TechnipFMC plc (FTI) Earnings Call Transcript & Summary

All right. We're going to keep things moving. A few minutes ago, I was asked by one of my key clients, what are some of the themes from this year's conference. And offshore came to the -- almost at the top of the list. You heard Doug's former employer, SLB. Olivier talked really about the offshore renaissance. It's something that Doug has been talking about for many, many quarters, and we are seeing that really to fruition, if you look at some of the trends in terms of what TechnipFMC has been seeing in terms of backlog trends, et cetera. Thrilled to have Doug Pferdehirt, who's the Chairman and CEO of TechnipFMC. Doug, I'll turn it over to you for maybe some introductory comments, and then we can start our fireside chat.

Super. Thank you, Arun. First of all, thank you for having TechnipFMC as part of this conference, an important conference on the calendar every year. We're delighted to be here. Thank you for all of you who are here in attendance. It's wonderful to see so many people. And then for those who are joining virtually, I hope that you find this time valuable. So I'll start with just a very brief opening remarks, kind of setting the stage a little bit. I'm going to touch on three factors kind of where we are in and what we've done to kind of reimagine the offshore market and the impact that, that's had both in our company as well as the industry. Then I'm going to talk a little bit about the offshore market, the resiliency and durability. As mentioned, others have been speaking about that as well. So I won't spend a ton of time on that. I think it's now widely acknowledged and accepted. And then thirdly, I'll talk about the market structure and how it has changed quite favorably as well. So as a company, we recognized years ago that we needed to change our behaviors to drive a change of behavior in the offshore market, making the offshore market the choice of capital for our customers. And for a while there, there was a lot of focus on other potential areas to spend capital. I won't say specifically, but you all know what I'm referring to and a bit of a -- that detracted a bit from the focus on offshore. Look, the focus is back squarely, but what we did to help ensure that, that would be the case was really looking at what could we do as the leading company in offshore, what could we do to drive and improve Subsea project economics. And honestly, the answer was pretty simple. It was have certainty and deliveries of shorter cycle times. And that's not been set a lot when you think about offshore. Offshore tends to be longer cycle, et cetera. So we said about doing that in two different phases. One was to redesign the architecture that goes on the seafloor. We call that Subsea 2.0 and completely reimagine the way that, that is done. That was launched back in 2017 shortly after we created TechnipFMC. We realized that wasn't enough, and we also had to drive a different commercial model. And the commercial model in the past in offshore developments was to compartmentalize the work packages amongst multiple contractors. That created a lot of interfaces and inefficiencies. So we decided somebody had to step up as a leader and remove those interfaces and drive better efficiency. That was TechnipFMC, which was created on the 17th of January 2017 by bringing together FMC Technologies and Technip. It was a bold move because nobody had ever actually purchased and integrated Subsea project before. And -- but we realized that somebody had to make the offering real to see -- or to allow the customers to be able to change their buying behaviors. It's been hugely successful. It now represents a total of about 1/3 of the total Subsea market is this new integrated model. And we are the only company who can deliver an integrated project, having all of the capabilities within TechnipFMC. So that is kind of the setup, but then we started to realize, as activity started to grow, the real benefits of what we've done. And that was -- from going from a bespoke company, bespoke manufacturing or engineer to order, start the engineering when you receive the order to a configure-to-order company, which means all of the components are pre-engineered and you go straight into assembly and test. We call that configure to order. You can't do configure-to-order, if you don't have a Subsea 2.0 product architecture, which is configurable and scale, and we clearly have both. So we now are realizing the benefits of that configure-to-order architecture. That allowed us to give guidance out to 2025 that is quite profound. Much of which is within our control. We're not banking on big pricing or other, other market kind of dynamics. It's really based upon the things that we've done ourselves to, again, reimagine our company. The message that I want to leave with you is that's done. That's behind us. We're now in execution mode. So 50% of our orders are now Subsea 2.0, 1/3 of the total market is iEPCI. This past quarter, 50% of our orders were iEPCI, which is that integrated model. That results in us receiving approximately 70% of our orders in our Subsea business as direct awards, never goes out to competitive tender. That, ladies and gentlemen, is differentiation. Our customers do that because we have truly established ourselves in such a way that they feel confident in our ability to be able to deliver and they see that differentiation in the marketplace. Having done all of that and having that behind us, at the same time, we now have a rather robust market recovery in offshore and others, as stated, have already talked about it at this conference. We started talking about it in November of 2021 that the next cycle was going to be international. We define international, principally as offshore in the Middle East, both of the markets that we are market leaders in. And those markets represent 90% of the revenue of our company. 90% of the revenue of our company. You now hear people using words like durability and longetivity of the offshore cycle, and we couldn't agree more with those statements that have been made. And then the third element is indeed the market restructuring that has occurred. This is a very serious business and very serious and that means only very serious players like TechnipFMC are declared adequate by our clients to work in such an area. So we couldn't be more proud. When you sum those three things together and you look at our 2025 guidance, you can see that there's going to be a significant amount of earnings -- incremental earnings that we're going to be able to get out of the business, and we've made a commitment to distribute that back to our shareholders. We started that already 12 months earlier than we had intended with a buyback program. And we've also stated our intent to initiate a dividend in the second half of this year. So with that, Arun, I'll pass it back to you.

