Técnicas Reunidas, S.A. (TRE) Earnings Call Transcript & Summary

Hello. Good afternoon. This is Eduardo San Miguel. Welcome to this first quarter 2020 results presentation that will be conducted, as always, by Juan Lladó, CEO of the group. It will take something like 15 minutes, and you can pose your questions in the Q&A session that comes after the speech. And now I give the floor to Mr. Juan Lladó.

Hi. Hello. I don't know whether you can hear me well as I have the speaker a bit further away. Let me get a bit closer, just in case. Okay. This is a presentation -- as I said, this is unprecedented presentation because times are different and difficult. But the message here, I'm going to -- within this context where we're going to go through this presentation, which is going to be brief, is how we're managing TR within this context, this pandemic context. We'll do a review of our results, our balance sheet position and our results, and then we'd -- I will give some reflection about how do I see the future for TR or the outlook. Obviously, we've been caught by surprise like everybody. It's been a surprise to everyone with this big, huge crisis, with oil prices not only collapsed, there were markets were that were absolutely broken. Customers are scared. Nobody really knew what was going to happen the day after. And now we're facing -- and it's true, we don't know when we'll come back again to normal markets, so will we have to manage a world recession. And how are we and how it's with TR based in these circumstances. Very often, I use the term lucky because it's true, we've been lucky. Napoleon wanted to have lucky generals, and I think I have a very lucky management as well, bright and lucky, because we faced it with a very solid backlog, as solid as ever. We faced it with all the projects, which, from one day to another, we thought they could be terminated, and they both have continued, at different paces but continue. In some cases, we're doing preservation maintenance, in others that have just started, we're just doing the kickoff meeting. But all of them have continued. As you remember very well, and we'd get into detail further in the presentation, at the end of -- when I was presenting the year-end results, I've said that we already launched -- not -- we already had an optimization program in place. The term efficiency, optimization, those are beautiful names, but at the end of the day, what we have is a strong optimization-cost reduction program that we launched more than 12 months ago when we thought the market was positive as we really thought that cost reduction, efficiencies, optimization, they have to be done in good times to be ready for bad times. In this case, the bad time came earlier than expected. But I'm happy to say that today, the whole TR, from top management to our engineers, detail engineers, they have embraced, very happy and very optimistic, this plan, this program. We're lucky because we have a plan and we've been planning to have a strong balance sheet and a strong financial position. And as you've seen on the results, we have the balance sheet, and we have also the credit support to manage a difficult situation. And number five is more a view, the -- a bit of, shall we say, a reality somehow. None of our customers have canceled their projects. And that's the pipeline. I mean all of them saying -- in the Middle East, some of the biddings that were going to take place in March have been postponed to July, and those bids are public. The same has happened with Aramco. The same is happening in Kuwait, and the same is happening with some large international and integrated companies. So those 5 points that you have here on the right, and then we're going to go in detail now further up, but it's allowing us to manage this crisis with rather optimism. Why do I say that we have a solid backlog? And let me pass the slides here. First of all, because of our customers. I mean it's true that we have close to EUR 1 billion backlog and because of our customers, and let me start by Sonatrach. I mean as you remember very well, Sonatrach, it was in the market that has done a temporary award by the end of last year. Then by January, we went over there and did the formal signature, presenting the bonds and then they sent us in writing the notice to proceed. But it could have been a good example of cancellation, and it has not been a cancellation. Last week, we had the first -- we have never had it before, the first kickoff meeting on a [ telemarino ] between Sonatrach, Samsung and TR telematics. So the project's engineering is launched, and we'll be adjusting the projects to these new times. But it's a priority for the customer. We have extremely supportive customer in this case, and the project is moving forward. So this is our first and very important award of this first quarter 2020. With our other customers, they have solid projects. I mean the Aramco projects are critical for them. We're going to have to adjust to the new schedules that are critical. The Exxon projects, we're going to have to adjust to new schedules as we're not allowed right now to continue mechanical erections in Singapore, but we will in a few weeks. But all of them, they're solid investments. And if you look at it in a rather solid