Earnings Call Transcript - FTI Q2 2022

Operator, Operator

Thank you for joining us for the TechnipFMC Second Quarter Earnings Call. To minimize background noise, all lines are currently muted. Following the speaker's comments, we will open the floor to questions. I would now like to hand the conference over to Matt Seinsheimer, Senior Vice President of Investor Relations and Corporate Development. Mr. Seinsheimer, please proceed.

Matt Seinsheimer, Senior Vice President of Investor Relations and Corporate Development

Thank you, Jack. Good morning, and good afternoon, and welcome to TechnipFMC's Second Quarter 2022 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 US 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.

Doug Pferdehirt, Chair and Chief Executive Officer

Thank you, Matt, and congratulations on your recent promotion and your expanded role. Thank you for participating in our second quarter earnings call. Before I comment on the strong operating results in the period, I want to first talk about yesterday's announcement regarding shareholder distributions. At our Analyst Day in November of 2021, we shared with you what we believe to be an appropriate capital structure for our company. Since then, we have made substantial progress towards our goal. In the second quarter, we successfully reduced gross debt by more than $500 million, and we remain confident in our ability to achieve our stated target of $1.3 billion. This targeted capital structure will ensure that we can maintain strong access to credit and allow for continued investment in our business through the cycle. Given our debt reduction to date, we now have the flexibility to begin shareholder distributions, as evidenced by the announcement of an authorization to repurchase up to $400 million of our common stock. This represents 14% of the company's outstanding shares at yesterday's closing price. We firmly believe that our shares are undervalued and that the share repurchase program underscores our confidence in the long-term outlook for our company. Simply put, buying our shares is one of the most compelling investments available to us today. In addition to this opportunistic approach to shareholder distributions, we have reaffirmed our intent to initiate a quarterly dividend in the second half of 2023. Our debt reduction, share repurchase announcement, and reaffirmation of a dividend distribution are all important milestones in delivering greater shareholder value. Turning to our financial results, I am very pleased with the solid performance demonstrated in the quarter, and the strong start to the year. Total company revenue in the period was $1.7 billion. Total company adjusted EBITDA for the quarter was $187 million, exceeding the expectations we outlined on our first quarter call. Adjusted EBITDA margin was 10.9%. Total company inbound orders were $2.2 billion driving another quarter of sequential backlog growth to $9 billion. In Subsea, quarterly inbound was $1.9 billion. Inbound for the first half of the year was $3.8 billion, a book-to-bill of 1.4 with iEPCI direct awards and Subsea Services, representing approximately 70% of total orders. Project awards inbound in the period included ExxonMobil's Yellowtail development in Guyana, where we were given full notice to proceed. The Subsea production system includes 51 enhanced vertical Deepwater trees, as well as 12 manifolds. We were also awarded a new flexibles contract from ExxonMobil for high-pressure, high-temperature risers for the Yellowtail development. And we received a contract from TotalEnergies to supply subsea production systems for the CLOV3 development offshore Angola. This is the first contract under the company's new framework agreement, covering Subsea 2.0 trees for brownfield developments in Block 17. As previously highlighted, our high volume of feed activity and unique client partnerships support our view that the Subsea tree awards for the total industry will likely exceed 350, a level not seen since 2013. In the first half of this year, TechnipFMC has already been awarded 117 trees. This is nearly double the volume we sold in all of 2021 and serves as further indication that the industry is in full growth mode. Earlier this month, we announced the award of an integrated FEED or iFEED by Equinor for the BM-C-33 project, offshore Brazil. The study includes an option to proceed with a direct award to our company for the iEPCI phase of the project. Upon FID, this would be one of the industry's largest integrated awards to date. This will also be the first time Equinor uses our configure-to-order production systems and further underscores our view that more than 50% of our tree orders will be Subsea 2.0 over the next two years. And within our new Energy Ventures business, two tidal energy contracts were recently awarded in the UK. The multi-turbine projects will be capable of delivering 7.2 megawatts of predictable tidal energy through our partnership with Orbital Marine Power. This award positions us as the leader in floating tidal energy. The first half order trends clearly demonstrate the strong momentum of the Subsea market. The underlying strength is also displayed in our Subsea opportunity list, which increased by 20% from the first quarter update and now represents an opportunity set of $24 billion for the industry based on the midpoint value of these offshore developments. It is also important to note that the list does not fully reflect the underlying strength of the market. There are 12 distinct customers represented on this list, most of which have participated in subsea developments for many years. However, our first half inbound was composed of more than 40 operators across all basins, illustrating the growing diversity of our customer base. Based on our strong first half results, the growing project pipeline, and the active dialogue with our large and expanding customer base, we expect full-year Subsea orders will be up as much as 40% versus the prior year, above the previous forecast of 30% with orders now approaching $7 billion in 2022. Moving to Surface Technologies, we are pleased with the sequential improvement in our results. We saw good growth in North America sales and profitability. And we continue to move pricing higher as needed to ensure we earn an acceptable return on our investments. As previously indicated, our results outside of North America were impacted by the startup of our new manufacturing facility in Saudi Arabia. We have now completed the facility audit and most administrative milestones leading to our first in-country orders. This sets the stage for improved financial performance as we ramp production in the second half of the year. Alf will provide more detail on our outlook for the remainder of the year. Now let me close my remarks with a simple message. We are very focused on delivering on our commitments. First, we said we would restore the balance sheet to a more appropriate capital structure. And in the quarter, we reduced gross debt by an additional $530 million to $1.5 billion. Second, we said we would initiate shareholder distributions and we have now made sufficient progress towards our capital structure to do so. This action has been accelerated a full 12 months ahead of schedule and reflects our view that a balanced approach to debt reduction and share repurchase is warranted, given the significant discount in our share price relative to peers and the long-term prospects of our company. Finally, we remain focused on meeting our financial commitments in 2022 and beyond. We are very confident that we will deliver results within the full-year guidance framework provided back in February. And looking further ahead, we remain confident that our internal initiatives coupled with a strong market backdrop provide us with a clear path in achieving Subsea EBITDA of more than $1 billion by 2025. I will now turn the call over to Alf to discuss our financial results.

