TechnipFMC plc (FTI) Earnings Call Transcript & Summary

Good morning. Again, this is Arun Jayaram, JPMorgan's Oilfield Services and E&P Analyst. Delighted to have TechnipFMC to present next. And we put them strategically behind Hess, which is one of their key customers globally along with Exxon. Delighted to have Technip's Chairman and CEO, Doug Pferdehirt. And FMC Technologies is one of the leading providers of subsea equipment and levered to the offshore space. Also have a surface business, which does well internationally as well as in North America. Doug, I thought you could start with maybe just a few introductory comments. We have more generalists at this conference. So maybe give a little bit of Scooby Snack in terms of the story. And then we'll pivot to a fireside chat.

Certainly, Arun, thank you very much. And thank you to JPMorgan for having us. This conference is always very well organized. And we had a great day yesterday meeting with investors and a nice dinner last night. So thank you very much for having us here. Thank you for those in the audience, and thank you for those dialing in on the webcast. We certainly appreciate your interest and support for our company. I'll try to keep it brief. It's hard because we've been doing a lot over the last 5 years. And we set out when we formed this company on the 17th of January 2017 to really do something different. We wanted to turn the offshore from a long-cycle business to a short-cycle business. We wanted to change the structure of offshore project economics that made them very attractive. And finally, we wanted to position our company as a company that could have leading through-cycle returns. And we feel very proud of the work that we've achieved over the past 5 years. It's been a lot. There's been mergers. We created a new company. We did a few debt tenders, improved our balance sheet tremendously, but it's been a lot of work. And even through the pandemic, we stuck with the strategy. And the kind of the news of the day is it's in the rearview mirror. All that has been done. So whereas a lot of companies right now are starting to look up and starting to think about what's our next strategic move, we finished them. It was a series of about 4 very significant moves, some of which had actually never been done in the industry before. Those have all been done. They have been completed. Those have been successful. And now we're very much focused on executing the business, and we have a structure company that's a pure play, a clear market leader and we think provides a very attractive investment opportunity.

Doug, I wanted to ask you a little bit about the spending cycle. This cycle has kind of played out very typical. We've seen some of the short-cycle stuff in North America to begin earlier. But I wanted to get your thoughts on what you're seeing in terms of internationally between the shift between, call it, short-cycle and long-cycle opportunities? And maybe what you're seeing between onshore and some of the offshore markets?

Yes. It's a really critical question, actually. We tried to highlight this a couple of quarters ago and then again last quarter on our conference call, the -- it's time to refresh the playbook. The old playbook of offshore is going to happen towards the end of the cycle. It has a long tail, so it's very attractive, and it has a much softer landing than which you experienced, particularly in the North America market. But we're trying to encourage people to really look at the real data, look at what's out there. The Subsea market size or the offshore market size has doubled in the past 7 quarters. $8 billion to $20 billion, we put that out every quarter. We give you what we call the Subsea opportunity map. It shows where the projects are around the world that are likely to FID in the next 24 months. That has gone from $8 billion to $20 billion in the last 7 quarters. Look at what our inbound has done. Our inbound has grown tremendously from $4 billion 2 years ago to projected $6.5 billion this year where we've already booked $1.9 billion in just the first quarter of this year. So the activity is there. The projects are there. The ramp has begun. And I can't say it better than my clients and partner of many years, who was just here on this stage before me. In his own words, he said that the long -- don't think of offshore as long cycle. Offshore has become short cycle. And he went further and said, the economics offshore from an operator's point of view are as attractive or more attractive than the shale economics.

Great. And you talked about the Subsea opportunity list now growing to 20-plus kind of billion dollars. And are you seeing more engagement in terms of these bigger, chunkier FID-type projects?

