TechnipFMC plc (FTI) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us today. We've got Doug Pferdehirt from TechnipFMC, CEO. Doug, thank you for taking the time.

Ati, thank you for having us, and thank you to Goldman Sachs for very productive day so far.

Appreciate that. Doug, maybe we start high level, if you can spend a few minutes talking about your view of the macro. How that's playing out? And maybe how you see your business feeding into that macro from that perspective?

Sure. Thank you. So when we look at the macro, our primary business is focused on the offshore more specifically to the subsea. We are really observing where the capital flows and where the capital flows are going. The capital flows are really driven by a few fundamentals. One is access, access to those parts of the world or to those reserves. The second is economics. And the third is the regulatory environment. And there's been a structural change. We started talking about this now 5, 6 years ago. But it's really becoming, I think, evident and more widely accepted or I would even dare to say accepted by everyone, which is there's this real structural change happening offshore because if you break up the world between kind of the Middle East, the offshore and the North America market, they're very different fundamentals in terms of access, great access in the U.S., but maybe the economics are a bit more challenging. If you look at Saudi or the Middle East and more generally, the access is more limited to external capital, but the economics are quite strong. But where they all come together in a perfect storm, if you will, is in the offshore, both in terms of access, in terms of the economics and as well as in terms of the regulatory environment and the stability. So when you put those together, it's attracting the capital today. On top of that, we see emerging countries. So if you will, new opportunities that simply haven't existed. And the amount of new opportunities for the offshore region is far beyond what it's ever been and certainly in my career, and we all talk about Guyana. We know about Guyana. We're super proud to be part of the Guyana and working with ExxonMobil, Hess and their partners in Guyana. But other countries are looking to do something similar, and there's -- the reserves are there, the seismic is there. The exploration drilling has been completed. So they're trying to pull themselves forward in the queue to try to attract that capital to make sure that their reserves also get into the energy mix. So the dynamic right now offshore -- pardon the pun, but it's much more dynamic than it's ever been. The opportunity set is far richer than it's ever been. And we are, we believe, very uniquely positioned in that market.

Doug, you've also gone through over a longer period of time, there's been a business model change, and you've gone through a few changes in how you price customers and how you think about the whole equation. Maybe if you can help us understand what that change has been, where you are today, where do you see that evolving over time?

Sure. And you'll have to cut me off because this is one I could go on for a very long time because it's been a journey, and it's been a complex journey. But the journey is behind us, right? So that's the main message is we've done the difficult, the bold, the complex moves. We're now fully focused on executing and moving forward and seeing the benefits of that. So I'll try to be as brief as I can, but you had an industry that was always admired. I mean what we do is pretty fascinating. The type of technology challenges that we face are very similar to NASA. NASA is probably the partner that we collaborate most from a technology point of view, be it from automation and control, be it from material sciences. The atmospheric conditions that NASA has to deal with are at a similar magnitude of technical challenges what we deal with on the sea floor. Many people think of the sea floor as, I don't know, diving down and picking up sea shells. Where we are placing this equipment is 1 mile to 2 miles deep in the water column. So over 10,000 feet below the surface of the water, extreme conditions in terms of corrosivity, in terms of pressure and in terms of temperature. You have well fluid coming out that can be 350 degrees Fahrenheit but you're in an environment on the sea floor that's about 35 degrees Fahrenheit. So that impact on the material is just absolutely dramatic. So it takes really advanced material science. And then it's 10 miles -- or excuse me, 2 miles deep, 10,000 feet deep, has to survive a lifespan of 25 to 35 years depending upon the technology that's being used. And there's no real way to intervene other than through robotics. So it's all done with advanced automation and control and robotics. There's no human intervention. So it really is quite space age, if you will, technology that we do. The problem is we were in a scenario where every single project we were doing things for the first time. We were always doing first article and when you do first article, you are in a bespoke model, which means you don't create leverage or you don't get any benefit of scalability. So if you will, you're somewhat limited in the value that you can create. At the same time, our customers were very -- it was customary amongst our customers to do each project with a new or different piece of specifications, which led to a brand-new piece of equipment even for the same customer in the same region, one field to the other field. And we needed to find a way to move that forward. So when we looked at it, we saw -- actually, there was really 3 dimensions that needed to be addressed. The commercial model needed to be addressed, the product architecture needed to be addressed. And then thirdly, internally, we needed to address our operating model. And we've been working on all 3 of those for as much as almost 10 years now. It led to the merger. It led to the creation of TechnipFMC and now we're seeing the benefit of that. And I'll pass it back to you if you want to dive into those 3 categories.

