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

Good afternoon. This is the conference operator. Welcome everyone to Technip Energies Half Year 2023 Financial Results and Conference Call. [Operator Instructions] Now I would like to turn the conference over to Mr. Phillip Lindsay, Head of Investor Relations of Technip Energies. Please go ahead, sir.

Thank you, Alicia. Hello to everybody, and welcome to Technip Energies Financial Results for the First Half of 2023. On the call today are CEO, Arnaud Pieton; and our CFO, Bruno Vibert, who will present our business and financial highlights as well as the outlook. This will be followed by Q&A. Before we start, I would urge you to take note of the forward-looking statements on Slide 2. I will now pass the call over to Arnaud.

Thank you, Phil, and welcome to our financial results presentation for the first half, where we have delivered on a broad range of operational, commercial and strategic objectives. Revenues of EUR 2.8 billion reflects strong momentum in TPS and lower project delivery activity resulting from the maturity of the portfolio as well as our exit from the Arctic LNG 2 project. But we expect project delivery activity to increase sequentially in the second half. Strong execution enabled us to deliver 100 basis points of margin improvement year-over-year. And with profitability trending above the full year outlook, we are raising EBIT margin guidance by 30 basis points to a range of 7% to 7.5%. The award of Northfield South in Qatar is a key highlight. And when combined with sustained commercial strength in TPS, our backlog has risen by more than 40% year-over-year to nearly EUR 19 billion, a record high [ quarter ]. Finally, we deployed our strategy through new investments to expand our lab network and digital capabilities as well as technology development and product launches to enhance our leadership in the markets for carbon capture and the decarbonization of ethylene. Moving to operational highlights. I will first comment on our exit from the Arctic LNG 2 project, which we successfully completed in the second quarter, in line with a schedule that we have committed to in Q3 last year. The complexity of this exit should not be underestimated, and I commend the team's excellent planning and [ resolve ] in reaching this outcome. As a result of the exit from Arctic LNG 2, Technip Energies no longer has any commercial or contractual relationship with the project. Turning to the ongoing portfolio. We continue to make strong progress delivering important milestones, derisking execution and completing projects. This includes the delivery of the world's first liquefied CO2 loading arms to Norway for installation on the Northern Lights CCS project. Overall, I am really pleased with our solid first half. Turning to the major commercial success of the quarter. In May, we were awarded the prestigious North Field South LNG project in Qatar, a contract for 2 mega trains, each of 8 million tons per annum that will boost Qatar LNG production capacity to 126 million tons per annum. This award meets all our selectivity criteria. We performed the feed and have an intimate understanding of the liquefaction technology. As incumbent, we know the environment, the customer and our partner, all extremely well. And with its large CCS scope and other energy management solution, it reflects our ability to integrate technologies towards lower carbon LNG. This award also demonstrates the strength of our relationship with Qatar Energy and Qatar Gas as well as our continued leadership in the LNG market. As a result of the NFS and the other projects in our portfolio, Technip Energies is executing 35% of global LNG capacity currently under construction. And if I look at the LNG market fundamentals, they remain strong, and we see a robust FID cycle until at least 2025. Beyond Qatar, we are actively engaged on multiple prospects in the Americas, Africa and other parts of the Middle East, and we are confident that T.EN will secure additional awards in the coming 2 to 3 years. Before passing to Bruno, let's take a look at TPS, where commercial success and market penetration is supporting strong revenue momentum in our highest margin segment. TPS benefited from a surge in order intake during 2022 and with relatively larger awards in ethylene and renewable fuels being complemented by strong front-end engagement and services activity across a range of energy transition domains. And while the first half of this year has seen a reduced number of the larger TPS awards, strong order momentum has pushed backlog to new highs, up nearly 80% year-over-year. This is driving material growth in TPS revenues and underpins confidence in our medium-term ambition to reach annual revenues of EUR 2 billion, a near doubling of top line versus 2020. This further confirms the strength of our hybrid model, a model which combines a long cycle project delivery business with a short cycle, the margin accretive TPS that enables T.EN to deliver strong financial performance across energy cycles. I will now pass over to Bruno to discuss financial highlights.

