TechnipFMC plc (FTI) Earnings Call Transcript & Summary

We'll continue with Day 2. My name is Saurabh Pant. I'm the oil field services analyst. And we have TechnipFMC with us. So we got TechnipFMC CEO, Doug Pferdehirt. Doug, you've been the CEO of the company since the 2017 merger. You were the CEO of legacy FMC Technologies before that. Spent more than 2 decades, I think 25 years, maybe close to 25 years at SLB before that, lots of experience in TechnipFMC, as you know, is the leader in the subsea market, a big presence in the international market and the surface side of things as well. Really glad to have you.

Well, thank you very much for having us. Thanks to BofA for hosting the conference, and I look forward to the discussion.

Okay. Let's just dive right in. Doug, I'd like to start a bigger picture. Clearly, offshore deepwater in particular, has come a long way from a breakeven standpoint, sub-$40, $40 to $50 is what we hear from most of the operators in terms of breakeven. So solid economics. But as we look forward, topics like supply chain tightness, cost inflation are starting to come up. What's the risk that these things derail some of the projects on the pipeline on the horizon for the industry?

Great question, and I know one that's probably on most of your minds, so let me kind of break it into three large buckets. So why is offshore so attractive? And why is it attracting so much capital today? And why are we seeing so much growth in the offshore? First and foremost, the rock. So I'm a reservoir engineer by background. It all starts with the rock or the reservoir. The reservoirs offshore are just phenomenal. Keep in mind, pre-salt well in Brazil is producing 50,000 barrels of oil a day with a very low decline rate versus, if you will, a well in the Permian Basin or somewhere else, which would be orders of magnitude less but orders -- but much more decline rate at the same time. So it's just a very different reservoir that you're dealing with to start. The second area really comes down to an oil company is looking for both economics and access, and they're looking for predictability in both. So when you think about predictability and access, that's where you're thinking about regulatory environments, changes, things that could very quickly take something from being attractive to less attractive. So if you think of -- and then economic speaks for its own. So clearly, economics in the Middle East are better than other areas that you could invest. But there's very limited access for capital because most of the Middle East is constrained or just doesn't have access to external capital. It's funded internally by the country. As opposed -- the opposite of that would be U.S. land, where there's pretty much open access. The challenge there is much less attractive economics. So offshore has really become the sweet spot. You have access and predictability, and you have very strong economics. Now why have the economics changed from prior periods? We would like to think that TechnipFMC played a role in that, which is we really looked at the offshore and realized that something needed to change. There was a lot of things were being overspecced, things -- there was a lot of redundancies, a lot of interface risk as well as the cycle time was quite frankly, just too long. As those -- all of those things impact project returns, particularly the cycle time, which impacts time to first oil. So we looked at it and said, what can we do to make this long cycle business a shorter-cycle business. And we've done that. We are the only company that can sit down very early in the project, work with our client and deliver them an offshore project up to and in some cases, 12 months earlier than the plan. That has a huge impact on the project economics. And if you will, it's making the offshore very attractive again.

Right. Right. No, that's definitely a big change that we have seen, Doug. And when we think about, like I said about the supply chain, maybe just give some color on how much of a typical, let's say, a greenfield project and then maybe a Subsea tieback kind of project, the scope of that project is within what TechnipFMC does?

