TechnipFMC plc Q2 FY2023 Earnings Call

Thank you for joining us for the TechnipFMC Second Quarter 2023 Earnings Conference Call. All lines are muted to avoid background noise. Following the speakers' remarks, we will have a question and answer session. I will now hand the call over to Matt Seinsheimer, Senior Vice President of Investor Relations and Corporate Development. Mr. Seinsheimer, please proceed.

Thank you, Jack. Good morning and good afternoon, and welcome to TechnipFMC’s second quarter 2023 earnings conference call. Our news release and financial statements issued earlier today can be found on our website. I would like to caution you regarding any forward-looking statements made during this call. Although these 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. 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 that 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, and thank you for participating in today’s earnings call. Our second quarter results reflect both strong operational performance and the achievement of several financial commitments. Subsea inbound orders were 4.1 billion in the period, representing a book-to-bill of 2.5. We delivered strong sequential improvement in adjusted EBITDA margin for both Subsea and Surface technologies, including a 420 basis point increase in Subsea to 14.4%, the highest quarterly margin since 2018. Free cash flow was 103 million in the quarter, and just yesterday we provided two updates to our plans for shareholder distributions, with the first being the initiation of a quarterly dividend and the second announcing the doubling of our previous share buyback authorization to $800 million. Alf will cover these updates in more detail. When taken together, these successes demonstrate that we are clearly focused on what we believe to be the most important drivers of shareholder value. Continuing with total company financial highlights in the quarter, revenue was 2 billion. Adjusted EBITDA was 254 million, with an adjusted EBITDA margin of 12.9% when excluding foreign exchange impacts. Total company inbound for the period was 4.4 billion. Total company backlog ended the period at 13.3 billion. Subsea backlog grew 29% sequentially to 12.1 billion, of which 81% will be converted into revenue beyond the current year. I would like to take a moment to highlight the quality of the inbound secured in the period. Subsea orders included six integrated projects, including the direct award of our largest iEPCI to date, a contract from Equinor for the BM-C-33 development in Brazil this year. Year-to-date, iEPCI has accounted for more than 50% of our order intake. We continue to expect iEPCI to achieve its highest-ever inbound in 2023, enabled by a record level of iFEED activity that often converts to a direct award. Importantly, 70% of our orders are expected to come from a combination of iEPCI Subsea services and all other direct awards in the current year. In the second quarter, we continued to drive further adoption of our Subsea 2.0 configurable product platform. Equinor was the first to adopt the integrated project model, and on the BM-C-33 project, they will be utilizing both iEPCI and Subsea 2.0. Also in the quarter, we were awarded our fifth consecutive contract by ExxonMobil in Guyana this time for the URO development, which will also utilize Subsea 2.0. And finally, last month, we signed a 20-year framework agreement with Chevron, under which TechnipFMC plc will provide Subsea 2.0 production systems for gas field developments off Australia’s Northwest Coast. As evidenced by the addition of three new adopters in the second quarter, more and more clients are recognizing the benefits of our configured-to-order product portfolio which reduces engineering complexity, shortens lead times, and improves certainty in project execution. With strong inbound success in the period, Subsea orders for the first half of the year totaled 6.7 billion, and today we are increasing our full-year outlook for 2023 Subsea orders to reach nine billion. The backdrop remains very strong. The feed pipeline continues to expand with more projects in advanced stages moving towards FID. Our Subsea opportunity list, which only extends out 24 months, remains robust with an opportunity set of more than 23 billion based on the midpoint value of these Subsea developments. And while these projects are typically available to the broader market, the strength of our outlook is predicated on our unique view into the offshore market. This is evidenced by the fact that, over the last 10 quarters, only one-third of our inbound orders came from the opportunity list, with the other two-thirds being the result of a proprietary set of project and service opportunities that are unique to our company. As anticipated, we have seen increased activity in Subsea services. In the quarter, we announced an award from Equinor for Riserless Light Well Intervention services. This contract provides us with scope that extends out to 2025. It is also important to note that our order outlook assumes little to no benefit from new offshore frontiers. Even without this optionality, longer-term visibility is improving. Our clients are securing capacity today for project inbound that extends execution all the way out to 2030. These are among the many tangible signs we see that support our view that this will likely prove to be a very extended market cycle. Even more importantly, it speaks to the level of confidence our customers have in our ability to safely deliver their projects on time and on budget. In closing, we have strategically placed ourselves in a very differentiated position. More than 90% of our total company orders and revenue are generated outside the North America land market. We are fundamentally changing the way we operate our business to ensure that we create greater value for all stakeholders, and this is clearly being recognized by the market given the continued adoption of iEPCI and Subsea 2.0. In fact, the quarter represented the highest level of inbound activity for both iEPCI and Subsea 2.0 in our company's history. We look forward to sharing future milestones with you as we continue on our more ambitious journey ahead. I will now turn the call over to Alf to discuss our financial results.

