TechnipFMC plc (FTI) Earnings Call Transcript & Summary

Hi, everyone. I'm Marc Bianchi, U.S. oilfield services analyst here at TD Cowen. We're excited to be joined by Doug Pferdehirt from TechnipFMC -- Chairman and CEO of TechnipFMC. So thanks, Doug, for being here. I'll -- I guess, maybe not everybody is as familiar with what you guys do. So maybe give us like 1.5 minutes on what you do just to get us going.

Marc, I don't think I've ever given an overview in 1.5 minutes, so that's a challenge. But let me first start, Marc, by thanking you for allowing us to be here and for the quality of research that you do. Also to TD Cowen, to everybody here in attendance and for those joining via the webcast, thank you for your interest in our company. It's very humbling. Look, we looked at the industry back in 2012 to 2014, and we made a decision that we felt there needed to be a material change in the way the business was done offshore in order to ensure that our customers would have confidence again and that the capital flow would go from the U.S. unconventionals, which at the time was attracting a significant portion and a growing portion of the total capital expenditure back to offshore. That was about bringing certainty back to these offshore developments. The challenge was always the certainty and the delivery of these very large and complex projects. So we knew we had a role to play that we had to materially change the way that we operated as a company. That led to us developing a configurable -- configurable architecture. So much like the auto industry, moving to where there were subcomponents that were pre-engineered, predesigned and were configurable based upon the customer need. So the customer experience was still, I'm getting something built for me as when you place your order for an automobile. But in reality, they're not, and we're not doing any engineering specific to your requirements. That's all been done upfront. That in itself removes 9 to 12 months of detailed engineering -- and it also removes a great degree of uncertainty and allows us to ensure the delivery of this very complex architecture when as promised. Beyond that, we said, okay, this is good. This is important, but is there more that we could do? So we're not a company that focuses on consolidation. We're a company that focuses on integration. What can we do in the adjacent space that will create greater value towards our singular purpose, which is the relentless pursuit of the reduction of cycle time, again, making offshore projects more economical and with greater certainty of the outcome of the delivery of those projects. That led to a merger between FMC Technologies and Technip on the 17th of January 2017, a long time ago, almost a decade ago. And here we are today to where the market is largely -- we call that iEPCI, integrated engineering, procurement, construction, and installation. On those projects, we're the architect, we're the builder, and we provide the life of field services contract. So we are literally engaged with the customer anywhere from 20 to 30 years. So it's a very intimate long-term relationship that we build with our customers. The success of these 2 things, moving the business to being integrated, which it was never in the past. So it used to be up to 14 different contracts, now a single contract with a single company and the Subsea 2.0 architecture, both unique to our company, have led us to where we are today to where our customers are rewarding us by recognizing that value because we're creating the value for them by the relentless pursuit of reduction of cycle time, improving their project returns. And they're recognizing that and rewarding us with now 80%, 80% of the business being direct awarded to our company in a market that's growing. It's a humbling and exciting position to be in, Marc.

Good overview, Doug. I think -- so this sort of plays into one of this ability to lower the cost and make offshore more competitive than it was a decade ago. And I think you have this view that we're not really going to be necessarily in cycles anymore because really the marginal barrel -- or the lowest cost barrel is offshore enabled in part by you. But can you just talk about maybe your world view of some of the other sources of supply and why you think offshore is really going to get the majority of the capital as we go forward?

No, it's a fair question. And also, I will acknowledge that the lowest cost barrel is in the Middle East. But you have to have economics and you have to have access. So the lowest cost barrels in the Middle East, but there's very limited access in terms of capital flows by other than the national oil companies involved into those regions or into those countries or kingdoms. So as a result of that, they have to go to the next best economics that has access and that's offshore. And it's really as fundamental as that. We saw this coming back in the third quarter of 2012 -- 2011, excuse me, 2021, we started talking about this. At the time, it seemed a little far-fetched, but you could see how that was setting up because at the same time, the economics in the U.S. unconventional were deteriorating. Plenty of access but deteriorating economics. We knew with what we had done with Subsea 2.0 product, configurable product platform, we knew that what we did with the iEPCI and having this integrated model and all of this capability in-house that we could drive that cost curve down. So we had our own internal ambitions. And by doing so, we realized that we could improve the economics offshore again. Then what we had to deliver at the end of the day was certainty. That was the variable because our customers were still hesitant. Yes, we get it. We see it. We believe it, but you've got to deliver it. And I will tell you, we have yet to deliver an iEPCI 2.0 project that wasn't followed up by a direct award of subsequent projects. That's how successful it's been. It's given our customers the confidence back. They're prolific reservoirs offshore. These are prolific reservoirs offshore. No fracking, no artificial lift. They flow naturally, very low decline rates, 4% to 6% per annum versus the unconventionals 30-plus percent over the first couple of years. So a very different setup in terms of your -- the size of the reserves, the ability to be able to -- the recoverable rates are much higher and the decline rates are much lower. So very favorable economics. It's just about making sure that the business is done the way that it was intended to be done, meaning on time, on schedule, and that's what we're delivering today.

