TechnipFMC plc (FTI) Earnings Call Transcript & Summary

Over the last several years, TechnipFMC has reestablished itself as the premier offshore equipment company, having reshaped the subsea industry with its integrated offering and iEPCI approach that's led to a commending market share in recent years. With its impressive backlog, not only do a few companies have as much earnings visibility, but FTI is benefiting from structurally higher margins through its Subsea 2.0 offering. It's my pleasure to introduce Mr. Doug Pferdehirt, Chairman and CEO of TechnipFMC. Doug was CEO of FMC since 2016, has been CEO since the merger back in 2017. Doug, thank you so much for joining us today.

Thank you, Dave.

Let's start with kind of a basic question, '24 is shaping up pretty well from an order standpoint, pretty much like what you were looking for. How does 2025 starting to look? Any reason to think the pace of orders is changing at all? I know you've had some guidance out there for a bit.

Yes. So just to remind everybody, in 2023, we put out a target of $30 billion from '23 through '25, or if you will, for 3 years. We turned $9.7 billion in 2023. We said we'd be targeting around $10 billion this year, leaving another $10 billion or so for next year. Let me just say, I'm extremely confident in that target. Certainly, nothing has changed to the contrary in terms of deferments or the tone of the conversation. The tone of the conversation is very much around securing capacity and securing the right capacity. And if a client wants to do an iEPCI project, which is the integrated project, or if they want to use the Subsea 2.0 configure-to-order product family, both of which, particularly when combined, can lead to the delivery of a project 1 year earlier than the way we used to do it or if you will, the way the competition still does it today. So they're wanting to secure that capacity. And our delivery performance, our execution performance has been exemplary, leading to repeat orders. So as a result of that, Dave, I would just say it's still extremely robust beyond that $30 billion target. It also remains quite interesting because you start to get into some of the emerging basins and the opportunities there as well.

That was actually my next question, kind of what's beyond '25? So I know Namibia has been one major area. Any other kind of areas that are sticking out to you? Or would you expect kind of more, I don't know, some of your traditional basins?

Sure. So it will always be comprised of kind of 3 buckets. And bucket one is your mature existing basins. Think of Gulf of Mexico, North Sea, West Africa, where you're really talking about tieback opportunities, but also some greenfield, but a lot of tieback activity. Then the second bucket, excuse me, is new horizons within those existing basins. And then you think about things like the Paleogene in the Gulf of Mexico. So the Paleogene has always been there. It just required some advanced seismic processing and the ability and the determination to go after it. It's a higher pressure reservoir. And there's been multiple projects to date, and we believe there will be more projects sanctioned in the Paleogene. So the benefit of taking and looking within an existing mature basin, as you know, the infrastructure is already there. So it reduces your cost. You might have to go deeper to get to the reservoir, a different reservoir than you've been traditionally producing for instance in the Gulf of Mexico, but you know all that infrastructure exists in order to support that project. And then the third bucket would be the emerging basins. So when we look beyond 2025, it will still be a combination of those 3. I actually think bucket one will continue to grow. There's been some speculation that there was such a focus on brownfields and tiebacks over the last several years that maybe we've exhausted that opportunity set. But with some advancements in technology, both in terms of all-electric as well as subsea processing, we have the opportunity now to expand the radius around a host facility up to 4x greater radius to look for tieback opportunities or marginal fields to tieback. So I don't think, in any way, we've exhausted those opportunities yet. Then again, we talked about things like the Paleogene as far as emerging basins within a mature basin. And then as far as the emerging basins, clearly, Namibia has a lot -- is going to be a big player. Mozambique, '25, '26 and beyond, I mean, I think we'll continue to see activity there that will probably surprise to the upside actually. Suriname, again, there's been a lot of talk, the operators had a lot of conversations about potentially Block 58 moving forward this year, maybe next year, but I think they're targeting this year. And then you start to get into, when does Tanzania come on, it's going to come on at some point after Mozambique, basically the same reservoir, gas. East Africa, easy access to the Asia Pacific market. You start to look at the continued activity in the Eastern Med and maybe acceleration of the activity in the Eastern Med again, largely gas driven. And then you start to look at things like South Africa, following the Namibia, maybe future phases in Suriname, Colombia, another deeper reservoir, but could be quite interesting as well. So there's a lot of -- we're opportunity-rich as we sit here today.