Thanks, Doug. Revenue in the quarter was 2 billion. EBITDA was 254 million when excluding foreign exchange loss. The impact of the previously disclosed legal settlement and restructuring and other charges. Operationally, we delivered strong sequential results. In Subsea, revenue was 1.6 billion, up 17% from the first quarter. The increase was largely due to higher project activity in South America, the North Sea, and the Gulf of Mexico. Services revenue also increased when compared to the first quarter due to seasonal improvement, including higher installation and intervention activity. Adjusted EBITDA was 234 million with a margin of 14.4%, up 420 basis points from the first quarter. Results benefited from the higher revenue, improved margins in backlog, and increased installation and services activity. In Surface Technologies, revenue was 354 million, up 7% from the first quarter. Revenue increased primarily due to higher activity in the Middle East and North America. Adjusted EBITDA was 47 million, a 16% sequential increase. Results benefited from higher revenue and improved operational performance. Adjusted EBITDA margin was 13.3%, up 110 basis points versus the first quarter. Turning to corporate and other items in the period, corporate expense was 154 million. Excluding a non-recurring legal settlement charge totaling 127 million, corporate expense was 27 million. The non-recurring legal settlement charge in the period was related to the resolution of all outstanding matters with a French National Prosecutor's Office. As previously disclosed, TechnipFMC is responsible for 195 million of the legal settlement. The charge represented an increase to the existing provision to now reflect the value of the total liability. Net interest expense was 30 million, and lastly, tax expense in the quarter was 43 million. Cash flow from operating activities was 156 million, and capital expenditures were 53 million. This resulted in a free cash flow of 103 million in the quarter, supported by solid customer collections. We ended the period with cash and cash equivalents of 585 million. Net debt was 844 million. During the quarter, we repurchased 3.6 million shares for 50 million. Under the buyback program put in place one year ago, we have repurchased a total of 200 million of stock at an average price of just below 12 per share. Moving to our guidance for the third quarter, we expect Subsea revenue and adjusted EBITDA margin to be in line with the second quarter. For Surface Technologies, we expect revenue to be in line with the second quarter with the potential for modest improvement in adjusted EBITDA margin. For full-year 2023, we expect Subsea revenue to be modestly above the midpoint of the guidance range, with adjusted EBITDA margin at the midpoint. For Surface Technologies, we now expect full-year revenue and adjusted EBITDA margin to be modestly above the midpoint of the guidance range. For corporate expense, we still expect to land at the midpoint of the range. When considering our revised outlook, we now anticipate the range of outcomes for full-year adjusted EBITDA to approximate 880 million when excluding foreign exchange. Lastly, there is no change to our free cash flow guidance of 225 million to 375 million for the current year. This includes a 27 million cash payment that was made in the third quarter as part of the legal settlement. The remaining portion owed will be paid in roughly equal installments over the first three quarters of 2024. Looking further ahead, our 2025 outlook calls for significant growth in EBITDA from current levels, which we expect will translate into strong growth in operating cash flow. Let me take a moment to discuss how we think about the allocation of that capital. First, there is the investment in our business. As we have stated before, we will maintain a disciplined approach to new investment. We have demonstrated for some time now that the strategic assets we own today can be managed and maintained in a capital-efficient manner. We have established a long-term target for capital expenditures of 3.5% to 4.5% of revenue, and we continue to believe that the changes we have made to our operating model will allow us to remain at the low end of this range, even in the current period of growth. Now, I will focus on shareholder distributions. We believe that returning capital to our shareholders should be viewed as fundamental to any investment thesis for TechnipFMC. In 2022, we initiated a 400 million share repurchase authorization, and yesterday we added an additional 400 million, doubling the authorization to a total of 800 million. As I stated earlier, we have completed 200 million of share repurchases under the authorization to date. Additionally, we delivered on our commitment to a dividend announcing a quarterly dividend of 0.05 per share, which equates to a 1.1% annualized yield based on yesterday's close. When the dividend and buyback are taken together, we are committing to distributions that will exceed 60% of our annual free cash flow generation through at least 2025. We also expect shareholder distributions to grow in line with or better than the growth in total company EBITDA in 2024. While there is potential for the dividend to grow over time, our current expectation is that the majority of distributions will come from share buyback, as evidenced by the significant expansion in the repurchase authorization. The final component of capital allocation relates to the balance sheet. We remain committed to achieving investment-grade metrics, and we are confident that our current financial plan can achieve that. The strength of our balance sheet today allows us to be more focused on capital investment and shareholder distributions. At the same time, we will retain the flexibility to reduce net debt. Importantly, this capital allocation framework is not aspirational; it is a commitment one that is supported by changes to our business and execution models, both of which are driving sustainable improvement in our financial performance.