Alf Melin, CFO

Thank you, Doug. Total company inbound orders reached $2.2 billion for the quarter, with strong contributions from Subsea at $1.9 billion. The total company backlog climbed 2% sequentially to $9 billion. Quarterly revenue was $1.7 billion, while adjusted EBITDA stood at $187 million. Our second-quarter income from continuing operations was $2 million, including after-tax charges and credits that resulted in a net expense of $6 million. Excluding these charges and credits, our adjusted income from continuing operations was $8 million, or $0.02 per share. These adjusted results also accounted for a loss of $30 million related to the early extinguishment of debt. Moving to segment results, Subsea revenue was $1.4 billion, reflecting a 10% increase from the first quarter, mainly due to heightened project activity in Africa, the North Sea, and Brazil. Revenue from Subsea Services also rose compared to the first quarter because of seasonal improvements, particularly in installation activity. Adjusted EBITDA for Subsea was $176 million, with an adjusted EBITDA margin of 12.4%, up 240 basis points from the previous quarter. Adjusted EBITDA increased sequentially by 36%, largely driven by higher revenue and greater installation and service efforts. In Surface Technologies, revenue reached $303 million, a 14% rise from the first quarter, primarily due to accelerated growth in North America, fueled by ongoing drilling and completion activities. Adjusted EBITDA for this segment was $32 million, marking a 47% sequential increase, benefiting from higher activity and improved pricing in North America. Outside North America, adjusted EBITDA saw modest growth owing to the transition to a new manufacturing facility in Saudi Arabia. The adjusted EBITDA margin was 10.7%, an increase of 250 basis points from the first quarter. Regarding corporate and other items, corporate expenses totaled $22 million, net interest expenses were $28 million, and tax expenses amounted to $20 million. Cash used in continuing operations was $97 million, while capital expenditures were $36 million, leading to a free cash flow consumption of $133 million in the second quarter. As previously noted in our full-year guidance, we anticipate free cash flow to be concentrated in the latter half of the year, similar to our 2021 trend. Our subsea operations typically experience higher activity levels in Q2 and Q3, which drive significant milestone collections in the second half, with Q4 being our peak cash generation period. In April, we sold our remaining four million shares of Technip Energies, fully exiting our position with total proceeds of $1.2 billion since the separation. In May, we completed a tender offer for $430 million of our outstanding 6.5% senior notes due February 2026. Gross debt decreased by $530 million in the second quarter to $1.5 billion, a reduction of over $1 billion since the spin-off in the first quarter of 2021. We closed the quarter with cash and cash equivalents of $685 million and net debt of $790 million. Looking ahead, we have reaffirmed our 2022 guidance, with all metrics staying within the previously communicated ranges for your modeling purposes for the remainder of the year. For Subsea, we expect revenue and adjusted EBITDA margin for the full year to be around the midpoint of the guidance range. The third quarter should mirror the strong results reported in Q2 for both revenue and adjusted EBITDA margin, benefiting from sustained strong activity and improved backlog margins. For Surface Technologies, we anticipate full-year revenue to be at or slightly above the midpoint of the guidance range, with third-quarter revenue expected to rise by up to 10%. We also project incremental EBITDA margins near 30% for the rest of the year. While North America was the main contributor to growth in the first half, we anticipate the second half to be led by international markets, particularly in the Middle East, supported by ramped-up production at our new facility in Saudi Arabia and an uptick in regional activity. In summary, we achieved a significant reduction in gross debt during the quarter, underscoring our commitment to a robust balance sheet. This initiative not only enhances our capital structure but also gives us the flexibility to advance shareholder distributions, a decision backed by our confidence in future free cash flow generation. I am optimistic that the improved operational performance across both segments positions us well for a strong second half and further advancements in 2023.