We heard from Jeff Miller earlier, he was saying that the change, one of the things that he's seen in the offshore is a lot more IOCs are engaging him. I'm curious what you've been seeing on that front in the orders. Are you seeing more of these IOCs engaging you and kind of looking longer term? Because one of the things I think about a lot is back in kind of 2014, the marginal barrel was deepwater, and we're at $85 a barrel, and now it's structurally changed sub-50 now. Is that kind of changing the mindset in your view of the IOCs in terms of the horizon in terms of what they're trying to do?

Sure. And so one, I would agree with what Jeff said. I'll add to it by saying our customers' capital is going to flow to -- it's going to be governed really by two things: access and economics. And right now for the foreseeable future, again, the offshore is opportunity-rich. There is access and the economics, and we would like to think we played a material part in that, have really structurally changed as a result of our integrated offering in the Subsea 2.0 and other innovation that we continue to bring into the subsea space, all focused on reducing cycle time. And if we can reduce cycle time, ensure deliveries, the project returns are phenomenal. But it was always considered to be a long-cycle activity, right? And we said it was 3-plus years, but then we deliver in 4-plus years. That's just the way it was. Now it's much shorter than that and we're taking 1 year off the deliveries and delivering on a consistent basis, leading to all of these repeat awards. So when I think about it from an IOC point of view, again, I'm just thinking about access and economics. And the offshore certainly works. The quality of the reservoirs there, which obviously also helps with the project returns. But I'll add a third dimension. We always talked about it in two dimensions, I'll add a third dimension, which is the regulatory environment. And at the end of the day, the capital is going to follow a regulatory regime that is predictable and consistent. And I would say there are parts of the world right now where the regulatory environment is extremely unpredictable. So how do you commit a significant amount of capital to these type of developments, as opposed to in the offshore where there tends to be a lot more stability in that regulatory environment. So I think it's really those 3 factors. Now maybe an anecdote, it would be when I'm having conversations with the clients, they're not only talking about that upcoming project, Dave, but they're starting to talk about the one after that. They never gave us that visibility into the pipeline. We always had unique visibility because of the pre-engineering work we do with the pre-FEED and the FEED engineering work that we do. We had a seat at the table early. But it was always for the upcoming project. We might be at the table 2 years ahead of time, but it was the visibility of the next project. It's now the visibility of the next project and the project beyond for the reason that you're saying, the IOCs are seeing this opportunity and they want to make sure that they can secure that capacity.

So you are a big part of lowering that cost structurally. Do you feel that you have accrued enough value for what you have added, for what you're bringing to the table? Are you being paid -- are you getting enough value from the customers or is that still to come in the couple of years?

No, fair question. Yes, I do. And yes, I believe there's more to come. Now let me explain what I mean by that. Every single day when we wake up, we're a pure play. We're very focused. I don't have to worry about 37 product lines. We're very, very focused on what we do. Every single day, everybody in the company, including myself, we wake up and we think about, what is the next move on the chess board to continue to make offshore the most attractive for the capital flow? I mean it's really not more complicated than that. If we don't remain absolutely steadfast and determined to continue to improve offshore economics, the capital is going to flow where the capital -- where the best returns are. So because of that, that laser-like focus, we continue to find ways to improve. I'm suggesting, we don't believe we've gotten to the end game or to the end state yet, that there are further improvements that we can make that can continue to accelerate, shorten cycle time or accelerate time to first oil, vastly improving the project economics. This is why our partners, meaning our clients, are entering into long-term partnerships with us. They wouldn't enter into a long-term partnership with us if they thought this was as good as it was going to get, right? They're expecting us to drive innovation. They're expecting us to bring out new technologies, to bring out new commercial offerings that will continue to drive that performance. And it's that relentless pursuit that we're all focused on.

On the flip side, the iEPCI model, it's been a really unique side of your business and it's really kind of enabled a lot of your smaller customers. And can you remind us how much of your business today is the iEPCI model? And what are typically the size of those projects? Are they all tend to be a little smaller in projects but very standardized? Is that the right way for investors to think about it?

