TechnipFMC plc Q4 FY2021 Earnings Call

Hello and welcome to the TechnipFMC Fourth Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. We ask that you limit your questions to one plus one follow up. I would now like to turn the call over to Mr. Matt Seinsheimer, please go ahead, sir.

Thank you, Lisa. Good morning and good afternoon and welcome to TechnipFMC’s fourth quarter 2021 earnings conference call. Our news release and financial statements issued yesterday can be found on our website. I would 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. 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 Chair and Chief Executive Officer.

Thank you, Matt. Good morning and good afternoon. Thank you for participating in our fourth quarter earnings call. 2021 was truly a breakout year for TechnipFMC. We are confident that we have entered a multiyear up cycle for energy demand with continued strength in inbound orders expected for our company through at least 2025. 2021 marked the inflection in order activity. With total company inbound awards growing an impressive 33% versus the prior year to $6.8 billion. Total company full year adjusted EBITDA was $580 million, with an adjusted EBITDA margin of 9.1%, a 300 basis point improvement on the prior year. Free cash flow from continuing operations was $523 million, more than double the high end of our guidance range. Beyond this much improved financial performance in 2021 were several notable accomplishments. We started the year with a partial spinoff of Technip Energies, successfully creating two industry-leading companies. Since the time of the separation, we have sold the majority of our remaining stake, generating proceeds of more than $1 billion. When combined with our strong free cash flow, these sales have contributed to a significant reduction in net debt, which declined nearly 70% over the course of the year to $678 million at year-end. As an industry-leading pure-play company, we concluded the year by hosting our Analyst Day, providing a comprehensive update on the path forward for TechnipFMC. During the event, we highlighted the tremendous success of iEPCI, the industry-changing commercial model we introduced just five years ago, which has strengthened our offering, expanded our alliances and positioned our company as the subsea partner of choice. We demonstrated how we are continuing to drive change with industrialized product suites like Subsea 2.0, which are transforming how we operate our business while also lowering the carbon footprint of conventional oil and gas developments. We introduced New Energy Ventures, which will position TechnipFMC as a key player for the development of novel sources of offshore energy as well as carbon transportation and storage. And lastly, we provided our longer-term view of the energy market, which serves as the basis for intermediate term financial outlook that extends to 2025 and illustrates the significant long-term potential we see for TechnipFMC across both traditional and new energy markets. Turning to segment inbound. The order momentum experienced in 2021 extended across the company, with Surface Technologies full year inbound increasing nearly 70% versus the prior year to $1.8 billion. Orders outside North America more than doubled when compared to 2020. This included a significant portion of the segment's largest ever award, a multiyear contract from Abu Dhabi National Oil Company to provide wellheads, trees and associated services. This contract is a resounding endorsement of our 40-plus year relationship with ADNOC. The Middle East represents one of our largest market opportunities this decade. Under the frame agreement with ADNOC, TechnipFMC will further grow in-country talent, and expand existing manufacturing, assembly and test capabilities in Abu Dhabi in order to deliver the company's complete portfolio of surface wellheads and trees locally. This follows the recently completed expansion of our manufacturing capabilities in Saudi Arabia, which supports our commitment to develop a diverse and capable local workforce as part of Saudi Aramco's In-Kingdom Total Value Add Program, or IKTVA and Saudi Vision 2030. In North America, our recently launched digital solution, eMission is the next level of optimization for surface production facilities. Using process automation and data, the system provides constant monitoring and adjustments in real time to minimize flaring by up to 50% while maximizing oil production. The technology is core to our iProduction offering and can be applied in existing facilities globally. Turning to Subsea. Full year inbound orders of $5 billion increased 24% versus the prior year. We experienced further adoption of iEPCI in the year, including further geographic expansion. Operators using the integrated approach for the first time included Karoon, whose Patola field will be our first iEPCI in Brazil; Tullow, which utilized our Subsea Studio digital solution to optimize field layout for the Jubilee development in Ghana; and Petrobras, which will utilize both iEPCI and our Subsea 2.0 platform for the Limbayong Deepwater Development Project offshore Malaysia. The improved inbound orders in the year also reflected continued strength in South America. In Guyana, we were awarded the subsea production system for ExxonMobil's Yellow Tail development, our fourth consecutive award within the Daybrook development. In Brazil, we further strengthened our relationship with Petrobras, announcing several awards in the year, including three long-term vessel charters, which will serve the Brazilian market for multiple years; a contract to supply subsea manifolds utilizing our second-generation all-electric robotic valve controller for the Marlim and Voador fields; and an award to supply equipment and services for the Buzios six through nine fields and three frame agreements for the manufacture of more than 500 kilometers of flexible pipe over the next four years. For the full year, iEPCI, direct awards and subsea services represented more than 60% of our total inbound, a testament to our innovative leadership, intimate client relationships and strong track record of