Operator, Operator

Your first question comes from Chase Mulvehill with Bank of America. Your line is open.

Chase Mulvehill, Analyst

Hi. Good morning. I guess, good afternoon over in Europe. So Doug, first question just kind of thinking about the macro here and obviously you gave us a good update on the Subsea opportunity list $24 billion. But if we can look past that a little bit and just think about tieback opportunities, could you talk about tieback opportunities out there? And maybe how much you think that's still left out there? I mean obviously, we've been doing a lot of tiebacks over the past few years. So just trying to understand kind of how much of that opportunity kind of still sits out there.

Doug Pferdehirt, Chair and Chief Executive Officer

Sure. Good morning, Chase. Actually, you raised a really good point. If you look at the Subsea opportunity list, which increased 43% since this time last year and now represents $24 billion, you are correct in pointing out that the majority of these are actually large greenfield projects. Behind that is a significant amount of tieback or brownfield activity that is still ongoing. I don't know that I'd call it even middle innings. We're still fairly early and there's lots of opportunities. And you can see that in our inbound numbers in the first half, where a large portion of the inbound number is actually coming from unannounced awards, or if you will, some of the smaller awards that aren't always, but are often in that category of tiebacks or brownfield. So simply stated, it remains extremely robust. There's a lot of activity. It is the shorter cycle part of Subsea and it's one that our integrated model, coupled with our Subsea 2.0 platform, makes us the partner of choice, because we can deliver those projects in 12 to 14 months, which has a huge impact on the tieback opportunities and a reason why we've been, if you will, doing so well in that market.

Chase Mulvehill, Analyst

Okay, a quick follow-up. I'm not sure how far I'll get with this, but I’ll try. You mentioned that for 2022, the Subsea margins are expected to be around the midpoint for the full year. Since you're securing a strong backlog, likely with better pricing and margins, I’m assuming that points toward improved margins in 2023. However, I realize it might be too early for you to provide specific details. Could you give us some guidance on how we should think about margins in Subsea for 2023?

Doug Pferdehirt, Chair and Chief Executive Officer

Chase, I would have been surprised if you didn't ask. So, certainly, worth asking. I think it is a bit early to give segment guidance, if you will. But no doubt, the market is setting up very nicely, particularly for us, because of the large portion of direct awards that are a result of the unique iEPCI offering, the large installed base in Subsea services, as well as our partners and the direct awards that we received from our partners. So we remain very excited about the remainder of 2022 as well as 2023. But I'm going to turn it over to Alf to maybe give you a bit of color, more from a total company perspective than a segment perspective.