No. But let me answer the first part first. The iEPCI today is about 50% of our new orders, are coming for Subsea 2.0 type trees, which is the configure-to-order. The benefit is it's not a first article, it's not a standard single tree, it's configurable, but all the components are standardized. Why is that important? Look, this is what the auto industry figured out a long time ago. We were just a little bit late to the party. It's simply doing what the auto industry has done. When you order your vehicle, there is 0 engineering involved. You might believe they're making it for you, but there's 0 engineering involved. In that drop-down menu, every one of those is a pre-engineered configuration. So we have the same thing. It's called Subsea Studio, it's an app on the phone. So our customers can go into the drop-down menus and there's a series of different pressure ratings, different flow rates, different temperatures, a flow loop, no flow loop, choke, no choke, variable choke, fixed choke. But all of those are pre-configured components. So at the time of the order, we go straight into assembly and test. So where is this 12 months of savings come from, this magical number we keep talking about? It's very simple. If we do a 1.0 project or the standard way it was done in forever, and the competition still does, I have to do 9 months of engineering when the order is placed because every single part number, and there can be a 1,000 part numbers, needs to be engineered. The CAD drawings need to be made and needs to be turned over to internal or external supply chain to manufacture. In a configure-to-order Subsea 2.0, when that order is placed straight into assembly and test, right away of savings of 9 months. Then through better execution, we typically make up another 3 months, hence, the ability to be able to deliver 12 months earlier. Now it sounds easy, but it took 4 years of detailed engineering to create a configurable platform because having a configure-to-order but nobody orders is not very lucrative business. So we had to find a configurable architecture and then introduce it to our clients, qualify it with our clients to get them to move and adopt that approach. Today, about 50% of our tree orders, we see that growing over time and it could grow quite substantially over time. We've not had a single Subsea 2.0 -- a client who made a switch, if you will, we've never seen one go back, okay? So once they're in a 2.0 world, they see the benefit and they want to stay in that 2.0 world because of that shorter cycle time and that certainty. So that's where we are in 2.0. Now one other interesting data point on the 2.0, whereas about 50% of the orders are coming from 2.0, that's not all flowing through the plant yet. Right now, only about half of that because it takes time, the cycle time for it to go through the plant, right now, we're only seeing the benefit from about 25% or half of that or about 25%.

I think back to the last cycle, kind of subsea almost became what it is today. Your big customer is either Shell or ExxonMobil or Chevron, they all have these big subsea engineering team. And they love to do all bespoke work. Going to Subsea 2.0 is a big shift in totality from the IOCs. Are the IOCs going that way? Or do they -- I assume they need convincing. So do you get IOCs into the Subsea 2.0?

Sorry, I didn't answer that part of the question about small versus big. So thank you for bringing it back. Sure, and I'm an engineer so this is meant to be a compliment, not an insult. The more engineers you have, the more resistance there will be. It's just kind of -- it's a pretty strong correlation. My wife tells me that all the time. But anyways, so these large engineering, I actually had one IOC tell me, Doug -- this isn't the CEO. "Doug, this sounds really great. Got to buy off on it. You convince my engineers." And they had this engineering gathering. It was huge in this like theater. And I went in there on the stage and talked about the virtues of 2.0, not because of me, because that meeting was lukewarm. But today, they're 100% Subsea 2.0. Look, of the IOCs, they're all pretty we've either done -- I'm just thinking here real quick. We have either done or have a contract to do Subsea 2.0 with them. So maybe it took a little bit longer, but just as receptive. Now in terms of the project size. Sure, a small independent who doesn't have the engineering staff tends to be a little more reliant upon us, but we don't take -- we're not taking advantage of that, but we enable them to be able to do some of these projects because we can do the iEPCI model with the Subsea 2.0, we can take and deliver that commission installed on the seabed for them. But we have Subsea 2.0 projects today. Some of the largest projects in our backlog, $1 billion-plus projects are Subsea 2.0 with IOCs.

You've had a long-standing target of 18% subsea margins in 2025. You're clearly right on the path towards that. Now you just said, Subsea 2.0 is only about 1/4 of revenue conversion today. So as you kind of think going forward, is that going to be the primary driver for margin expansion from here? Is it going from 50% to 75% to some level? Is that where you're going to see the margin expansion for you?

So great question. I would say there's really, well, there's a couple of contributing factors. First and foremost, as we execute and complete legacy backlog projects and they fall out of the backlog, and therefore, out of the revenue, that's obviously contributing to margin expansion. But that doesn't go on forever, right? And also to me, that doesn't structurally change the way that we operate the company. So the second area is the overall market, right? The overall market is, I'll just say, very supportive. So we're benefiting from that as well.

You mean pricing?