execution. Importantly, these orders often provide us with a unique opportunity set that goes beyond the publicly identified projects and speaks to both our market positioning and industry relationships, providing TechnipFMC with the most comprehensive view of the market. Our subsea opportunity list has expanded to a record level of more than $20 billion, providing increased visibility into the middle of the decade. The continued growth in part reflects the very robust front-end activity experienced throughout 2021. Given the extensive opportunity set and our strong visibility, we remain confident that we will see a multiyear subsea up-cycle with the potential for inbound orders to reach $8 billion in 2025. Looking more closely at 2022. Our early engagement in client partnerships supports our view that subsea tree awards for the total industry are likely to exceed 350, a level not experienced since 2013. We anticipate subsea inbound order growth of up to 30% in 2022, with iEPCI direct awards and subsea services approaching 75% of our inbound orders. Our growth expectations also highlight continued expansion in greenfield opportunities as well as increased tieback activity with growth from these smaller projects coming primarily from the North Sea, Gulf of Mexico and West Africa, all regions in which we have a strong presence and are well-positioned due to our extensive installed base. With this higher level of activity, we also anticipate an acceleration in the market adoption of Subsea 2.0. We estimate 50% of our subsea tree orders over the next two years will be 2.0. And this will provide us with the volume needed to leverage a configure to order, or CTO operating model. While not a new concept, CTO is revolutionary to our industry and allows us to leverage the efficiencies of standardization while still addressing the unique requirements of individual projects. All of which can be selected from a product catalog that unlocks efficient manufacturing and servicing of our equipment. CTO has enabled us to create a value stream that delivers a more competitive offering to the market, resulting in a 25% reduction in cost, a 50% reduction in product delivery time and manufacturing throughput that has more than doubled within our existing footprint. Looking beyond CTO, which is all about how we operate our business, we continue to pave the way forward with the introduction of new subsea technologies, including all electric systems. Electrification offers advantages to all subsea wells and is particularly well-suited for the development of long tiebacks, gas fields, water injection and carbon transportation and storage. In subsea services, we expect revenue growth of approximately 35% by the end of 2025. This growth will be driven by market expansion, new technology introductions and other commercial initiatives. Our revolutionary Gemini, remotely operated underwater vehicle, is transforming the ROV industry through disruptive technology and delivering optimized performance. Our first two Gemini systems were successfully deployed with Shell. And based on this success, the client has awarded us contracts for three additional Gemini systems. We are now expanding this service across our customer base. Additionally, our integrated Life of Field model is designed to unlock the full potential of subsea infrastructure by transforming the way services are delivered and proactively addressing the challenges faced over the Life of the Field. Looking further ahead, we are confident that oil and gas will remain an important part of the energy mix for an extended period of time. While this view is supported by the outlook for higher global energy demand, we also recognize that we are in the early stages of the energy transition. To address the evolving markets, we recently announced the formation of New Energy Ventures or NEV, where we are leveraging our core competencies, capabilities and investments made over the last several years. We have appointed a dedicated leadership team, who has extensive industry knowledge, and are focusing on our contribution to the energy transition through three main pillars: greenhouse gas removal, offshore floating renewables, including wind, wave and tidal energy, and hydrogen. In these target areas, we see a total addressable market of close to $80 billion for TechnipFMC by the end of 2030, and we anticipate NEV inbound orders of $1 billion through 2025. In order to accelerate our growth, we are leveraging our extensive experience and project integration to approach these opportunities with a new execution model. Integrated offshore novel energies or simply I1. We have demonstrated our ability to successfully collaborate with key industry players over the last year. We have made announcements regarding several strategic agreements and partnerships, some of which have already resulted in real project opportunities. In greenhouse gas removal, last year, we entered into a long-term strategic alliance with Talos Energy to develop and deliver technical and commercial solutions for carbon capture and storage projects along the United States Gulf Coast, where feed activity has been initiated on multiple projects. As for renewables, we announced just last month that our partnership Magnora Offshore Wind was successful in the ScotWind leasing round application, where the proposed development project will have a total capacity of approximately 500 megawatts, which could power more than 600,000 homes in the United Kingdom. And today, we are announcing a hydrogen storage MOU with Storengy, a subsidiary of Engie, which has the potential to accelerate the development of a ready to scale-up solution for the underground storage and utilization of green hydrogen across Europe. We are making solid and tangible progress and are fully committed to playing a meaningful role in this challenging yet exciting period of transition. We believe we have the right competencies, resources and teams to make this a very successful journey. And we are confident that as the energy transition accelerates, so too will the opportunity set for TechnipFMC. I will now turn the call over to Alf to discuss our financial results.

