TechnipFMC plc (FTI) Earnings Call Transcript & Summary

Okay. Good afternoon. Thank you. We're really pleased to have Technip FTI in this afternoon's panel. Maryann Mannen, the Chief Financial Officer of the enterprise; and our good friend, Matt Seinsheimer, Head of their excellent IR team. Let's dive right in, Maryann because we got about 30 minutes here, and we're going to cover, hopefully, close to 10 topics.

Let's start with the separation. This is likely, at least from my standpoint, one of the more important catalysts in rekindling new money interest in your stock. Can you provide any illumination and update as to the requirements to effectuate a separation? And in broad terms, when we should expect that to happen?

Yes. Sure. Thanks, Bill, and thank you for the opportunity to spend some time together, and thank you all for your attention. First and foremost, let me say, when we made the decision, I'd say, sort of mid-March to pause the spin, obviously taken with a lot of concern, certainly a lot of consideration at the time. As you know, we believe very strongly in the strategic rationale behind the separation into 2 diversified pure-play companies. The world was a tad bit different, if you will, at the time we made that decision. We were headed into growth markets, really, as we looked at the opportunity set for LNG. We were sitting on very healthy and robust, in what we perceive to be, growing backlogs in both of those businesses. We believe we were successful with demonstrating a business model that would have a sustainable change in deepwater development, and we were ready to turn our sights to continuing to improve other areas of the, what we would call, the remaining business of TechnipFMC and certainly look at the opportunity set for Technip Energies. So we paused at that particular time because there was a tremendous amount of uncertainty. It was the beginning days and the uncertainty around COVID, and how that would impact behaviors, human life, our decisions. And at the same time, we were experiencing quite a bit of volatility in the commodity price, we know that. And certainly, therefore, the behaviors and the reactions of our clients to the challenges happening between Saudi and Russia, to the volatile oil price and then the impact of COVID and how that will all come together. So the decision to pause was based on a series of those variables that were changing quite rapidly. And probably more importantly, we really didn't have much in the way of certainty in terms of -- in the outcome. So to address your question, where do we stand today, the world is a different place, and we continue to look at some of those same factors that framed our decision before and those factors and how they will play out over the coming time. We fully recognize the impact that the decision has. We're well aware of the need to come to resolution quickly. We remain committed to do so. We said that we wanted to be able to have no more than a 90-day window from the point in time in which we said we were ready to enact that spin, and we remain committed to that. Why? Because we recognize that we did create what I would call a bit of information desire that we couldn't fulfill as an organization as we were continuing to migrate through all of that. So we're looking at structure. We're looking at those variables that caused us to pause and, again, recognizing that we need to bring resolution as quickly as possible. Let me pause there, Bill, and see if that answers the question.

It does, but I have a few follow-ups. So is there any particular kind of metric or, like, financial threshold that you need to attain in order to affect the separation? Or is it just that there is such a wide range of outcomes in the near to intermediate term that there's no way that you can kind of stick the landing here as we're kind of navigating through this purgatory and this pandemic?

Yes. I think it's pretty hard to say. It's -- we need to look for this one or that one. It is a convergence and, I'll say, a confluence of the proper set of metrics that we want to see. Certainly, as we look at things that have been critically important, they remain critically important, liquidity, balance sheet strength, those are -- those remain important tenets of the separation. There isn't one that we point to. I can't say, "Well, Bill, on the day that this happens, we'll be ready to do that." I think there are some triggers that are obvious in terms of what would need to happen. As you know, we just gave guidance for 2020, right? So we're beginning to see a level of stability. Our understanding from our clients are improving in terms of what their path forward is. And all those things are truly helping. But there's no single one element. We want to ensure that we've got 2 very viable entities as we move towards separation.

In the realm of aspiration, but I think it's plausible, in the event that we get a vaccine, at least the science is validated by year-end and it's increasingly distributed over the course of 2021 and a sustained normalization with regard to global reopening is unfolding, would it be unreasonable to expect that a separation would occur next year?

Yes. I don't think solely a vaccine is the answer. I think a vaccine certainly helps build stability and confidence, just sort of an overall underlying operations. I think a commodity price is a critical component there as well.

