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

Hello, good evening. This is Joaquin Perez de Ayala. Welcome to the Results presentations of the third quarter of 2022 that will be conducted by our Chairman, Juan Llado and our CEO, Eduardo San Miguel. It will take around 15 minutes, and you can ask your questions, after that. And now I give the floor to Mr. Juan Llado.

Hello, everyone. This time, I promise it's not going to take more than 15 minutes. So lets get to report. Let me start this presentation with a quick summary of what are going to be the initial remarks, which I have summarized right afterwards, the quarter highlights, following with an update, which I think is necessary of [indiscernible] engineering capacity and capabilities as well pipeline opportunities. Let's continuing to start. After I finish, Eduardo will brief you on our financial results. The financial results of this quarter, and he can also brief you with our guidance before opening the floor, obviously, like every quarter, to questions and answers. I'd like to start with this slide with the [ uncertain ] volume of investments there for coming. You may think that I'm optimistic. I'm not, I'm being realistic. If you analyze the market, all vectors are pointing to the same direction. We have a growing energy demand, fast de carbonization plans of the main energy companies or even a strong interest in diversifying supplies in Europe. Everything points to that direction. And that direction is investment, investment, and investment. Where do we think that investment is taking place and is going to take place? We do expect the Middle East is going to be leading this upcoming investments, let's call it super cycle. And I do believe, and I'm convinced and I do expect that TR is going to be extremely well positioned to take advantage of this very positive scenario. Moving to financial results. Let me do a brief introduction, and Eduardo will explain in more detail later on. I'm very happy to highlight the quarterly sales back to the EUR 1 billion, approaching already recovery levels with quarterly EBIT, EBIT margins reached 2.3% indicating a reversion to normalizedx. We're talking about Super cycle, and we're talking about compensating investment [indiscernible]. So let's get down to business. And let's analyze this slide. Based on data from McKinsey that summarizes the global investment trends of our industry. First, on the one hand, we have a very sizable investment still needed only -- just only need to address the depletion of current oil and gas wells in the market. 2, secondly, this is not only depletion but investment has to take place in traditional energy, but also the volume of growth. The market investors have to supply the growing energy need to both developed and less developed countries. And finally, but in parallel, we're facing an enormous investment effort in the acceleration of the deployment of low-carbon technologies, as have already been assured by the investment plans made in industrial -- in both industrial and financial players. If we follow the slides, and we add up these 3 investment reasons together, we estimate an addressable market for TR. The stocks currently on more than $600 billion and is expected to grow close to $1 trillion by the end of the decade. And this huge amount of investment, I think you all will agree is already creating or is going to create different bottlenecks. Bottlenecks and in our case, we have to anticipate as one of the big bottlenecks we do believe as we are ready facing it is going to be a scarce in engineering capacity of the market. The scarce engineering capacity to cope with all the projects that are going to be announced. And we're getting ready and we are already anticipating that issue. In this context, TR over the last months, so when I say the last month, it is not the last 2 months, closer to over last year has been working hard, preparing sales to give the best response for these investment load expected already in the coming years. We have more than 4,000 engineers -- more than 4,300 engineers. We centralized our operations in Madrid, as we've always done. From Madrid, we do most of our engineering, and it is from Madrid where we manage risk and coordinate all the engineering centers. And with the support of all the engineering centers all across the world, we're going to be able -- and we're already able to offer the best engineering expertise to our customers. With strengthening Madrid, we're strengthening within Spain, Cartagena, that many of you know they [ have a small ] -- what was small is today is more than 200 engineerings [ strengthening ] Cartagena, Spain. We're strengthening India and we're growing in India. We strengthened very much the Middle East, our engineer offices, in Saudi Arabia, Abu Dhabi and Oman. And obviously, we are strengthening Chile. You might be wondering why Chile. It might not be the center of action. But you have to remember, as an investor, for us, an analyst that we Spanish, and we had a strong presence in Latin America. We have operations in Chile. We have operations and recent awards in Mexico. We operate in Peru. We operate in Dominican Republic. We operate in Colombia. And obviously, we have announced this year, we're operating in Argentina. So we are also strengthening our engineering center in Chile. And you might be asking or wondering why the award. It is true that we have not announced any awards over the last quarter. However, we continue to be and we are very optimistic over the future evolution of the backlog. Our major clients are publicly announcing an increase and also an acceleration of the investment plan. Obviously, on a daily basis, monthly basis, we talk to our customers. In those stocks, they're keenly requesting us to keep engineering capacity available as they do think that this could be a scarce resource [ who wants] all these investment waves and forwards. We are very positive also about timing. We are already seeing and we see how many your projects are getting ready on the final investment decision. It was seen, and I'm sure you as well have seen have front-end engineering design contracts already been sectioned to speed up the [indiscernible] investment decision. In the same slide, on the right-hand side, we see -- you can see we're working on a total pipeline of EUR 48 billion just for the next month. It's not a 3-year pipeline. It is next month within that pipeline. We're very much concentrating with focusing our efforts on more than EUR 20 billion. Those EUR 20 billion is what we call key opportunities. And we are optimistic, and we all think that we are very well placed for more than EUR 50 billion of awards. So you understand now why I'm positive. And obviously, we have to understand where we've been working over the last month to strengthen our capacity when we're doing so. So with this brief message and a positive message, let me now hand the floor to Eduardo for the financial section.