David Anderson with Barclays. Your line is open.

So the massive Subsea order intake this quarter sort of speaks for itself in the wake of all the offshore FIDs we saw this quarter. So just curious, in your view, that incremental billion dollars that you are looking at in the order outlook this year. Are these orders being pulled forward, compared to what you were expecting, or are these on top of what you internally forecast as it relates to that three-year order outlook that you provided earlier this year? Thanks.

Thanks, Dave. I appreciate it. I think that is an important point to clarify. The strength of the first half is obviously exceptional, including this quarter, which was truly exceptional, not just in quantity but in quality. And that is why I really tried to emphasize that in my script. We continue to be very selective. We are humbled and honored to be in a position to do so. And we clearly demonstrated in the prepared remarks the quality of that inbound in the quarter. As we look forward, we remain deeply committed to the 25 billion by 2025. There's no concern, if you will, about things being pulled forward. We are very confident, even more so obviously, but remain extremely confident in the 2025 outlook for 25 billion by 2025. What's kind of unique about the strength of the first half of the year is it has enabled us to take a view of 2024, which I know is a bit earlier than we normally would, but I'm actually going to let Alf share the good news.

Well, thank you, Doug. Yes, clearly, the strong Q3 inbound, which primarily will impact revenue in 2024 and beyond is going to be very beneficial for us to move forward with an outlook here. So this is an early look. As I mentioned in my prepared remarks, our updated company guidance for full-year 2023 is approximately 880 million of adjusted EBITDA excluding the foreign exchange component. That implies roughly 30% growth versus 2022. So now if you take that and look into next year, and given the strength of the first half of inbound and how much of that will actually impact 2024, and given how the quality of that inbound helps the margin embedded in the backlog, my confidence in our ability to successfully meet our commitments is strong. On top of that, I believe we can deliver growth in adjusted EBITDA of 35% in 2024.

So that was actually where I was going. My follow-up question, I guess, is sort of related to this. I'm just curious about manufacturing utilization and how that might change in the next coming 12 to 24 months. And maybe you just answered part of that just with the surge of orders in the first half of the year. Doug, I think you said 70% of the inbound this year is Subsea 2.0 or somewhere thereabouts. Even if the orders - even if the peso orders were to slow a bit in the second half, I'm just wondering, would you expect to be kind of close to full utilization or at least what you would consider optimal manufacturing utilization? How about the back part of 2024? Just sort of thinking about Subsea margin progression, lighter the higher than expected throughput next year and into 2025?