Another way of saying. We'd like to say, economic value. Yes. So it's favorable and continues to be quite favorable for multitudes of reasons. But those are both kind of -- one is just mathematical. It just happens over time, but it eventually, you exhaust your legacy backlog. The second one is really externally driven. Both are positive, both are constructive, but the one I get most excited about is, indeed, the Subsea 2.0 and the iEPCI. So it's the quality of the backlog because the quality of the backlog has gone up substantially. And as that new high-quality backlog or inbound -- and if it goes in the backlog, the same goes in the revenue, flows through the projects and through the facilities, that's sustainable. And that's the beauty of it, is we've structurally changed the company. We've changed the operating model. We've changed many aspects, including the capital requirement to run the company. All these things have improved that are structural changes that will drive through cycle returns to a level that's never been achievable before because in the past, you just had one and two, the first two buckets, you didn't have the third bucket, and the third bucket was never structural and sustainable, and that's what gets me most excited.

So in terms of that conversion, in terms of the Subsea 2.0, what are some of the KPIs that you're kind of focused on? And has it been as efficient as you had hoped? Is it better? Just kind of curious what are you watching in terms of the success of it?

Good question. So obviously, we're targeting, attracting the right clients with Subsea 2.0 on the right projects, so if you will, the first part, which is the percent of the inbound of Subsea 2.0. But not just chasing it for the sake of chasing it, we want to make sure it's going to be with the right client on the right project and that we're going to be successful. The second area that we focus on is the execution of the Subsea 2.0. It's relatively new to the industry. We introduced it in 2017. Obviously, it's grown over time. But we're still learning from that ourselves. I will tell you this, and this maybe sounds like we weren't ambitious enough, but it is exceeding our expectations, even in this early stage of it only representing 25% of the mix going through the plant. So recently, I was at one of our plants with a client with their VIPs, they wanted to visit our plant and they were getting ready to -- this was one of those that was committing not only to the next project, but the project afterwards. So they wanted to have a serious meeting and we were at the plant. And as we were walking through, we do takt time, like a lot of manufacturing companies. So there's different cells, and there's amount of time or days allocated per cell, and then you want to have continuous flow. You can't do that in a 1.0 engineer-to-order world, but you could do that with a 2.0 configure-to-order. So I was confused by the indicators because they were all off in my mind, they were not showing the right numbers. So at the end, I pulled the Head of Manufacturing aside, and I said, without the client present, I said, "Am I missing something? What is going on here?" Because it was -- we were running at 21 days takt time per station, okay? And then there's a series of stations. But none of the indicators were at 21. When you do lean manufacturing, one has to be at 21 and then the others go down to 0. And the highest one was 17. And I said, "What did I miss?" And the answer was, we're just a heck of a lot more efficient than we thought we were going to be. Again, the flow is going faster than we anticipated. So we took the takt time per station and adjusted it accordingly to continue to track. And I think that 17 will become something less than 17. That just gives you a feel for how substantial this is. And again, as we have more of our volume, a higher percentage of our volume, we're going to benefit from that more. What does that all lead to? Obviously, it leads to the ability to be able to do more with less. So through that same plant, I can put a lot more volume without having to spend capital to grow the company, which is important. But it also means not only am I going to deliver on time, I'm going to deliver ahead of time, or in future projects when I adjust, I'm just going to create the competitive moat even wider than it is today because while I'm 12 months ahead today, I may be 14 months ahead in the near future. And that's what drives us in. So it's, look, it's super exciting. And I'd like to tell you, we know exactly where the endpoint is going to be. All that I know is that there's certainly room for improvement.

Well, it certainly appear to be entering or having been in a sweet spot here, and it looks like it could last the next couple of years. What could derail this? We think of vessels, and certainly one thing I've been hearing about is that there's not enough out there. I know you have different ways of dealing with that. But is there anything that's kind of bothering, that concerns you that could change this pace or kind of slow this down at all?