Okay. Thank you, Juan. Good evening, everyone. Let me move now to September figures. I will go briefly over the quarterly results. My main headline to summarize those results is that they are fully aligned with the guidance we provided in July. With regard to sales, let me underline that we moved back above the EUR 1 billion threshold, regaining a volume of activity that we saw last time in the first quarter of 2020 when COVID started. Our quarterly EBIT is EUR 27 million. That is one in the last 2 years and is due to 3 reasons: first, bigger sales due to the smoother execution of projects under less stress environment. Second, the operational leverage of the company as overhead spread up over the higher turnover. And third, our continuous effort devoted to contain our costs. I also want to highlight the positive evolution of the underlying cash generation. As you can see in the graph, we had a positive operating cash of EUR 50 million that compensated a big portion of the payment related to [indiscernible] that took place at the beginning of July. Moving to our guidance. As guided in previous presentations, we expect to end the year with quarterly sales above EUR 1 billion and margins moving towards 3%. With regard to 2023, it's still not easy to predict the timing and speed execution of future major awards. Thus, we will provide formal guidance for 2023 in February when we expect to have more visibility. In the meanwhile, and I believe it's extremely relevant, let me anticipate that just only with our current backlog, we have already secured a level of revenues of EUR 4 billion in 2023, with an EBIT margin of 4%. And given these projections for 2023, we understand there should be little doubt about the fact that our midterm targets are highly achievable. Considering our engineering capabilities and the expected growth of demand in our sector, reaching EUR 5 billion in awards and revenues does not look a very challenging task. And the 4% EBIT margin is a figure we will already see next year with only EUR 4 billion of revenues. I can assure you that we are working hard to reach those goals and that we will take all the necessary steps to get there and to stay there. So thank you very much. And now we will be happy to answer any questions you may pose.

Ladies and gentlemen, the Q&A session starts now. [Operator Instructions] The first question comes from [ Mike ] Pickup from Barclays.

A couple of questions, if I may. So firstly, I think in your press release, you mentioned new ways of working and new business models. I wonder if you could elaborate on that. I'm assuming that's the preconstruction support agreements out of Abu Dhabi. So can you just talk about that new clients? And secondly, you seem to be indicating a very, very strong market, which looks like if I look at everything that's going to become very tight. So can you talk about the terms and conditions that you're seeing on contracts, what clients are saying about cash? How are you going to handle it on that in if it does get as busy as you're saying, it's going to be a better world?

Nick, I'm Juan and I am going to be answering to you. As I've always done for the last, I don't know...

I'm only 21.