Okay. So on a greenfield project, meaning you have to have a host facility, you have to have something floating on top of the water for the hydrocarbon to produce to. That could be which typically cover an FPSO, floating production storage offloading vessel or it could be an FPU, a floating production unit like a platform. In that case, in a greenfield case, now with our new much broader footprint as an integrated company, we're about 1/3 and let's say, the drillers and subsurface OFS companies are about 1/3. And then whoever is building that floating object is about 1/3. In a brownfield, we can be up to 70% to 80% of the cost of a brownfield development because you don't have that floating structure. In a brownfield, you're going back to an existing host. So it really comes down to the architecture on the seabed and in the water column, which is what we put in place. Now I do want to circle back because you said supply chain twice and I failed to answer. So let me circle back to the supply chain question, fair question. Clearly, when there's growth, there are constraints on supply chain, et cetera. You don't hear us talking about it. And I know a lot of other companies are talking about it on a pretty routine basis. It doesn't mean we're immune, doesn't mean we're perfect. I mean we have challenges every day. But because of the new operating model of the company, which we'll get to later, which is called the Subsea 2.0 product family, which enables a configure-to-order operating model, our supply chain is much more resilient than it used to be. In the past, everything we built, we were building for the first time. Imagine that. Imagine that. When there's 10,000 parts to a piece of equipment, and you're going on to a supply chain and say, "Build me 10 of these, Oh, and by the way, you've never built them before. So good luck." And that's what the rest of the industry is still doing today. With our platform that we have today because it's configured to order, which means everything is pre-engineered, much like the auto industry, when you order a car, no auto manufacturer is doing any engineering just for you. When you do their drop-down list on the website, all those components that you're choosing from those options that you're choosing from have all been pre-engineered. Our clients order Subsea equipment on an app -- I won't say Apple, I shouldn't be promotional. But just on an app, be it an iPad -- well, I shouldn't say an iPad, be it a tablet or whatever, but that's how they order it. They order it online now through a series of drop-down menus. So because of that, -- and because of the volume that we have as a company, being the market leader, we can give -- sit down with our suppliers a year in advance and say, we're going to need 1,000 of those. And by the way, the exact same thing. It doesn't matter who buys it. It doesn't matter which oil company buys it. It's going to be the same. And that's made our supply chain much more resilient.

Got it. Right. So your side of the equation, like you said, 1/3 on a greenfield project, 75%, 80% on a brownfield project, that's pretty predictable in your control, so you feel good about that. But what about the parts, for example, the 2/3 in a greenfield project that's not in your scope? Should people worry about that? FPSO is one thing that comes up all the time.

So it's a great -- it's a really good question. As I like to say, we have a relentless pursuit of project timing or acceleration of first oil. So the culture of our company is -- every single employee wakes up thinking what can I do today to make things more efficient, to reduce cycle time, to ultimately deliver first oil on these projects sooner. Everybody in the company understands that's our secret sauce, that's our winning recipe. And as long as we continue to think that way, not only will we continue to do well, but the industry that we serve will continue to do well, which both are equally important. So we do look at -- even though it's not in our scope of work, we are not an engineering construction company, do not take on that -- those type of projects or that level of risk. Other people build those floating things. We don't do that. But what we do is we look at their value chain. It's a lean principle. So we value stream map and we look at it and we kind of look for the inefficiencies. Well, if you really look at these floating objects -- let's just call it FPSOs to make it easier. If you look at these FPSOs, by definition, an FPSO stands for floating production storage offloading facility. It's meant to be a big tanker with a lot of storage in the hall and a mechanical arm that allows you to offload to a shuttle tanker to take it to wherever you're selling the oil. When you actually look at one of these and what they actually have become are offshore floating refineries. So the top sides that you hear about, were never really meant to be there. But now because the chain -- as you're producing the oil, there's changes in the geochemistry, the oil, et cetera, you start to build water handling, gas handling, CO2 handling, all these other modules or modules the size of this conference room, and you're trying to put it on a deck of a vessel, which is the most expensive real estate in the world, more expensive than London, New York or anywhere else is the real estate you have on the deck of a vessel. So what we're doing now is we're looking at it and going, what if we could simplify the FPSO. What if we could de-bottleneck the FPSO, we want the FPSOs company needs to do well. We want them to produce more FPOs shorter, which means we continue to shrink the cycle time of offshore. And they're not opposed to it because those top sides, they don't manufacture. Those are being built somewhere and then they have to integrate them, and it's a very difficult, very complicated, very condensed area that they're working. But I talked about the most expensive real estate. What is the least expensive real estate in the world? Trick question, the sea floor. We don't pay a lease check or a rent check to any landlord. Never paid them. And it's pretty expensive, right? 70% of the earth's surface is covered by water. People are -- don't think about the sea floor when they think about building things. That's what we do. We build from the sea floor up, and we're very comfortable doing it. So we just announced the project earlier this year for Petrobras called the HISEP project for the Mero 3 project. HISEP is a separation project -- we're instead of separating it on the floating FPSO like they're doing today with all that expensive real estate, difficult environment. We're taking that capability and we're putting it on the sea floor, where we can build -- we don't have to worry. On a boat, you can't build east and west, north and south, you can only build vertically up, right? It's limited. So we can spread this on the sea floor, very sophisticated technology, took years of development between Petrobras and ourselves. But we're now able to do that. In addition, we have projects around the world where we're separating water on the seabed and reinjecting it, separating gas, natural gas on the seabed and reinjecting it. One of the big benefits of the HISEP project is it's also a greenhouse gas reduction project because what we're separating is CO2. So that CO2 is coming from to the surface. It was being separated on the FPSO, and then being reinjected back down into the aquifer. In this case, we're able to do it on the seabed in a closed loop system. By definition, if you're on the sea floor, you better have a closed-loop system or you're going to have a problem. So everything is being done in a closed loop system, the CO2 never sees the atmosphere and gets reinjected. So a really interesting project for multiple [indiscernible].

