Technip Energies N.V. (TE) Earnings Call Transcript & Summary

Good afternoon. This is the conference operator. Welcome, and thank you for joining the Technip Energies Third Quarter 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Phillip Lindsay, Head of Investor Relations.

Thank you, Judith. Hello to everyone, and welcome to Technip Energies financial results for the first 9 months of 2022. On the call today, our CEO, Arnaud Pieton, and our CFO, Bruno Vibert, will present our business and financial highlights as well as the outlook, and this will be followed by Q&A. Before we start, I would urge you to take notes of the forward-looking statements on Slide 2. I will now pass the call over to Arnaud.

Thank you, Phil, and welcome, everyone, to our financial results presentation for the first 9 months of 2022. Before I discuss the highlights, let me begin with a few words on the very positive market outlook for Technip Energies. The world requires an energy system that balances affordability, availability and sustainability. As such, there is an urgent need for increased investment and accelerated project development with particular emphasis on natural gas, LNG and low to zero carbon solutions. And let's not forget the critical need to decarbonize traditional industries, a theme we highlighted on our first half results call alongside key awards in carbon capture. For Technip Energies, this market reality is evidenced by two key trends: First, we see strong TPS order intake in Q3, driving a 60, 6-0 percent step change in segment backlog year-over-year with notable awards in renewable fuels and ethylene. This reinforces the revenue growth trajectory of our highest margin segment. And second, there has been a material growth in our commercial pipeline for project deliveries since we presented our full year outlook in March, with substantial early engagement in energy transition prospects, including LNG, as well as decarbonizing traditional markets. Therefore, we expect a significant improvement in order intake trends over the next 12 to 18 months for our longer cycle segment. Turning now to the highlights. Third quarter revenues and EBIT were robust, further strengthening the year-to-date performance. Revenues for the underlying business, excluding Arctic LNG 2, grew by more than 20% year-over-year. On a full company basis, revenues at EUR 4.9 billion were essentially flat with a declining contribution from Arctic LNG 2, almost fully offset by activity growth on other ongoing projects. We posted a strong EBIT margins of 6.9%, which are in line with the medium-term trajectory we set for the company at inception. At this stage of the year, and in the context of our orderly exit from Arctic LNG 2, it is now appropriate that we return to full company guidance, which Bruno will discuss later. Finally, 9-month orders of EUR 2.7 billion are 55% weighted to TPS, reflecting the very strong momentum for this segment. In contrast, we see a strong recovery for project delivery orders ahead of us. Now I would like to update you on Arctic LNG 2. Our orderly exit is progressing, and we have demobilized all operational personnel from the project. We have signed an exit framework agreement with our customer, which we are currently implementing, and we anticipate completing this process within the first half of 2023. In light of this, the remaining backlog on the project has been slightly reassessed in the quarter and stood at EUR 890 million at the end of Q3. We reconfirm that we do not expect any negative net financial exposure as a result of our exit from Arctic LNG 2. Turning to the operational highlights. Our teams continue to demonstrate robust business execution, and I would like to express my gratitude for their performance and dedication in difficult circumstances. We have continued to make strong progress across the portfolio, delivering project milestones and activity outside of Russia increased as planned over the quarter. The strength in margins demonstrates the quality of the underlying portfolio and improving mix, including growth in TPS and sustained excellence in project delivery. Overall, our performance year-to-date and improved visibility underpins our full year outlook. Now let's take a look at key recent awards and how we continue to position the company for an increase in order intake across strategic markets. In [indiscernible], we booked a large proprietary equipment order for Project 1 for INEOS in Belgium. This award follows our early engagement work, including the selection and licensing of our proprietary technology earlier this year. The cracker design utilizes our latest technology enhancements to achieve a CO2 footprint at least 50, 5-0 percent lower than the best existing facilities. And the furnaces are modularized and designed to transition to 100% hydrogen firing in the future, in addition to the plant being carbon capture ready. I will revisit the exciting market potential for ethylene in my outlook section later. Our broad offering in clean hydrogen market achieved notable successes this quarter. This includes a first license sale for our proprietary Blue H2 by T.EN solution to decarbonize the petrochemical plant in South Korea. And in Australia, a green hydrogen project for Yuri, which consists of a 10-megawatt electrolysis plant for Phase 0. This will generate green hydrogen, which will be used to produce green ammonia. In addition, recent announcements indicate our involvement in green hydrogen project of industrial scale in excess of 100 megawatts of capacity each. Elsewhere in the portfolio, we have secured access to other opportunities through front-end engagement with key studies in a number of markets, including LNG and floating offshore wind. And finally, we continue to invest and strengthen our position in technologies and the markets of the future. During Q3, our partnership with Swiss sports brand on LanzaTech and Borealis announced Clean Cloud, the first ever shoe that uses carbon emissions as raw material. The process included the application of our amine technology to produce bio-ethylene. And we look forward to working with the [indiscernible] team to scale up and industrialize this solution. And in line with our strategy to expand our plastics circularity portfolio, we entered into a cooperation agreement with APChemi for advanced plastic Waste-to-Olefins technology. Here, we will contribute our ethylene expertise and proprietary purification technologies to commercialize a process for the chemical recycling of plastic waste. So in summary, a very positive quarter for others, notably in TPS, where our Q3 book-to-bill was 2.8 and several promising seeds planted for the future. I will now pass over to Bruno to discuss the financial highlights.

