TechnipFMC plc (FTI) Earnings Call Transcript & Summary

Welcome to the next session. Next session, we've got TechnipFMC. Technip has been our SMID Cap top picks as we upgraded it back in July. Really interesting time for the offshore industry, for TechnipFMC. Hopefully, we can walk through a bunch of stuff here and highlight some things. But they're the subsea leader and subsea equipment installation aftermarket and set to benefit from a real offshore growth cycle over the coming years. And from TechnipFMC today, we're excited to have CEO and Chairman, Doug Pferdehirt. He's joining us today from Houston. And previously, I guess -- so previously, he was President and CEO of FMC Technologies. And prior to that -- well, he joined FMC in 2012. And then prior to that, he spent 26 years at -- I have Schlumberger here. It is not Schlumberger. It is SLB. So I think I said Schlumberger about 10x today. I said SLB. But Doug, it's a privilege to share the stage with you, and thanks for joining us today. So I guess we're going to have Q&A, and if anybody has any questions, just raise your hand. And -- but I'm going to try to go through a lot. We've got a lot to cover in 33 minutes here. But Doug, I'll -- before I ask my first question, I'll kick it over to you, just anything intro or...

Chase, thank you very much. Thank you to your team. Thanks to BofA. We've been at their conference all day. We've had a rather intense set of one-on-one meetings that have all been very supportive and very enthusiastic about where we are and where the industry is. So thank you just for putting on a great conference.

Yes, thank you. Intents being good.

Intents being good.

There you go, yes. All right. So obviously, you're bullish on the offshore and you're not alone now. You've been bullish but now everybody else is, including me, is joining the party. But maybe it's time to kind of step back and a quick history lesson and walk us through kind of what you and your customers have been doing to improve offshore economics. And because like if we think about it, I mean, this was -- oh God, was this '13, '14, we're $100 crude. Offshore didn't make sense, right? Your breakeven economics didn't make sense. Today, we hear of $40 breakevens. So how did you change the industry?

Well, thank you, Chase. Let me boil it down to a few points. First and foremost, when you go back to that environment that you were describing, it's important to understand that everything that was being done offshore was being done in a bespoke manner. Every order we received was a new, unique order. We're building things that had never been built before. We, in 2014, keep in mind, things are still pretty good in 2014. We came to the realization that things had to structurally change in the subsea world or subsea was going to become de-minimized over time. And as a company that is all in offshore, it was obviously, we felt the responsibility, although we might not be the largest cap, we clearly are the dominant offshore player. And therefore, we have the responsibility to step up and demonstrate a different behavior. So we started to invest in a technology platform and that technology platform, we named Subsea 2.0. You'll be happy, as investors, to know we don't spend a lot on branding so we just went with Subsea 2.0. But it was prolific because Subsea 2.0, the whole concept was we need to move the industry and starting with ourselves from every single order being new, unique, bespoke, to repeat orders. Now that often got confused with standardization and standardization is quite different. This is about industrialization around a configurable architecture. So it took us 4 years, working with our clients to really understand do you really need 40 versions of this? Or can we get it down to 2 versions? And what we ended up with was an online app that allows our subsea customers to order, much like you would order an automobile. So you do these drop-down menus and you pick what's available in the menu and which spits out the end and shows up in your driveway or shows up at the dealership is a vehicle that you built. It's your own vehicle. No, it's not. There's probably 1,000 other ones running up and down the road just like it. In the number of selections you had, you felt like you were building your own. It was actually all built on components that have already been engineered and were on the shelf. That's what we did with 2.0. So the game changer is, they can build their subsea architecture to feel unique to their application, but all of those individual components have been preengineered and are available, and all we have to do is to configure and deliver, which means you cut out the engineering at the time of the order. You do it in advance and you greatly reduce the risk of the execution. And so point number 2 of which changed in offshore is, in the old days, you launched a project. You hoped for the best. You literally hope for the best. The likelihood of it coming in on budget, on schedule was not the norm. It was the exception. Well, I think what kind of business model is that? So we said, no, we will be the subsea company that delivers to our commitments. We'll deliver on time. We'll deliver on budget. Well, you can't do that if you didn't change the way that you operate. So the Subsea 2.0 then became our -- allowed us to move to a configure-to-order operating model, which allowed us to be able to provide that certainty. And then finally, the ability to be able to -- we looked at the market. We were still just an equipment manufacturer at the time. This is all prior to 2017, and we said, but we have to do more. And how do you improve and how do you compete with a short cycle business like the U.S. shale as an example when you're a long-cycle business? Well, shorten the cycle time. So that was the challenge we gave to our engineering team. And what they came back with is, well, if we deliver this as an integrated project, there's a lot of overlapping redundancy that we could remove. There's a lot of time that we could save. On an average project, that amounts to about a 30% reduction in upfront capital and we can just shorten the delivery time by 1 year. That's what gave birth to the integrated concept. We then went and tested it. We picked a partner. We performed -- we executed the merger back in 2017. All of that is -- and then we did the integration and all of that. Here we are today in a very constructive macro environment where we've done all of our strategic moves. We're not right now figuring out what are we going to do to optimize the value in this cycle. That's all behind us. So we're 100% focused on execution. We're 100% focused externally on our clients and they're rewarding us. Up to 70% of our business is direct awarded to our company. That is absolutely unique in this industry.