Right. And that was a big project, by the way, right? Interesting and big, big dollars that move the needle for you. Let's maybe switch to your line of sight to projects that are in the pipeline. I know you talk about your subsea opportunity list, which is at a record $25 billion, but then a lot of your orders don't really come from that list. They are direct orders, they come from your iFEED work that you do for your customers. Just add all of that up and just give us what confidence you have in the longevity of this offshore cycle?

Sure. So look, always difficult to predict the future. But we are in a privileged and unique position to be able to provide longer-term outlook with a high level of confidence. And we've delivered that, time and time again, over a long period of time. And let me talk about why. A couple of reasons why. So I'll say, maybe the best for last. So let's start with the fact everything that I said earlier, the offshore is attractive, the economics are improving. Everything that I talked about with the configure-to-order and the Subsea 2.0 and the integrated projects. All this is new, right? Think about the unconventional 20 years ago., That's where the offshore is now. We're not at that harvest phase, where we're seeing big time, big acceleration, big savings in time and acceleration of first oil, and we're still very early in that process. So that gives customers the confidence to spend their capital there. Second of all, we are privileged to be at the table very early, 2 to 3 years before you've sometimes heard of the project. And we're sitting there. We're working with our clients on an exclusive basis, working using our integrated knowledge which again removes redundancies, interfaces, et cetera, and working with them to make the project economical. Contractually -- that's called an integrated front-end engineering and design study. Contractually, if we achieve the economical hurdle rate, the customer is obligated but honestly, they want to, they're obligated to direct award us the integrated project. which is ultimately the prize at the end. So an attractive area for the capital expenditure, meaning offshore. We have a privileged early knowledge to be sitting with them at the table. And we know what's working and what's not working. So we know it's likely to go forward because we understand the economics. And then, as I said, this direct award, and I said I'd save the best for last. Over 70% of our business in Subsea is direct awarded to our company, never goes out to a competitive tender. It's truly a privilege and honor position to have. It's been built upon not only creating a differentiation in technology, commercial, execution, excellence and deep, deep client relationships.

Right. Now that 70% number is hugely powerful from a visibility standpoint or your ability to plan a standpoint, right? So that's -- it's massively unique from that standpoint. I want to talk about technology a little bit, Doug. Two things that come to mind is your all-electric subsea offering. You've already won a contract on that, not on the oil and gas side of things, but you already won a contract on that. And then the 20,000 psi Paleogene projects. Just talk to those two technologies.