Thanks, Arnaud, and good afternoon, everyone. So turning to the highlights of our financial performance for the first 9 months. Adjusted revenues were flat year-over-year at EUR 4.9 billion. This included around EUR 1 billion from Arctic LNG 2. Revenues, excluding Arctic LNG 2, increased by 23% year-over-year. And EPS growth year-to-date is 6%. Adjusted recurring EBIT was EUR 336 million, equating to a margin of 6.9%, a 60-basis point increase versus the first 9 months of 2021. This was due to strong project execution and margin expansion in TPS. I will come back to that in more details on the next slide. Bottom line is very strong. With adjusted net profit 40% higher than the prior year at EUR 223 million, benefiting from the growth in EBIT, lower net financial expenses and the absence of transaction costs that impacted last year's results. Adjusted order intake was EUR 2.7 billion with EUR 1.1 billion booked in Q3. Book-to-bill, on a trailing 12-month basis, has trended up versus midyear and is expected to improve further in the coming quarters. Net cash at period end was EUR 3.3 billion, again up versus H1 position. In summary, despite a challenging external environment, the collective performance of our teams, is continuing to yield strong results. Turning to guidance. With 3 quarters of the year behind us and improved visibility on our exit from Arctic LNG 2, it is appropriate to return to full company guidance for 2022. We expect full year revenues in the range of EUR 6.2 billion to EUR 6.5 billion, clearly supported by backlog scheduled for the fourth quarter. We see adjusted recurring EBIT margins of between 6.7% and 6.9%. This is broadly in line with the year-to-date performance and is above the 6.5% achieved in 2021. Our expectations for effective tax rate remains at 28% to 32%. And I should point out that this guidance is consistent with the prior financial framework which, as a reminder, excluded the contribution from Arctic LNG 2. While it's obviously too early to provide any firm financial guidance for 2023, there are several building blocks to consider when estimating our top line. We have EUR 4.5 billion in hand for 2023 as per the backlog schedule. Future orders in both segments will also contribute to this top line. And as we implement our exit from Arctic LNG 2, there will be some residual revenue contribution from there. On margins, as we have previously mentioned, sustained margins will be delivered through effective cost base management, strong project execution and the growth from TPS activities. All this is supported by the execution and materialization of our strategy. Turning to our segment reporting and starting with project delivery, where our first 9 months performance demonstrates robust business execution. Revenues were modestly down year-over-year with a significant decline in contribution from Arctic LNG 2, largely offset by 30% growth in the underlying portfolio, as major LNG and downstream projects ramp up. Segment adjusted EBIT was EUR 280 million, equating to a margin of 7.2%, up 80 basis points year-on-year. Margins benefited from a strong contribution from LNG and downstream projects in the latter stages of completion. Excluding Arctic LNG 2, the margin was in line with the overall performance at 7.3%. This demonstrates the quality of our underlying portfolio, the maturing mix and strength in execution. It also underpins our confidence in the outlook for the remainder of the year and beyond. Trailing 12-month book-to-bill was 0.4, reflecting the absence of [indiscernible] in the period, but it is worth noting that this calculation includes significant revenues from Arctic LNG 2 over this period. Backlog has declined 24% year-over-year to EUR 11.7 billion, impacted primarily by the majority removal of Arctic LNG 2. Excluding this project, backlog is nearly flat, benefiting somewhat from favorable FX movements. While Arnaud will provide details in the outlook section shortly, we are confident that book-to-bill trends for project delivery will improve significantly in the coming quarters. Turning to Technology, Products & Services. TPS continues to deliver strong financials with revenue growth of 6% year-over-year and EBIT improving by 13%. The growth was driven by higher PMC and engineering services activity, especially in the Middle East, and strong activity in renewable fuels and process technology, including licensing and property equipment, notably for ethylene and for PBIT, a biodegradable polymer. EBIT margins improved by 60 basis points to 9.2%, benefiting from higher activity levels overall and a favorable mix, including process technology and advisory services. And this expansion has been achieved despite higher selling and tendering expenses to deliver our ambitions in future growth markets. TPS backlog, which has seen a huge 60% expansion year-over-year. While Arnaud will discuss this in more detail later, we have benefited from sizable recent wins in renewable fuels and ethylene as well as the strengthening of smaller awards in the third quarter. As such, trailing 12 months book-to-bill has improved to 1.4 from 0.9 last quarter with a clear acceleration in this third quarter. Turning to the other key performance items across our financial statements and beginning with the income statement. R&D at EUR 34.5 million is materially higher versus last year and consistent with our strategy for targeting the investment to enhance our energy transition positioning. Net financial expense at $7.2 million is down versus the H1 position. As I discussed last quarter, the rising interest rate environment around the world will benefit us, thanks to the large cash position on our balance sheet, and we see this in Q3 with higher interest income on our deposits. Finally, the balance sheet is largely unchanged versus the first half and remains very strong. Let me conclude my part of the presentation by discussing cash flows. While the first 9 months performance shows continued strong free cash flow conversion, free cash flow at EUR 122 million included EUR 153 million working capital outflow. Net of working capital, free cash flow was EUR 275 million and consistently strong as we executed across our portfolio. Cash conversion from EBIT ex working capital remains high, and we continue to expect to deliver consistently high free cash conversion net of working capital in a 70% plus range in the medium to long term. Regarding the potential impact from Arctic LNG 2, as we progress further on our orderly exit, we will experience some working capital and cash outflows as we close out purchase orders and subcontracts. But as previously mentioned, no net negative financial exposure is expected. Below free cash flow, the key items include our maiden dividend of EUR 0.45 a share, which was approved and paid in May for a cash outflow of EUR 79 million, and EUR 54 million related to share buyback. We end the period with EUR 4 billion of cash and cash equivalents. I will now turn the call back to Arnaud for the outlook.