And there's really -- it's unique what you're doing, but another competitor is attempting to replicate what you're doing, but they're a ways behind. Maybe just talk about like the lead that you think you have...

Well, there's -- of those 2 components, let's break it down into the product architecture and the integrated model. So in terms of the product architecture, this was an extensive engineering effort. It took a -- we started this in 2013. We announced it in 2017 and started taking orders in 2019. I mean it's a huge body of work. There is no one else trying to do that today. There are companies talking about standardization, but standardization is not -- it's not configurable. I don't think configurization is the word. But there's a very distinct difference because we started focusing on standardization, too. Standardization is simple, buy my piece of equipment. And a customer, just like you, it would be like the auto industry saying, buy my car. It's the only one I'm going to make, and this is what I want you to buy. No, you want to have choices. You want to have color choices, you want to have engine size choices, whatever it may be. You want to have some choices. That's what we mean by configurable. So that's -- so it's just a different approach. Clearly, I think the market's adoption of the configurable platform is indisputable. And we have a significant advantage. And now we're well over 50% of our orders are coming in with this 2.0 architecture. Now there will always be space for this kind of bespoke one-off kind of building and our competitor is kind of filling that void, but it is not somewhere where we aspire to participate. And then if you look at the integration side, look, there's a fork in the road when you come to -- from strategic decisions in terms of making M&A type transactions. You can focus on consolidation or you can focus on integration. I will tell you, consolidation -- the outcome is more certain because you're just buying somebody who does what you do and then cutting cost and trying to get benefit from it through synergies, cost synergies. That's a well-known playbook. And integration is often less traveled of the 2 paths. And in our case, had never been done before. So look, it was not obvious. We chose that path, and our competitor has now chosen the path of consolidation. So I would say we're actually heading in 2 very different directions. And our clients see that and our clients recognize that. And there's space for both of us, but we have different strategies, and we're proud of what we've delivered.

Okay. You've said this, and we've had a few sessions together over the last couple of days, the relentless pursuit and reduction of cycle time, I think I've got it down now. Like talk to us about how far along you are on that journey and what it means for the business? What does it mean for margins? What does it mean for capacity? And what kind of advantage do you think it gives you?

So I've always been on the service side of the table. I started delivering newspapers before school and then many other service jobs throughout my career. So let me start with what's most important, which was what is the benefit to our customer. That's all that matters. And that's a thing. You have to focus on your client. You have to focus on creating success for your client. So the relentless pursuit of reduction of cycle time translated for our customer means higher project returns. And not only higher project returns, but higher project returns with certainty of the outcome. which is why they're spending more capital offshore, why they're exploring offshore again, why this is the big focus for them in their portfolio now that maybe it wasn't over the last 15, 20 years because of other distractions that had occurred in the global energy mix. So that's most important to me and keeps me aligned with my customers' interest. Now we benefit as well. And how do we benefit? Because by focusing on the relentless pursuit of cycle time and having the 2.0 and the iEPCI where the competition doesn't, it creates just greater differentiation for us and aligns our outcome with the outcome of our clients. So people often use win-win. This truly is a win-win. Our clients are winning because they're getting improved project returns with greater certainty, and we're winning because they're willing to give us a greater portion of the economic value that we create. That's only fair. So both sides are feeling good about it and both sides are winning. Whereas if you're in a commodity business and you're just trying to increase day rates or you're trying to increase pricing, that's obviously counterproductive to your client relationship. Our client relationship is aligned. I mentioned earlier that we're the architect as well as the builder. So we are sitting there at the table working with them intimately to design the architecture to meet their economical hurdle rates 2 to 3 years in advance of that project actually becoming -- moving into the execution phase. So we're aligned from the beginning. And this is why they have the confidence in us to, again, honor us by giving us 80% of their -- honor us by us receiving 80% of our business as a direct award, never going out to a competitive tender. So it was all about getting those aligned. Now maybe to further answer your question, Marc, is it over? Have we achieved -- we achieved that outcome? Well, yes, but only partially because we're only about 1/3 of the way through this journey. So we still have significant areas that we are convinced that we can reduce cycle time and improve the certainty of the outcome, hence, improving clients' project returns offshore, which will lead to greater value to us and to our shareholders at the same time.

So I'm sure this is a question on everybody's mind is like how do we translate that opportunity into margin upside or business throughput or something that I can put in a spreadsheet. How -- what do I do with that?