Sure. But also some of the smaller projects, right? So let's break down the $1.9 billion in Q1. What was really amazing about that number is we had the highest level of unannounced awards. What does an announced award mean? Something less than about $200 million or $250 million, at which level we would not put out a public announcement about the award. That was a substantial amount in the first quarter. More importantly and I think shockingly to some, we also said it came from 30 discrete clients. 30 different unique clients made up that 40% of our inbound, the $1.9 billion in the first quarter. A lot of people couldn't announce 30 offshore operators. They think it's only IOCs or NOCs, or a few of the independents. It's actually growing quite rapidly. And when it grows, it is actually quite favorable to our company because back on the 17th of January of 2017, what we created was a fully integrated Subsea company that could take on a project and deliver a project from the front-end engineering or the architecture all the way through the installation and commissioning on the sea floor. So that's very attractive to some of these newer players. It's attractive to the established players, but also to some of these newer players that are coming on board. In terms of the larger projects, we announced a very large greenfield project in our second quarter, this quarter. We announced a public announcement about the next phase in Guyana. Again, thanks to ExxonMobil and Hess. We are proud to say that we are the subsea provider since the beginning in Guyana and remain and could not be more proud to be associated with the success in Guyana. So we announced Yellowtail in the second quarter. It was not in the first quarter, $1.9 billion. We announced it in the second quarter. I believe you'll see other very significant greenfield activity driven largely by South America, between Brazil and Guyana. But you're going to see other activity in most of the regions -- operating regions around the world. I think it is vastly underestimated, the amount of greenfield FIDs that are forthcoming.

Okay. Doug, let's talk a little bit about the FTI's in more detail. 2017, you announced the merger. What was your -- what do you think was your thesis in terms of the combination between FTI and Technip? And maybe talk about some of the complexities that we've seen post the merger. And I believe now, as you mentioned in your preamble, that the story is going to be a lot cleaner from here going forward. So maybe give us a little sense of how we got from 2017 to today.

Okay. That's a whole book. That's a book of multiple chapters and many sleepless nights, all of which ended successfully. But I will try to be very brief. I know there's a lot to talk about. The single strategic rationale for the merger in 2017 was to create something Offshore or Subsea that never existed before. And that was a company that could again go from being the architect from the very early, early engineering stages just post sometimes the seismic activity or the initial exploration drilling and be at the table as a partner all the way through the engineering, the manufacturing, the delivery, the installation commissioning on the seabed and then normally for about 20 to 35 years as the life of field service partner. So it's a very long-term, very sticky relationship once you get established. In the past, the way that the Subsea industry worked where there were manufacturing companies and then there were installation companies, and they were separate. So all of those interfaces between the 2 which are very complex, in many cases proprietary, were managed by the client or by the oil company themselves. It created inefficiencies and not that they aren't more than capable of doing so, it's just you had 2 major providers in your project not collaborating. And if anybody's built a house, it can be hugely frustrating. We've moved 14x my family and I through our career. We built more houses than I want to mention here, haven't made any money. But the most frustrating thing you can do is to walk into the house and for the plumber and the -- the plumber and the electrician to be competing for space or fighting or working against each other, which leads to a bunch of variation orders or incremental cost at the end of the project. And that's exactly what happened because there was no incentive for the equipment manufacturer to work to the vessel company or the installation company schedule or vice versa. So we looked at it. We studied it really hard through a joint venture back in 2016. We talked to all of our clients to make sure that they were comfortable and would endorse this. They all encouraged us to commensurate our relationship, in other words, to actually merge because this is a huge scope and a huge responsibility and they weren't comfortable working through a joint venture or an alliance or a consortium. They wanted to be able to contract with a single entity with a single point of responsibility, single point of contact, and that led to the merger. Now when we merged, we obviously had choices and we thought really hard and we looked for the best combination. And there was no better combination of 2 companies than FMC Technologies and Technip. It has the broadest offering when you put it together, it had the broadest footprint, it had the most complementary client relationships across the board. So we had studied it hard. We had talked to everybody, and decided to create TechnipFMC. There were some assets that were associated that were not part of the strategic rationale. And quite frankly, that we felt it would be better as an independent company and that was the engineering and construction business of the old Technip and that was spun off here recently, about a year ago, where we created Technip Energies, which is an engineering construction company and the best at what they do, but a very different profile than what we do as a technology company. And we gave them a new life. We thought it was the right thing to create shareholder value and it was very successful. We retained 49.9% ownership in that spin-off for that new company, Technip Energies. We've since fully monetized that. So in just 14 months, we monetized about $1.2 billion. We used that largely to reduce our debt load. Our debt from the original time of the merger -- or the spin-off, excuse me, has been drawn down by about $1 billion. We had a very successful debt tender this quarter. Our gross debt -- I'm sorry, that's all gross debt. Our gross debt will be down to about $1.6 billion. Net debt has dropped even further. And we've got some targets to get to about $1.3 billion of gross debt. We've got our debt ratios coming towards the 2% range, which we think is the right range for a business like ours, which then we will be very excited to be talking about the next step and the final step in this journey thus far, which will be shareholder distributions.