Yes, sure. Maybe we can go through each one of them. Maybe the technology side, we've spent a lot of time talking about Subsea 2.0 configure to order, how that improves your time efficiency. If you can talk about why that efficiency is important, what that is doing to your direct orders and how that has stood out against what the industry practice has been?

Okay. Thank you. So Subsea 2.0 being let -- this new product architecture. So when we were going to bespoke or the first article on every single project, that's what it was. It was something we had never built before. We were going to build it for the first time for use on that project never to be used again. And that's what we did, and that's what -- how the industry kind of developed. Our customers understood that they're saying design one, build many or standardization was beneficial. I mean our customers clearly understood that. But there wasn't a -- the only option was choose one supplier's architecture and make that the standard. Well, that didn't really work, right? Because think about the automotive industry. You don't want to buy the same car as your neighbor, the same car, same color, same configuration, you want to have some input into that vehicle and how it's built for you. But the automotive manufacturer certainly doesn't want to engineer and design one car and sell one car to you. So what the automotive industry figured out was configurability versus standardization. So we learned. We actually work very closely with the Lean Institute in Toyota. They were very helpful and worked very closely with us to go and look at what we offer, this architecture on the sea floor, and really break it down into configurable components. So again, the easiest way to think about it is the automotive industry. The automotive industry has -- and automobile has hundreds and -- has thousands of parts in it. Let's just think about the transmission. The transmission has thousands of parts. But when you order a car, you don't order the gears or the gear lube or the transmission casing, you either get a manual transmission or an automatic transmission. Same as engine sizes and things. So they broke them down into configurable components and then they gave you the consumer the option of configuring your own vehicle. Now you get your vehicle delivered, you feel really good. Your favorite auto manufacturer, whoever it is, built that just for you then you drive down the street and you view of children, like my daughters, they point out that there's a car that looks just like yours a week after you bought it. And you realize they probably built thousands of this exact configuration. But when you ordered it, it felt like your own. This is what we've done with the Subsea industry. So with the 2.0 configurable product architecture, we actually have an app now. So the client can go on their favorite device, they have scrolled on menus, just like you do when you order your vehicle. It's how you order subsea equipment, 5,000, 10,000, 15,000 or 20,000 psi. 200, 350 or 400 degrees Fahrenheit, flow module, no flow module, et cetera. When they do that, we go straight into assembly and test. Just like the automotive industry, they don't engineer that car for you, they assemble, test and deliver that car for you. We assemble, test, deliver and commission it on the seabed. So it's the same idea. That has taken out approximately 9 months of engineering that was done at the time of order, just to be able to place orders in the supply chain because remember, these things had never been built before. There was something unique and different about what the client was asking for. So what that leads to then is a completely different operating model. So the second part is this different operating model that we now have, which allows us to use that leverage, to use that scalability. Things are interchangeable between projects, but even between clients now that before were from the time of the forging all the way through to the time of the final delivery, there was no way to change or alter that order. We now have much more flexibility and much more adaptability built into the way that we operate the company. This was created again, from a business that had no leverage or scalability, we now have that built into the company today. And we're just in the early stages of benefiting from that because we went through the whole process of the engineering 4 years, the most extensive engineering program we've ever done was to take this incredibly complex because the architecture is bigger than the size of this ballroom. I mean we have massive spreads on the sea floor. And we had to figure out a way how to get that down into these configurable components versus thousands of individual parts and then make it, take it out to our customers, make sure our customers accepted it, qualified it and subscribe to it. So we've been commercial. We've been selling this now since late 2017, we introduced it into the market. It makes up about 50% of our orders. We're now seeing that flow through our manufacturing plan. Why is that exciting? Because to me, 2025 in the future years are very exciting. The hard work is done, as I said before. Now we see it flow through the plant. It is fundamentally change the efficiency of the company. We knew on paper theoretically that we should be able to double our throughput capacity. We've now demonstrated and exceeded doubling our capacity. So imagine the same capital investment, no new investment, I can put twice as much through the same footprint. And we're now finding out it's going to be more than twice as much. We're learning as we go as we get more of this flowing through. So 50% of our orders, about 20, half of that is flowing through the plant. That will continue to ramp up, as it converts from orders into the assembly and test manufacturing assembly and test, and we're seeing the benefit of that now. So it's actually an extremely exciting time for the company to see this come together. I didn't touch on the commercial model. I don't know if you want to handle that. And then the third element was to really fundamentally change the cycle time of offshore projects, which is really the key. Offshore projects have been notorious for being long, expensive and unfortunately, often not being delivered on time. So we recognize that to really make this a structural and sustainable change for the offshore capital flows as we talked about early on, was we had actually made fundamental change in the delivery model. So the commercial model or the delivery model is now what we call integrated projects or I for Integrated EPCI, engineering procurement, construction and installation. So we merged with Technip to create TechnipFMC so that we would have all of those capabilities under one roof. The result of that is when I take an iEPCI, an integrated project, along with the Subsea 2.0 and that faster cycle time, I can deliver a project approximately 1 year earlier than I used to and 1 year earlier than my competitor who still is in a 1.0 nonintegrated world. It's created a tremendous moat around our company. We're humbled by that. We don't take it for granted. We continue to work on that every single day. We can talk about other technologies that we're working on, but it's been truly game-changing and positioned us uniquely in the industry. This has led to -- if there's one number that you take away from this, it's led to 70%, 7-0 percent of our business being direct awarded to our company. This is just unheard of, never goes out of the competitive tender because what we have built is so unique, so differentiating and quite frankly, so interesting to our clients.