Okay. Good. I thought you were going to ask about HISEP. I already snuck that one in. So we had three really big technologies that we introduced this year. A CO2 separation on the seabed like we talked about earlier for Petrobras in Brazil. Then let's move on to the all-electric. Super excited about it. This is an area that, quite frankly, I've said here on this stage and other stages in the past that I think the industry has been a bit lethargic in moving to an all-electric operating system. But to put it in perspective, it took pilots sometime to get comfortable with fly by wire. So pilots always had hydraulic controls on an airplane. And today, they have electric control, so electric over hydraulic controls. And it takes people a while to get comfortable with it. Our industry has always had hydraulic actuation. So -- but think about what that means. We operate from hundreds of meters to 2 miles deep in the water. So hydraulic fluid is a certain viscosity. When we pump it through very, very, very small diameter tubes, you pump it from whatever is at the top of the water, and when you say open or close a valve, you push the button, it turns on the pump. It pumps the hydraulic fluid down, maybe as much as 2 miles, which I know is pretty unimaginable, but then could push it out another 5 miles to get to the thing that it's operating, the valve that it's operating. Well, friction pressure, you have loss along the way. So it creates, if you will, a lag time in the response. We all know electricity is going to be much more responsive. So look, it just makes sense. It simplifies the overall system. And it's also going to allow us to work at a much longer distance than hydraulics because there are physical limitations to how far because of the friction pressure losses that I was referring to earlier. So a good example of that is the project that we were awarded, which was for the Northern endorse partnership which is led by BP. And this is actually a carbon capture storage project. So we don't do the sequestration in that. Other people will do that. We'll take the carbon -- the CO2 that's been extracted or sequestered from a central gathering point onshore, and we're going to take that 145 kilometers offshore, 145 kilometers and everything will be under the water. If you used hydraulics, you would have to come up to a hydraulic distribution and pumping station back down up to hydraulic distribution pumping station back down and you'd have all these connections, et cetera, that could ultimately lead to leagues, et cetera. This is all going to be done with the electric actuation. I actually believe now the bigger market for all-electric -- and that's, by the way, the first -- world's first all-electric subsea production system, and we're very excited to have that and also another big greenhouse gas reduction project for our company. I actually now believe that CCS will be the bigger market than oil and gas. Why? Because we never gave the CCS market the option of hydraulic controls. It's a little bit of this pilot mentality I talked about earlier. If you go to somebody who hasn't been using hydraulic controls, they say, well, well of course, should use electric controls. Of course, it just makes sense. So we've only offer all-electric in the CCS market. And the CCS market is -- there's no resistance because there's no legacy, if you will. And they're much more interested and willing to adopt this new technology. We develop specific valves and specific trees. In this case, it's an injection tree. But specific to the CO2 market but on the 2.0 configured a platform idea. So it's called CO 2.0 is what we call it, but it's very specific. So we have the architecture, we have the all electric, and this is going to be a very big opportunity for our company. The third technology we talked about was a 20,000 psi technology. Why is that important? So think about it from an oil company's perspective. If you're blessed and you've got acreage in places like Guyana and Suriname and Namibia and Mozambique and Tanzania and Colombia, all these new emerging basins, wonderful. But if you don't or if you have, you may have a very strong footprint in an existing mature basin, Gulf of Mexico, North Sea, West Africa, just to name a few. So if you have that existing acreage, and you know that there's a potential hydrocarbon bearing zone lower in the ground than what you're producing today, deeper in the ground. But logically, if you know you have a couple of reservoirs, you're going to produce the shallowest reservoir back 30, 40 years ago whenever you went after because that was really the technology that was available at that time. Well, now the technology is available to go deeper. Why not, why not? The infrastructure is in place. You probably already have one of these floating objects out there that you don't have to buy another one. So why not just go deeper and see what else is down there? So seismic technology and the processing and seismic technology is enabling that. The drilling industry is enabling that, and we're enabling that. So we have a 20,000 psi production system that stuff that sits on the sea floor, that's fully qualified and being purchased today. There's -- this is really serving the Paleogene in the Gulf of Mexico. We just announced -- I'm looking for my IR guy. We just announced -- yes, okay, I wanted to make sure. So we just announced a big project for BP, the Kaskida project. And another example of a great 20,000 iEPCI direct award 20,000 psi. We're also doing a project for Shell called The Sparta project. And we're doing two projects for Beacon, Monument and Shenandoah. So it really is exciting because, again, you have an existing mature basin where you're introducing a brand-new horizon.