Thank you, Doug. At our Analyst Day in November, I reiterated our increased focus on cash, both cash generation and capital discipline, which we believe are essential to increasing shareholder value. I am proud of the efforts made across the organization as we delivered strong free cash flow of $423 million in the quarter and a much improved balance sheet with net debt declining to $678 million at the end of the period. I will spend more time on these topics shortly. But let me first provide a broader recap of our results. We finished the year strong with total company inbound orders of $2.1 billion in the quarter. Subsea inbound was $1 billion, putting full year orders at $5 billion, an increase of close to 25% versus the prior year. Surface Technologies achieved inbound of $1.1 billion, which included the multiyear award from ADNOC. Full year inbound was $1.8 billion, an increase of nearly 70% from last year. Total company backlog was $7.7 billion at the end of the period. Fourth quarter total company revenue was $1.5 billion with adjusted EBITDA of $130 million. For the full year, we delivered on segment guidance for both Subsea and Surface Technologies. Fourth quarter reported loss from continuing operations was $0.28 per diluted share, which included after-tax charges and credits that netted to an expense of $71 million or $0.16 per share. These charges included the following: expenses totaling $42 million related to impairment, restructuring and other charges. The majority of these charges relates to the continued optimization of our global footprint and a loss of $30 million on our equity ownership in Technip Energies, which primarily relates to the unfavorable change in fair market value during the period. When excluding the impact of these charges and credits, our adjusted loss from continuing operations was $0.12 per share. The adjusted loss included a loss on an early extinguishment of debt of $22 million and a Foreign Exchange gain of $5 million. Turning to the segment results. In subsea, revenue was $1.2 billion, down 6% from the third quarter. Adjusted EBITDA was $124 million with an adjusted EBITDA margin of 10%, a sequential decline of 120 basis points. Both revenue and adjusted EBITDA were negatively impacted by reduced product activity in Africa and Australia and the seasonal decline in services activity, particularly in the North Sea. In Surface Technologies, revenue, up $287 million, increased 7% from the third quarter. Results benefited from increased activity internationally and the continued recovery in North America. Adjusted EBITDA was $29 million, a 2% increase sequentially. Results benefited from improved operating performance in North America, partially offset by investment in new international manufacturing capacity. Adjusted EBITDA margin was 10.1%. Turning to corporate and other items in the period. Corporate expense was $30 million, which included $2 million of restructuring and other charges. Net interest expense was $34 million and tax expense was $39 million. Cash from continuing operations was $484 million, which benefited from strong performance in customer collections in the period. Capital expenditures were $61 million. Free cash flow from continuing operations was $423 million in the quarter and for the full year was $523 million. We ended the quarter with cash and cash equivalents of $1.3 billion. We reduced gross debt by $251 million, sequentially. Net debt at the end of the quarter was $678 million, a reduction of nearly 70% since year-end 2020. During the year, we sold approximately 75% of our stake in Technip Energies for proceeds of $901 million. In January of this year, we sold an additional 9 million shares for total proceeds of $135 million. As of today, we retain a direct stake of 12.9 million shares or 7% of Technip Energies issued and outstanding share capital. Moving to our full year 2022 outlook. In subsea, we are guiding for revenue to be in the range of $5.2 billion to $5.6 billion. Backlog scheduled for execution in the current year is $3.4 billion. Subsea services revenue is expected to grow to approximately $1.2 billion, the majority of which is not included in backlog today. Taken together, over 85% of revenue at the midpoint of our guidance is fully supported by scheduled backlog and services. In 2021, we delivered a 200 basis point expansion in subsea adjusted EBITDA margin, and we are confident we will see an improvement again this year. We expect adjusted EBITDA margin to be in the range of 11% to 12%, a further 100 basis point increase at the midpoint of the range. Notably, we are expecting continued margin improvement even when assuming the midpoint of our revenue guidance, which implies essentially flat revenue versus the prior year. This highlights that changes we have applied to our business model are translating into improved operational and financial performance. For Surface Technologies, we expect revenue in the range of $1.15 billion to $1.3 billion, an increase of 14% at the midpoint. We expect North America, which represented just over 35% of revenue in the fourth quarter to grow at a faster rate than the overall segment. We expect adjusted EBITDA margin to improve to a range of 11% to 13%. This guidance considers that our investment in new international manufacturing capacity in support of the strong Middle East outlook will continue to be a headwind in the first quarter, with a reduction in EBITDA margin of approximately 100 to 200 basis points versus the fourth quarter. I will now highlight several of our other guidance items. We expect net interest expense of $105 million to $115 million, an improvement of approximately $30 million versus 2021, driven by further reduction in debt. Capital expenditures are expected to be approximately $230 million or 3.5% of revenue at the midpoint of guidance. Free cash flow, which we define as cash flow from operations less capital expenditures, is expected to be between $100 million and $250 million for the full year. Similarly, to 2021, we expect free cash flow to be weighted to the second half of the year, with the first quarter expected to see a net outflow due to the payment of annual incentives and timing of working capital consumption. Full year free cash flow in 2022 assumes only a limited use of working capital, therefore, sustaining the improvement we achieved in 2021. When all of these items are taken together, our 2022 guidance at the midpoint implies adjusted EBITDA of approximately $670 million, a year-over-year increase of 15%. I will now turn the call back over to Doug for a few closing remarks.