Yes. I think they would go hand-in-hand with all due respect, but...

I think you're probably right.

Yes. But I hear you. All right. Good. So let's move on with regard to the business at hand. And to kind of start here, Doug on the Q2 call struck me by the following, which was basically expressing essentially a shrink to grow strategy. And "we will need fewer assets to deliver more comprehensive solutions. We will have fewer operating bases, service, facilities and manufacturing sites. We are optimizing our operations across geographies. And if economic returns don't make sense, we will look to exit. We will have a smaller fleet. We will continue to rightsize our assets," and on and on. So can you provide specific examples where this is taking place? And let's just kind of start with Subsea. By what order of magnitude is your capacity and footprint being reduced? And as a follow-on to that, what's going to be the percentage reduction in your offshore vessel fleet?

Yes. Sure. So let's try to take Subsea first, as you suggest. So first and foremost, let's talk about the things that have happened already. One, as we look out over the last year or so, one of the things that we did in response to our plan to continue to drive a more standardized footprint with respect to the adoption of 2.0 technology, our lighter footprint, our smaller footprint, et cetera, we actually reduced by 50% the global manufacturing capacity for trees and controls and manifolds. And I'll come back to talk about umbilicals and flexibles, et cetera, here in a second. But if we look at that for a moment, we had 4 major facilities for the manufacturer of that, along with some auxiliary. And we believe that we could reduce that to 2 major locations. And that's been enacted and largely, that's the way that we operate today. One of your -- so important piece in terms of that overall footprint there. As we think about the growth, and we believe strongly that over the next several years, we're going to begin to see the recovery, we're going to see units, if you will. We like to think about projects in terms of iEPCI, but obviously, there's a portion of that that's unit-driven, i.e. trees. And so we do see that demand grow. We think what we're able to do is actually maintain and improve our throughput as we reduce the amount of hours and the complexity of that equipment on a smaller footprint. So basically, said more simply, we can get a lot more through a lot less, right? And so that is really where we're driving to improve the efficiency as we see the growth happen, kind of point one. We've talked this year about headcount reductions. And there's more in Subsea to happen. We've done a lot in Surface, and I know we'll talk about that in a moment. But we're on a path right now for the back half of the year for further reductions in Subsea, as we have been communicating. And part of that is due to our ability to have the vertical integration, the benefit of iEPCI and having really an organization and a workforce that has the capability to manage across the full spectrum of those projects. And so there's another example. When we look at umbilicals and flexibles, this year, we've taken a real hard look at that footprint, and we've made some reductions and announcements. You've seen that probably reflected in some of our cost in reducing the footprint there, a facility for umbilicals and similarly a consolidation in Brazil. So a lot of action, I think as we look at the footprint for Subsea, to allow us to benefit from 2.0 integrated and then be able to grow on a much smaller footprint. Let me pause there and see if you've got a follow-up on Subsea.

No, that's fine. You were sort of referencing the inevitable growth that is to come in Subsea. Let me explore that for a second because it just seems like for the next probably 2-plus years, the increased call on OPEC production, driven by normalizing demand, can be largely fulfilled through the reactivation of shut-in production, most of which resides in OPEC Plus, it's mostly onshore plus Russia. And then it just seems that, God willing, if there's a cycle with duration in ceiling, that the incremental production gains can be more easily realized through shorter cycle production onshore. Lower 48 would be one. What drives the growth offshore and Subsea? Yes...