Thanks, Arnaud, and good afternoon, everyone. Let's first look at the highlights of our financial performance for the first half of the year. Adjusted revenues were 13% lower year-over-year at EUR 2.8 billion, impacted by the maturity of the project delivery portfolio and the exit from the article in Q2 contract, partially offset by activity ramping up on Qatar NFE and very strong [ TPS ] growth of 45%. Adjusted recurring EBIT increased slightly year-over-year despite the lower revenues. Thanks to strength in margins, which increased by 100 basis points year-over-year to 7.3% and benefiting from solid project execution and the growth in TPS. Beyond the operational performance, certain factors impacted adjusted diluted EPS. Higher interest income year-over-year was more than offset by non-recurring items relating to the P&L settlement as well as the technical accounting and non-cash charge associated with our orderly exit from Russia and the sale of our main Russian operating entity. As a result, EPS reduced by 5% year-over-year. Adjusted order intake for the first half was EUR 9 billion, equivalent to a book-to-bill of more than 3, benefiting from the major NFS award in Qatar and strong contribution. Net cash at period-end was EUR 2.7 billion, further highlighting the strength of our financial position. So in summary, a very solid first half, closing legacy items and building up for the future. Turning to guidance. Supported by strong first half execution and as mentioned by Arnaud, we are raising adjusted recurring EBIT margin guidance from 6.7% to 7.2% to a range of 7% to 7.5%, an increase of 30 basis points. The consistency and quality of our portfolio and strength in execution fully supports this margin outlook. For revenue, we expect to sustain momentum in TPS and drive sequential growth in product delivery in the second half, well supported by our backlog schedule. As such, we confirm our full year expectation for revenues with a range of EUR 5.7 billion to EUR 6.2 billion. Regarding tax, the effective tax rate in the first half was above the full year guided range, specifically due to the P&L settlement, an exceptional item that is not deductible for tax purposes. Excluding the impact of the P&L settlement, the underlying tax rate is 28.6% for the first half. On a full year basis, we expect the settlement to have a lesser impact and maintain our tax rate guidance of 26% to 30%, albeit we are likely to be towards the top end of the range. Turning to our segment reporting and starting with project delivery. Revenues are materially lower year-over-year reflecting the completion of the Yamal LNG warranty phase and the exit from the Arctic LNG 2 project. The continued ramp-up of activity on Qatar NFE and strong volumes in downstream projects are starting to offset this. And we expect H1 to reflect the trough for project delivery revenues. Execution remains strong with notable strength in margin at 7.8%, up 140 basis points year-over-year. With NFS in backlog and potential for additional projects, awards materializing in the coming quarters, portfolio maturity will become more of a balanced blend of early and later-stage projects bringing margins to more normalized level. Backlog has increased substantially by 37% year-over-year to a record EUR 16.8 billion, equivalent to more than 3x 2022 segment revenues and providing excellent forward visibility. Turning to TPS where our strategic emphasis and commercial focus are yielding very positive results. Revenue growth of 45% year-over-year benefited from strong order momentum throughout the [ life ], 18 months, leading to higher technology and product-related volumes, including property equipment for ethylene and services activity in the renewable fuels market. In addition, engineering services activity remains strong with growth in pre-feed and feed work across various energy transition domains. Segment EBIT has improved by nearly 50% versus the prior year, led by higher volumes and positive mix, which enabled a 30 basis point margin improvement. Significant commercial success boosted the 12-month book-to-bill to 1.5 and an impressive 78% expansion in segment backlog year-over-year. In summary, TPS is performing at a high level, and as Arnaud will shortly address, we are actively deploying our strategy to invest and build on this positive trajectory. Turning to other key performance items and beginning with the income statement. Corporate costs of EUR 31 million are in line with the run rate that we indicated at Q1. As a reminder, the trend higher year-over-year reflects the cost of strategic projects and pre-development initiatives. We continue to anticipate a full year [ outdone ] of EUR 60 million to EUR 65 million for corporate costs, which should normalize closer to EUR 50 million in subsequent years. The net financial income line continues to benefit from Central Bank decision and higher global interest rates. In the second half, we could anticipate a contribution broadly in line with that achieved in the first half. Lastly, on the P&L, weaker non-recurring expense of EUR 34 million. This includes the P&L settlement as well as the non-cash charge associated with the closure of our Russian operating entities, which we discussed last quarter. Turning to balance sheet, where our gross debt is stable and our gross cash remained strong at EUR 3.4 billion, notwithstanding working capital outflows and the exit from Arctic LNG 2, which I will come back to shortly. The net contract liability has trended up versus the year-end position, reflecting the growth in backlog during the period. Before passing back to Arnaud, let's conclude on cash flows. Free cash flow, excluding working capital, was EUR 179 million and consistently strong, supported by cash conversion from EBIT of more than 85%. As a reminder, the positive impact of interest income is currently providing an upside for a normalized conversion from operational execution. The working capital outflow trend from Q1, partially reversed in Q2, thanks to the initial down payment received on NFS. Although the position year-to-date continue to reflect the maturity of the portfolio and our exit from the Arctic LNG 2 project. As part of this, the cash position was deconsolidated and [ conferred ] with the project entities. Other items of note include a cash dividend of EUR 91 million paid to shareholders in May. I'll now turn the call back to Arnaud for the outlook.