When you say new ways of working in construction with clients [indiscernible], I don't think it's just only Abu Dhabi, I think is worldwide. I think as market tightens and the quality of design, modulized design develops, I think modularization in this business is taking a very important -- very important role. And in Abu Dhabi, we're really doing [ so ] -- I'm not going to put it here, but I was watching this week, a little short movie, which shows how it's huge 10-store building models are going into the vessels and from the vessels to the I don't know. And I think we're very good at that. If you analyze not only in Abu Dhabi, we're working with but also in Singapore, we're working with models and the big, huge job that we're doing on a service basis for EMEA in the heart of Europe is going to be modelized. So models is important. And I think today, we're very strong. It has to do also with quality of engineering. It's not the same way you'd have to design a plan if it's going to be models. There is also a way to de risk construction and is also a good way to de risk for execution. And so we're happy to say we're good at that. And our [ math has ] to say there is room for improvement, but we're very good at that. The second question, terms, conditions, and contracts. Obviously, most of the jobs that 2020 were practically stopped in the first half of 2022. There has been rescheduled, rethought, and sometimes rewritten in many cases. Our customers today, they need to accelerate execution. Our customers today, they have ambitions, target for us to finish and to make money. In that in a good agreement with our customers. I think it put us back with the market with before 2014 or [indiscernible] conditions, I'm not going to be optimistic, but they're fair, they're very fair. Payment terms are much fair and contract conditions are better. We're not negotiating in the middle of the oil price and renegotiating with customers really is to the benefit for us to run and to deliver.

[Operator Instructions] The next question comes from James Tonsan from JPMorgan.

Good evening. Thank you very much for the brief presentation this evening after market closed. Much appreciated that. Just in terms of the 2023 guidance, you seem particularly confident, obviously, now in terms of the EUR 4 billion revenue level. I mean, I think, obviously, what we can see in 3Q now is as you guided us, the progress through the projects has improved pretty significantly. But I wondered if you could maybe talk a little bit about some of the kind of risks around that 4% EBIT margin. Again, it feels like you've sort of struck a more positive tone about achieving that, which is notably above, I think, probably where consensus is thinking right now for EBIT for 2023. So just some color about the confidence there and maybe some of the kind of risks associated with that 4% margin target would be helpful.

Hi James, it's Eduardo now. -- It's been a difficult time this period of post COVID. We have been working very hard with the clients trying to define the scope, the price, the rhythm of execution, the schedules and I honestly believe that we have a very deep knowledge of the cost base of the projects. And we have also agreed with the client how they are going to compensate us in most of the cases, all the relevant costs. So when we say 4% margin, we are quite confident that is, as I said, quite -- I don't want to say quite easy to achieve, but I think it's not a very challenging target. I think 4% is quite consolidated. That's my feeling.

Okay. Okay. Well, interesting to the confidence there in terms of discussions. Secondly, this year has been, I think, a year of much higher activity in terms of tendering levels from a number of your clients, and it feels like they're gearing up. I mean, obviously, there's been a lot of volatility, however we look at it, raw materials or just geopolitics in general. What gives you the confidence that your clients are now kind of ready to move forward? Is there a window of opportunity now in the fourth quarter and the first part of 2023, that is actually going to mean some of this pipeline, which has been slipping to the right can materialize or crystallize for you?

I mean if you go through the analysis, you saw that there is a huge trend of awards before the war. I think the world was sort of an inflection point any war, obviously, I mean [ if it's ] an expected [ war ]. It scares the investors for a while, and that has happened. That it is true. But none of our customers have stopped their investment, none of them. It has been delayed. It has been deeply analyzed, and we do really expect that our customers, and that's why the message that I said before that we have to anticipate and to get ready. Our customers are launching -- are going to be launching this year and we'll see awards by the end of the year and by the end of the year, first quarter next one. So we're going to be seeing awards, market is moving. We are placing bids, and we get in that already and there are Q&A questions on the bids. So we see a positive market. And that's why I started my presentation saying that -- which is a message for you and for our customers for both. When I made this presentation, I think on the investors and in parallel, I speak on our customers that we had to strengthen and we continue to strengthen our capabilities because in our capacities of engineering, quality and quantity because we do believe we're convinced as we pulse the market and bids that -- investments are going to take place, very soon.