market, where 55% is downstream and 40% is upstream, but most of it gas, which is a bit more resilient than pure oil. So it's -- all of this together in this crisis, I wish it had been better, but it's giving us the minimum 2-plus years of visibility. And I've said before that we have continued this backlog with all our customers. I've said, the first one, we were talking about Sonatrach, how do you start a project working from home? Well, we've done it. A task force of 250 Spaniards with close to 200 professionals from Samsung, from a project management team, from managers at Sonatrach, we'll work together quite nicely, preparing documentation, and then we've already organized the job, and we've started. We've started quite nicely and very successfully. As a number of examples, in less than a week, we had more than 5,000 engineers working from home, designing from home. And the rate of problems that we're having, there were less than 300 a day. So while -- and then when you compare the advance on a weekly basis, it was surprisingly -- sometimes they were quite similar as if we were working in our offices. It doesn't mean that now we're going to continue working from home forever, but I mean, we've moved, telematic have been -- the move is smart working, which is the fancy thing to say nowadays, quite nicely with a very high productivity. Procurement. Procurement, we have had huge challenges. To give you an example, in some of our big projects, in February, we moved the source from China to Italy, not very -- we didn't get it right. So we have to sometimes wait, in some others do telematic inspections, virtual inspections quite successfully and in some cases, alternative sourcing and in some others, reprogramming the job and do -- and work with what can be supplied local, waiting for the Italian, Chinese or American equipment for a later stage in the project. So it's in our DNA to reprogram our jobs together with our customers to whom I'd like to thank as well in this presentation. And we say construction, construction has been extremely difficult in some cases. It has been stopped in some -- for weeks in some countries. But we have demobilizations occur at times. But all of them, at one stage or another, we've all had continue. So while it has been difficult, despite that we're not in a very comfortable situation, I'd like to -- as well, all our subcontractors scared, working, complying with local regulations, they've all worked, and we have a different pace, obviously, a different pace than we had expected. But we have given continuity to the construction operations quite successfully, very successfully. And now I move forward to what we call the TR-ansforma project, optimization and efficiency. This is not a reaction to COVID. I mean when COVID came, we were already here. I mean the whole process has started more than 12 months ago, but it started to become, last fall, a reality, well organized by team and flowing down through the whole operations of TR. I'm not very happy to throw numbers because we want to be and we are extremely ambitious in all the cost reduction and optimization scheme that I'd like to outline here. Obviously, corporate reduction is very important and we're already going to have -- we feel the impact in this year's results. In procurement, I mean, centralizing, standardizing, negotiating procurement, I mean, is -- you have to realize that we procure more than EUR 3 billion a year. I mean -- and we put together a profound scheme of optimization, of procurement capacities, that is money to be saved, and that is money we're going to be saving for sure. And obviously, we've always claimed that we were the best engineers. But once we went through the oil crisis of 2014 and we were developing our full class of resources in 2018 and '19, I think it was time to review whether we could optimize our engineering, both our home office engineering and field engineering. A lot of inefficiencies in home office engineering translate to field engineering. A better design of our shops here and there translating to a huge -- very important efficiency in terms of timing, which is money, and in terms of cost, which is money. In all of that, it couldn't be done without a management scheme, a talent management scheme that is already in place, where we have to motivate the good ones, like in any company, and we would not -- and identify the least efficient, like in any company with thousands of engineers. Reduction schemes, as I said before, it has to be done in good times to be ready when bad times come. We launched it at the end of 2018. It was fully in place by the end of 2019 and 2020 bad times came, and we're ready. That's the message. If you put all that together, when the pandemic crisis surprised us, we are facing it with a strong balance sheet position, a strong financial position. Our net cash was expected because it was somehow announced on February to you. You were asking me one way or another with different words whether I could anticipate an improvement in cash, and I was saying if we waited, maybe. The reality is we've ended up -- probably because we have good customers, good customers that we need today. They pay well. We have ended up the quarter with a solid net cash position. But most importantly, the net