Sure, Dave. So, we laid out already our ambition for 2025 to take Subsea margins all the way to 18%. We updated that, I think, just a couple of quarters ago. Obviously, having these high-quality orders gives us that greater confidence. And it is not only the confidence to be able to achieve the margins but also to take the volume and give our customers the confidence to be able to give us the orders because they have seen the profound change that Subsea 2.0 or the configure-to-order operating model has had on our company. And they have all been on this journey with us. The vast majority of them have spent considerable time within our facilities. They see what it does to the pace and the cadence and the throughput, which is what really allows us to continue to enjoy the success and have confidence in the road that we are on. And I will always repeat what we said here a few quarters ago, which are these are major milestones, but they are just that—major milestones on a more ambitious journey.

Understood, thanks Doug. I appreciate it.

Doug, I wanted to get your thoughts on just the quality or mix of orders that you are seeing this year. You now expect 70% of your orders to be integrated services, direct awards, or subsea services. And I just wonder if you could talk about how the market is evolving for Subsea 2.0? And how does the favorable mix impact your thoughts on your 2025 margin guide of 18% in Subsea?

Thank you, Arun. Clearly, the market has spoken both in terms of Subsea 2.0 and in terms of iEPCI, both setting a record this quarter, with iEPCI now achieving 50%. It is quite remarkable. Again, we remain very humbled with the level of confidence and trust that our clients put into our company. These are major projects, but they do so because of the operating model that exists. Their greatest focus is on ensuring quality capacity within the industry. We have demonstrated time and time again to them that they see what we've done with our new operating model and our ability to deliver projects safely, on time, and on budget, and that really remains the primary focus for them. So look, I think the 70% is a phenomenal metric, unique to us, and one that we cherish, and there's no reason to see it vary significantly from that 70% because our journey is not done. We are well into the next generation of our operating model as well as the innovation and technology we are bringing to the market for both traditional and new energy.

Great. My follow-up, Doug, I was wondering if you could describe what you are seeing in some of the emerging offshore basins, more exploration-driven. Patrick at Total had some positive comments on Suriname, and we did note that you raised in your subsidy opportunity list the potential project size to over $1 billion in Block 58. So wondering if you could give us a sense of what you are seeing in some of these emerging deepwater basins—Suriname, Namibia, et cetera?

Sure. I mean that is—we can add South Africa, Tanzania, Colombia, the Eastern Med resurgence in Mexico and Mozambique, all to that list. The first two are important to note as there are a lot of eyes on Suriname and Namibia. It is important to note that in our $25 billion inbound objective, it does not depend on these emerging basins, which will give strength to what happens in the latter part and into the next decade. As these projects will continue to add significant levels of subsea opportunities going forward. We remain very focused; our intent is to treat those basins and to create early success as we have done in Guyana and Mozambique. And that is by working very closely with our partners, building upon our long-term relationships and bringing them something unique from the rest of the market, which is the iEPCI 2.0.

Great, I will hand it back. Thanks Doug.

You just had a monster quarter in orders and raised your guide for the year, but this doesn't include any 2.0, which you have talked about could be, I believe, over $8 billion in orders through 2030. Can you talk more about this product? When do you think an order can be received and maybe how conversations are going with customers?

Sure, Luke. Thanks. Actually, it was a pretty big quarter for us in terms of our milestone on the journey. We have been working through a joint industry program with all of the major players that you would expect, and they are actually working with us on a standard all-electric system that will fulfill the opportunity set that they need. At the same time, and I talked about this maybe a quarter or two ago, what's really drawing our attention is the CC U.S., or in particular, what we call the integrated carbon transportation system, where we will take the CO2 from the emitter offshore and inject it subsea, which would be the most favorable way to do it, both from an ESG point of view and from a social point of view. The CO2 market is really looking like it is going to benefit from our configurable eCO2, as we call it. This is designed to be unique for that application, and we are seeing several opportunities for that at this time. The benefit we have is we have over 600 systems installed using our all-electric technology, mainly around the valve actuation. They have been in the water a long time. They have been tested for a long time. They are the industry standard. So we will be able to build on that as we develop the complete subsea all-electric architecture. I do want to include our relationship with Halliburton in this as well because it is about providing electric controls in the wellbore that don't rely on electric hydraulics, allowing us to go to an all-electric system. I think what we have put together between our technology and that with our partners is quite unique. We continue to be excited not only for traditional energy but also for the CO2 market regarding all electric systems.