Yes, Doug, let's start with the longer-term outlook that you outlined in February. At that time, you surprised the market with your 2025 guide, $8 billion in Subsea revenue 18% margins, $1.4 billion of subsea EBITDA. This is 33% above your prior guide. One of the questions I get is that's a pretty lofty number. I think about the growth from there. Give us confidence that you can reach that guide?

Sure. So but a pinky promise or a blood promise. Look, we're all in. We're a company. We don't give guidance unless we have a high degree of certainty. How can we do that? We have visibility that's unique in the industry. 70% of our work is direct awarded to our company. We have worked for major IOCs and been their exclusive provider for the longest one -- the longest duration, 28 years. We have visibility that our competition just will never have. I'm humbled to say that. We earned that through being the company that's driving innovation in the space, the company willing to make bold moves like the creation of the integrated model, which both we and the client benefit from and also a lot of personal relationships. It's important to us and it's important to them. So that visibility is what gives us that certainty. We know what's coming down the pipeline. We are doing integrated FEED studies today that we know will convert to integrated projects, and they're not available to the rest of the market. So the market doesn't see those and we know the timing of those. We know the increment in which they are likely to occur. And it gives us this unique visibility to be able to put out, not only the revenue and EBITDA guidance and the free cash flow conversion guidance, but also that to say that we are on track to inbound $25 billion in new orders in our Subsea business alone this year 2024 and 2025. I can simply say we have a high level of conviction. Nothing has changed. If anything, we are even more confident than when we gave the guidance just a few short months ago.

Great. One question on 2024. I know you haven't provided 2024 guidance. But one question from investors is your previous Subsea outlook was $7 billion of revenue and 15% margins. Could you potentially do that in 2024?

So we gave '23 and '25, so we didn't give '24. So that's where everybody gravitates to, which is -- that's fine. Don't forget the '25, plug-in to '25, and you'll see this company is grossly undervalued and it's why we are actively -- hopefully, along with many of you in the market buying the equity. But okay, how do we get to 2024? Arun, I think that's a fair way to kind of look at it. Clearly, the inbound is occurring earlier. Q1 inbound this year was $2.5 billion. I'm talking Subsea alone. That's a 1.7 book-to-bill. So clearly, the inbound is coming a bit earlier, which means the revenue follows, and then obviously, the EBIT or EBITDA follows that. I would just not necessarily get ahead of yourself. And what is the governing factor? The governing factor is really we have to work out the legacy backlog, right? So in our backlog today, we said this year, about 65% of our -- what is in our backlog today is legacy. I guess, a gentler kinder way of saying lower margin. So we have to work that out of the backlog. By 2025, we said that will be down to 11%. So you can see we exhaust that relatively quickly. Is that linear between 2023 and 2025? Maybe not it's exactly linear. And that's why maybe I wouldn't go all the way to the previous 2025 guidance in 2024, but maybe marginally below that.