Right, right, right. No, that's definitely an important opportunity for the industry and for you. One thing I want to switch to now, Doug, is that obviously, yesterday was the first day of the conference. We had some offshore drillers. We had some service companies that operate in the offshore environment and slowdown in deepwater rig contracting, white space, all of that was part of the discussion. And then it comes to people like you, TechnipFMC, $10 billion in orders last year. Close to $10 billion this year and your guide is $10 billion again next year, right? So it's almost like the rest of the value chain is being impacted, at least from a contracting standpoint. But you are untouched, you keep going as strong as ever. What's going on? What are investors missing?

Well, I apologize. I wasn't here yesterday, so I don't know what was said yesterday. I hope investors aren't missing anything. But I would agree that it begs the question, right? When you start to hear different kind of -- different things being said. I've heard about this white space thing. I can tell you, we have no white space. We are prioritizing the projects that we go after. They have to -- obviously, economics play into fact, the terms and conditions play into fact. If it's a direct award, iEPCI 2.0 plays into it, we're clearly prioritizing. We no bid large projects because we don't think they're the right projects for us or, quite frankly, for the industry. I can't comment on what they're saying because I don't see what -- I'm not part of their conversations with their clients. I know the conversations we're having with our clients. We just got back from a tour. We kind of do our end-of-the-year tour with all of the major clients. We finished Europe. We're working on the U.S. now. What they're talking to us about is securing our capacity. They want to lock us in through 2030, 2030. This isn't a 2025 comment. It's projects '28, '29, 2030, that would have phases beyond that. They want to lock in the capacity now, so that they know they have access to iEPCI Subsea 2.0, which is only available from TechnipFMC. So honestly, I don't know. What I said on the Q3 conference call, didn't mean to be controversial, but meant to be factual is I believe all this white space in this conversation is company specific. It's not an industry-specific issue. It's certainly not one that we're experiencing. I'll just add one thing, again, not to be controversial, but we're not in a commodity part of the supply chain. We're clearly not a commodity. Everything we do, we've talked about already this morning, and maybe that plays into it.

Right. And you are not an asset-heavy business, so you don't have to worry about gaps in your asset utilization rate, so that's the other thing. One thing Doug may be related to that to help investors think through the life cycle of, let's say, a greenfield project sanction, right? People look at FID as a key milestone. But maybe tell us when do you get involved relative to that FID? When does that operator contract an FPSO? When does that operator contract a rig, just the time line of how -- the sequence of how these things happen?

