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

Hello. Good afternoon. This is Eduardo San Miguel. Welcome to the 2020 results presentation that will be conducted as always by our Chairman, Juan Arburúa. It will take something like 20 minutes, and you can post questions after the speech. And now I give the floor to Mr. Juan Lladó.

Hi. Hello, everyone. So let me try to go through the presentation as fast as I can. So there is time for -- enough time for Q&A. In this presentation, everybody has the numbers of TR. Some of you already made comments. So I'm just going to focus on the financial highlights and the analysis of the adjustments because whenever you give adjusted figures, it deserves a good explanation and a justification. And then let's talk about the future, and the future is why do I believe '21, which is definitely, we're already in 2021 in a transition year, but it's a promising year this year, just coming forward with a quick outlook. If we go through the 3 big good numbers of our presentation, we have sales figures of EUR 3.5 billion. Obviously, it's not the sales figures that we would have expected exactly 12 months ago. 12 months ago, our sales figures, we would have expected the figures closer to EUR 5.2 billion than EUR 3.5 billion. So you were very much flipping the numbers. With those numbers flipped, with those self-flipped, we have an adjusted EBIT margin and EBIT margin that I will analyze on my next slide, 2 slides, but we have been able to manage the year, managed the execution of our jobs with the net cash decision of very close to $200 million. As well, we have a year-to-date backlog of close to EUR 9 billion. Here, I'd say it's fair to say year-to-date because I think it gives a better -- it represent the health of the business, what we have been awarded by the end of the year, a PTA plant for the Sasa Group in Turkey that I was signed. In this case, I was there myself in Turkey, and it was signed there 2 or 3 weeks ago. And I think it's important that we can -- and it's important to underline that, we can start talking about pipeline. And that probably 6 months ago, we were not ready to talk about pipeline. And now we're talking about pipeline, but a very active pipeline that we can value at 45 billion dollars -- or euros. So when we talk -- when we have to analyze and we analyze our results, let's do an analysis and how the profit has been impacted. Obviously, we started -- we, last year, we had -- our sales has been reduced by 20-something percent over last year. And our -- the expected sales, which was only accruing of the existing backlog about a year ago, just accruing the existing backlog a year ago, it was in the neighborhood, as I said before, of 5.2. So we're reducing our sales by 35%, and we have to survive doing that. At the same time, we have been very much impacted by COVID, and we can separate COVID -- and we try as much to be very transparent, separating the COVID impact. We have the impact of the really direct costs of COVID, having to do with health protection, low productivity, confinement, quarantines, temporary idleness in our business. And then obviously, had the COVID not been here, the work would have been different and very much some of our projects would have behaved and customers are very different. And that's the other impact that we have had in the business and very much showing the power division. Obviously, 2 big impacts that we had in the power division. Some of this we've been talking through the whole -- and both of them through the whole year, having to do with Finland and the U.K. It would have been very different under a normal environment. It's very unlikely that you're working in Finland, and we're working with 3 reputable and very good customers, and the plant is terminated and now it continues by themselves on a commission [ stage ]. It has happened. I mean everybody behaves differently, and even ourselves, we behave differently under stress and the COVID situation: difficult to negotiate, difficult to travel, difficult to commission and difficult -- very difficult to render services. And very much so different story, but in the U.K. In the U.K., it was a good job. We have to manage the Brexit inefficiencies, uncertainties, we get paid to manage uncertainties. And we were in good pace, very good pace by this time, this year with our subcontractors, and then we have been faced not with one, like everyone with one, 2 and now 3 waves of COVID. Being the last one, probably the one that is hitting us more. I'm not going to say economically, no, but more in our hearts, in their personal hearts because we were very much ready to first fire, and we are ready and working hard to first fire. But the third wave has very much made the continuation of the plan or the investment of the plan in this just few weeks, very difficult with specialists and very difficult with our support team. But I'm very much convinced that in a very little while we will be back in productive pace to first fired and then translate these plans into a profitable plan for us. So having done this brief analysis, now let's work through the numbers. Let's work why do a, we have 3%, say EUR 1.5 million of adjusted EBIT. We have an accounting EBIT, which is the one that you've seen in our accounts of EUR 41 million, which is 1.2%. And then we have what we call the direct COVID impact. We've gone in big detail. We don't want to overstate that figure of EUR 58 million. And then we have to add up restructuring costs. Everybody, we have to react to COVID, and we've done a very aggressive and very, let's call efficient reduction of our employees, of our cost business, which has translated obviously afterwards, in a very important efficiency and cost savings. That has -- you have to bear some cost on that. They would have not taken this had we not done that. And it's a place of consultants and compensation, obviously, to the [ employees ] they have to the TR. And then to that, I mean, if I want to compare pears with pears, we have to deduct $10 million -- EUR 10 million, sorry, of the profit from the sale of Eurocontrol. Eurocontrol was run by TR, with 80% of the company was TR and has been sold this year and that profit, the $2 million is part of our EBIT. But has been extraordinary, I think is for to take it away so we can