Okay. Doug, I know that you get some questions on Subsea tree awards, and I hate to ask you this question. But last year, you estimated 350 Subsea trees, and I think your number was one or two off.

No, I missed. It was 348.

One question I've gotten from the conference, SLB very, very constructive on offshore fundamentals. In their slide deck yesterday, they talked about an expectation of 300 tree awards. And I was wondering if you can maybe unpack that.

Sure. So, Arun and I are having a little fun up here because when we created the integrated company, I said I was going to quit talking about Christmas trees. That's maybe 10% of the total company, right? So it's not really a great way to look at our company as an integrated company. If all you do is make trees, then that's probably more relevant. But last year, I was drawn into the debate because there was another company that had said, I think, 168 trees for the year. And I just knew that, that was well below what was actually going to happen. And I didn't want you to not have maybe the rest of the story as they say. So that's when I said it would be approximately 350 and I think we were at 348. Look, we thought -- we said it would be similar for this year, so plus or minus 350. I think Schlumberger gave some really good outlook in terms of the total offshore market. The rig count in the offshore market. Their services are directly tied to the rig. We are dislocated from the rig. We are putting in place the -- we're the architect, we put in place the infrastructure that stays on the sea floor and up through the water column throughout the 25-, 30-year life of the reservoirs. So we're not so much playing -- we -- our businesses are tied to the rig count as much as theirs, but I think they gave some good guidance on that as well. Look, they're a solid company. I have a lot of respect for them, as you know. And I think that their guidance is -- market outlook is -- and macro outlook is normally spot on. In terms of the actual Christmas tree count, if you want to be safe, go somewhere between 300 and 350, but it's certainly going to be in that range. It will come down to as it always does end of the year. Will project gets sanctioned on December 28 or on January 4. And I'm literally, those two dates tend to be big order dates in our history of our rig and that's just customers that are trying to accelerate and exhaust capital budgets for the current year or deferring it to the capital budget for the next year, and that could swing the market by 25 trees.

Great. Can you talk -- the mix shift towards iEPCI awards and Subsea 2.0 awards, why does this benefit FTI in terms of your margin profile?

Well, number one, it's direct awarded. We're the only ones who have it. Number two, it allows us to have -- it allows us to have much greater certainty in delivering projects on time or ahead of schedule. Most of our iEPCI 2.0, so iEPCI using integrated projects using the 2.0 architecture are delivered ahead of time. When was the last time you heard of a project, including building your own home or adding an addition to your home that was delivered on time, on budget or ahead of time. My daughter is building a home right now. That's why I'm kind of referencing that. And I somehow became the banker for that. But -- so it just doesn't happen, right? It's just unheard of. That is that ability to go to that configure-to-order model, have that repeatability just drives tremendous success. Look, it gives us more leverage in the way we manage the projects. There's a lot more leverage with our supply chain. So it kind of goes across the whole gamut, Arun. If I'm fully transparent, I don't think we've yet actually realized the impact that this is going to have of this new operating model. We've said about 50% of our orders in 2022 and 2023, we're going to be 2.0. That doesn't mean 50% is going through the facilities right now, obviously less than that. So as that ramps up, we're going to continue to see that benefit. So again, if you go back to why do we have confidence in the margin guidance that we presented, it's things like that, that are within our control that are in our backlog that we have visibility to. We're not tying the strategy of the company to the commodity price or to just project pricing. It's what -- we have the visibility and the control over. Our customers benefit by that certainty of delivery. Our customers benefit from an acceleration of time to first oil. That's what drives their project economics. And they're more than willing to share the economic value that we create with us.

Okay. Doug, you talked about $25 billion of inbound orders over the next 3 years. What type of visibility do you have beyond 2025? And is 2025 a peak year? Or what do you think about the normalized potential of your Subsea business?