Great. Let's talk a little bit about the Subsea market today. You've booked $1.9 billion of inbounds in 1Q. Yellowtail is also will be -- we think will be in your backlog in 2Q. Just confidence around hitting the $6.5 billion, it feels pretty good right now, but I want to get your thoughts on that.

Yes, Arun, you know me very well. I say too much. So on this one, I'm just going to say, yes, we are very confident.

Okay. Okay. And then I wanted to -- you've mentioned that you saw a lot of these smaller orders, which don't get press released and things like that, 30 different kind of clients. Do you see this as being like a trend that could continue, I mean, for some time?

No, clearly. Look, there's a bit of a restructuring going on out there. You see it in every industry as it matures, et cetera. The same is happening in the offshore industry. There's some very high-quality assets that are being picked up by some smaller players. They're very ambitious. They are very driven by a partner like model, as I described earlier. We are that company. We're a very humble company. We're a company that is very -- we put our clients first and everybody says that, but not many do. We've really grown over the years to be that company in the industry that clients go to when they have a problem, when they have an opportunity, and they know that we are the type of partner that will deliver and we'll be very -- we won't take advantage, but we also build very long-term, very sticky relationships. So I think as far as the overall structure, you saw it first that fragmentation, if you will, let's call it that. I don't know that, that's the best word. But the diversification of the client base really started in the U.K. sector of the North Sea, then the Gulf of Mexico, then the Norwegian sector of the North Sea. So just think about the mature basins, and it just keeps moving around as the basins mature. And we would expect that to continue. And again, we continue to be partners of choice with most of the IOCs and NOCs, but we also welcome these new clients into the mix.

Okay. Doug, since you've been the CEO, one of the things that you've helped to change is this iEPCI approach for integrated projects. Could you describe how you guys are doing things a bit differently than your peers and what are the benefits to FTI?

Sure. So that was the strategic rationale of the merger. It's a little i like integrated and then EPCI, engineer, procure, construct and installation. And that's the primary model of what we do. That's this ability -- other than the drilling, somebody drills the wells. We don't get involved in that. But you hire a drilling contractor and us. And that's it. And you can do a multibillion-dollar offshore development with just a few very key players. So -- by the way, similar to the success in Guyana, as I said, we're honored to have been there from the beginning. And likewise, some of the fastest track greenfield developments have been delivered. So back to the iEPCI that was the vision of how we could structurally change the Subsea and make it from a long-cycle business to a short-cycle business. On an integrated project, we typically take 9 to 12 months out of the delivery of the project versus if it's not nonintegrated. And that hasn't changed. Nonintegrated time frame is still what it was, but integrated is 9 to 12 months. So when you sit down with a client and you just explained that you can deliver this first oil 9 to 12 months earlier, it doesn't take long to plug that into the economic model and see what it does for the project returns. Now you have to be able to do it. It's one thing to talk about it, and we all know the math works because you get revenue 1 year earlier than you planned. The great news is we've been highly successful. This model has been attempted to be replicated by others, but we're the only company that has been created to deliver this model. We've delivered over 80% of all the integrated projects thus far. I think it's well -- it's over 30 in counting. And most importantly, of the various many different customers that we have, over 50% have been repeat clients. So that tells you that they see that it works. And many of them have now made it their model of choice. What else is really interesting about this, and I think maybe potentially underappreciated, is because we had the courage back in 2017 because we went through, yes, some turbulent challenging steps through the last 5 years that maybe made the story a little opaque, much cleaner today, as you point out, all that's in the rearview mirror. But because we stuck with it, we are in a unique position to be able to have this offering. In other words, about -- of our integrated projects, about 70% of those are direct awarded to our company. So they never go out to competitive tender. So we sit down in the early stages. We do a little iFEED, integrated FEED study. We work with the clients, we develop the architecture, we show them the economics for the project, assuming it meets their economic threshold, they direct award us the project. That is just unheard of. And now I'm going to give you another 70, but it's a different 70. Of the $1.9 billion of inbound in the first quarter, we mentioned that 70% of that was a direct award. It wasn't all from this integrated model. It was also from direct awards from our alliance partners, of which we have many and some of which we've worked with exclusively for over 25 years, some of the biggest IOCs as well as our Subsea services business. So it's a really -- it's a humbling position to be in, but it's been built by decades of building customers' trust and confidence, always being on the leading edge of innovation and technology because if you're not, you're going to be left behind and then delivering and creating client success.

