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

Good morning, everyone, and welcome to TR's Q1 results presentation. We apologize for the slight delay in our schedule. We've had certain communication issues. The presentation will be conducted by our Chairman, Juan Lladó; and our CEO, Eduardo San Miguel. This is going to last approximately 15 minutes, and you will be able to pose your questions after the final remarks. I now leave the floor to our Chairman, Mr. Juan Lladó.

Hello, everyone. Let me start reminding you that in 2 weeks, we'll be hosting our Capital Markets Day. It Is going to be Abu Dhabi, as you know. And obviously, in this event, we'll be able to devote enough time with you to share TR's very motivating and promising growth strategy. So therefore, today's presentation will have to be shorter than usual. I will start then with a short update on our commercial pipeline, and then I'll follow with some minutes devoted to track in our transition energy business. As you celebrated its first anniversary, track's division has celebrated its first anniversary. Then Eduardo would follow with a financial review for this quarter and then as always, I will conclude with our guidance for '24. So let me start with the quick glance of our commercial pipeline. When you look at this slide, an important number is that we have a strong EUR 72 billion pipeline for the next 2 years. But let me walk now with you with a different breakdown of this EUR 72 billion, which I think you will allow all of us to understand how TR by engaging early with our customers, by engaging in early contract is today for a better position for future and healthier awards. First, we have the first tranche, EUR 51 billion of our traditional EPCs, EPs and EPCMs, I mean our service business, which are pipeline that we're already bidding. We are -- we qualify and we're going to be bidding obviously in competition with other engineering firms within the next 24 months. This is a traditional pipeline, and this figure already shows that investment cycle remains very solid. The second tranche, you see there are only EUR 1.4 billion which represents several contracts that TR has already secured, negotiated and agreed. Those are contracts where we are already working with our customers on a service basis, and eventually will be converted in EPCs from the final investment decision take space, which we expect will be within the next 18 months. And finally, you see the last tranche of the commercial pipeline. We're bidding or we're getting ready to bid about EUR 10 billion, which represent or corresponds 3 EPCs we have already been engaged with our customers by executing do all our competitive goods, which means we'll have to compete with one or there are traditional fits where customers will give us the opportunity sometimes to continue and sometimes to compete. But obviously, it's a different story when you have bidding for EBIT, you have design. And obviously, many fits that we are engaging with the customers. So those are EUR 10 billion that we bid in that obviously not only increases the likelihood of getting awards, but also the health of both -- of those awards. So we think that this breakdown shows well how the market dynamics have changed over the last 2 years. So having gone through the pipeline, which I thought it was important, this continuous asset with an update on track which is our transmission business unit. Just a few weeks ago, we're here celebrating that TR synergies that business unit track, we're celebrating its first anniversary of the public presentation. About a year ago, we made a big presentation here with our government included of our track division and we still [ worry ] as such. And all of us, we were extremely satisfied, and that's where we want to present to you today what has been accomplished over the last year and how optimistic we are for the future outlook of the business. As you know, the purpose of creating track was to generate more opportunities in the carbonization and focus on project, offering additional to our customers and differentiated value. To achieve these goals, we have put together different service proposals within track and obviously, attracting and moving into convening new business lines, combining our traditional business lines, our traditional customers with new business lines, which is basically cement and steel. So what has happened? Let's look into the left-hand side of this slide. And we see that since first quarter '21 when all of us were learning and doing feasibility studies about this market, TR has accumulated more than EUR 300 million in awards of engineering services, fully devoted to low-carbon projects. And we tell you EUR 300 million in services is a lot. And especially in this business that as you know very well, it's a very slow growing business -- of developing business. What that means in terms of resources? What that means in terms of where are we? If we look into the right-hand side, we see we have been very successful in developing these 3 lines of low carbon business that we're very good at. We're very good at good hydrogen, and we have been successful. We're very good at biofuels and we have been successful and we're very good and we're needed for the low carbon capture business, and we have been successful. And what does that mean into resources? I mean why are we successful? And why are we needed? We are needed because engineer resources are needed to really tackle this business. That means that we have deployed 1.8 million engineering man hours which are fully focused in this fast-growing market. Which if you translate that into people, into engineers, into chemical and process engineers. That means there are about 1,000 engineers of focus in TR in this business. So this is only where we are. And then just put -- just one quick slide to tell you where are we going. So now let's just look into the next pie on the right-hand side as well to see where we're going. A couple of minutes ago, I told you and I showed to you that we have a pipeline for the next 24 months of EUR 32 million. While we've seen this year, EUR 12 billion actually corresponds to projects already focused in low-carbon technologies. Let me tell you that 2 years ago would have -- would have been very difficult for me and for my whole team to have that figure in front of [ Aramco]. Also, it's important to highlight that we're greatly widening our client base, where today, we have customers that we didn't have before. That is very important. And a big portion of these investments will be undertaken as I've said before, with companies outside our traditional oil and gas base, allowing us, in many cases, to work and develop those EPCs hand-to-hand, codeveloping with our investors, which was, as I said before, differentiating strategy. So I think this is my whole presentation. Strong pipeline, a good breakdown and extremely well positioned in the growing low carbon business. And with this message, let me now pass the floor or the micro in this case to Eduardo.

