sold to post-sold phases. The third tier includes a rapidly growing group of both Brazilian and non-Brazilian independents exploring deepwater developments in Brazil, where we are the preferred partner. Regardless of their experience, they trust TechnipFMC for a fully integrated solution from concept to asset support, which positions us favorably. I realize this is a lengthy response, so thank you for your patience.

No, no, that was a great answer. Thank you. And then just like a follow-up, on the services side Subsea, how do you think of revenue opportunity in 2021 versus 2020, in terms of directionally what the magnitude of the change could be?

So referring to Subsea services, correct Waqar?

That is correct, yes.

Yes, look we certainly expect that to grow in not only in 2021 but in 2022, that's being driven by let's just face it, our installed base is growing. If you just look at the market share that we have gained since the creation of TechnipFMC and the only company offering a true integrated offering. I mean, it's been substantial. As you know, back in 2019, it was 50% of our inbound or $4 billion of just integrated projects. And so all these projects come along with most I should say most, if not all of these projects come along with a very long-term service contract associated, we're installing more, and certainly we'll be installing more in 2022, 2023. So that goes up, we are servicing more of the installed base, because it's growing, our installed base is growing, plus it's aging. And on top of that, we expect to see a lot more Subsea well intervention wellbore, I should say Subsea wellbore intervention. There's a lot of Subsea wells that are offline today, because something is failed in the wellbore. As you know, we don't do wellbores, that's not our scope, but something down there under the ground, something happened and the way that the customer accesses that is to, we go out with them either on the rig or on one of our vessels, to be able to retrieve the Subsea tree, put in place the controls so that they can enter into the wellbore, perform the remedy that's required, and then reinstall our equipment. And that's a very important part of our Subsea services. So I kind of what I'm alluding to is a lot of OpEx growth, followed by CapEx growth, driving our Subsea Services growth.

Our last caller comes from the line of Chris Voie from Wells Fargo. Your line is now open.

Thanks. Good morning. Maybe just to try a little bit on cash flow one more time. So excluding the separation costs of $70 million, I think guidance suggests about 20% to 40% of EBITDA conversion in 2021. If I think about lower interest expense, and probably an opportunity for cost efficiency, and maybe tax efficiency, should future years gravitate higher compared to that 20% to 40% or is there any kind of one-time benefits this year that maybe aren't visible that could be a headwind?

So let me start and say, there aren't any material one-time benefits really to this year first of all. I think you're right about that we have certain costs that are detracting a little bit from our current ability to generate the capital that we would like. So if you look at things like interest expense, as you mentioned, if we can continue with our plan to deleverage our balance sheet, get the interest expense down, that's an important component. I think we have to work on optimizing our tax positions a little bit more. Those are a couple of items that are detractors at this point. But there's no reason that we could grow cash flow generation after considering those items as an example. And then of course, on the back of where we think the markets could be going in the long-term and generating further EBITDA would set us up for future cash flow generations.

And Alf, you stated earlier but I know how pleased we are that we've received the $200 million payment from Bpifrance and the $80 million on the reversal or the benefit from the hedges will be coming as you said in early March. So, it's not something in the distance. It's right in front of us. It's happening today. It's exactly what we said. There was some near-term, short-term capacities due to the fact that we accelerated the spin schedule from 90 days to 40 days. But we're getting back to exactly the levels that we had discussed earlier, and I couldn't be more proud of the work that is being done. So thank you, Alf.

Okay, thanks. That's helpful. And maybe just specifically on corporate expense, I guess it's tracking about $90 million to $100 million ex-D&A this year. How do we think about the opportunity to streamline those costs as you normalize in 2022 plus?

Yes, so first of all, of course, if you look at the corporate expense for 2021 and obviously, we have streamlined them a little bit already from the removal of incremental expenses associated with Technip Energies. We also further have had some cost reductions in spite of our programs in 2020. We also have some headwinds into 2021. Corporate expense that is not as visible maybe, but that includes some increase in pension liability expense, that actually is driving up the expense. So when you kind of look at that, there are going to be continued opportunities to look at driving down this cost. I'm not going to give you an exact number, but clearly it's a number that we're looking at to make sure we continue to streamline as we run this business.

At this time, I'll turn it over to Mr. Seinsheimer for any closing remarks.

This concludes our fourth quarter conference call. A replay of the call will be available on our website beginning at approximately 8 P.M. Greenwich Mean Time today. If you have any further questions, please feel free to contact the Investor Relations team. Thanks for joining us. Operator, you may now end the call.