cash we have ended up with a strong liquidity position of, if you put them all together, about $1.2 billion liquidity, which is if you add up together the gross cash, which is the $600 million you see in the balance sheet, plus the $400 million you see in net cash, together with the lines of credit that we have not used. So again, this is good news that we have to have this. Uncertainty is uncertainty, and we have to manage big and huge projects. We have to find ways to improve, to satisfy customers, to manage cash together with customers as most of the jobs has to be reshuffled somehow. And in many cases, we're going to have to support some of our suppliers, which are not as strong. They're qualified, and they're not as strong as others. So we're going to run a difficult year, but I think we're going to run a successful year in terms of our balance sheet management and liquidity management. And after that, we have the first quarter results. The first quarter results could have been slightly better. It could have been slightly better. True. I mean I'm not -- I mean I don't want to be very proud of the results. But there has been already some delays translated in the turnover, which has its margin and some costs, but we've been able to finalize March with a EUR 24 million EBIT, which is -- I think is quite acceptable, which is in the neighborhood of 2% EBIT margin. We have a bad number. It's not important, but it is bad because of its size. It's not important because it's quarterly, which are the net financial results. I mean in order to explain our running rate of financial cost is -- give or take, is EUR 1 million-plus a year -- I'm sorry, a quarter. And then we have, depending on the picture, ups and downs having to do with a picture of appreciation or depreciation of weak currencies that we have debt and cash balances that we have dollars. And that's what we have shown in the numbers, about -- close to $4 million, $3.8 million in -- which is the picture, the mark-to-market of our FX balances. And the bad news, this is not very important either, but it's bad news, is our financial assets, the picture of financial assets in the middle of the beginning of the pandemic, market comes down and have a hit, which does have to be multiplied by 4, if anything, will recover, which is of -- close to EUR 6 million. That's why our net results, although not as nice as I would have expected because of that impact, but definitely is not recurrent, which I mean it definitely is not multiplied by 4. That gives us a profit before taxes of EUR 12.4 million, which when you compare to what we had a year ago, it is still quite good, and a net profit of close to $9 million (sic) [ EUR 9 million ], which, again, is quite good comparing to first quarter 2019. And I think you've done your analysis of the P&L, so I'll move forward to our outlook and pipeline. I think I cannot talk about outlook without talking about pipeline because everybody says, so what comes next? I think we're going to have to wait. I mean let's be prudent. I mean when I say that there is no cancellations, truly, there is no cancellations. So on the other side, there've been -- projects are being postponed or delayed. Projects -- sanctions of investments are being delayed. But on the other side, we're getting more than expected awards and prequalification to bid on FEEDs, which is the FEEDs -- competitive FEEDs with rollover all sort of ways that signals that investments are coming. So that's the second good news that allows me to be optimistic. And the third, often was criticized, is that 65% of our pipeline is in the Middle East. And I do believe that out of all of them, it's the Middle East who's going to come first. I mean the first investment we will see is the investments in all the Middle East country. They were planned. They're moving forward into petrochemicals. They need it, and they're very much advanced into investment sanctioning. And in some cases, we're already bidding. So this is like, then move forward to the last one, which, at the end of the day, is quite, quite similar to the -- what I've said at the very beginning. And a lot of you may be wondering why we're not giving us a guidance, and I said I cannot today give. I mean uncertain things are still too big to give a quantitative guidance. But if you take into account where are we today with our backlog, our projects, our cost structure, financial position and the pipeline, I can give you a qualitative message. We're doing good. We're going to end up this year with acceptable results for sure, but uncertainties are too great to quantify that. So the last sentence is a very important sentence that I'm optimistic, but I have to be prudent. I mean if I would not put the term prudent here before optimism, you would have think that I would have lost credibility. I mean today calls for prudency, we all have to be prudent in managing the jobs in bidding, in managing the cash flow for projects, in better -- in trying to anticipate what's going to happen next, nobody knows. So the TR's, as I said before, customers, balance sheet, pipeline, backlog and all our professionals allows me to call for optimism, prudent but optimistic. Thank you very much. And now I'm looking forward to answer any questions you may pose.