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

Sorry, I'll jump back in for this chance. A couple of questions, if I may. You mentioned the [indiscernible] of [ $4 billion ] of investments on a service basis. Can I just assume that's the reason why you're confident on margins, assuming that comes through low revenues and much higher margins than the rest of the portfolio? That's the first question. And secondly, on the [indiscernible] project where you've had to pay out your EUR 80 million. Where do you stand on that? Are you going through arbitration? Are you trying to recover it? Or is it gone, [ unlisted? ]

[indiscernible] as you know, it was announced by them, it's a big investment in the heart of Europe [Technical Difficulty] and its [indiscernible] plant in the [indiscernible] by which we started with the [indiscernible] plant, and we're moving forward together with them to do the [ wider plant ], so to speak. And now we're trying to expand our services. It is -- as I said in my note, it's a cost plus. It's not an EPC -- so have you been in EPC, our [ number of ] sales volume awards will be out of this world. But it is -- in fact, we're not. We are working [ for ] them where we have way up of 300 engineers teaming up with the [indiscernible] team here in Madrid in extremely good terms to focus in the design of the engineering, the models, the supervision of the models, the transport and the construction. But everything is going to be together with [indiscernible] with an ambition and schedule -- with an ambition investment that is prosperous. So margin [ is an ] issue.

And Algeria?

Algeria, we are -- we have conversations with the customer. We have not broken conversations. We traveled back and forth, and we travel back and forth with the objective of reaching an agreement. It is a customer with whom we had worked together with ups and downs like in this business always happened for the last 25 years. And I'm convinced that is the -- and that -- it is my opinion, I am convinced and I do hope [ our customers are ] convinced [ as I am ] that sooner or later, we're reaching agreement.

The next question comes from Kevin Roger from Kepler Cheuvreux.

2 questions on my side, please. The first one is related to the net cash position. So we have a net cash position that declined a bit quarter-on-quarter. Can you explain as the driver for that? And the second question is related to the order intake. You mentioned EUR 6.5 billion [Technical Difficulty] EUR 4 billion in leverage if we take 22 [Technical Difficulty]

Sorry, Kevin, there is a problem with the line. We cannot clearly hear your second question.

The second question.

Can you repeat it, please?

Yes, absolutely. It's related -- sorry, for the line. It's related to the [Technical Difficulty].

Kevin, I think I can only answer the first question because for us, it's impossible to understand the second one because of the line. So if you don't mind, you can pose a question to the [ relations -- investor relations ] department, and I will answer you later. But now let's talk about cash. You say that there is a reduction of cash in the balance sheet, and it's a fact. This is [ slightly smaller ] than it was 3 months ago. But you have to [ be ] in mind that we have paid toward gas an amount of EUR 80 million because of the execution of the bank warranties. And also if you reduce this active money from the evolution, what has happened is we are seeing an increase of EUR 15 million in the ordinary operations of the company. So I think the picture is just the opposite. We are improving our cash situation, and it's a reflection of how the market behaves. I mean this message about a global improvement and moving towards a more ordinary situation, we can see that as well in the treasury side. I mean we see it in the cash. So I think it's -- my message for you is cash is improving, not deteriorating, that's [ why ] I mentioned.

Yes, understood. Thanks for that. And sorry for the quality of the line.

Thank you very much. There are no further questions in the conference, dear speakers I give you back the floor.

Okay. Thank you. Thank you all of you. Yes, as you know, this time, I promise it because it's going to be 15 minutes, and I think I was watching my watch. It has been only 14. Thank you for being there this late. It was just -- the reason why we have this meeting this late is that [indiscernible] do with the troubles and board [ with our ] issues, so have to choose myself for that. So we're always better to have it in the morning. But again, thanks a lot. Thanks for being here, and thanks for posting all these questions. So I'll see you on the next quarter which I think will be on the February results. Thanks again.