Yes. When we think about Subsea 2.0, standardization versus bespoke, what does your customer lose out on? It seems like -- so...

Heartache, pain and suffering. No, I mean, their biggest worry was, is this project going to come in on time? Their biggest worry was, are these 2 pieces going to be compatible? Because you had 1 -- somebody making the equipment and somebody installing the pipes. And more often than not, they didn't fit together. And then it was a whole another 6-month delay to a 1-year delay in the project. I'm not being silly. What it has removed is heartache and suffering for our customers, and that is why we have 70% of our business being direct awarded. It's unimaginable to be in the position we are today.

Yes. So no impact on flow rates, anything like that? No technical?

They didn't give up anything in terms of what we call the specifications, right, the functionality, flow rate temperature, depth, all of that, they didn't sacrifice anything. And nor would we, right? I mean, this is our backyard, right? And we are the company that has defined the subsea market. We own the market and we hold, therefore, the obligation to ensure that everything that is done subsea is to be done in the most proper way, and we always will.

Yes. You talked about breakevens and so maybe if you can kind of update us where you think breakevens are today and kind of how that compares to '18 and '19 and even back to 2014, which you talked about a little bit. And over the last couple of weeks, we saw a project get canceled. They talked about cost escalation. So kind of weave that into your thoughts about where breakevens are today and the risk that cost escalations or inflation have on those breakevens.

Sure. So just 1 maybe clarification. The project was deferred, not canceled.

Sorry. Yes.

And it was still relatively early in kind of the procurement phase, if you will. So I point out those 2 things for a couple of reasons. This isn't unusual. This has happened time and time again. I think rightfully, it's drawing a lot of attention because people are trying to figure out, is this a yellow card? Is this a red card? I'm trying to get into the FIFA mode here. Or is it no card at all? No. Okay, I think it's naive to say it's no card at all. But let's just look at the facts of what's going on in the market and quite frankly, with that customer who is a very strategic partner of ours and I have a lot of respect for. So first and foremost, we gave some an outlook of $9 billion. I never used the number 9 before when we talked about inbound. And we said $9 billion of inbound in the next 5 quarters. That project being deferred has no impact on the $9 billion. So I want to make that perfectly clear. So there's no impact on the $9 billion. Number two, the project itself and the client is still very active offshore. So the headline didn't read, we're never going to work offshore because the economics don't work. They just awarded us a very large project, iEPCI, that integrated model, plus the 2.0, the subsea architecture they configured to order. That's the holy grail for us. iEPCI, 2.0 is the holy grail. That's what they awarded to us, the largest project that they've delivered or ordered in Brazil. We haven't inbound the project yet. We're doing the front-end engineering, and then it will be direct awarded to us at the project phase. So they're still very active. They're working on a very large project on the east coast of Canada. And there will be other awards by that same client in the North Sea between Q4 and Q1. So I think everybody is making priorities in our personal lives and in professional lives. And I think it was a prioritization more than anything else, that I would not read too much into that. As a matter of fact, again, we're seeing an acceleration of orders first time we've seen $9 billion in 5 quarters.