Yes. It was when we gave '25, we -- it was the first time, I think, anybody -- I think some others have now gravitated towards longer-term guidance. But we were the first to do it. I think it was very well received, but then the very next question was what about 2026. So that's fine. But again, look at the 2025 numbers, put them in your model and you'll see there's a lot of upside just in the 2025 deliveries. But there is something in all seriousness that I want to make sure that at least I attempt to answer and put to bed, which is this thought that the party is over in 2025. The party is not over in 2025. As a matter of fact, when we gave that updated guidance for 2025 in February of this year, and I'm looking at Matt Seinsheimer, he authored a quote. I think it's a very important and famous quote, which was -- and I'm not going to get it exactly right because I don't have my script in front of me, but it was something along the lines of, "it's a major milestone on a more ambitious journey", So clearly, we weren't indicating that it's the peak in terms of margins or in terms of activity. I will back that up. I'll give you something like real to back that up with. We are now sitting in discussions with our clients, very advanced discussions like getting ready to sign the contract, not early discussions, but final discussions, and we're booking capacity in 2028 through 2030.

Interesting. Interesting. I was wondering if you could kind of walk around the world and go through some of the traditional key deepwater basins from Brazil, West Africa to the Gulf of Mexico to some of the emerging opportunities, Guyana, Suriname or John was just up here, Namibia. Maybe give the investors a flavor where you're seeing inbound entries about opportunity sets for the company?

Okay. So as far as the traditional basins, they're actually all quite robust. They're robust in different ways, right? So let's start with the North Sea. It's been a Subsea area for a very, very long time. Obviously, you all follow the -- what is transpired, the Norwegian government had passed some incentives in terms of getting projects basically through FID by the end of 2022. That led to a significant amount of new orders in that time frame, Q4 and into Q1 of this year with companies like -- for us, companies like Aker BP, companies like Equinor and many others that we're privileged to work with, some in exclusive relationships that are very, very important to our company. So you had more greenfield activity in that basin than maybe you would have traditionally expected as well as a huge installed base for us, which drives our Subsea services business, but also allows for tiebacks and brownfield activity. Now let's move to the Gulf of Mexico, another very mature basin. Probably a bit less greenfield activity, but sometimes I get the question, there's no greenfield projects left in the Gulf of Mexico. There's three ongoing right now, three ongoing right now. So don't count off the Gulf of Mexico. It's important. Again, for us, both from the installed base, from services as well as tieback opportunities or brownfield and greenfield. And now some deeper trends and some very exciting projects that are going on in deeper reservoirs within the Gulf of Mexico. Now let's move to Brazil. Brazil has been robust for some time, continues to be a very important country for us, one where we are the market leader and one that we're very pleased with the level of activity that we have. And again, not only with Petrobras, which was the case historically, but now with others. We delivered the very first integrated project in Brazil for an operator, Karoon Energy, and that we couldn't be more proud of that. And just recently, we received the largest integrated project award in Brazil from Equinor on their BM-C-33 field. So lots of activity in the existing basins. Now to shift around the world to Asia Pacific, I would say that's been more brownfield related, and it's been a little bit later cycle. So you'll start to see that really peak up, and that's really because it's tied to LNG. These are gas reserves offshore that are fueling the onshore LNG facilities and you're going to see a big uptick there. And that's important for us because those are very sophisticated equipment because it's large-bore gas and requires a much higher level of sophistication, which we are somewhat well positioned to deliver. Okay. Now go into kind of the rest of the world. You put it as an emerging basin. It's almost now becoming, in our minds, almost a mature basin just because of the huge success that ExxonMobil and Hess have had in Guyana. We're extremely proud to say that we are their provider and have been their providers since the very beginning. It's a phenomenal, phenomenal success in terms of taking a new country, putting it onto the energy map in a short and very efficient and effective time frame. Mozambique, there's been -- there has been a project delivered, which we were part of. There will be future projects in Mozambique as well. Those are all kind of in that $25 billion guidance. Now what's not in the $25 billion guidance that we provided is all the others, Surinam, Namibia, South Africa, Colombia, the eastern parts of the Eastern Med, parts are, parts are not. So there's a tremendous amount of emerging basins that we're not even putting into that $25 billion because again, we're fairly conservative. And I wanted to have clear visibility on the $25 billion by project name, not by, hey, this country might do this or might do that. So that would be all upside above and beyond.