[Operator Instructions] Your first question comes from Mick Pickup from Barclays.

A couple, if I may. Just on the projects, which are obviously going to see some form of delays at the moment, can you just talk to me how your contracts are structured and how you cope with those delays? Do you end up squeezed against a deadline or are contracts flexible enough to allow you to extend the contract out? And secondly, just -- I know you don't give the number at this stage, but when I looked back at the full year results, the big surprise was the big loss in power in the second half. Can you just talk how the power business is doing at the moment? And obviously, with that comes how well is the oil and gas section doing?

The contract structure in all the contracts, there is a clause of force majeure, and the force majeure allow us for extra time and then the customers accept there has been a force majeure in all of them. And in some cases as well, contracts allow to change of law, which is more difficult. Owners are -- changes owners' demands. I mean if an owner allow -- doesn't allow us to go into the site, then you have allowed to claim. But we're not only claiming the status. Right now with our main jobs, say, in the Middle East, the big names in the Middle East with whom we're working and we're now working -- I don't want to start naming customers here, but we're not working with the small ones. We're all sitting down and saying how we're going to together analyze the impact. Obviously, the schedule, there is no -- I mean I'm not going to say there's contractual pressure, what we have is we have to do a smart managing of the jobs. We're going to have less pressure on the delivery so that we have to be ready and sit down with the customers to be ready. So when the customer says, run, we'll have to run. But now it's no time for running. Now is time for managing and trying to assert what is the new date that, that job has to be delivered in extremely good pace. I mean all of customers from one -- I mean from Northern Europe, Singapore, I mean, South America and the Middle East are sitting with us trying to analyze what is the impact on the job and how we can work together for a new date, and in many cases, a new cost.

Okay. Magic. And on the power?

And on the power. On the power we've announced before, we have -- and very importantly, in the U.K., we have problems, and we had problems because of -- has nothing to do with COVID, had to do with Brexit, inefficiencies, unions. And we were working and shuffling with the customer a deal to anticipate the jobs and run, and we have close to 2,000 guys working for them to find ways so our customers could start making money, be in operations by early this summer. Now COVID has come. I don't think we're worse than we were before. But again, we're working with the customers in a way to now -- I'm talking in the U.K. that from 1,500, we went down to 300, and now we have 100 guys working there, how can we restructure the job and move the job into a profitable one for the customer as soon as possible. So we're not worse than we were before. We had Brexit impact and then we have COVID impact. And together, customer and us, we have to find a way to still accelerate this whole thing. There's a lot of uncertainty, let me tell you because we thought that we could launch the job this week, and now we've learned we cannot. But if it's not this week, it will be in 2 or 3 weeks. It had to do with local norms and the day-to-day management of this unfortunate pandemia.

[Operator Instructions] The next question comes from Francisco Ruiz from Exane.

I have 3 questions from me. The first one is regarding the working capital. If you could give us a reason of such a good improvement versus previous quarters and if this level, together with the level of cash, is sustainable for the rest of the year. The second one, if you could give us an idea of how much of the margin improvement this quarter is due to the TR-ansforma plan. And last, I understand the high-level conservatism, now there is that. Can we discard already reaching about 3% margin for this year?

Working -- let me tell you, working -- on the last -- I remember very well there were -- all of you guys were trying to [ have me ] exactly anticipate that the working capital improvement of last quarter of 2019 would be reflected on the future quarters. And I was saying, yes, no, maybe. I didn't want to anticipate. Obviously, our feeling is that with the new backlog and as our planning were showing us, sometimes plans get truncated, that our working capital was improving, and it has improved this first quarter. I cannot anticipate that it's going to be improved. I mean now we're going to have to go through different -- very difficult quarters, extremely difficult quarters with no awards that I can anticipate, important awards, we get engineering, agri. Improvements of the jobs we already have, not important awards. In managing jobs, we're in a difficult situation. So I don't foresee any improvement in working capital. Let me be clear about that. We have to manage cash very carefully. We have to -- when customers want to extend the project, we have to negotiate with subcontractors and extend the same -- in exactly the same way. Otherwise, we'll have a working capital problem. In some cases, if it's small-quality suppliers, we're going to have to support them. So it's going to -- the term crafty is not very good. But now in the next 2 quarters, it's going to be quite crafty, project by project, supplier by supplier and customer by customer. I mean -- so -- and very difficult to plan. So we have to do a bit of a defensive management, cash management defensive, but we have to maintain our suppliers and negotiate with our customers. And it's an equilibrium that we're going to have to manage within the next 2 quarters. So if I have to give you a number, I couldn't give you a number, but it's going to be closer to last year's working capital or net cash flows than what we've seen now. We can get surprises because customers know. What was the -- you had another question, right?