Yes. We'll talk about the orders here in just a bit. But let's talk about growth. I mean, it's obviously order-related. But where do you see kind of the biggest growth opportunities on the offshore side? And then what about tiebacks versus greenfield? Obviously, we've seen a lot of tiebacks. Me and you've kind of talked about this before, but how sustainable is the level of tiebacks that you see today?

Yes. So if you -- we kind of break our inbound down into 3 buckets: announced awards, the large awards that we publicly announced; the unannounced awards, they're smaller, below our threshold for announcement; and then our subsea services. And with this -- all have been growing. But clearly, the unannounced awards have grown at a significant rate. Now that doesn't mean they're all tiebacks. There are some very small projects in there as well. The biggest takeaway, brownfield, greenfield, tieback or geographically, what's actually bigger is the proliferation of new clients offshore. So our client list kind of went from, let's say, plus or minus 10 forever. It was plus or minus 10. Most people could probably name 6 of them, maybe 8 of them, and we are now at over 40 clients making up our Subsea inbound. So what does that mean? That means that you're seeing more and more operators shifting CapEx to offshore from onshore. And you're seeing the emergence of a new tier of players who find mature assets offshore to be very attractive economically. Now in general, not in each case but generally, they don't come with large engineering -- subsea engineering organizations. That's just not how they built up their company. They tend to be quite nimble and sometimes smaller in size. When they see a company like TechnipFMC that has the reputation of client intimacy and project delivery and safety that we have, they look at us and they go, you can really deliver this whole project for us? We don't have to bid out individual packages and figure out the interfaces between each? And you're the only ones who have that? And oh, by the way, you can do it and deliver it in a much shorter cycle time if we use your 2.0 architecture? And our answer is yes. And what it's created is just a very rich opportunity set for us, where most of those, not all, but the vast majority of those have entered into exclusive iEPCI alliances with our company, integrated project alliances with our company because of that unique offering. So that's really the most -- the biggest thing that's been happening from our perspective. Actually, the mix between greenfield and brownfield, you're going to see a lot of greenfield and there's been a lot of greenfield. We're kind of thinking of Brazil and Guyana almost as brownfields now. They've been so successful. But these are huge stand-alone greenfield projects that are going on. And we certainly wish both continued success and we're a big player, as you know, in both of those regions. So yes, there's a good balance going on. I don't see any particular mix issue. The -- in terms of greenfield, brownfield, the biggest change has been around the proliferation of this new customer base, almost all of which are working exclusively with our company.

Yes. You talked about $9 billion in orders over the next 5 quarters. I think this year is $7 billion you're on pace for. And if we look at -- if you can do the math on that, I'm from Alabama, I can still do the math. So '23 is going to be up but it's still going to be a little bit shy of 2018 in dollar value. But how would you compare and contrast kind of '23 overall kind of Subsea outlook versus 2018? And then if you can kind of weave the pricing margin kind of commentary. I know you're not going to tell me an explicit number. But just trying to look back and think about 2018, kind of what you were bidding at, what the margins look like, better, worse, absolute levels, you feel that the environment is a lot stronger than it was at '18?

Okay. So let's start with on the inbound side. On the inbound side, based on the $9 billion over 5 quarters, and we weren't trying to be cute or reinvent the calendar. It's just things happen at the end of the year for budgetary reasons or get pushed to the next year for budgetary reasons, accelerated or deferred. But within that 5 quarters, we're very confident. The -- again, the outlook on that $9 billion over the 5 quarters remains very, very robust. We haven't seen anything to -- except to have increased confidence in that. In terms of where it is relative to '18, '18 was a good year for the majority of the year, as we all remember. Things were pretty strong. But again, you were depending upon far fewer customers and you were depending upon fewer geographies. So what has changed is there's significant additional activity going on in new geographies. South America would -- back in that range of time, was always important but not nearly the importance that it holds today as an example. We talked about the expanding customer base. These are all, I think, good things to demonstrate the sustainability of this offshore cycle. And I even hate to call it a cycle, but we know nothing goes on to perpetuity, but cycle sounds like it's still got a duration to it. But clearly, there's a more robust commercial discussion that goes on today than went on in 2018. Look, let's also be realistic. It's a very different competitive landscape than it was in 2018. We have a very different competitive offering than we had in 2018. Our first -- I think in 2018, we may be between 1 in '17, and if I remember right, 2 or 3 in '18. We had less than 5 integrated projects. Integrated projects are now 1/3 of the total market, of which 80% go to our company. So it's a profound change in terms of the market. Now shouldn't that be good for margins? I'll just give you a short answer, yes.