Thank you, Bruno. Turning now to the outlook, where our TPS portfolio is strengthening, and our energy transition pipeline is expanding. Let's first focus on TPS, which achieved significant backlog expansion of 60% year-over-year to EUR 1.8 billion. The third quarter was notable for key awards in renewable fuels with the Rotterdam expansion services award for Neste and the ethylene proprietary equipment award for INEOS. These two awards have a longer cycle dimension to the TPS backlog. In addition to this, TPS benefited from a well above average quarterly run rate of smaller technology and services awards that are shorter cycle and more book in turn in nature. As I said previously, TPS is a strategic growth segment for Technip Energies, and we continue to enhance our position in the value chain. Beyond ethylene, markets are supportive notably in decarbonization, clean hydrogen and many other energy transition themes. Our increased R&D spend is focused on enhancing our technology portfolio, and we continue to actively scout the market for suitable technology bolt-ons. Turning to project delivery, where we see a further improvement in macro outlook and strengthening of the commercial pipeline. The energy sector is now entering a multiyear expansion phase, which is necessary to address energy availability and affordability. This is further supported by governments around the world creating conditions for capital to be deployed in the pursuit of net zero goals, such as the Inflation Reduction Act in the U.S. and the Repower EU plan for Europe. Against this backdrop, our energy transition commercial pipeline has expanded by 50% compared to the position at full year 2021 results. Two main factors are driving this: LNG, where prospects are being reactivated at a pace rarely seen previously; and energy transition opportunities, excluding LNG, which are accelerating with a near doubling of the commercial pipeline since the start of the year. These trends fit very well with our strategy and are supportive of a sustained improvement in orders over the next 2 years. In summary, a very positive commercial outlook across the majority of our markets, which is enabling us to deliver on our purpose to engineer a sustainable future. Turning now to Ethylene. The market, which is historically GDP-led has been -- has seen a reduction in major new capital projects over the last 3 to 4 years due to new capacity coming online and recent economic uncertainties, but we are now seeing recovery in near-term market prospects as well as structural drivers that will support the market through a recession scenario and over the long term. This includes regulations, such as the EU packaging directive, national and political economic agendas, and refiners strategically expanding into petrochemical production. In addition, we should not underestimate the drive for decarbonization, both to optimize the new infrastructure and to future-proof existing production capacity. Our market position is very strong, reinforced through the Stone & Webster acquisition back in 2012 and continuous investment in R&D programs. We have a robust technology position with more than 40% market share of licensing. This leadership position gives us a seat at the table for a high proportion of prospects and provides us with an early engagement tool to evaluate and select the right models. Sometimes this can be through pure licensing. Alternatively, we can license and supply proprietary equipment such as furnaces, as was the case for the recent INEOS award, or we can license technology, supply our products and secure the project's EPC, like we did for Borouge 4. Over the next decade or so, we see the market adding nearly 80, 8-0 million tonne per annum of ethylene capacity. With several prospects currently being assessed, we remain well positioned for additional awards in the coming quarters. Finally, we are making substantial improvements to decarbonize the production of ethylene, including integrating CCS technology, firing hydrogen other fuel, electrification and through circularity using feed from recycled plastics, and we're not done. Our sustainability drive continues through further R&D and open collaboration with partners as we develop the ethylene of the future. In closing, we have delivered a robust performance for the first 9 months of the year. With this, an improved visibility regarding our exit from Arctic LNG 2, we returned to full company guidance for 2022. TPS orders in Q3 drove a step-change in segment backlog, bolstering the growth potential in our highest-margin segment, where the commercial pipeline for project delivery has expanded through higher energy transition and LNG opportunities. T.EN's business strategy is fully aligned to an improving energy market outlook. Supported by our strong balance sheet and commitment to further invest in technologies, we are well positioned to enable solutions for affordable, available and sustainable energy. And we remain resolutely focused on generating value for our shareholders through effective capital allocation and sustained excellence in execution. With that, let's open the call for questions.