A good question because it's actually changing quite a bit. It's actually changed. It's much different than it was in prior cycles. In prior cycles, honestly, the supply chain we like to think of ourselves as partners when 70% of your business is direct awarded. But more broadly, the supply chain was kept in the dark. You found out when it was time for them to put a request for tender, that's the minute you found out. You probably didn't even know the project name. You just got something that had this new project and you had to return it in such a period of time. Typically, then the FPSO would be awarded first because it had the longest cycle time, but subsea wasn't far behind it. And then ultimately, the downhole services kind of contract, a rig in downhole services. What we're seeing now is very different. We're seeing actually the subsea being -- because of these relationships -- and remember, I talked about that integrated front-end engineering designs that we do. We're in there well before the FPSO folks are in there. Typically 2 years, sometimes 3 years in advance. I promise you we're working on projects now on an exclusive basis with our clients. So therefore, we've signed an NDR and I can't talk about those projects that you've simply not heard of. And I know you know a lot more than I do, and -- but I mean there's just stuff that they are planning now for the latter part of the decade that is not in the public domain right now. Those are -- that's the type of visibility that we have. And then, look, it doesn't take us long. Within a year, we kind of know if the project is going to make it or not because we're a big part of that. Again, we're either 1/3 of the cost or 60% to 70% of the cost. So we can understand pretty quickly if that's -- if this project is going to work or if it's not going to work. We do that hand in hand with the client. It's a very collaborative relationship. And as I said, when the projects then are sanctioned, they go forward as a direct award to our company. So yes, we have much -- we have visibility much earlier, and we have visibility beyond the set of projects that we all know about. So what do I mean by that? You mentioned it earlier, I'll go back to that. We publish a Subsea outlook, right? So we list all the subsea projects that are likely to be FID-ed over the next 24 months. Those are pretty much the ones that the customers are talking about in the public domain. So they're public, we put them on the list, everybody knows about them. But then there's a whole another list and not that we're not trying to be transparent because I think we give a tremendous amount of information to the financial community, but there is another list that we don't publish, that is an exclusive list to us where we're doing those integrated feed studies because most of them are done under an NDR, so we can't put the names out there, the projects. That list is also very large. And those almost -- if they go to FID and not all do, but the vast majority do, those are the ones that are direct awarded. Now some of the projects on that Subsea opportunity list, but the public one are also direct awarded like the Kaskida project last quarter was on that list, but it was a direct award. But because BP had made it public, it was on the list. So it's a combination of the two. But no, the visibility is -- I would like to think we've earned it. They wouldn't have us at the table 2 to 3 years in advance if they didn't think it was important that we were there and that we were contributing.

Got it. Right, right. No, that's obviously, like you said, it's a privilege to be in that position to earn the trust of the customer that way. And then one thing, Doug, investors are worried about the macro -- oil side of the macro, they look at 2025 balances, they're like [indiscernible]. There's a lot of spare capacity potentially in the system. In a hypothetical scenario, if oil prices go to $60, below $60. I'm just making that up. I've got no idea where oil prices go. How does that impact FTI from a backlog perspective, order perspective?

Look, we think about it, too. We're certainly not -- we're well aware of the various scenarios. We do our scenario planning. We review it with our Board on a regular basis. We actually have a meeting coming up in a couple of weeks that we'll do another deep dive into the subject. There are some nuances, right? And I do think they're important. We have a very robust backlog. So we're not like -- I don't know. Most of the other companies in this space don't have back -- it's not a backlog business. Even the biggest ones, it's a book and turn business. Their backlog is a matter of maybe a few months or 1 or 2 quarters. We've got backlog coverage for a solid 18 months, almost 2 years. So it's a very resilient business. And I'm not going to say recession-proof because I know that's naive. You all are much more savvy financially than I am. But nothing is recession proof, but we do have a lot of confidence because our business doesn't get turned on and off. A frac job in the Permian Basin can be -- it can be turned off today for tomorrow. And very quickly, they go -- that's a very day-by-day kind of business, not a backlog business. So very healthy backlog with quite a bit of duration. Because of where we are in the value stream for our customers, we've never had a project canceled in the backlog. I want to repeat that. We have never had a project canceled from backlog, which is wild, I mean -- but it makes sense when you think about it. We're at the tailwind. They've already done the exploration. They've already bought the license or whatever concession they had to. They've already done the drilling. The only thing that stands between us -- or between them in producing revenue or whatever they're producing hydrocarbon or whatever form of energy is us. It's putting the production system in place. So even during the pandemic, nothing was canceled from our backlog. So it's very resilient. We've got quite a bit of cushion, if you will. And again, I won't repeat everything from the beginning. Our customers are looking at the offshore as a very attractive growth market for them because of all the things that we talked about and their confidence that we will continue to drive the project economics even -- or the project returns even higher, primarily by further reducing the cycle time. Obviously, we benefit from that because we get more confidence, more direct awards, but also think about it. Our returns go up quite dramatically because we're doing more with the same amount of assets or, in many cases, more with less assets than we're working with today. So it's a very exciting time for our company.