Okay. We will let you -- we'll talk about margins later. So we'll dig into that a little more, and I'm not sure how far I'll get but I'm going to try. But free cash flow profile, I mean, the 1 [ knock ] on the company has been the free cash flow conversion. And you've set out goals to get to 40% to 50% in 2025. If you look at it this year, I think what do we have for this year? 15% free cash flow conversion. This is versus EBITDA. Look out next year, it's going to 35%. Then 2025, you're getting to 40% to 50%. So what's the path? Like how do we get there? What are the key points that we should be looking at? I mean, obviously, margins are a big part of this. I realize that. But there was something really interesting you told me last night about Subsea 2.0 and kind of the opportunities that you have there to improve your working capital. I'm not sure if you're ready to talk about it just yet, but I think it was a pretty interesting little data point that you told me about last night.

Well, you just made it hard for me not to, Chase. So in fairness of disclosure and everything else, it was nothing that was -- it's just, we're learning about Subsea 2.0 and the configure-to-order operating model. Again, this isn't rocket science. Other industries have been doing this for a long time. But for our industry, it is cutting-edge. And we ourselves are learning from it. And one of the things that we were talking about last night was when it is -- everything is a bespoke new product, you have to carry the working capital because your supply chain isn't going to touch it because they're never going to get another order that looks like the order you just gave them. So I used a silly example of like a tailor when you think of a bespoke suit. They have -- their suppliers carry the black with gray stripes and the blue with gray stripes. But anything with a little more color in it, the tailor themselves has to buy the whole ream of the material even if they only make 1 suit for 1 customer. So they're carrying that inventory and net working capital. We're now in discussions with our -- and actually, they're coming to us and proactively in some cases and saying, look, we see your outlook, we see your win rate, we see the impact, the standardization, the acceptance of Subsea 2.0 now over 50% of our inbound in 2022 and 2023. We're willing to go in and build this component. Whatever component it may be, we're going to build this and we're going to hold this for you. So we're now shifting some of that working capital from our balance sheet into the supply chain is what we talked about. And that's just -- look, I'm going to tell you, when we thought about configure to order, we weren't thinking about that. These are learnings that we're having, positive learnings that we're having by moving to this new model. We're very confident in the free cash flow generation potential of the company. We're seeing it as you, as you just pointed out, that's a pretty healthy rate of improvement. A lot of that, obviously, starting with the margins and the free cash flow that we expect to generate. But a lot of things are included in there. It's -- the shorter cycle time also benefits us. We can do more with less. The Subsea 2.0 configure to order allows us to put double the capacity through the same roof line. We're not announcing big capital programs and big new assets into our company. We're learning to work with others, collaborate with others, use their assets versus using our assets. Look, we are deeply, deeply committed to this and I think we're going to show a real change in industry mentality.

Before we kind of dig into subsea a little more and hopefully have time to dig in to surface a little bit, let's talk about capital allocation. You put your debt targets out there at $1.3 billion, hold cash of $800 million, so $500 million of net debt. You're at $655 million in net debt at the end of 3Q. You're going to generate some strong cash in the fourth quarter. You'll get there but working capital is lumpy, so maybe you get back a little bit over that in the first half of the year. But you've committed to, I think, back half of next year dividend. How should we think about level of dividend? And do you give kind of a more structured capital return strategy? I mean, you've got a buyback outstanding, I understand that, and you bought back some. But -- and if you give a capital allocation strategy or capital return strategy, will it be operating cash flow, free cash flow? So anything you can provide there.

No, thank you. And obviously, very committed, very proud of the progress that we've made, particularly on the liquidity side of the business. Thank you for pointing out, I was going to raise that. We did announce the $400 million share buyback before we met those objectives only because of our confidence in what we see building up in terms of our new orders and our backlog and our ability to be able to execute those into very profitable projects that are going to generate incremental free cash flow. Yes. The dividend, we're committed to implementing or reimplementing a dividend in the second half of 2023. We would look at it as a more traditional, sustainable -- at a sustainable level that we could grow over time. Right now, quite frankly, we struggled with not focusing on the share buyback. We're active, and we announced $50 million buyback in the third quarter. We think the valuation -- based on the valuation of the stock at this time, it's clearly in the best interest of our company in terms of the use of cash and in terms of our shareholders to remain very focused on the share buyback. We'll look at the dividend when the dividend comes along. And in terms of other metrics and other kind of guidelines, let's give it a little bit of time and we'll see what we mature to. But I think right now, what we want to demonstrate is our commitment and our focus, and we're going to do that through the buyback.