Okay. Wondered if you could talk about Subsea 2.0. I think you introduced this back in 2017. Could you talk about how Subsea 2.0 is doing in the marketplace of adoption rates, et cetera?

Yes. Thank you. That's great because I just talked about innovation. That's a nice segue. Thank you. So let's -- let me wrap up that integrated because maybe I left out a really important element. About 1/3 of the total Subsea market today is integrated. So in 2017, it was 0. It had never ever been done before, had never been an integrated Subsea project, didn't exist. The ability, the capability didn't exist. We created the company. It's now 1/3 of the total market, of which, again, we have 80%. So just think about that. You've -- this exceeded our expectations. You now have 25% of the total available market is proprietary to us. It's a really, again, phenomenal situation to be in. So now, as I said, you have to continue to innovate. You can't stay on that leading edge. You can't have these 25-plus year exclusive relationships with your clients if they don't feel that you're the one driving the innovation, right? And you certainly don't want to get surprised by a disruptive technology that could do -- take away all the good things that I mentioned. So back in 2013, we started to think about a next generation of Subsea architecture. Just to put it to kind of ground us all, Subsea 1.0, so since the beginning, and still what the rest of the industry is delivering today, is bespoke. You place an order, you launch the project engineering and then you start the machining and then finally, the delivery of the project. If you think about the auto industry, and we actually work very close with Toyota, and I give them a shout out here because they really helped us along this journey. When you think about the auto industry, when you purchase your car, today, this afternoon, there's zero engineering that gets initiated when you place the order. What is done is the configuration of your vehicle. You get whatever engine size you chose, you get NAV or no NAV, you get leather or cloth interior and you get 1 of 5 paint colors. It's your car when it shows up, you had choices, but there was zero engineering required at the time of the product order. In Subsea 1.0, the product order initiates the engineering. So with 2.0, we basically took this Toyota model or this auto industry model and said we're going to develop a set of configurable components, we're going to do all of the product engineering now, such that when the product is actually ordered, we go straight into the configuration or the assembly and test. That shaves about 9 to 12 months off of the delivery time of the product. It allows us to have a significant reduction in product cost, i.e., higher margin. We're happy. The client is happy because they're getting their first oil sooner. And we're obviously getting a better margin as a result. I know it sounds really simple, and why haven't we done it sooner, but it was in the mindset of the industry. It was in the mindset of our customer. Every project, every opportunity, they wanted to build a set of Subsea architecture that had never been built before. So everything was new, everything was different. And then to try to convince them to go to a single standard, which has been talked a lot about in the industry, we realized that was the wrong approach because then you're trying to make everybody drive the same car. You don't want the same car as your neighbor, you may want a white, they may want black. You don't necessarily want to be forced to have the exact same car as your neighbor. So the auto industry figured out a way to make -- give you a car that you feel is unique to you. There's probably thousands made to your specification every week, but it feels good because you had choices. So we did the same thing, and this was a 4-year effort. And really proud of the team internally that led this effort because at times it seemed insurmountable. But we took this industry, we brought them together around, Look, we can give you a 5,000 to 10,000 to 15,000 and 20,000 PSI option. We can do a horizontal or a vertical tree that has to do with the type of downhole completion you're running. We can give you a flow meter or no flow meter. We can give you a flow module or a no flow module. Do you want to choke or no choke. And it's actually they order it from their iPad. They order it through an app just like you do the car. But all of those things that I just mentioned are standard components. All the engineering is done. We don't have to do it at the time of the order. And it also allows us to work then into our supply chain by giving them standard repeatable parts, which really also gives us a lot of leverage in terms of combating things like inflation, et cetera. So it's been the biggest -- I mean, iEPCI is amazing. And we just got done saying 1/3 -- it shifted to 30% -- about 1/3 of the market, 30%, 33% of the market, which is, again -- and growing, it will be more than that. That's just where we are today. But 2.0 is probably just as big. Now what has been the 2.0 penetration? We launched it in 2017, the new product platform. And what we said is this year and next year, '22 and '23, we expect our Subsea -- our Christmas tree orders that 50% of those will come from Subsea 2.0. And again, if you follow the industry, to have 50% saturation of a brand-new technology platform in less than 5 years is also unheard of. So yes, we're very excited.