Thank you, Alf. Before moving to Q&A, I want to reiterate our view of the intermediate term outlook. The inflection for the energy markets is here. And we also believe this cycle is different in a way that will accelerate its impact on our company. Since 2015, offshore economics have materially improved and subsea cycle times have become significantly shorter. This has resulted in new subsea investment coming much earlier in the cycle and more in parallel with U.S. land markets. We believe these changes are fundamental and sustainable as a result of new business models and technology pioneered by our company. Importantly, TechnipFMC is well positioned for the anticipated activity growth given our leadership in both Subsea and the Middle East. The acceleration across these markets has created a multiyear up-cycle in our business. We are confident that this outlook, combined with the changes we have made to our business model, will translate into improved operational and financial performance. Subsea EBITDA margins of 10.5% in 2021 were 200 basis points above the prior year, with margins set to improve an additional 100 basis points to 11.5% at the midpoint of our 2022 guidance. The timing of our Subsea margin expansion is particularly noteworthy, occurring much earlier in the recovery than in previous cycles, further supporting our goal of achieving 15% margins in 2025. Our strong project execution and continued industrialization of our operations leaves us well positioned to see improved EBITDA across the entire portfolio, including the potential for Subsea EBITDA to nearly double by 2025 with several of the key drivers firmly within our own control. This along with our emerging role as the offshore architect for the energy transition will allow us to thrive in both present and future energy markets. Operator, you may now open the line for questions.

Your first question comes from the line of Ian MacPherson with Piper Sandler.

Thanks. Good morning. Hi, Doug.

Good morning, Ian.

I was curious about the outlook for orders. You're expecting subsea orders to grow roughly 30% this year, which seems like a modest upgrade from the previous guidance of $7 billion over the five quarters, including the last quarter. The 2025 target of $8 billion suggests a significantly lower growth rate from 2022 to 2025, which might indicate some conservatism, but I'd like to hear your thoughts on that. Additionally, we understand that Bonga has slipped again, according to media reports, making it seem less promising for 2022. Could you share your insights on how the rest of your pipeline appears to be improving or becoming more likely for this year, excluding Bonga?