In terms of the other technologies, if you can spend a couple of minutes on the all-electric option, what are you seeing there? You have a pilot project, I think you are working on with BP. Any kind of color there and how you're thinking about that part of the business?

Sure. So if you look at a traditional subsea architecture today, the valves -- everything is actuated with hydraulic controls. Hydraulic controls are dependable. They've been around forever. You all flew on airplanes in the past that were hydraulically controlled. You don't anymore. There's obviously benefits to electric over hydraulic or electric controls. The main benefit in subsea is the distance that you can send the signal with limited loss. So we all know electricity can go a long way with very limited loss. That's why you see very long transmission lines and underwater cables. Hydraulic control means you're pushing hydraulic fluid. When you hit the brakes in your car, assuming they're hydraulically controlled, you hit the brake, it pushes the fluid out to the caliper, puts friction on the wheels, so it slows down. Same thing in subsea, except remember, we got to go 2 miles, up to 2 miles vertically down to the seabed, and then you can go out another 5, 7, 8 miles in a star shaped pattern to get to the individual wells. That's a very long distance. It creates latency. And it also makes you build equipment called an umbilical that's very complex and very expensive. You can replace all of that with the electric controls with basically a long extension cord. Now it's a little more elegant than an extension cord, but with a long power cable. And that's all that you need. So the contract that we announced earlier or towards the end of 2024 was the Northern Endurance Partnership. It's in the U.K. It is a carbon capture and storage project. We're extremely excited about this. We are the company that enables that carbon to be able to take it offshore and to inject that CO2 into an aquifer for permanent storage. Obviously, important for the world, important for society. but enabled by the all-electric system because the distance that we're going from, from the emitters onshore to the actual aquifer where it's being stored is 145 kilometers. You can't push hydraulic fluid 145 kilometers or you'd have to have a huge pipe and you'd have -- it would be expensive, you'd have massive friction losses, et cetera or you would have to come up in intermediate locations back up to the surface, so you have to build a big surface floating structure, you'd have to reenergize, pump it back down and so forth and so on. In this case, from shore to the injection point on the seabed, there is nothing visible on the water surface, all enabled by the all-electric system. So this is the industry's first all-electric application. We strongly believe that carbon transportation and storage market will be primarily driven by this type of all-electric subsea technology. And we also fundamentally believe that the right place to be storing carbon is offshore, not underneath of residential communities and onshore but taking it offshore.

Doug, as you think about the opportunities in '25, both in terms of inbounds and what might be incremental to those inbounds, what does the market look like in terms of what customers are talking to you about?