compare 1 year from the other. That comes to an adjusted EBIT of EUR 105 million, which I think it shows the -- we have in the oil and gas business. We have a solid margin and despite underperformance of the power division that I've talked before. Let's move forward. I mean we have a good backlog. We had a good backlog. We maintained that backlog, which is a good and healthy backlog that has been rescheduled. And the main -- I mean the larger jobs of the back -- of those backlog [ had voice in ] schedule in good agreement with those customers. And we have explained in previous presentations, obviously, has forced us to restructure TR, but it has created the opportunity to make money in the future into '22 and forward. But had that not been restated, had that difference in sales had been executed normally with the normal and even lower prudent margin of 7%, we would have had a margin of $118 million, $118 million that are there, it's part of the backlog. It has been moved forward. And we do believe that's a conservative 7%. But if you take that into account, if we want to analyze the health of the business, the health of the backlog and the health of our customers, we have to include into 2020 analysis throw in an embedded EBIT of 223, which comes to a margin, which is the expected margin, what we wanted to have, what we were aiming for of 4.3 of our sales, EBIT of our sales. And this year, obviously, many at the many presentations were asking me whether our net cash figure was going to improve or not. It's been difficult and it's under uncertainties, restructuring, less sales, no payments, no new jobs. It is not easy but within that environment, we've been able to maintain a positive net cash and close the year with a net cash position of very much close to $200 million. And now let's move into the next phase of the presentation. First of all, the numbers, sales, lower sales, margins that needed to be adjusted, COVID impact. But now let's talk about '21 and what I call a promising future. And why a promising future. And let's go and then let's -- I'll do an analysis of those 4 points. Promising future because we are securing margins in our current backlog. We have not lost backlog. I mean we have a strong backlog that are eventually and sooner than later would be even replaced with healthy margins. A promising future because we have been working very hard starting in the good year in the second half of 2019, and we captured efficiencies. And today, we have a much leaner and efficient operation. A promising future because the market is back. That is probably the most important thing as a business, the market is back and now and we're bidding. And we'll go through that later on. And a promising future because this whole issue that everybody talks about of energy transition, I'll explain later on that TR is very well positioned. We have the know-how and we have the technology, and we are already seeing some successes in this whole venture. If we want to analyze why I'm saying that we are securing margins, I think the best way to analyze the backlog instead of going through pies and colors is going through customers and projects. And we go through the main contributors to this '21, and it's good to have those customers. Our Petroperu, with whom we're doing a fantastic job with them, is probably the most -- it's going to be probably the most efficient refinery in the whole Latin America. We're working very well in Colombia with Termocandelaria. We have been awarded this year, which is light of a good success, a job for Enap, which is an all-time customer in Chile. Obviously, we continue working, and we have to deliver jobs this year for Aramco. We are delivering and executing successfully with a great level of understanding with ADNOC in Abu Dhabi. We are delivering and executing with a very good level of success and understanding in Bahrain with Bapco. One of our best customers, KNPC, we have 2 big jobs, the bigger refinery has ever been built at once. Those process units has been done by us very much successfully and this 2021 is the year of commissioning. Now we're preserving together to the customer, we're waiting for the services, for the op sites, for the power and hydrogen to start up, but we're ready. It's a successful job. Very important and very successful the way we're managing, together with our customers, managing Duqm. Good customer, good country, good project. Sasa is the new job, is the job of PTA. If PTA is pit stock for our polyesters, different variations, it strengthen our position in the PTA, polyester and all different technologies related to petrochemicals, very important for us, a very good customer. The job has already been launched. So it will have already some positive impact in 2021 accounts. So far, good customer, and you see good customers when you have to manage jobs under difficult situations. You have to realize that we get along with them. We like to work with them, and we have to suffer not only COVID but a war. They've gone through a war for 2, 3 months over this year. And it was not pleasant to be there, but that's when you -- when a good customer shows, demonstrates [ they be a good ] customer, and we tried our best to show and demonstrate that we have the best service companies that they may have. And the last one here, I want to spend also some time is Indonesia. We're working for Pertamina and Rosneft, 2 very important customers. That we're developing with them, we're developing with them the basic designs the [ projects ] moving into FEED design of the big investment that will take place with them in Tuban, Indonesia. So this is main contributors to 2021. And let's move forward to, again, the very important customers, all the big reprogram jobs. If we were to add up the size of those jobs, we will go to more than EUR 7 billion, the size of those jobs. But the important thing is that we have reprogrammed 2 big jobs for Aramco. So we'll have -- which will start to contribute to margins in 2022. We have reprogrammed the big job that we have in Singapore with Exxon, and we're working together to see whether we're able to deliver here, probably the best job ever. It is going to be the first time working for Exxon with a very good quality of engineer finished with most of the equipment bought together with Exxon in the site and