Alf Melin, CFO

Yes. Thank you, Doug. And certainly, it's a little bit early to give specific guidance here for 2023. But what we can say is that we do expect continued revenue growth and that is in both segments. And when we look, maybe, at company EBITDA, we are on track to grow up to 20% based on the progress we've seen so far. So, for instance, the second consecutive quarter of $1.9 billion of Subsea inbound and the total inbound approaching $7 billion and indeed the Subsea orders continue to be booked at average margins that are accretive to backlog. And then, when you just quickly glance at Surface, we certainly continue to see continued progression in our Surface margins as well. So that's probably the color I can offer at this point in time. But the takeaway is that, the company EBITDA is expected to go up in 2023 and we are currently saying up to 20%.

Chase Mulvehill, Analyst

Okay. Perfect. Sounds good. I'll turn it over. And congrats, Matt, on the promotion.

Matt Seinsheimer, Senior Vice President of Investor Relations and Corporate Development

Thank you, Chase.

Operator, Operator

Your next question comes from the line of Mark Wilson with Jefferies. Your line is open.

Mark Wilson, Analyst

Hi. Good morning, gentlemen. I'd like to ask about the profile of the free cash flow and cash generation from here. And specifically, what is different going forward versus, let's talk to the past 12 months, or since the separation of Technip Energies. You had a net debt 1Q last year of just under $1.8 billion, is just under $0.8 billion now. So there's $1 billion of deleverage and you've sold $1.2 billion of energy shares. You spent about $250 million of CapEx. So it suggests roughly cash breakeven over the last 12 to 18 months. And so, could you just take us through the moving parts that changed that profile going forward. Doug or Alf, in terms of your own self-help of your cost versus the market pricing and the pass on cost, one imagines. Everyone's talking about inflation, but, yes, these moving parts as we look forward to this cash generation. Thank you.

Alf Melin, CFO

Thank you for the question. To begin with, I admit that Q2 was a bit softer than we had anticipated. We experienced some net working capital outflow during the quarter. Specifically, the fluctuations from quarter to quarter stem primarily from the timing of achieving milestones related to billings and collections, especially for our Subsea projects. This remains the main factor influencing our quarter-to-quarter variations. Like last year, we anticipate this trend to continue, particularly in our Subsea operations. As I mentioned earlier, the activity level in Subsea significantly impacts our progress, which in turn affects our contract assets and receivables in Q2 and Q3, leading to collections in the later part of the year. We expect this pattern to repeat itself this year. Our confidence is bolstered by our visibility into these milestones and their related collections, which reinforces our overall guidance. This will, of course, be a key driver for our annual cash flow. In a broader sense, regarding EBITDA, we foresee continued progress. We expect to maintain a favorable ratio between depreciation and amortization compared to our capital expenditures. For this year, our expected CapEx is around $230 million, and we anticipate that it could potentially come in below that figure. We expect to keep that favorable ratio while also adding new capital investments. As noted during our Analyst Day, we indicated that our CapEx would be in the range of 3.5% to 4.5% of our revenue. Currently, we are on track at the lower end of that range, and I don't foresee any factors that would significantly increase it as we look ahead. Those are some of the key dynamics at play, and I hope this provides clarity. Doug, would you like to add anything?

Doug Pferdehirt, Chair and Chief Executive Officer

Sure. Why don't I add a little bit on the cost side, Mark, to your question. We talked a lot about this at the Analyst Day back in November. A lot of what we have been doing in the company to iEPCI changing the commercial model Subsea 2.0 enabling configure to order, or CTO as our new operating model, both give us significant cost leverage because we can get the benefits of scalability and we're seeing that. And if you remember back in the guidance we gave in November of last year, which was Subsea margins would expand to 15% by 2025 along with revenue growth, doubling the EBITDA of Subsea that had very little pricing element involved. There was activity there was volume because our revenue was going from $5.5 billion to $7 billion, but we're in a very different environment today. And we're seeing the benefit of all the hard work and the innovation and now the saturation with Subsea 2.0, 50% of our orders over the next two years we expect to be Subsea 2.0 that creates that ability to really start to get that cost leverage. And then on top of that we are certainly in a very different pricing environment than we had envisioned just six months ago. So, net-net very favorable.