Yes. There were 2. The one on margins. So how much of the margin improvement comes due to the TR-ansforma plan? And if we could expect margins above 3% for the year.

Okay. Let me -- I mean we're going to be successful in TR-ansforma. And in this quarter, we've not have seen any TR-ansforma, practically nothing. I mean this is the first quarter, and it started this year. But I don't want all of you start growing expectation on TR-ansforma. We're going to start a company with a 10% margin. I mean we've gone through extremely difficult times. We're going to start giving you, as soon as we have some visibility guidance. And TR-ansforma is to make TR stronger to protect all our projects. So we don't have to go and come back with bad news and with profit warnings. I mean when we optimize and we become efficient, I mean, at the very beginning until -- the very beginning for the first quarter, so for the first year, it has to protect the business. And it has to protect the 3% margins that we like to have and the 4% margins that we are very much looking forward to have. So -- and if you see in the future that we're back in the 3s and 4%, it's because we feel comfortable with the business and we feel very comfortable with the TR-ansforma efficiency program. But I'm not going to say this is TR-ansforma, this is -- it's all together. But if we can protect TR's project one by one with a strong contingency to be competitive and then translate into a rather strong and visible margins, I think we'll be winning this battle. I mean the third question is the margins, is it still possible. We'll have to see towards the end of the year. I mean the number of uncertainties is -- and I don't want to -- I'd rather not to answer the question because I don't know what's going to be possible or not in the next 6 months. But this is...

[Operator Instructions] The next question comes from Mick Pickup from Barclays.

Juan, just one more, I'll jump back in. Can you just talk about the conversations you're having with clients? I understand and I realize COVID did have an impact, but the oil prices dropped significantly. A lot of your clients' balance sheets and cash flows are totally different to what they did back in January. So given that they're likely to look for lower costs on these projects, can you talk about how they're coming to the engineers and the front-end guys and asking you to do something different to make these projects work?

Mick, can you -- sorry to be impolite, but if you can rephrase the question again. I got a bit lost.

Yes. No, I said the oil prices come down. A lot of your clients don't have the cash they once had. They want to get projects significantly cheaper. I don't think you can do that by going after a contractor who makes 3%, 4%. So I'm wondering if your clients have come to you and ask you if you can do things differently. Are they more prepared to listen?