[Operator Instructions] The first question is from Kate O'Sullivan with Citi.

The first question is around Arctic LNG 2. You mentioned, it was reassessed the backlog in the quarter. Obviously, increased by about EUR 40 million despite revenues. Could you provide some further color on the moving parts here and looking forward, how we expect Arctic LNG 2 backlog and revenues to move through first half of '23 before you exit fully? And then secondly, you talked about the -- I can come back to my second question.

Okay. Thank you, Kate. Actually. I will -- yes, I will hand over to Bruno for the backlog question, which is a very interesting one. Thank you for asking.

Yes. Kate, so in terms of backlog or -- and the moving parts for Arctic LNG 2, as we know, we've entered discussions with the clients about our exit. And we reassess the scope of work, which was being done there. And this led to some reduction in Q2. And obviously, as we continued our discussions, we slightly updated basically the third quarter. This will be further adjusted as required based on ongoing discussions with the client that will continue. And just as we close out of any projects basically, we have a team mobilized. We will incur costs as we close out subcontracts, we closed out POs, we transfer POs. And this cost of completion will also then, in turn, generate revenues out of the backlog. So we will continue and make reestimates. Some part of this backlog will translate to revenue, but this will be further adjusted as we get along the process as we said in this quarter's release, we expect to be fully completed by the first half of 2023.

Okay. And just a second question, if I may. You've talked about the expanded energy transition opportunity set, but specifically on LNG and the Northfield South expansion in Qatar. Could you provide any color on that bid process and timeline? I believe it's a competitive tender, but you obviously are the incumbent on a competitive landscape.

Yes, Kate. Thank you. And indeed, we believe that there is significant investment that is still required for the years to come to ensure natural gas and LNG, in particular, as a key part of the LNG energy transition. The NFS expansion of the project in Qatar is one we are competing for. So you're -- and yet while we are the incumbent, you're right to say that it remains a competitive landscape. The calendar and the timing is unchanged in terms of the technical submission, which has taken place. And in terms of the commercial submission, which will take place before -- in all likelihood before year-end. And after that, it's really within Qatar Energy tends to decide on the FID, but the process is progressing and the studies are ongoing, including the preparation of the future infrastructure and it's, I would say, potential improvement in terms of the low carbon solutions, which we are very excited about because we have a major role to play in terms of the solution we can contribute. So it's -- I would say, it's a live process, which is pursuing its course, I would say, as planned.

The next question is from Jean-Luc Romain with CIC Market Solutions.

My question relates to LNG as well. Well, we have seen the situation this year with a loss of LNG required. And so far this year, finally, very few new FIDs and LNG. We are expecting NFS for next year and a couple of [indiscernible] but how would you explain it's so slow finally with current prices, which should maybe get the acceleration to be faster than that?