Mark Wilson, Analyst

That's great information. Yes, there's a lot to discuss about this at the Analyst Day, so I appreciate the follow-up. Doug, can I ask about Subsea 2.0? Are you just beginning to introduce the equipment sets that you've developed? Can you provide some insight into how many of those are currently in the market?

Doug Pferdehirt, Chair and Chief Executive Officer

Yes. We started commercializing Subsea 2.0 at the end of 2017 and into 2018. We began receiving orders in 2019, but 2020 was a challenging year for everyone. Now, orders are increasing as expected, and we anticipate growth of up to 50%. When you factor in the usual delivery schedule, you can see those installations starting to happen. I don't have an exact count on the number of Subsea 2.0 installations, but they are progressing well. We have received repeat orders from all our customers who have used Subsea 2.0. Notably, some customers, like TotalEnergies, have decided to exclusively use Subsea 2.0 for their brownfield activities in Angola. Overall, we are witnessing positive developments, and we are very pleased with the success of Subsea 2.0.

Mark Wilson, Analyst

Excellent. Thank you for the color. I’ll hand it out.

Operator, Operator

Our next question comes from the line of David Anderson with Barclays. Your line is open.

David Anderson, Analyst

Hi, Doug, how are you?

Doug Pferdehirt, Chair and Chief Executive Officer

Very well. Good morning, David.

David Anderson, Analyst

Good morning. So order has taken a big leg up here as you mentioned since 2013. So long time since we've seen us. I was wondering if you could talk a bit about your manufacturing footprint, your capacity and how it sits today compared to the last time we saw this. Last time the market really expanded, not necessarily just a number of trees but more where it is, what's changed and your expectations for operating leverage with particularly this configure-to-order model, which I would think would drive quite a bit of that.

Doug Pferdehirt, Chair and Chief Executive Officer

Well, David you're spot on. And it's actually an intriguing question because in this environment you think we'd be announcing big capital increases and adding more manufacturing capacity, adding more fixed assets. We said we were going to change the way business was done. We were going to develop our model, so that we could drive higher returns and sustainable returns and attractive through-cycle returns. And David if it wasn't for 2.0 and the ability now to be able to leverage the configure-to-order model would be in a very different situation. So we have doubled the Subsea 2.0, CTO allows us to double the throughput capacity within the same footprint. So we've actually reduced manufacturing capacity roofline, but increased our throughput capacity. That's just exactly what we want to hear and we believe our investors want to hear. And it's what sets us up I believe to deliver very different results than what is typical at this point in the cycle when companies are increasing their capital budgets to accommodate the growth. In addition to that beyond the manufacturing, you know we've changed the operating model in the industry by partnering with others and using their assets and providing them access if you will to our market, much of which is proprietary because of the integrated model and the direct awards that we have, allowing them access to that market where we can utilize their floating assets to support our fleet without us having to add additional capacity to be able to service this growth. So this is our approach. We're going to remain very disciplined, but still grow the company, which I think is the best of all scenarios.

David Anderson, Analyst

I wanted to follow up on the trees. You mentioned that 50% were Subsea 2.0. Does that imply that the other 50% would use the CTO model? Is that correct, or will you apply the CTO model to non-Subsea 2.0 as well? I may have gotten that a bit mixed up.

Doug Pferdehirt, Chair and Chief Executive Officer

Yeah. That's a great question. And yeah the best way to think about it is 2.0 enables CTO. So CTO equals 2.0.

David Anderson, Analyst

Okay. Thanks. So my other question was on your Surface business. Obviously a really good leverage to the Middle East rig count. You talked about this briefly. I was wondering if you could expand a little bit more on what's going on in the market right now. We've heard mixed things. It sounds like things are idling. But I would think with the rig counts picking up that you're already starting to see a pretty big pickup in demand on that Surface side and also does that new manufacturing facility in Saudi, does that cover all of your needs in country or do you still have to bring some stuff in?