I mean for the -- in all the jobs, they're new. I mean they're less than 50% advanced. None of the customers have said now, can you get things cheaper and give it back to us, because they know what we have to negotiate with them is different milestone and payment structure as the whole project has changed, different schedule, which has extra costs, where all the extra costs that we've got, we have to still decide for 1 more year, even though we can be very efficient. Instead of having 300 guys, we may do it with 200. So I think when we sit with our customers, none of us is coming up, "Give me back the money that I think you'd be saving," which, in fact, we could. Not much, we could. They're trying to see how can we restructure the job to a new date, to a new and different cash flow on their part. They're willing to pay you at a different pace. It doesn't make for them to pay you at the same pace if they're not going to get the job. So we -- I mean the good thing is that we're sitting with them and restructuring the whole thing. We like to be efficient, like any engineering company and with the new schedule and new -- we'd like to look for those efficiencies and see whether we can manage the job. And those efficiencies, the way we're focusing is whether we can diminish the risk in the managing of the job. It is not the same thing, a job that it was 43 months end, and it was -- and now we have to add up 9 months. And maybe if you manage it well, you are far more efficient and being far more efficient because we have more time because the models arrive to the site, and many of our jobs are models when they arrive, better and more finished because you've been able to structure with more time with a subcontractor. Maybe -- and that's, as we call it, a derisking of the job. You realize that very often in our business, everything is beautiful, and then we can run into problems the last 6 months. What we try now is our advantage, and it's going to be an advantage for both the customers and TR to restructure the job in a way that we're able to derisk it in terms of procurement arrivals, subcontractor structure and models arriving, better finished and better managing of the site. So it's given us a breadth. And this breadth is when we're trying to negotiate, and it's a friendly negotiation with the customers in order to come out with a better job at a different date. And that -- it's very difficult to translate that into numbers. But just -- if you deliver the jobs with no overruns, it's a lot of money. And it's good -- and there is no overruns, no claims, and it's good for both customers and contractors. And I think that's an intelligent way of approaching it.

The next question comes from Luis de Toledo from BBVA.

Two quick questions from my side. The first one regarding net cash. Should we consider that the first tax settlement for EUR 39 million is included in the cash figure for the quarter? I assume it is the case. The second question regarding the divestment program within the TR-ansforma plan. Do you expect delays in your projected divestments? You see any risk on the one you completed on Empresarios Agrupados?

Luis, sorry, I was trying to review -- net cash, tax settlement. A very small portion of that has -- was paid in the first quarter, and it was paid. I don't know the precise number because it had -- it was -- the agreement in that it was going to be paid in 2 years. So one portion was paid the first quarter of this -- which is included, but I cannot tell you the precise number, but it's not very relevant. The divestment plan is ongoing but, again, delayed. I mean we have a divestment plan of some of the smaller businesses and some of the smaller assets, not very important but it's ongoing. And Empresarios Agrupados has been sound, and that is not at risk. It's been signed. It's not at risk. It's already sold.

[Operator Instructions] The next question comes from Nitin Bhalotia from Praxis Partners.

Yes. I have a good question on working capital, if I may. How do you see your working capital evolving over next 6 to 12 months? It's been great performance for the first quarter, but how do we see that in -- over next 2, 3 quarters? Do you think still you'll be as good as it has been so far? And what has been the key driver for this? Clearly, as you've mentioned, it's not advanced payments from your customers.

Let me -- the thing is the first question, let me very clear. And as I said before, it's going to be quite crafty, as I said, quarter-by-quarter, restructuring all the jobs customer by customer. In some cases, we have to support our suppliers; in some others, not. In some cases, we're going to have to support our subcontractors; in some other cases, not. So I do not expect a great working capital as running a company in a normal business model. Our business model has changed, and it's going to be different for -- at least for the minimum 2 quarters until we restructure all the jobs. And as I said, it will be very unlikely that we'll get down payments or important down payments in the next 2 quarters either as we had expected in our plans before. By the end of last year, when I was making the presentation to you all, obviously, I had in mind my own personal planning, give or take a quarter, important down payments of new awards. So we have to manage the business without that. And that's why when I made the presentation of the net cash position, I've also added what is our liquidity position and who -- and that was the message, how we can manage in this crisis. And as seen, we can manage quite nicely so that we may have our ups and downs in the managing on a quarterly basis our working capital. So our working capital number, although they have been quite nice over the last 2 quarters, they could -- we may have quarters closer to what we had through 2019 on average than what we have over the last 2 quarters. I was being more optimistic on that when you guys were asking me questions in February. But in February, the world was different. Thanks, Nitin.

There are no further questions in the conference call. I now give back the floor to the speaker for the conclusion.

Okay. This is done. Thank you very much. When we planned this conference, I had no idea that it was a holiday in the U.K. and many European countries. Sorry for that. Sorry. Thank you very much for attending. And I think this time, you've been quite nice to me. You could have asked much harder questions. These times are hard and difficult. So thank you very much and looking forward to talk to you on the next presentation.