Okay. Could you talk to us a little bit about Subsea services. We're let me...

Let me be careful, because I see my IR guy looking at me. When I say above and beyond, maybe not above and beyond the $25 billion by 2025, but I'm saying that's what's fueling the orders for 2026, '27, '28, '29 up to 2030.

Got it. We don't need an 8-K release today. I'm just kidding. Let's talk a little bit about Subsea services. Where do you participate in terms of Subsea service and talk about some of the partnerships and the vessel ecosystem that you talked about in the last call?

Look, this is something that you do things in your career that you -- obviously, everything you do in your career, you think is meaningful or you wouldn't be doing it. But some things -- some things actually turn out to be much more substantial than you actually anticipated. And when we merged the company, it was really important for me to demonstrate that we could change the operating model and the operating model of a fixed asset-based company, so that's just rigs, vessels, et cetera, are largely predicated upon day rate and utilization. I mean that's really the two primary factors. And one of the ways that they've competed against each other is always to have the most or the newest or the most capable. Well, if that is your strategy, it means you have to continuously put new capital into your business and build new assets. So when we joined the companies, we thought we could. We weren't certain we could, but we thought we could break that mold. And the way we did that was we changed the philosophy of, we actually don't have to have the most, the biggest, the newest or the most capable. We just have to build an ecosystem of friends and partners that we can work reliably with, that we can ascertain those assets on a need basis versus building and spending capital and that affecting ultimately through cycle returns. So that's what we call the vessel ecosystem. We bring people in to work with us on our integrated projects versus keeping the build and build and build. I think actually this is going to have a profound impact on our company and hopefully, a profound impact on the industry because I think if the industry can learn to work in a more collaborative way, it's going to benefit the shareholders at the end of the day, and we're leading by example.

Yes, I want to touch just on the surface business, pretty levered to the Middle East. How are things going there?

Well, I'm on my way to Saudi here shortly. It's tremendously active. They're very serious about -- and not just Saudi, but Abu Dhabi, Qatar, I mean there's very serious activity going on across the Middle East, where it's a very important business to us. And just to give you kind of why is that? Typically, there's two or three of us who work in those countries, maximum, typically two. And the technology intensity and the value of what we build because of -- I mean, those are very prolific reservoirs compared to the U.S. shales is about 10x more. So I mean, if I stood a -- Saudi -- an Aramco tree next to a tree for the U.S. shale. I mean, you would see visually what I'm referring to. So very sophisticated, higher end, more value. We have much greater differentiation as a result of that in that market, a very, very important market for us. And I think like offshore, it's going to be robust for years to come. They're not planning short cycle, and I'll be perfectly candid. They're not as influenced by short cycle as others need to be or are. They take a much longer-term view. So very important to our business.

Okay. Most of my questions have been talking about the long term. But any thoughts on how 2Q, rest of the year is kind of progressing, and thoughts on free cash flow generation. If there's one question that came up post the 1Q printed, you did have a working capital build like a lot of service companies?

Yes. Look, obviously, we're getting real close to the end of the quarter. I know, Arun, you weren't going to let me get off the stage without it. Look, we're highly confident in the guidance that we had given at the -- in Q1 in February in terms of Q2. So no change to that. Very confident in full year guidance, including the free cash flow guidance, which we're doubling the free cash flow of the company year-over-year at the midpoint of our free cash flow guidance, $300 million. Don't be -- don't put too much focus on the Q1. It is seasonal. Our offshore business is quite affected in the first quarter because in a lot of the world, during in the winter season and the seas are such that you don't operate much offshore, but obviously, we see a big build into Q2, which is what we had forecasted, and we intend to deliver and then Q3 is also very strong. So the working capital build or I'm sorry, the free cash flow follows that because when you reach those milestones, you achieve those payments. And that's why we always see our free cash flow progress through the year. But again, a high level of confidence in all of the guidance, including the free cash flow guidance for 2023.

Okay. I'm sorry, I took up all the time, but Doug can stay around for a couple of minutes if you have any questions. So thanks, again, Doug.

Appreciate you all.