Doug Pferdehirt, Chair and Chief Executive Officer

Sure, Dave. Let's begin with what we see as the most significant growth market for us in Surface, which is the Middle East. This extends beyond just Saudi Arabia to include the UAE, Oman, Kuwait, and others. There is a considerable amount of investment happening in the Middle East right now. The facility we established in Saudi Arabia will meet 100% of our needs as well as Aramco's. This means we will be fully integrated within the country, and we are taking a similar approach in the UAE. This is indeed our most important market. We are well positioned, and as we mentioned in the prepared remarks, we are currently accepting new orders with expectations for a gradual increase. This process will not be instantaneous, but we anticipate strong growth by the end of the year, leading into a solid run rate for 2023. North America also remains strong, though we believe it does not have the same growth potential. However, there are limitations in capacity as we have stretched our available resources, both in terms of personnel and physical assets. It is crucial for us to achieve acceptable returns, and because of this, we are requiring higher price points for the work we are doing in the North American market.

David Anderson, Analyst

Pretty clear. Thanks, Doug.

Operator, Operator

Your next question comes from the line of Arun Jayaram with JPMorgan. Your line is open.

Arun Jayaram, Analyst

Good morning, Doug. I wanted to see if you could talk a little bit about the pricing dynamic you're seeing within the industry. You mentioned the potential for 350 Subsea tree awards this year. And one of the things we did note is going back to Schlumberger's call that they noted improving pricing dynamics and the fact that their backlog was growing. And that was going to be a key driver of their second half growth. So just wanted to get some thoughts on what you're seeing in terms of pricing?

Doug Pferdehirt, Chair and Chief Executive Officer

Sure. Good morning, Arun. I agree with Schlumberger's comments, but the difference is we're experiencing it now, not just in the second half. It's apparent in our current results. I want to emphasize that our goal is to capture a larger share of the economic value we provide to our customers. We have long-term relationships, many of which are exclusive to our company and some have lasted over 20 years. We continue to innovate and differentiate ourselves. As we create greater economic value for our customers, they willingly share a larger portion of that value with us. We are definitely reaping the benefits of this approach. The iEPCI model combined with our unique Subsea 2.0 offering enables us to gain this value share. Additionally, as I mentioned earlier, there’s cost leverage involved as well. We are benefiting from both sides while ensuring we deliver greater economic value for our customers and better project returns. We achieve this by completing projects significantly ahead of what others in the industry can manage, which would not have been possible without creating a single integrated company and investing in technology and innovation, as demonstrated by Subsea 2.0. This is what gives us confidence as we move forward.

Arun Jayaram, Analyst

Great. And my follow-up Doug, is that we've seen a lot of fluctuations in the currency; the US dollar has appreciated significantly against the euro. You had a very small currency impact in the quarter, but how should we think about the impact on your business from a stronger dollar?

Doug Pferdehirt, Chair and Chief Executive Officer

Sure. I'm going to have Alf comment.

Alf Melin, CFO

Sure. Let's discuss the financial statement impact on our company. A significant portion of our backlog originates from business units that use a functional currency different from the US dollar. This situation doesn't cause an economic loss but results in a translation of foreign exchange, which has led to a decrease in our backlog by over $300 million this quarter alone. Although our total backlog remains at $9 billion, you can see that impact. Additionally, as the US dollar continues to strengthen, the revenues and earnings in non-US dollar currencies will convert to slightly lower amounts when reflected in our financial statements. This is the most immediate effect you will notice. We are also actively managing our cash flows and balance sheet to limit foreign exchange gains and losses, so there shouldn’t be any extraordinary issues there. It's worth noting that there are some currencies we can't hedge, particularly in Africa. As these African currencies fluctuate against the dollar, this will also affect the foreign exchange line, causing some variance. These are the main impacts from the strengthening dollar.

Operator, Operator

Great. Thanks a lot. Your next question comes from the line of Marc Bianchi with Cowen. Your line is open.

Marc Bianchi, Analyst

Thank you. I wanted to talk a little bit more about free cash flow. So you kept the guidance for the year and that would seem to imply sort of $600 million to $750 million of free cash generation in the back half of the year. First part of the question is just wondering if, sort of, the lower end of that range is more appropriate now just given how the first half developed. And then if you could put a finer point on what to expect in third quarter that would be helpful.