Let's come back and dig in to Subsea a little bit. You talked about 70% of your orders being direct awarded. So very little -- I mean, just 30% of your businesses, which I think you used to call [ $3 billion ] about, maybe it's [ $2 billion ] about now, I don't know. But even there, it feels like that, that market, the discipline there is starting to show up and pricing is starting to move. But how should we think about the margin differential of competitive bid projects versus the direct awards?

Well, look, we didn't invest -- we didn't make the bold move of creating an integrated company and invest in Subsea 2.0 and CTO and create some real value for our customers. Let's go back to what I said at the beginning, delivering a Subsea project up to 1 year earlier than they had anticipated, that is huge value to our customers. The certainty of supply, the certainty of delivery by using iEPCI and 2.0, as we talked about, is something that's really driving and structurally changed the subsea and offshore market. Our customers recognize that we need to share incrementally in that value that we're creating. So I guess, Chase, the way -- just think about it in your own kind of life. If somebody trusts you enough to give you 70% of their business without going out to the market and testing it, I think they understand the level of commitment and trust that has been built between those 2 entities, 2 individuals or 2 corporations in our case. So look, they understand that, that will be our most incremental -- in terms of incremental margins, they're going to be highest in that business, but they're very happy for it to be because, again, they're getting the benefit of the improved subsea project economics. We're moving subsea projects forward at an economic level that previously was unheard of. These things have created real value for our customers, and they're willing for us to share in that value.

Yes. Can we talk about pricing? Can you kind of walk us through what pricing's done, I guess, maybe pre COVID, post COVID? It kind of went down and obviously, it's starting to move. And what should we expect from pricing as we go into 2023? I mean, I'm assuming that strong order growth, continued pricing momentum, but just kind of walk us through kind of the pricing.

Sure. And it's a little trickier for us to answer that question than like a traditional OFS company because we're not selling the same thing over and over again, and the competitive landscape is very different. So when you think about that 70% of that direct awards, a large portion of that being either our Subsea Services or iEPCI, we are sitting down early in the project. The client, it's -- think of us as a subsea architect. The client has a plot of land. It happens to be a lease under the water. And they've done some work, seismic, maybe delineation drilling. They've worked with a downhole OFS company to kind of figure out how many wells need to be drilled. And then they're coming to us and saying, kind of where should the wells be? And how are you going to put an architecture to bring all of this together to allow us to optimize the production of this field and produce it safely for 25 to 35 years? And we sit down at the table and we design, based upon our ability with 2.0 and the integrated model, something that is unique. So there is no line item pricing. There is no -- we're just talking about the project to project economics. We can deliver you this architecture with the functionality that -- they do request the functionality, flow rate, temperature, et cetera, as you said earlier. We give them the architecture and then we give them the time to first oil. And often, they're very impressed, which is why our conversion rate from integrated FEED studies to integrated projects is extremely high. I don't know the exact number, but we've had just a few that haven't actually converted. So there's not really a pricing element discussion in there. Now we have an expectation in there for what type of margins that, that's going to deliver to our company, and that's what we focus on. And that's why we have the visibility and the ability to be able to give guidance like we gave a year ago out to 2015 in terms of a 450 basis points expansion in our margin because we have that unique visibility, which the benefit of that is you don't have to wait for -- you don't have to wait for a sunny day. You don't have to wait for an up cycle. You don't have to wait for supply and demand. These are things we're doing on our own to structurally change what we are going to be able to earn in this business. Now on top of that, when you get into a cycle like we are in, in terms of the macro, sure, there's some additional market-based pricing that we will share in, and so will others share in that pricing. But the problem is if you haven't fundamentally changed the way that you operate and improved your margin or your profitability, which is sustainable, you lose it in the next down cycle. And that's what OFS companies have done over and over and over again. And what we've done is to structurally change it so that they're sustainable.