Okay. Thank you, Juan. Good morning, everyone. Let's move now to the financial results. Well, this slide summarizes the main financial figures for the first quarter. In terms of sales, TR surpassed the EUR 1 billion threshold with a 13% growth from our previous quarter. As our -- the quarter was a quite extraordinary small quarter in terms of sales due to a bigger than usual volume of projects in the engineering stage. The EBIT reached EUR 40 million with a 4% margin of our sales in line with our guidance for the year. And the net cash position stood at a healthy EUR 333 million level at the end of the quarter. Focusing now on margins, as you can see in the slide that in the last 2 years, we have consistently grown our operating margins up to the 4% level reported in the quarter. There are several reasons behind this positive recovery that were elaborated in previous results presentation. But however, I think it is important to highlight them again because they will also be supporting the future margin evolution. First, we are more selective when choosing which projects we want to bid for. Second, we have implemented a proactive risk integration strategy. And third, the cost efficiency mindset has landed solidly throughout the company. We're moving to the current evolution. As you can see in the slide, the net cost efficiency stands at EUR 333 million. One of the positive drivers that the actual investment cycle is bringing is the improvement of the cash cycle linked to new awards. And this is not only related to the revival of initial loan payments part in general to a more positively balanced milestone scale for payments. And investments to give you some additional color. While the 2023 full year figure included the payment of the MERAM project, the first quarter figure does not include the down payment of the [indiscernible] gas in Saudi Arabia. Cash inflow, we expect to occur in the second quarter of 2024. The purpose of TR is not to maximize our cash and bank but to consume wisely this cash inflows in accelerating the project execution. It has been a short presentation, but now I give the floor to Juan to conclude with the guidance for 2024.

Thanks, Eduardo. As always, as usual, let me conclude today's presentation with our guidance. Our guidance for '24 contemplates the level of EUR 4.5 billion for sales and a solid operation EBITDA margin. But this is not just the number. I think the message we were to throw with this guidance is that it shows that in the last 2 years, we have to strengthen our capacity in all fronts. And let me underline that capacity in all fronts. And today, we are already having been stronger as we are to capture that we see an extremely exciting and promising market. So I do understand that is a solid and good guidance. And having say that, let me finalize again the reminding you that we'll be hosting the Capital Markets Day from the 23rd to the 24th of May in Abu Dhabi. You know that United States in [indiscernible]. This place where we're currently executing one of the most important projects in our backlog. We have there are one of our most important customers and customers different divisions for customers and will be definitely key for our long-term growth. We enjoy and we want to be in Abu Dhabi, Eduardo and myself, I know the members of TR's management team will be devoting time all the time required to explain TR's strategy and the growth path for the company in the coming years. We're very sure it's going to happen. And now happy to finish. And with this reminder, we're more than happy to answer any questions that you may want to address. Thank you very much.

[Operator Instructions] Your first question comes from the line of Francisco Ruiz from BNP Paribas.

I have 3 questions, if I may. The first one is on the EUR 12 million pipeline that you highlighted on track, could you allocate this in the 3 blocks in terms of your commercial pipeline? I mean, how much is in the first one? How much in the second half and in the third? The second one -- and my second question is on the book-to-bill that you expect for this year. If you think that for sure, it should be an acceleration, but would you be able to be at levels of 1x your sales? And my last question is if you could provide what's the level of low-risk contracts you used to providing in previous presentation as a percentage of total pipeline?

I want to start with your third question. This is the only one I think we are clear. It's -- there is now a significant modification of the existing backlog compared to the backlog we had 3 months ago because there are no relevant additions, but the one in Saudi Arabia, we only have one. If I'm not wrong, at that time, we were saying we were around 75% of the backlog had any kind of mitigation, risk mitigation measures implemented. So it should remain similar. It should be around 75%, that's first. Regarding to your first question. I think you are asking for when we are going to deliver this pipeline and what is going to be converted into EPCs.

Eduardo, what I am talking about is taking into account the clarification you made on your pipeline between traditional awarded and not in the backlog and potential. If you could split the EUR 12 million -- EUR 12 billion of the track pipeline into these 3 tranches?

Thank you for your clarification. It's EUR 12 million, EUR 4 million out of these EUR 12 million are part of the EUR 10 billion that are already on an ongoing service contracts. I mean the third class. And the other EUR 8 million are in the first class, traditional EPC, EPCM, we are bidding for, and we are planning to bid in the future.

And the last question was on the book-to-bill. I mean what's your order intake estimate for the year? If you could give us some color on this.

Now let me answer that question to you. If we do believe it's not a real challenge, but this is obviously a challenge in this business to be able to replace sales. I mean, is this -- I mean, is -- I mean, last year, we wanted to replace sales, and we did better. This year, we want to replace sales, and hopefully, we may doing -- end up doing better. But should be a challenge.

But after we never -- I think in the capital markets, they will be more explicit. I think we'll get more into detail of what we go in what we expect customers, markets and [indiscernible] business services the EPCMs.