being preserved, with enough time to do a very good modulization construction. So it's good news. I mean it's difficult that we had to restructure our sales. We have to -- many of our professional have to leave TR with this year, but we have a good project and a good customer. And obviously, Canada Suncor. This is the second time we work for Suncor successfully, it will reprogram 2 years and now has been pulled back to only 12 months. And I continue to be positive and throwing the message that we have a promising future. And we have a process which is a very promising future because we have been able already, and we continue doing to capture efficiencies and be a much better operation than we were 2 years ago. If we go through those numbers, it has not been easy, but through this year, we have reduced our workforce by 26%. And that has already been implemented. For a businessman, this is not good news. It's necessary, but it's not good news. The businessman wants to hire, not lay off, obviously. That translates into $70 million this year and has an annualized effect of close to EUR 200 million. Obviously, we have to reduce our space and we have to reduce our space by more than 15,000 square meters. Very little impact this year, that's obvious, but a very important input of EUR 9 million next year. And our operations that in overall engineering, procurement and construction, and that's very much linked to the transform -- very much linked to the transform exercise we have been doing over the last -- starting in 2019. We are reducing our structure and improving our engineering, procurement and construction by $15 million. We've worked hard, [ incurred ] cost reduction structure. We've worked hard into having a far more efficient engineering and construction supervision and centralized procurement, far more efficient. We have worked very much to standardize our process, and we have very much together with our consultants, our team to move -- to take a step forward towards digitalization. And we already can tell you, we've been very successful. And let me continue, why do I believe that we have a promising future, and this is important, as I said before, because we're bidding in the next wave of investments, market is back. Now, I can say that we have a pipeline of $45 billion. But most important, those $45 million that can come and go is that out of those, $22 billion already been tendered or they're going to be tendered in the first half of the year. So we pose that the market is ready to invest. And some awards have already taken place. A good example for us is Turkey. So it's good news. That's probably the most important good news which I would have been very much very impossible to talk about 6 months ago. And finally, I'm optimistic, and I do believe I have a promising future because we're positioning TR quite well and quite successfully into what is called energy transition. And let's move into details. Those are details. And this is just the beginning. There are 41 projects in the pipeline that we're bidding. And we're working with customers and with partners, 3 having to do with carbon capture, 21 which is trendy and that's our know-how, very, very close to know-how, hydrogen and green hydrogen, electrolyzers and developing technologies is very important. 11 having to do with biofuels, the biomass is again, that's a know-how. We've done it before and now we're doing it for our customers again, and 6 related to circular economy. Obviously, we're very much focused, the whole team of TR is very much focused, trying to focus on the new generation of the European funds. And we're going to capture them. I mean I can assure you that here from Spain, we're going to be successful. At the same time, we are focusing on additional opportunities with customers and partners related to carbon capture, digitalization, waste to chemicals as part of our business as well, hydrogen value chain, and methane. And all of that is probably the message here. We're moving -- we're sitting with customers, we're sitting with partners and why? Because I do believe that TR has the technology has the capacity to develop those technologies, have the capacity to escalate those technologies because very often those technology already they have to be escalated and you need TRs or companies like TR to do so. So we have the know-how. And we have that because we have the quality of engineers that have done that similar task before. So it's good news. It was a lot of noise a year ago, and today it's a big reality. And here, I'm going to go through this one. Here is for you to read. I'm not going to go line by line. So there are some small jobs that we have already executed. There are some jobs that we are already working and they are under execution. And it's a huge pipeline that we are following. So I'm optimistic, and I do believe we have a promising future because sooner than later, part of our sales and part of our profit will be very much related to our energy transition. And finally, at the end of the day, the outlook is more of the same. Securing margins, good news. Capturing and captured, I mean, let's use the verbs correctly, efficiencies. Bidding, and we have already presented offers, many of them have already been presented in a new and a strong pipeline. That's extremely good news. And we're well positioned for energy [ transition ]. Difficult to make guidance on a year of transition, very difficult to make guidance. Because obviously, we're going to get awards, but will -- those awards will have very little impact on sales. So it's very difficult to make our sales figures grow in this year. We'll see a growth of our sales into '22 as the new -- as the reprogram jobs will restart and new awards will come into force. And therefore, we can forecast an EBIT, full of uncertainties. I mean everything this COVID, it's an uncertainty, full of uncertainties, but we can forecast an adjusted EBIT in the neighborhood of 3%. And probably good news because the market 6 months ago was dead, the good news is that we feel very comfortable that the level of sales can be replaced with new awards. So we see the market moving, and we are very well positioned in that market. And that's it. I think I'm done with my presentation, and I'm more than happy to answer any questions you may want to pose.