Let me start with the numerical part of the answer. When we provided the guidance of $7 billion over the next five quarters, which includes Q4 and the four quarters of 2022, we were coming off a year with $4 billion of inbound, and we expected to be in the range of approximately $4.5 billion to $4.7 billion of inbound for 2021. As you pointed out, we achieved $5 billion in 2021, representing a 24% to 25% increase from the previous year. This year, we are looking at an additional 30% increase, bringing us to around $6.5 billion. So the transition from $7 billion over $5 billion changed to $6.5 billion over $4 billion, which is impressive, given our previous position, and the growth rate is quite remarkable. Looking ahead, at the Analyst Day, we projected $8 billion for 2025. Could that happen sooner? Yes, but we are not altering that perspective at this moment. We are confident in reaching $6.5 billion for 2022. Moving on to the major developments in the Subsea opportunity list, which has now grown to $20 billion from $19 billion last quarter. You mentioned Bonga, and I agree it's likely not a 2022 event. Where do we see activity increasing? South America is already very active, and it's heating up, leading to an acceleration of projects. We're also expecting more activity in the Norwegian sector of the North Sea, and significant developments in Asia Pacific, particularly in Malaysia, as well as in Africa. We're being asked to speed up and advance projects at a pace we haven't seen in a long time.

That's great. And none of that sounds surprising at this point given the state of play in the markets. On the surface side, congratulations, by the way, on the big ADNOC award. I don't know if I missed this in the prepared remarks, but have you described how much of that was reflected in the Q4 bookings, I don't think all of it was?

So as far as in the impact to Q4 was minimal, as far as the inbound and the way that we inbound that project, we only inbound about 50% of the total project value, so there will be more to come in the future.

Hello. Thank you. Good morning. I have two questions, if possible. First, regarding the guidance for 2022, could you provide insight on how depreciation is expected to change year-over-year? Do you anticipate it will be lower than last year? My second question concerns market share. Of the 350 wellhead estimate you mentioned for the total market, could you share your expectations for your market share? How does that compare with the 2013 figures you referenced for FMC technology? Thank you.

Sure. Let me address the question about market share, and then Alf will discuss the 2022 depreciation. We don’t usually discuss market share, or even tree count for that matter. We appreciate you bringing it up. It's been a while since we mentioned it, particularly since the formation of TechnipFMC. As I've mentioned many times, we are involved in much more than just delivering trees nowadays, which is why we prefer to focus on the subsea opportunity set. We provide total contract values to give better visibility beyond just the subsea tree numbers. In fact, I haven't talked about the Christmas tree count in about four years. The reason we're bringing this up is that there's a lot of misinformation out there that we felt needed clarification, and as the market leader, we have a responsibility to address it. That’s why we announced the 350 tree count. We expect to be well above pre-pandemic levels, and it's been almost a decade since we've reached this level of activity. A few noteworthy changes have occurred during this time. Approximately 30% to 40% of the total manufacturing capacity has been eliminated. We and our competitors have significantly reduced our manufacturing capacity, which has created a favorable economic situation for our company. More importantly, we can continue to grow while reducing manufacturing capacity. How is that possible? That’s the essence of the Subsea 2.0 initiative, which began in 2017, and the configure-to-order model we introduced at our Analyst Day last November. This model allows us to double our capacity with a smaller manufacturing footprint. In other words, our demonstrated capacity has stayed consistent, and our ability to deliver remains unchanged. This is not the case for others who have also reduced capacity but may lack the necessary volume, scale, or technology platform to succeed with the CTO model. In summary, our market share is definitely increasing.

Yes, hello, Mark, this is Alf here. Just coming back on your depreciation and amortization question. It's basically going to be very flat year-over-year. So no, no market difference in what you saw in 2021.

Got it. Okay. I just want to elaborate on your points. Doug mentioned the CTO model and the efficiencies in the manufacturing process and the system dynamics quite well. Looking at the guidance for 2022, my main concern is whether this business can achieve a positive net profit in that year. Based on what you mentioned about depreciation, it seems that if exceptional items are minimal, there's a strong possibility of that happening. Do you anticipate the business will return to profitability in 2022?