Yes. Can we talk about risk? Integrated projects, when the people first -- when you're with -- first, down the strategy, people worried about you absorbing more risk and potentially having to take charges. Obviously, we haven't seen anything -- any material thing for sure. And so like how do you convince investors that you're not taking on more risk by doing more integrated projects? Like what is it that you're -- are you reducing risk? So like how are you actually reducing risk for -- not for your customer but for you?

No, thank you very much. And if there's anything we can clarify, let's clarify that. We are not an engineering and construction company. We had some experience in that. It's a very different business. And that is -- you don't -- you do not -- we have none of that risk within our company. We don't build big objects, think of it that way. We're not building plants and floating objects or anything like that. That's done by others. People do it very, very well and it fits their business model and their risk profile. That is not what we do, so let me make it very clear. What we are -- think of it as an architect. We are the architect to the customer, giving them the ability to optimize the production from a development in the subsea space. We work very closely with them. We work very intimately with them. There is a contract and the contract is there to protect both parties, but we don't reference the contract. We're working in a very open and collaborative way. It's a very different business. It's a -- one should not think that there's a greater risk -- there was no risk transfer or a greater risk profile by doing an integrated project. As a matter of fact, it gives us a lot more leverage, and let me give you an example why. In everybody else, there's somebody who builds the equipment and somebody who installs the equipment. You build the equipment. If you don't deliver to the quay side by the time the boat gets there, you're going to be penalized. If the vessel doesn't show up to pick up the equipment when it's delivered, they're going to be penalized because it's done in a single phase. What we tell the customer is you're going to get first oil by this date. We might do it in a single phase because that might be most optimal for us in our schedule. We might do it in 5 different phases. It doesn't matter. We have so much more flexibility and adaptability. So when we see those bottlenecks or those potential risks occurring, we can mitigate those because of the portfolio of projects and the flexibility of an iEPCI project.

Yes. We'll see how far we get with this next question and we may have time for one more on surface. But look, when I think about your margin profile, like look, you've got integrated -- you think about the integrated model, you've got 2 players. That's all there is. It's continued to kind of get better adoption across the market. If you just think about the overall subsea market, I mean, the top 2 players are 70%, 80% market share. You talked about what you're doing and other people are not with Subsea 2.0, CTO. Pricing is starting to move. Like the market structure, everything about -- high barriers to entry. Everything about this market says margins should move a lot higher. I mean, I went back and I told you -- I presented to somebody and I looked back and I just totally forgot that this used to be a 20% to 25% margin business. And I'm not talking about the E&C business, right? I'm not talking about the offshore construction, all that. I'm talking about the subsea equipment business, SPS business. And so you guided to 15% margins in 2025, and I know that you've been very clear that does not include any pricing. So like why the hell can we not get back to 20% to 25% margins? Like if we don't get there and the market stays where it is, why do we not get back there?

Sure. I think everything you laid out is fair. I think that when you look at the margin profile and what we've done and where the subsea market is today and the unique position that we have, because of the investments that we've made in Subsea 2.0, allowing CTO, the iEPCI, big bold moves that we've made over the last 5-plus years, and the value that we're creating with our clients and the relationship we have with our clients that they're happy to share in the value -- for us to share in the value that we're creating is why I keep emphasizing that in 2021, when we said margins were going to go from 10.5% to 15% in our Subsea business, it was in an environment, that was a lot. It was 450 basis points improvement in a market that everybody thought was either dead, nonexistent or would never recover. We obviously saw it differently. And most of what we were doing in that 450 basis points was self-help initiatives, and as you said, with very little pricing assumption built in. Now we're in a very different environment 1 year later. Clearly, the market is much stronger. Clearly, our inbound is growing faster, earlier than we had anticipated. We said $8 billion in 2025. We're seeing $7-plus billion already occurring in 2023 based on our most updated guidance. So look, I think the best thing that we can do is use an opportunity in the near future to clarify that the 15% was not -- is not the upper limit and put out some new numbers that will help people understand what we think is the real earnings potential of this company. So stay tuned.

Yes. Stay tuned. All righty. Well, we're a minute over. But Doug, really appreciate the time. Always enjoy these fireside chats. Finally, they're live in Miami. Hopefully, you get to go see the beach, just look at it. But appreciate the time. Thank you, everybody.

Thanks very much, and thanks to BofA.