[Operator Instructions] We have a first question from Mick Pickup from Barclays.

A couple, if I may. Obviously, projects been delayed and there are some notable ones in the Middle East that have been basically put on pause. What certainty do you have that they are going to restart? And tied in with that, obviously, these projects were bid a long time ago, steel prices have effectively doubled in the last 3 months. What protection do you have on the pause of those contracts from changes in commodity prices?

Okay. The first question you're talking about projects that have been delayed. I mean investments that have been delayed. I mean what we have -- obviously, some of them have continued to be delayed in Saudi Arabia. So Kuwait have announced new wave of investments, but not important ones. And Oman has not announced the new wave for petrochemical investments. They are delayed, but you see that Qatar is moving, and Qatar is already awarding and we're there. You see that Emirates were delaying. We were bidding in 2020, and now we're bidding again and they're not delaying themselves. I mean we're -- and I do believe they're ready to award because when you are bidding and people ask for extensions, they give you extensions of 1 week or 2, no more. So they want the numbers, and they want to go through all the -- they're already going through tabulations of economic offers. So while we haven't got certainty, but that level of pressure of percent offers I give you 1-week extension. I'm going to open the -- offers will be open in weeks. When you're talking some of the customers that we have, and I said, okay, they give you certain days, certain days of opening their award. You wouldn't see that in 2020. In 2020, I mean, the answer was, I don't know. I mean let's wait and see. And now that wait and see in some of those customers is not the case. It's not the case with our customers in Turkey, it's not the case with our customers in Azerbaijan, it's not the case in Qatar, it's not the case in Emirates, it's not the case in Chile. We have an award and we're seeking other jobs. It's not the case in the Far East. And it's not the case in most of the jobs related to gas, to be -- if I want to focus on a project. And on the reprogramming, you were saying we have any capacity?

I mean no. I was -- sorry, what I was asking was, obviously, you have, say, paused progress on major projects in a period when steel prices have doubled. Do you have protection on your procurement for a steel price that you double what it was when you were bidding 1.5 years ago?

No the thing we have -- what we have been doing as the projects are awarded and are alive, we have with many, and we've been done part of our agreements in many of our -- with many of our suppliers and -- not customers -- equipment manufacturers, suppliers, still what we have is 3 agreements, not contractual protection with our customers. But we have 3 agreements, and even with contractors, saying that if you hold that price, you will be the one working in this job. And so we have 3 agreements. And some of them, we had already awarded part of it, and we have already contracts in place that has been somehow rescheduled.

And the second question, if I may. Obviously, you're very happy that the underlying performance this year is in the region where you want it to be, but the power section looks like it's still losing money quite sharply in the second half of 2020. So how does that power operating profit progress into '21?

I mean we've -- accounting-wise, that's how we run projects. I mean we are already running all the costs, and we've already incurred or account for all the costs that we have if there is no greater uncertainties to finish those jobs, I mean, to finish the [ fife ] job, which is the only one we have to finish all the other costs of Finland has already been -- we've already provisioned or accounted for. So if -- so on the U.K. side, we've already -- we've taken the loss and we've taken the cost and shooting for first firing, and we're working very hard for our first firing, extremely hard for a first firing, which is going to be within the next week. First firing is key. We wanted to have at the end of the year. And then we got the second wave. We wanted to have at the very beginning of this year, and then we got the third wave. And now we are -- we have -- we're looking for a window, a good window to come back and work hard to first fire that plant. Now it's difficult. I mean let me tell you, the last 3 or 4 weeks has been extremely difficult because there is always a line between our eagerness to finish and first fire work together with the customer and the health and safety of the plant. Some neighboring plants have closed. We have not closed. We have reduced part of our activities because the level of cases in our plant has -- in some cases, in our team has multiplied by 3, difficult to get specialists in site and travel into the U.K. and put together a team to commission 1 of the units. It's been difficult. But we do believe that in the next few weeks or days, we'll see light and focus on the first firing, which is important because starting that day in a few weeks, our customer will start make money.