So look, we've been talking about our outlook and I'm certainly -- and I know I'll say this in a tongue-and-cheek way, I'm certainly not saying this is next week and next month, and I'm looking at sort of that short to midterm opportunity set. When we look at the major project opportunity set, what we see is a shifting to the right, as you clearly say. At one point, we said there was about 50% of the opportunity set that was moving within a 2-year window to the right, and that was sort of our earlier view. And then as we came in a little bit tighter around the second quarter, we talked about a handful of projects as well that we're actually moving into this 24-month window, so fundamentally reducing that push out to about 30%. So when we look in the range of the $250 million value projects to $1 billion over the next 24 months, we see a fairly significant opportunity set. And as you know, we tend to think we have the largest share, and we certainly have the ability to continue to garner that share with iEPCI and the 2.0 technology. So when I talk about the potential for growth, I think about this year, it's fairly minimal in terms of the number of trees, et cetera, somewhere between 75 through the middle of this year. 100 maybe is the full year forecast. And when we look out for the next year, that number is growing. It looks like it could be somewhere in the range of about 150. And again, when you get out beyond 2021, right, it's really hard to visualize. But I think there's a series of projects, as we look to replace that decline there, that have the ability to be economic in this range of oil price. And we continue to see, based on the conversations with our clients, particularly around the brownfield opportunities, some growth in that. And that's just how we're viewing it. And then as you know, Bill, we've got a services business. We see an opportunity set as we look at close to 50% of the assets that are out there, risers, flexibles, umbilicals, trees, controls, it presents a fairly healthy platform for us to continue to provide services to our clients and look for some growth there. So that's how we -- that's how we're thinking about it today.

Okay. To make sure I heard this correctly. So 75 to 100 trees possibly for 2020 and as much as 150 for next year. So we're talking about 50% to like 100% growth?

Yes. That 75, I think, is what we're seeing year-to-date. If you struck it at the middle of the year, there's been about 75 trees awarded so far in 2020. So that's why I'm saying based on our inbound for the back half of the year, as we look at it, that tree count is going to grow.

So -- right. So let's say you actually end up kind of getting 100 trees industry-wide for 2020, you're quite confident in the 150 for next year as you see it right now?

Yes. And you know, right, we're just depending on the timing of one project versus another, if it happens in this year versus the next, that can sway that. But I do think when we say we're confident, we are seeing the potential when you look at the project awards that, that number can grow from '20 into '21. Yes.

What do you think is the -- so that's a pretty optimistic outlook. And look, given your platform, there's reason -- there's every reason why people should listen to you as opposed to others with regard to offshore visibility, on the one hand. On the other hand, the large-cap integrated service companies seem to be pretty cautious with regard to the evolution of offshore spend. What do you think the disconnect is between your view and their view is?

Yes. Look, I don't think we have necessarily a significantly different view on that offshore spend, right? I mean I think when we look at the opportunity set that we have, we look at those projects, and then we also have a group of projects that we're working on that aren't necessarily viewed by others, right? We have our approach around the iEPCI. And so we have, if you will, a set of projects that we are working on today that may not have full visibility. And so we look at those projects that we're working on in iEPCI. We look at the potential for the list there. We're aligning that with the conversations with our clients. If we think about activity that's happening in Norway, as an example, certainly, some incentives there for projects to move forward. As you know, we've been a very big supplier to Petrobras in the Brazilian market. We were just successful in announcing that award and putting it in our backlog, further confirming our conviction around the in and around $4 billion number this year, Bill. So I think there's certainly a set of probabilities that could say we would see an increase. I don't -- I'm not trying to profess that we -- that there's an absolute around that. But if you look at the potential for certain of these projects based on what we're seeing, there's a potential for growth in '21.

Got it. And with regard to your 2020 guidance, Doug effectively reaffirmed $4 billion in subsea inbound for this year. You did $1.7 billion in the first half, and that basically implies a pretty robust number for the second half, call it, $2.3 billion or thereabouts. Are there any major projects for the second half of this year which you think are more likely to be awarded? And moreover, how's the pricing associated with the projects that you're sort of bidding on right now?

Yes. Sure. So look, Mero 2 is one of those projects, right? We just announced it. It certainly contributes to the requirement for the back half of the year in a pretty robust project there. So step one. We are certainly tracking a few other projects that we think -- they're larger in nature, obviously, that have a high degree of award potential in the remaining, where are we, 4 months -- it is September isn't it already, in the remaining 4 months of this year. And then keep in mind, as you know, that we've got typically every quarter, our subsea service is inbound. And then if you go back and as long as time as you want to, every quarter, we typically have those smaller projects, those tiebacks, et cetera, that will make that up. And so my point is it's not like we need a multitude of major projects to get there. We need 1 or 2. We need services to continue and that sort of steady base of projects to happen. So we remain fairly certain around our $4 billion.