Alf Melin, CFO

We continue to aim for the midpoint of our free cash flow target, which we are confident we can achieve. The variation between the low and high points will depend on the timing in the fourth quarter, specifically how quickly we meet certain milestones and the speed at which these convert into billings and collections by year-end. This will primarily determine whether we land at the higher or lower end of the range. Nonetheless, we have visibility to reach the midpoint of our guidance. Regarding the third quarter, as I mentioned, accurately predicting cash flow on a quarterly basis is challenging, but we do expect positive cash flow in the third quarter. It's important to note that most of our cash generation is anticipated to occur in the fourth quarter, which remains our expected pattern for the year.

Marc Bianchi, Analyst

Yes. That's helpful. And then on the buyback in the context of that cash flow progression. Should we be thinking about the buyback more likely to be occurring when you're having strong periods of free cash generation, or are they sort of independent from each other?

Alf Melin, CFO

Yes. So maybe to say it this way. So, first of all, I mean, we're very pleased with our share buyback program announcement now. I mean, it describes how much we're satisfied with the progress we've already had on the leverage and balance sheet. And we really believe this is a question of timing. Also, we do believe that the current share price reflects an undervaluation of our company. And with this in mind, we're certainly going to have a balanced approach going forward where we can take advantage of call it the undervaluation, while also being committed to having a strong balance sheet. So in that mix certainly free cash flow is going to make a difference. But it doesn't mean that we sit completely on the sidelines either as long as the valuation is through where we see favorable economics to do share buyback.

Marc Bianchi, Analyst

Okay. Thank you very much.

Operator, Operator

Our final question comes from the line of Waqar Syed with ATB Capital Markets. Your line is open.

Waqar Syed, Analyst

Thank you. Doug, I have a broader question. We've observed a significant improvement in the outlook for offshore. Do you think the recent catalyst has been the energy security issues, or do you believe that even without that, the trend was always moving towards increased offshore activity as the cycle progressed?

Doug Pferdehirt, Chair and Chief Executive Officer

Thank you for the question. It's important to clarify that this trend has been developing over time and is now becoming more apparent. There isn't a single catalyst or a short-term effect driving this. This has been an ongoing process, and we believe that the preference for investment in offshore projects for various reasons has been growing and will continue to do so.

Waqar Syed, Analyst

Thank you very much. That's very helpful. I have one more question regarding the significant issue of supply chain inflation that we're observing everywhere. Your margins have remained strong based on the guidance you've previously provided. Firstly, how are you managing inflation in your backlog? Additionally, how are you addressing the supply chain challenges affecting your throughput? It seems that your results have been relatively unaffected by these issues that are impacting the global landscape.

Doug Pferdehirt, Chair and Chief Executive Officer

Thank you for the question. I appreciate your recognition of our management efforts, which is something our shareholders expect from us. It's undoubtedly challenging, but it is a reality we face. With proactive planning and strong relationships with both customers and suppliers, we can navigate these tough times to create mutual benefits. Our approach has always been to support our suppliers, even through the difficulties experienced during the pandemic, and our customers have reciprocated that support. There are many contractual and legal reasons that allow us to do this, but it’s important to treat people well, as they will remember how you treat them and respond accordingly. When we look at the current market, we received 117 trees in the first half of the year with a goal of 350 for the entire year. This gives a sense of our market position. Our suppliers recognize that this is our core business and understand that by aligning with us, they are cooperating with a leading partner both now and in the future, which comes with certain advantages. This approach has been beneficial for us, and I am proud of the work our team has done in building and maintaining these relationships. We continue to support our supply chain, and while there are contractual obligations, the way we operate is unique and yields positive results, as we can see today.

Waqar Syed, Analyst

Thank you very much, Doug. Appreciate the colors.

Operator, Operator

I will now turn the call back over to Matt Seinsheimer.

Matt Seinsheimer, Senior Vice President of Investor Relations and Corporate Development

Thank you. 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 for joining us. Jack, you may end the call.

Operator, Operator

We thank you for attending the TechnipFMC, Second Quarter Earnings Call. We thank you for your participation. You may now disconnect.