Right, right. All of that flows into the natural question of your guidance. And by the way, you've already raised your 2025 guidance twice. I'm not going to ask you to raise it a third time today. Because it's been just a quarter. I'll ask it next time we chat. But the way I'm thinking about it is you are booking $10 billion in orders last year, this year, likely again next year. if you keep going down that pace, I mean your revenue is going to hit $10 billion, right? Just mathematically, you're going to be at $10 billion at some point. And I'm sure there's margin upside to that, right? As your legacy orders move out of backlog and then I'm assuming that you're capturing more value as you're creating more value, right? What's the upside? I know you talk about math maybe has copyrighted the line that it's a major milestone on a long journey, right? But just maybe shed some light on that long journey, what lies beyond that...

Yes. I'm trying not to smile as you ask the question because it would be inappropriate. But yes. I don't disagree. So just again, for clarification, we said we'd do $30 billion of inbound over a 3-year period ending '25. We delivered $9.7 million in '23. This year, we said would be approximately $10 billion. That leaves another $10 billion for next year. A high level of confidence and obviously, the '24 inbound, but also the '25 inbound. We did just go out with updated guidance, which we increased again for 2025. I think we're the only ones out there with 2025 guidance. And we said -- at the midpoint of the revenue range, we said $8.5 billion, which is another 10% growth in revenue, even more so in EBITDA, quite a bit more in EBITDA growth. But we said $8.5 billion. And sure, mathematically, one would say they should converge, inbound and revenue should converge. I'm not prepared to commit to $10 billion here today. But clearly, we're heading in a direction -- in that direction. And as you said, margins for all the reasons we talked about are even more resilient from a CAGR point of view. And that's because, obviously, we talked about earlier, 70% being direct award never goes out to competitive tender. The impact of the new operating model, this configure to order, where we're not having to do engineering at the time of the order. We're not building things for the first time. We're using components, preengineered components. We're reducing cycle time. Our cadence through our manufacturing plants is double what it was in a 1.0 world. We're working with other people and other people's assets on our jobs, i.e., they're floating assets. So we don't have to use our capital for that, and we can continue to grow and expand the integrated portion of the market. So yes, we remain very confident. Now look, I want to be balanced here. We've got to execute, we've got to execute. So for me to sit up here and talk about how wonderful the backlog is, you all realize that's only as good as when we deliver it. I will say, in a 1.0 world, which is the world we used to live in or the rest of the industry still lives in, it would be very difficult. The supply chain you talked about earlier would be much more complex. First articles are always more risky than doing things on a repeat basis and much more engineering intensive. So people are -- subsea engineering is a real discipline. It's not something you can get out of school. You can get your mechanical, chemical, petroleum, whatever it may be. But then we've got to make you a subsea engineer really is a unique niche, and that takes years to develop that competency. So by us not having to put all that engineering at the time of the award because it's the first time we've ever done it, now that it's repeated, configure to order, that engineering can work on other things like integrated front-end engineering studies versus on the time of award. So less engineering hours being consumed per project, which obviously helps margins and allows us to grow the business without adding more people or more capacity. So no. And I said it earlier, we're in the early stages of this. Whereas Subsea 2.0 represents about 50% of our orders today, only about half of that is what's flowing through the manufacturing plants today because it takes time, 1 to 2 years to convert. So ultimately, that will continue to ramp up. But we're already seeing the benefit and the margin expansion, which, as you know, our guidance is out there right now is far above where we had guided to be just a few years ago because we had not yet realized the true earnings capacity of this new operating model, and we're seeing that today, and it's very real. And most importantly, it will be sustainable. So this isn't a cycle question. This isn't a pricing question. This is about changing the operating model and making it more resistant through cycle.