Thank you, Bruno. At our full year results, I presented our key strategic objectives for 2023, and I'm happy to report strong progress year-to-date. We have reinforced our growth outlook through strategic initiatives to sustain leadership in our core markets. In addition to the commercial success in LNG, we made strong progress on low carbon ethylene by deploying our e.Furnace by T.EN with leading customers in the U.S. to improve the technology at industrial scale. This new product will contribute to our customers fulfilling their decarbonization objectives. In support of TPS growth, we enhanced our ability to develop proprietary technologies in sustainable chemicals through the acquisition of Processium, the process technology development company with lab facilities that complement our existing R&D footprint in the U.S. and Germany. We also expanded our digital offering by acquiring SEED Energy, the start-up that specializes in digital services for multi-technology renewable energy system. Now in laying the groundwork for our future [ core ], we are focusing on the development of innovative products and solutions that will serve to break some of the cost barriers required for these nascent industries to take off. This includes the launch of Canopy by T.EN in modular, configurable and integrated suite of post-combustion carbon capture solution and the creation of Rely a new integrated technology and solutions company for green H2 and power-to-X market, which we discussed at Q1. Our R&D investments and new product developments are making the path for T.EN's future business and are consistent with our ESG ambitions. But as these net 0 compatible markets are still shaping up, we are positioning in a responsible manner, one that focuses on technology differentiation, one that requires limited capital investment yet creates potential for market leadership and major sources of future earnings. Before diving into Canopy by T.EN, let me introduce Capture.Now. Technip Energies is playing a key role on the journey towards a low carbon society and is strategically positioned as a leader in CCUS. This is best evidenced by Capture.Now, which consolidates our diverse portfolio of CCUS solutions that are available now at scale anywhere in the world. With unique coverage across markets and end-to-end integrated offerings across the value chain, we are designing and supporting our clients' decarbonization ambitions. With our comprehensive portfolio for both pre-combustion and post-combustion emitters, we are offering practical solutions and removing complexity. And we also have midstream capabilities notably with our proprietary CO2 loading arms and early-stage support for major hubs development. And we are expanding our portfolio with emerging solutions for carbon management and valorization, for example, [ as ] eFuels. In summary, Capture.Now is our platform to transform carbon into opportunities. As part of Capture.Now, we recently launched Canopy by T.EN, our new range of integrated post-combustion solutions for any emitter by combining a leading and proven carbon capture technology, Cansolv. With optimized, modularized architecture and seamless integration, Canopy enables customers to capture with confidence regardless of scale, industry allocation. This will be particularly important for smaller industrial emitters because we can significantly de-risk project execution, improve schedule certainty and minimize operational downtime. For the smaller emitters, that is to say those emitting less than 1 million tons per annum of CO2, which represents 80% of all emissions in the U.S. and Europe. We offer a range of standardized solutions delivered at site designed for optimum plant integration and ready for CO2 exports. But Canopy also extends to bespoke solutions for larger scale emitters. And with a CO2 recovery rate in excess of 95% it is compatible with all types of industrial facilities, both new build and retrofits. Finally, Canopy is digital by design. Our capture plans are fully instrumented and completely automated for [ admin ] operation and plant performance monitoring. In summary, Canopy by T.EN is an exciting solution for current capture market that will form an important component of our future core. In closing, our strong first half performance has enabled us to raise our full year margin guidance. Backlog is at a record level, driven by the NFS LNG award and continued commercial strength in TPS. And we are deploying our strategy to sustain our leadership, deliver TPS growth and build our future core. With that, let's open the line for questions.