Doug, you held the November Analyst Day. And at that Analyst Day, you gave some longer-term targets to 2025. $8 billion in inbound Subsea orders, $7 billion of Subsea top line. And if you did the margin -- a 15% margin, about $1.50 billion of Subsea EBITDA at that mid-teens margin. At that time, most of the buy side thought this was a pretty long putt. Give us an update on your thoughts on that longer-term goalpost that you provided just a few short months ago, how the market has changed since that time.

Somehow I thought we were going to get to this question. No, an important question, and thank you. Yes, it's interesting. Think about your Thanksgiving meal. It wasn't that long ago, who was at the table, what you had, but it was a very different environment. And we stood there on the stage trying to convince the audience that we could take our margins from 10.5% to 15% from the time -- from the end of last year to 2025. There was skepticism. The big driver in that was this Subsea 2.0. Talked about how it's been successful. It enabled us to go to a configure-to-order from an engineer-to-order operating model. We have a different operating model in the company. It allows us to double the cadence through our manufacturing facilities. So we've actually reduced our manufacturing roof line or cost by 33%. We had 3 locations, went down to 2. But at the same time, have as much demonstrated capacity as we had with 3 because of the cadence and the flow and the CTO versus ETO. So we really spent a lot of time on that concept and what that means. And you can go back and look at the collateral from our Analyst Day maybe to dig a little more into it. We're happy to answer questions afterwards. But we said, look, that and some incremental volume that we saw coming, again, up to $8 billion in orders, up to $7 billion in revenue from $5.5 billion where we were at that point when we gave the guidance that, that was really going to contribute to this growth of EBITDA margins, which if you took the EBITDA margin guidance along with the revenue guidance for 2025 was going to double the EBITDA of the Subsea business, a substantial increase. Today, that putt, if it's still a 30-foot putt, it's pretty much a -- it's pretty straight. There might even be some bumpers up. It's a little bit like going bowling with your kids and you put up the bumpers. Yes, it's certainly not as tortuous, it's a lot clearer. You're not putting into the wind. You got a little bit of wind behind you, more than a little bit right now. And honestly, that 30-foot putt has probably become an 8 or 10-foot putt. So -- not that I make all of those either. So -- but all joking aside, it is -- there's -- look, the change has been tremendous. What I said on last quarter's conference call is that it is possible and may be likely that we will achieve those targets before 2025. But I also want to clear up one thing because this has come up in a lot of the one-on-one discussions we've had. When we said 15%, we never said that, that was the upper limit. We just gave from 10% to 15% over that period of time where there was no real pricing assumption built into it because we weren't in a pricing environment. It was really, again, just driven by that activity increase and the benefits of the Subsea 2.0, the engineer-to-order, the direct awards, everything we talked about. I'm looking at the clock, I have 8 seconds. Really, that was how that was set. And now you have that support of the macro, you have that support of the pricing environment. But I want to be very clear, we never said 15% was an upper limit. So the future is bright.

I have one more question. I'm going to sneak in here. Talk to us about your key balance sheet targets and the potential -- the timing for FTI to shift into a capital returns kind of framework.

Sure. So first and foremost, we are fully committed to that. We had laid out -- again in November of last year, we laid out the road map. We really wanted to get the gross debt down. We had levered up a bit with the spin-off. We thought it was the right thing to do for the shareholders and for the new company, which proved to be right. I mean if the market cap and we were able to benefit from the monetization of 49.9% of that or $1.2 billion was the right decision. We use those proceeds to largely pay down the gross debt. As I said, we paid down over $1 billion of gross debt from 14 months ago or from the time of the spin-off. We had a very successful debt tender this quarter. We think we'll end this quarter around $ 1.6 billion. Our targeted gross debt is about $1.3 billion. We have about $800 million operating cash and then we see the ratios getting from where they were at the time of the spin-off down to a level of around 2.0. That would be a very comfortable position and appropriate position for us to initiate shareholder distributions. We indicated that, that would be in the second half of 2023, given all the success that we've had and the acceleration of the restructuring of the balance sheet. It is certainly possible that, that could happen sooner.

Great. Doug, thank you so much for your support of the conference. Really enjoyed your time this morning.

Thank you.