If I was allowed back I'd go and help out myself.

Can you say that slowly because I'm sure it was a good -- but I don't get it.

If I was allowed to go back home, I'd go and help out myself, it's just down the road.

I might call you. I may call you. Maybe we go together.

Next question from Kevin Roger from Kepler Cheuvreux.

Yes. Actually, it's a kind of follow-up on the 1 from Mick. Looking at the EBIT margin for 2021 in terms of adjusted numbers. I was wondering if you look at basically the guidance, you seem to expect a quite stable adjusted EBITDA margin -- EBIT margin close to 3%. But this year, we have faced basically a very, very challenging power environment with a very poor performance. So I was wondering if you can give us a bit of granularity on how you built the 3% EBIT margin forecast for 2021 because if we have the kind of improvement in the power, it should maybe at least offset any weakness in the oil and gas compared to what you had in terms of exceptional this year? And as a kind of follow-up, I was wondering if you can give us some [ tools ] on how much do you expect for 2021 in terms of COVID cost, if you can? And also, if we should expect any additional restructuring costs for 2021, please?

Let me start by the end. Because I think if I answer the last question first it somehow clarify the first -- your first question. Obviously is that is I cannot forecast COVID costs for 2021. I don't think none of our government has been able to forecast COVID costs for 2021 or 2020. So I am not the one to make forecast here. To be honest, I was thinking that as this fourth quarter of the year would have been a good year in terms of COVID cost and has been awful. So well, that's the conversation that I was having. The good thing about the fourth quarter is that our customers were back. But the level of confinement, inefficiencies, travel restrictions, has been crazy, very difficult to anticipate, impossible to anticipate. So I'm not going to anticipate anything. So that forces me. If I cannot anticipate that, I cannot anticipate further restructuring costs. I mean restructuring cost is very much related to the need, whether the market picks up, whether I have further impact in COVID and it's very difficult. But if there are any costs, they're not going to be very important. I mean they're not going to be great cost. I mean it's not something that takes my sleep away. The restructuring costs would be something very marginal. If they're needed, if we see that investing, and I underline word investing -- in restructuring costs would be good for TR because it will be more efficient and is needed. We'll do it. I mean there's -- we're definitely focused in doing it. But I think we've done quite well over the last 12 months. We're not going to be needing far more restructuring. And three, the 3% that I gave of adjusted margin. It's not a guidance, it's a forecast. I mean let me underline that, it's a difference. Because I cannot give you a guidance or commit myself to a full guidance because the level of uncertainties, that's why I wanted to start by the end and not by the very beginning, are great. I don't know whether we're going to have a fourth wave, and if we do have a fourth wave, the awards get delayed. And the -- and some of the jobs that are being reprogrammed get reprogrammed 3, 4, 5, 6 months further. It is very difficult. It is also a year that we are good jobs, let me underline that very good jobs have to be commissioned. We have to commission this year together with the customer, provided that we have [ all ] the upsides. The big refinery of Kuwait, we like to commission. We commissioned a very big refining unit in Ras Tanura for our customer, Aramco. We're working very hard to commission some of the units, the units of Duqm with our customers. And let me tell you, those are good jobs that we're doing very well, extremely well in full coordination with other contractors and the customer. So while we have contingencies for that, commission is always difficult. Uncertainties may come. So it's difficult to anticipate how are we're going to be using those contingencies when you're commissioning plants. But they're good jobs. We're also commissioning this year, provided we have all the upsides in the hydrogen. Now we're preserving and maintaining the big refinery of Talara. So units are good. The unit has been preserved for months. It has been improved. We don't foresee any problem on the pre commissioning and commissioning stage, but there is always uncertainties. They are good jobs, and they're profitable jobs and they're strong customers and they're very strong units. I mean we don't foresee any problem, but we have to be prudent.

[Operator Instructions] Next question from Nikhil Gupta from Citigroup.

Hello? Hi, can you hear me?

Yes, sir. We can hear you but the line is very bad. Very, very bad the line, sir.

Hello?

Yes. We can hear you but your background is very...

Yes. I -- no, actually -- hello?

Yes, yes. We hear you but a lot of background noise.