So as you know about LNG, this is more of a long-cycle business, and it can be sometimes challenging to truly compress FIDs and project durations. Now it's not for the lack of interest for new LNG projects. I think the landscape or part of the landscape may be shifting in favor of established LNG players. And this is why you are seeing the likes of Qatar energy, progressing with NFS. And really, while there is no massive acceleration, I can tell you that there is indeed, higher pace to this prospect, but they are absolutely keeping the right course and they are on track for their FID decisions whenever they will decide. And it's the same for other players in the UAE. We've seen, and you are aware of the fact that we signed the pre-FID agreements with a couple of developers in the U.S. So this -- I mean, we have seen no change of course in terms of our engagement with those players. And I think the -- what we're observing is a market that is now being driven by a strong interest for solutions that can be providing a faster-to-market opportunities, i.e., the modular design. And you know we are well positioned when it comes to modular designs for LNG or through the productization of the LNG infrastructure through modularization. And I think, what we've been observing is an acceleration of the interest for faster-to-market modular design that will particularly advantage those who will select this solution in the coming years. So there is no anxiety on our end in terms of the pace of new award. You may recall that should 2022 have been a normal year without a war in Ukraine, we would have booked in more likelihood more orders in LNG for our clients in Russia. Obviously, this has not happened. It takes a little bit of time for the pipeline, for us to not replenish really, but for the remaining opportunities to convert and materialize but it's coming. So no anxiety from our end. And on the contrary, I would say, a lot of optimism on the back of the faster-to-market modular designs that we are promoting.

May I ask an incremental question? On the other side of equation change there is [indiscernible]. And we all know that the onshore regas plans may be difficult. Then you would have to do that to use the gas for power plant. Would there be a way kind of to regas to power to accelerate the process for making electricity and maybe not being onshore?

You're talking about gas to power offshore solutions?

Regas to power, for instance, I don't know if there is a research on that or whatever.

Yes. We have actually teams who are working on solutions like the ones you're mentioning. And it's an interesting theme, which has been going on for some time between us and our clients in the industry. I don't have -- we don't have, at this stage, a clear line of sight of an opportunity that could convert in the future. It is about differentiation and bringing the price tag at the right level for, probably, the kilowatt hour. So it's work that is ongoing, and we have teams mobilize working on some of the solutions, but too early to say if and when any of that could convert into a real business opportunity. But indeed, it is a theme that is attracting interest.

If I may, what is at the back of this, maybe further down the train, further business opportunities would be the decarbonization of the gas to power plant. You remember, we've been finding essential ways to power. We're working on the conserve technology. So at the back of more projects from gas to power, we have the technology, we have the solutions for decarbonize as such. So almost more opportunities for us in the decarbonization agenda. And on top -- coming up, obviously, on top of the -- basically facility to regas.

The next question is from Mick Pickup with Barclays.

A couple of questions, if I may. Firstly, for Bruno. Can I just check in the quarter? Obviously, it looks like Arctic had a very strong profitability quarter. Is that just because you know where the end of the project is now and you could hit milestones on that? That's just the first question.

So obviously -- thanks, Mick. Obviously, Arctic was contributing based on the discussions. And as I said earlier to Kate's question, we will continue to work on our exit, executing the exit framework agreement, and this will generate cost and revenues. Now as you know, the project recent performance is not necessarily indicative of what its future contribution could be. Of course, it's the outcome of derisking milestones, the commercial closeouts, project completion. So the Arctic closeout and exit will be just the same as every project. So from our point of view, obviously, what's important, Arctic is one project within our portfolio. It's important not to consider just one single project in isolation. Project always will be driven by portfolio approach. So a bit more Arctic. For instance, this quarter, Yamal was significantly down in Q3 versus the H1 run rate. So for Q3, the Yamal's contribution to the gross margin of Technip Energies was really quite low, quite immaterial. So in other words, high Arctic, this multi-recurring questions on Yamal, Yamal Cliff, kind of low Yamal. So Q3 is almost to the point where we have entered a post-Yamal world. So what you will see unfolding in future quarters is, yes, some contribution from Arctic in revenues and bottom line, depending on some of the closeouts. And of course, the ramp-up of the rest of the project and the project delivery, which will come into play for next year.

And then I ask a question about [indiscernible] press release with Shell's Cansolv. Obviously, you've been together for many, many years. What's just prompted the closer collaboration and what exactly is it that you're putting together?