Alright, great. Thanks, Doug.

So Doug, yes, I wanted to maybe get a little bit more insight around this competitive moat that TechnipFMC has been able to develop with Subsea 2.0 as well as the iEPCI, et cetera. And you kind of heavily emphasize the amount of business that is coming in because of that dynamic. So how much of a competitive moat is that, how long can you sustain it? And what are the key factors for an oil company when they are deciding to go with what you are doing? Is it economics related? Is it execution related? Just wanted to give a little more color because I know you've got a lot of opportunities here extending out into the end of the decade, and clearly, the oil companies find a lot of value in what you are doing. So just looking for more insight on that.

Sure, Kurt. First and foremost, we are extremely respectful of our competition and respect what they do. We have chosen to take a different path, starting back in 2014 or 2015, with the Subsea 2.0 engineering work that led to the joint venture and the creation of TechnipFMC on January 17, 2017. It is really a combination. We are doing things differently, we believe better, but again, respectful of our competitors. We have built deep relationships with our customers where they know they can trust us and know that we are focused on this business. We are a pure play; this is what we do. Our challenge is to create success for our customers to ensure that the offshore market continues to be economically robust for them. How do we do that? We have a relentless focus on certainty because what they are looking at is an economic view that yes, there is a capital cost to do the project, but it is the certainty in the delivery that matters. Projects delivered late negatively affect economics, and we offer a unique value proposition with iEPCI 2.0, giving them first oil or gas up to a year earlier than our competition. This greatly impacts their project returns upfront, but they trust that we will deliver. We’ve consistently demonstrated this commitment, and they acknowledge that we are doing things differently.

Great, that is awesome color. So one other thing that you flagged here today was this 20-year framework agreement with Chevron. I know that TechnipFMC has had framework agreements with major oil companies for periods of time, but clearly you felt it was extremely important to highlight this one in particular. So is this, in your mind, the start of a trend where you are going to see more opportunities to have these extended framework agreements? Just to add a little more insight if you can on that, that would be great.

Sure. As you pointed out, we have a long history of deep and long relationships, many of which are exclusive with our company and have really built differentiation for us. We earn those every single day. The reason specifically for calling out the Chevron framework agreement was because of the adoption of Subsea 2.0. So this is the first framework agreement with Chevron where they are going to the Subsea 2.0 configurable product family, which was a real highlight for us.

I wanted to ask a little bit more about the orders for this year. Now you have got this upgraded guidance of $9 billion. That leaves about $2.3 billion in the second half. How are you thinking about the unannounced and announced portions of this? By my math, it would seem to assume maybe a slightly lower unannounced piece and almost zero large awards. Is that the right way to be thinking about the outlook here?

Marc, I don't know that I would draw any—might be early to draw any strong determination of the mix. There will be more announced awards; I will certainly confirm that. Obviously, the strong base from our subsea services and, as you know, the continued level of unannounced awards. What you saw in the second quarter was just exceptional. I think I just want to ensure the focus remains on the $25 billion. That is where our focus is. Our confidence in our ability to achieve the $25 billion in the next 10 quarters has increased significantly.

This concludes our second quarter conference call. A replay of the call will be available on our website beginning at approximately 8:00 p.m. British Summer Time today. If you have any further questions, please feel free to reach out to the Investor Relations team. Thanks so much for joining us. Jack, you may end the call.

This concludes today's conference. We thank you for your participation. You may now disconnect.