Got it. Right, right. And Doug, we are running out of time. So we'll quickly cover two topics. I don't need to rush you, but one thing just like you said, on execution. Maybe touch quickly on the vessel ecosystem that you've put together helps execution, keeps you CapEx light Just maybe spend a minute on that, and then we'll spend a minute on capital allocation?

On the ecosystem. Well, that's hard for me to do. It's actually the thing I'm most proud of. I'll just be real quick. We made a decision when we created the new company that we weren't going to continue to add fixed asset capacity into the industry. It's not a good investment. But everybody likes it, everybody likes to talk about their new capacity. So we said very early on, we were not going to build new vessels. Vessels is the biggest consumer of capital in our company, and we've honored that. We've significantly grown the company without adding new vessels or -- and we've actually reduced our capital expenditure far below -- annual capital expenditure far below where we were historically. How did we do that? We just decided, why can't we all work together, right? Why can't we work with our competitors, we'll compete with them at times, but in other times, we'll work with them. So we call that the vessel ecosystem. So we went out to all the vessel operators and our ecosystem is open to anybody. And we said, do you want to work with us? Initially, they said, no, I'm not going to lie to you because they were used to competing on vessels. Over time, they see that the integrated execution model or what we call iEPCI is becoming the industry standard. So if you only have vessels and you're not -- we're the only integrated company. So if you only have vessels and we're getting 80% of that integrated market direct awarded to our company, your total available market shrank. If you own fixed assets, the most fearful thing in your life is your total addressable market shrinking because all that you have is day rate and utilization. So now they're coming to us saying, "Hey, can we work with you?" So in that case, instead of me having to build more vessels, will be awarded an integrated contract, but we'll use other people's vessels on our contract. The vessel is not the differentiation. The differentiation is the project management and the integrated operating model, and that's what we bring. And the physical floating asset is just a tool in the toolbox. We still have ours that are very specific to a type of technology, but we use others in other areas. And you'll hear us announce big integrated projects that were enabled by the vessel ecosystem. So very important. It allows us to keep our capital expenditure at a very low level, and you don't have to be fearful that we're going to come out and announce a big capital increase because of growth. We're actually going to grow the company without having a big capital infusion.

Right. And then very quickly on capital allocation, free cash flow, cash flow power. I know you've put 2 numbers out there, 50% EBITDA to free cash flow conversion, at least 60% of that free cash you returned to investors. Why is that the right number? How should we think about upside to both those numbers?

Well, I think it's a solid benchmark and it also demonstrates our discipline and our commitment to you as our shareholders. But quite frankly, given everything we talked about today, your all models will be able to quickly recognize that there's a significant amount of free cash flow generation left in our company. We will continue to be respectful and committed to you and distributing it in the most appropriate way. This year, we distributed well above the 60%. So I think those are the right benchmarks for now, but clearly, your models will indicate that there's going to be significant more free cash flow generation. We just said we're not going to ramp up our CapEx. We don't have to do the M&A. Others are doing M&A today. We don't have to because we got that out of the way in the -- when the cycle was in the early stages, and we're benefiting it from it now. So we did that back in 2015, 2016, and we're in a position now that we very much understand and are committed to not only having a very strong balance sheet, but at the same time, making sure that we maintain a level of distributions. We did just announce a $1 billion share buyback. I don't want to leave that out. That was a pretty big benchmark for our company, a much higher level than we've had in the past. And we also -- obviously, we also have our dividend at the same time.

Right. Doug, time flies when we're having fun and surely time flew by pretty quickly. But thank you. Thanks for the time, Doug.