[Operator Instructions] The first question is from Bertrand Hodee from Kepler Cheuvreux.

I have 2. The first one is on the Arctic 2 LNG exit and the cash deconsolidation. Is that cash gone? Or is -- do you expect to recover in some ways through, I don't know, dividend or cash being returned by the [ JV ], some cash? And can you confirm how much of cash was deconsolidated this quarter? And second question is around your carbon capture offering. Really excited to see how you have modularized the Cansolv offering with Canopy? When do you expect to see the first award with Canopy by T.EN?

I will take question number 2, and then I'll hand over to Bruno for the cash deconsolidation. So regarding Canopy by T.EN, obviously, a very exciting piece of offering. We're really happy that now we have a product that is hitting the market, which is based on a technology that is a proven one. So it's one that -- for which there is no question about the performance of its capture rate, in particular, the cost of OpEx and the rest. So it's a very efficient solution from that standpoint. And the market potential is massive when considering how much carbon is to be captured as a complement to the rest of the initiatives towards decarbonizing the well. So all-in-all, a strong offering and a very exciting opportunity set. The -- for Canopy. So it is likely that starting next year, we will see some award for Canopy, probably the [ C200 ], which seems to be one of the optimized one in terms of capacity. But yes, starting next year, we should see Canopy by then being part of the backlog and the commercial successes.

I'll take the first question on the cash and -- associated with the Arctic LNG 2. So we exited the Arctic LNG 2 project, which means we transferred and we went out of the 2 main -- or the 2 project entities that were [ working ] on this group. To do this transfer, this means transferring our rights obligation and the -- basically contractual dealings that these companies had with the suppliers to continue to go to undergo the project. So this means we -- when we deconsolidated -- when we transferred our shares on these 2 entities, we deconsolidated the cash. We also deconsolidated the working capital, notably liabilities associated to that. So the neutral effect, if you take the net assets view between cash and let's say, working cap on terms of pure gross cash amount, and it's reflected in the cash flow statement. You are looking at something about EUR 100 million which was deconsolidated because it was cash associated with working capital for the project entities for which we exited.

The next question is from Daniel Thomson from BNP Paribas Exane.

2 questions from my side. Firstly, we've obviously had the Qatar award and some of your competitors have expressed relatively bullish outlook for LNG FIDs over the next few years. I was wondering if after Qatar, and given this outlook, if we should expect any changes to your medium-term guidance within project delivery for revenues around the EUR 5 billion to EUR 6 billion type of level, and if this might get exceeded? Then secondly, on TPS, you've made steady and consistent gains towards building out this business, particularly with the new energy sectors. So looking beyond the medium-term guidance that you gave for around EUR 2 billion of top line, could you speak about your longer term ambitions for the relative split between the PD and TPS divisions?