Yes, we are projecting a positive net income at the bottom line for next year. And yes, the amount of neutral charges would come down overall from where we were in 2021.

Good morning. FTI is generally viewed as a late-cycle stock. The OFS strategy has focused more on the short cycle in North America. It's interesting that you mentioned a decline in subsea cycle times, which may align more with U.S. land trends. Could you provide some evidence to support this perspective? Additionally, what differences are you noticing this cycle in terms of subsea orders compared to previous cycles?

Arun, thank you for your question and for highlighting that in the prepared remarks. It was indeed one of the main messages we aimed to convey today. I understand that many are reflecting on historical trends. It is true that more of the North America leveraged stocks typically see benefits first before the offshore stocks start to gain traction in a cycle. The offshore stocks have a longer tail and benefit when things slow down; they don’t experience changes as abruptly as what occurs in U.S. land. However, this cycle is different. We hope the numbers we are reporting show this. Our growth rate aligns with the growth in the Permian Basin. We are experiencing margin expansion that normally wouldn’t happen until the second or third year of a cycle; we are seeing this expansion now, specifically a 300 basis point increase in subsea margins from last year to the midpoint of this year’s guidance, with more expected. This change is happening in real time. Internally, we’ve always perceived that the U.S. land sector was ahead of us, but now both sectors are moving forward simultaneously. We want to emphasize that our sector has started to gain momentum. We believe we have provided the investment community with sufficient data—from Analyst Day to the 2022 guidance—to illustrate a clear trajectory of what’s taking place. If you analyze customer capital expenditure spending, you’ll see where customers with exposure to both U.S. land and offshore markets are focusing their CapEx growth. It’s evident that offshore has many strong attributes, especially in this phase of the energy cycle, including a lower greenhouse gas footprint. These offshore operations produce some of the lowest greenhouse gas barrels from highly productive reservoirs and have a relatively stable regulatory environment compared to other areas.

Great. My follow-up, Doug, you mentioned a subsea revenue guidance of approximately $5.4 billion for 2022 at the midpoint, with an EBITDA margin of around 11.5%. During the Analyst Day, you projected a 2025 subsea revenue outlook of $7 billion with a 15% margin. As we look to connect the dots between 2022 and 2025, do you anticipate the interim years of 2023 and 2024 to follow a more linear trend? How do you view the revenue and subsea margin profile shaping up between these two periods?

No, thanks. I'll return to Ian's question and my response, which hopefully provided some insight into how that shape could evolve. We are not offering guidance for 2023, 2024, or 2025 at this time, as we have only released guidance for 2022. You now have those two benchmarks to consider. It's a valid question. Reflecting on what I mentioned earlier, Ian, we're experiencing a level of intensity in our client conversations that I haven't seen in a long time, particularly in terms of acceleration. It's difficult to predict exactly, but if we take a linear approach, there may be some upside potential.

Thank you, Doug and team, for taking my question. My first inquiry is about capital allocation. We saw a significant free cash flow figure for Q4 and for the entire year of 2021. I'm assuming net debt is lower than you expected at the end of the year, at least compared to your previous guidance. At the Analyst Day, you mentioned reducing gross debt to $1.3 billion. My question is whether, given the strong free cash flow performance in Q4, there have been any changes in your capital allocation strategy regarding shareholder returns. Is the plan still to reduce gross debt to $1.3 billion before taking any other actions, or is net debt approaching a level where you might consider speeding up that timeline?

Thank you, Taylor. I agree that we are very proud of our ability to reduce net debt. A 70% reduction along with positive momentum gives us ample confidence. I don’t want to take any of the joy away from Alf, who is very pleased these days. So I’ll pass it over to Alf to finish the answer.