Sure. So look, I certainly wasn't smart enough to predict the pandemic we had. So let's leave kind of the big events off to the side, that is always something that we have to deal with in life. And like we did, we would deal with it accordingly. And all of our projects continued during COVID. We had no project cancellations, which just shows the robustness of the business once these projects get sanctioned. But let's leave that to the side. Look, first and foremost would be our own execution. We are in a very humble, humbling position that our customers have entrusted us with an enormous amount of value. And it's beholden upon us to continue to execute at an exemplary level to continue to earn their trust. We measure that by repeat orders, and not just repeat orders, but repeat direct award orders. As many of you know, there's a lot of the market we've done 100% of the work in. A direct award after direct award after direct award, you have to be executing very well to be able to do that. Now execution sometimes is associated with risk. I understand that. But I caution you not to jump to that conclusion because with this 2.0 repeat orders and the volume that we have in the example I just gave you of visiting the manufacturing plant with the client, we're just not seeing the same challenges that we would have seen in a standard 1.0 world where you're building everything for the first time. So much greater certainty, much greater confidence, but still, it's right to call out execution. And then the third bucket I would say is some sort of -- and I'm going to say a significant disruption in the supply chain because I've consistently, even through the 2020, 2021 era, never got on the mic and complained about inflation and it's impacting my margins or whatever it may be. To me, we're paid to manage that and that's part of our job. So I'm not suggesting that the normal disruptions that happen every day, there's always something going on either with a shipment or a local geopolitical issue within a particular country. It's our ability to be able to manage those in the aggregate and minimize the impact on the business. So it would have to be something really quite significant. Other than that, I'm not suggesting it's easy. It took a lot of work to get here. Obviously, the 4 years of detailed engineering to create Subsea 2.0, the ability to be able to go out and not only create the integrated offering, but to have the courage to consummate the relationship and go become one company in 2017, do the integrations, integrations last 3 years, all that's behind us now. So it really is focusing on execution and just continuing for our customers and for us to benefit from all the hardwork.

There's a couple of minutes left. I want to ask you about one thing that is on the horizon. Well, it's been on the horizon for a while, but now it's kind of here, is electrification. You talked about this, gosh, 10, 15 years. But now you now got some orders in electrification but it has a lot of other benefits as well, particularly in subsea tiebacks. Can you just talk about what electrification could mean in terms of kind of, I guess, your orders, in terms of the market itself?

Yes. And look, I'm with you, Dave. I've been kind of frustrated that the adoption rate on all-electric hasn't been more quick than it has. But think about it like the aviation industry, right? Every airplane you got on had hydraulic controls. It took a long time for the aviation industry to, let's say, have the courage to go to electric over hydraulic or fly-by-wire. Every plane you get on now, unless you're up in Alaska, sailing and fishing, it's almost certainly a fly-by-wire plane and you don't -- you probably don't hesitate. So it's a little bit of the same transition curve. Hey, all valves, subsea have been controlled by hydraulic pressure. So by [indiscernible], it needs to stay that way. We're going to get past that. I don't think we're -- I'm not suggesting we're at the tipping point today, particularly in traditional oil and gas. I still think it's going to be a little bit lethargic, but it will get there. The benefit in traditional oil and gas is it's a higher upfront cost, and this is -- I want to emphasize that. And if it was cheaper, it would be a lot easier, but it shouldn't be cheaper. The benefits are not in the unit cost of the actuators on the tree. The benefit is the overall architecture becomes greatly simplified because that umbilical that was pushing all that hydraulic fluid down becomes basically an extension cable. All you need is electricity. You probably still have telemetry and things, but it's greatly simplified. But if the customer wants me to build an all-electric tree cheaper, I'm not going to do it. It's not right. They got to look at it in terms of the total value. So anyways, we'll get there. That's kind of in the oil and gas domain. So you will see onesies and twosies. Where it's going to take off, and this is the benefit of being in a new market, is in the CCS market. So we've gone into the CCS market with only an electric offering. Now, could we use hydraulics? Yes. But we've gone out there and said, don't even think about it. This needs to be done via all-electric. So the Northern Endurance partnership project that we announced earlier this year, we are taking the CO2 from a terrestrial source, and we're taking at 145 kilometers offshore without it ever coming back up to the surface, all underneath the water because of electric actuation, we wouldn't be able to push hydraulic fluid that far. You'd have to come up, have a hydraulic boosting station, go back down, have hydraulic boosting station, go back down. Much better for the environment, much better socially. You don't have all these structures out there. So I'm really bullish on all-electric for CCS. I'm a little more cautious on all-electric for oil and gas. It will grow, but I think it will grow at a more moderated pace. But now on the tiebacks, I'm sorry, on the tiebacks. It is a big benefit on the tiebacks because what it allows us to do is to go further away from the host facility, find stranded reservoirs and tie those back.

When will the Northern Endurance project be in the water? When do you expect to install that?

That's in like the '27 time frame.

Yes. Great. Doug Pferdehirt, CEO of TechnipFMC. Thank you.

Thank you all for your attention.