So to start with Qatar, obviously, very pleased with this award, which, like I expressed, is ticking all of the boxes that we imposed to ourselves in terms of the selectivity principle for a project to make it into our backlog. So it's a very important component of our future, and it's entering the backlog in a good condition from the standpoint of the project, really ticking all the boxes that are important to Technip Energies in its future. The outlook for LNG remains strong. We continue to see the potential for this LNG cycle to extend for several years with a pipeline of new international opportunities, expanding project visibility out to 2025, 2026 and maybe beyond. Now the -- We're not going to -- it's not changing our view on the medium-term guidance for project delivery for several reasons. First of all, we want to continue to favor quality over quantity. So while the number of opportunities are large, we will continue to focus on those that are going to yield the best possible performance for T.EN and create the most value for the company. The good news is that we are not at capacity fully. Our engineers are busy because there is a high demand for engineering at the moment around the world and we are very positive about that. In the past, I've spoken about Golden Edge for engineering. So our engineers, there's no lack of work. But in terms of how much we can absorb in LNG, in particular, we have room for a couple of more large LNG projects, in particular, as their award is turning to be staggered as you know, we don't control the timing of the FID. But the nature of the market is such that the opportunity that we are pursuing are likely to have a pace or sequencing of FID that is favorable to Technip Energies being capable of tackling them, I would say, [ serenely ] because of, again, the way -- the sequencing of them and the project that will be actually closing and new ones starting. So there's potential for more in terms of how much we can take, but we will concentrate on quality over quantity. Volume matters, but the performance on the bottom line is equally as important. That's why at this moment in time we are not focusing on changing the guidance for the medium-term outlook on project delivery. If we can be in the range that we've provided, that's ideal. And our effort will be on continuing to progress TPS to reach the EUR 2 billion and to establish TPS at a EUR 2 billion -- a steady EUR 2 billion, so almost an unquestionable EUR 2 billion baseline of top line revenue and growing the profitability of TPS. We certainly have an objective for TPS to be steady at 10% of EBIT. This is what is [ animating ] my team -- the team and the commercial teams and the technical teams to establish TPS there. The potential for TPS growth is -- and I'm not going to give a quantum or numbers on the front, but when you look at the exciting opportunities that Canopy by T.EN is providing. The launch of new products that are aiming at decarbonizing the hardware-based industry, the e.Furnace by T.EN is one of the examples, but there's more to come. The range of products that -- or services that are going to be needed in the domain of sustainable aviation fuels, clean fuels or green H2. So in the coming months, you will see an increased, I would say, frequency of new product launch by Technip Energies that are going to fuel other solutions on the market and be compatible with the net 0 trajectory because this is where we are focusing and where we are investing on products and solutions that are compatible to achieving or giving you -- a chance to the world to achieve and reach the net 0 target. As you see more products being launched and solutions hitting the market, and as we are confident in our ability to -- for our solutions to be adopted by our clients and the size of the market, then it will fuel TPS. And the fact that -- I think I've discussed that in the past with you guys, there are several ways to grow TPS. We need more technologies, and therefore, we can sell more licenses. And with technologies, we can also generate more proprietary products. And proprietary products is the way like it was the case last year with ethylene, to actually grow the top line for TPS because the average order when you sell a product is much higher than the average order when you sell a license or an engineering services. So the more new products, the more novelty, the more innovation through converting into solutions, the more potential for TPS. So we've not quantified it just yet. There's more to come and I think we will have the opportunity to talk more about that in a more quantified manner in the future. But for now, we're focusing on launching the products, bringing them to maturity and making sure that the launches are fulfilling needs and what clients are requiring for the net 0 trajectory.

[Operator Instructions] The next question is from Guillaume Delaby from Societe Generale.

[Foreign Language] Two housekeeping questions, if I may. Two housekeeping questions for Bruno. So first one, tell me if heard correctly, but I heard that corporate cost, which should be between EUR 60 million to EUR 65 million in 2023 should go down by -- should go down to circa EUR 50 million in the coming years. Did I understand correctly? Can you confirm it? And if it is the case, why? And the second housekeeping question is that, I've been a little bit surprised by the high level of minority interest in Q2, EUR 13.7 million. So I guess there might be a little bit of Article LNG 2 with that. But what level of minority interest should we assume for the next 2 quarters of 2023 and for 2024, 2025.

Thank you always for giving the housekeeping to me. On the corporate cost, you're right. So this year, we are guiding towards EUR 60 million to EUR 65 million. This includes some key development initiatives, for which it's more difficult to plan on a go-forward basis. So this will be part of the decrease. And on top of that, the corporate cost this year include within our guidance a provision, let's say, or an amount for the employee share ownership plan, which is taking place as we speak and which will be a negative contribution in terms of current costs. So as these are more one-off to some extent, we should be able to decrease to a more normalized level, closer to EUR 50 million in subsequent years. So that's why this year of 2023 is somewhat inflated by a couple of operations. On your other question related to minority interest, you're right. You have a few entities that can have our constituents to this amount. You have including -- entities including in Asia, in South America as well as Arctic LNG 2, for which we were having a clear majority stake with minority stake. As we exit the companies, there is more impact or more noise, if you want, in this line for this year. This should normalize starting 2024 going forward -- 2024, 2025 to levels around EUR 10 million, EUR 15 million, the ones we had in the prior years. So you could expect to have still a bit of movement in the second half associated to those lines as we complete these entries of existing all the project entities associated to Arctic. But then going forward, beyond 2023 should be lesser.

[Operator Instructions] The final question is from Jean-Luc Romain from CIC Market Solutions.