Thank you, Doug. We are very pleased with the Q4 free cash flow generation, which exceeded our expectations and has positioned us well with net debt below $700 million. As you mentioned, we are on track to achieve the target capital structure we discussed at the Analyst Day, aiming for cash around $800 million and debt of $1.3 billion. This represents significant progress for us. Regarding capital allocation, we remain committed to reducing debt and distributing to shareholders as previously indicated. We still have $700 million left to reach the $1.3 billion target, so this will continue to be a key focus. We anticipate fulfilling our scheduled debt servicing this year, which totals about $200 million. We will also explore options for further tendering outstanding debt when it's economically viable. Additionally, regarding our senior notes, we have a call provision in the first quarter of 2023. Moving on to shareholder distributions, as mentioned on Analyst Day, we intend to initiate a sustainable dividend in the second half of 2023 and will consider share buybacks to enhance shareholder value. With improved cash flow, we may assess the possibility of starting distributions earlier in the second half of 2023, including share buybacks if it is feasible. However, the priority remains ensuring we maintain metrics to secure long-term access to credit, so we do not want to lose sight of the necessary deleveraging while also keeping some flexibility to reinvest in our business as we continue on this growth path. I hope this provides some clarity.

Yeah, does. Thanks for that. And just a follow-up unrelated on supply chain. A lot of your peers are still struggling through a number of supply chain-related issues. And I imagine you're dealing with a lot of the same issues today, but not readily apparent in the numbers for the back half of 2021 or in the guidance for margins in 2022. So just curious if you could give us an update on all things supply chain related? Are things getting worse as we enter 2022? Or have some of the issues you've been dealing with kind of flatten out? Just curious on all sorts of topics there.

Thank you, Taylor. As you mentioned, this is quite a broad topic. I appreciate your acknowledgment of our performance in the current environment. We understand that we are not immune to the circumstances we face, and it is our responsibility to navigate through them. In 2020, we encountered unexpected challenges that have had lasting impacts, alongside ongoing supply chain and logistics difficulties. Just consider the momentum we are achieving in spite of these obstacles. If conditions were to improve or if we experienced some favorable changes, the potential for earnings growth in this company could be significant. This is why we take pride in our performance without highlighting it every quarter. While we acknowledge that our guidance and operating results could be stronger without these challenges, it is our duty to manage these issues and provide our shareholders with consistent progress. It’s worth taking a moment to recognize how much more we could achieve if we were not faced with these headwinds. Thank you again, Taylor, for your insight.

Okay. Thanks, Doug.

Thanks, I guess, Doug, you mentioned trees. So I'm going to ask more about trees. This may be the last time we talk about it on a call for a while. The 2013, looking back, I think the industry awarded something like 550 or that was the estimate at the time. You mentioned that a bunch of capacity has come out. But I think along that discussion, you also mentioned that your efficiency and your ability to kind of do more with less has also improved. And I would suspect that's the case for your peers. Can you just kind of walk us through how the competitive dynamic has evolved over the past couple of years? And how that sits today? I mean I know that a large portion of your business is maybe not exposed to that well with iEPCI and such, but just how that looks and what the anticipation is for 2022?

Sure, Marc. I wanted to address a few points. There's no evidence or significant volume of orders indicating that others in the industry are moving to a CTO model. I don't agree with the notion that others have made this transition. While they may have improved, they're still developing basic versions of their products. Achieving a CTO model requires not just volume but also a solid technology platform, like our Subsea 2.0, which we began developing well before 2017 and announced in that year. Currently, it accounts for 50% of our projected orders. This has been a long journey, and it's clear that others either haven't started or are far from reaching this capability. Our market position is such that it's unlikely others can attain the volume needed for a CTO model. We're proud of this achievement, and our customers recognize and reward us for it. Regarding the marketplace dynamics, I pointed out in my remarks that as of 2022, 70% of our business comes from iEPCI and direct awards from customers and alliance partners, alongside subsea services. I've never experienced such a close relationship with clients in any professional context. Our focus and commitment to being a pure play have helped us become exceptional partners, giving us great visibility and benefits like managing supply security. We maintain strong relationships with our suppliers, who rely on us for consistent volume. Unlike in the past, where we experienced cyclical trends, we are now seeing steadiness in our incoming orders. While fluctuations will always exist, it’s a rewarding place to be. We are grateful for our position, which stems from the trust our customers have in us, and we strive daily to uphold that trust.

Okay, thanks for that, I guess talking more – more near term on the – the guidance for surface talks about a decline in margin in the first quarter, any commentary on subsea as we go through ’22? I mean, my base case assumption would be, I don't know, you get based on historically, you get kind of like 65% of the business in the middle two quarters of the year, and then the first and the fourth, or the balance, but any further color on how it shapes up.

No. Actually, thank you. That's a good clarifying question for everybody. And we don't see any real change to that pattern. Clearly, Q2, Q3 will be the strongest. Q1 will not be as strong and that's Q1, Q4 mainly being driven down because of the weather conditions in certain parts of the world and also a reduction in our subsea service activity during those quarters. So if you will, Q1 step up in Q2, Q3 and then an adjustment back down in Q4 as is the typical pattern. Nothing atypical that we see at this point.

Hi, and thank you for answering my questions. Doug, you discussed a significant amount of supply being removed from the market in trees and at least 350 next year, which I appreciate. Can you provide some insight into pricing? It seems that a strong rebound in smaller capacity should lead to good momentum in pricing and incoming orders. Additionally, I recall that in 2017, the pro forma order intake for the combined company was around $50 billion. While I understand there has been deflation, are there any comments you can share to help us compare the current conditions as closely as possible? Lastly, could you provide more visibility on the movement of contract assets and liabilities within working capital? If it’s project-specific, that’s fine. I just want to understand if there were any consolidation effects, or what drives those movements. Thank you.

Sure. There was a lot to address, so I'll try to focus on the important points. Regarding our outlook, we are confident that 350 trees will be awarded in 2022, and we hold a significant market share of those awards, enabling us to achieve our goals. Due to the 2.0 initiative and our CTO, we can operate with a smaller manufacturing footprint, which we have already reduced by eliminating entire facilities no longer part of our company. The pricing implications of this move, based on basic supply and demand economics, are favorable. We don’t discuss pricing in the subsea market often, mainly because 70% of our business is awarded directly through our alliance partners in iEPCI or subsea services. We're not pricing against our competitors; instead, we work closely with our clients to ensure we secure a fair economic benefit from the project, which is why they award contracts to us. This collaboration tends to lead to favorable pricing as our clients trust us to deliver results that meet their economic needs for successful project execution. While we don’t emphasize pricing much, the indicators are certainly positive. In terms of pricing in the North American market for Surface Technologies, we are facing inflation across the board, necessitating frequent price adjustments. However, this can place limits on the economic value of those projects. It's a necessary approach to endure the conditions in the U.S. land market. It’s also worth noting that a large portion of our revenue is generated internationally and isn't tied to the U.S. land market, although acknowledging the inflationary environment there is essential. In our subsea contracting model, we have mechanisms to mitigate, delay, or transfer these inflationary pressures. Overall, pricing remains good, with most activity concentrated in the surface business and particularly in the U.S. land sector, which is a small part of our overall operations experiencing inflation. The pricing in this area helps to counterbalance the inflation effects. Beyond that, I’ll let Alf share additional insights.

Yes. Regarding contract assets and liabilities, I want to clarify that the significance of these numbers has diminished compared to when the E&C business was still part of our company. At the end of this year, our net contract liabilities might be around $45 million. Previously, we likely had a positive net position, but this slight change is expected. There is usually some fluctuation, but it won't significantly impact our working capital. In the fourth quarter, our focus was more on collecting from customers and converting our receivables and assets into cash, while also working on reducing our inventory. Thus, this does not play a major role in our net contract liabilities.

Got it. Thank you guys.

Maybe just one other comment I'll make, back to kind of the original part about the geographical mix and stuff. I do think it's important that we note that post the spinoff, if you look at the pro forma filings of TechnipFMC and certainly what we'll be filing here in the coming days in regards to 2020 to 2021. I just want to make sure that it's clear to everybody that our exposure to Russia is far less than 1% of our revenue, less than 1% of our total revenue. I just wanted to make sure that we had made that point as well.

Thank you. This concludes our fourth quarter conference call. A replay of the call will be available on our website beginning at approximately 8:00 pm Greenwich Mean Time today. If you have any further questions, please feel free to contact the investor relations team. Thank you very much for joining us. Lisa, you may end the call.

This concludes today's conference. You may now disconnect.