Well, look, let's just look at what's happened so far. I think the numbers speak for themselves, right? You've seen that incremental margins that we've been able to deliver. Again, I shy away from talking about it because it's more important for me to focus on my clients' returns and my clients' project returns. But yes, we benefit from it as well. But this isn't something that -- this isn't a concept that I'm trying to convince you of here today. This is the way we've been operating. Remember, January 17, 2017, we created TechnipFMC. November of 2017, we launched Subsea 2.0. So this has been going on for a while. 50% of our inbound in 2024 has been iEPCI or these integrated projects. We've said this year, Subsea 2.0 is well over 50% of our inbound. So this is happening today. Our customers are realizing we are -- we have delivered iEPCI 2.0 projects multiple times for our customers today. So they're experiencing it already, and they're seeing that benefit. So you see what we've been able to deliver. We've already given 2026 guidance, which I think is probably unusual for most companies. We've already done it. We're a backlog company. We have significant visibility. And yes, it included more revenue and more margin. So I think you're seeing it build out. And we believe that as we continue to convert more of our backlog to this higher-value backlog, iEPCI and 2.0, both for our clients and for ourselves, we'll continue to be able to grow margin as a result of more of that flowing through our execution. And so you're building that sustainability that is not necessarily driven by external factors. It's because of the difficult decisions we made almost 10 years ago and realizing the benefit of those now in our results.

I think someone had asked the question recently about where can margins go? And I think you gave a really interesting answer like, I don't want to have a target and I don't want to give targets to my people because we get some other benefit from them thinking through how to do that. So maybe you could just talk a little bit more about that because there's some interesting organizational things that you guys are doing that I don't think comes out as often as it could.

Sure. And I know I wasn't going to get away with the prior answer, Marc. So I knew you're going to follow up, and that's a fair question. So look, we get asked that question a lot because there's obviously interest. What I have said, and I appreciate you saying it was an acceptable answer. In some ways, I could understand it. People may not be satisfied with it, but it's the truth, which is I don't know where the margins are going to go. And that doesn't mean I'm worried about them going down, let's be clear. But I don't know where they're going to go because, again, this is a new experience for us as well. But what I do know is that we have real tangible evidence that the cadence and the flow rate and our ability to be able to deliver these complex projects in shorter and shorter cycle times. And we're not shaving days, we're shaving months and years off of a project on a consistent basis. And we know we're -- as I said earlier, we're only in the early innings or early -- I'm a hockey player. So we're only in the first period of a 3-period match here. I mean there's a lot left to be done. But look, me setting a target in this environment, I do think would be counterproductive because the organization where we have gone as an organization is dramatically different than where we were just 5 years ago. And everybody talks about transformations, and I get it. But we'd love for you to come and see how we operate today. It is a very different company. I had to change my behavior significantly. But as a result of that, you've truly empowered 22,000 women and men and the output from that is just tremendous. Everybody is looking to shave a minute, an hour, a day in everything that they're doing. This is really lean. I mean, we have tried to model a lot after Toyota, who has been hugely successful in this area. They've been very supportive in the Lean Institute in helping us through this journey. And a lot of companies get lean through their manufacturing and then they stop. We've taken this through the entire organization, every function, every person, including myself, has had to transform their behavior in the way that they work to where we're all focused on the same thing, which is the output which is relentless pursuit of reduction of cycle time, i.e., improving our clients' results. And our clients see that. This is all about the clients being successful and then we're successful as a result of that. So the cultural change within the company is dramatic. And yes, so maybe I'll pause there. But it's -- what I do know is that there's certainly more fuel in the tank. We have a higher quality backlog than what we're executing today because of what we're putting into it, more iEPCI, more 2.0, higher quality. All that will need to be executed. Today, it's another 1/3, not to be confused with the prior 1/3, but only about 1/3 of our manufacturing capacity is actually executing Subsea 2.0 work today, but yet 50% of the inbound is coming in at 2.0. So by definition, as that flows through manufacturing, that will go to 50%. So we should see a benefit from that. And again, I just want to keep repeating this because this is the key. It's not about our margin going up. It's about our clients' project returns improving. And as a result of that, our margin is going up. That's how you keep the relationship with your customers.

Yes. On the topic of lean, you -- I think this is what you were alluding to on the earnings call, where there's sort of an opportunity to start to leverage lean maybe further downstream into some of the development. Is there anything more you can say about that? And if there's a plan to say more in the future, like let us -- when should we be expecting to hear more from you about that?

Okay. So let's just go back quickly through the history of it. So 2013, we launched this concept of configurable architecture, started working with the Lean Institute on this. We were FMC Technologies at the time. So our scope was the seabed. FMC Technologies was everything that sat on the seabed, which, by the way, everybody talks about a subsea tree. It's far greater than a subsea tree. Everything is big, the size of this room, and it's a small city down there. So a lot of things are on the seabed. But the seabed needs to be reconnected to the surface. That's what led to some smart people in the company saying, well, maybe we should do an integrated approach, not do a consolidation, but do an integration. And that's the area that Technip played in, if you will, in the water column, that's called umbilical risers and flow lines. So we brought that into the portfolio. We created the iEPCI, the integrated commercial model that we've talked about, again, about shortening cycle time, removing redundancy. But we've never really taken the opportunity yet to take all of that -- all those products and put those -- fully move those to be configurable, okay? Just because it takes a while. As I mentioned, 2013 and 2017 as we went public with the seabed. So you should expect that now that's the benefit of becoming one company. We couldn't have done that in a joint venture or an alliance because your interests are not aligned enough. So that's why we did the merger. And now we're looking at all of that other architecture, which there's a significant amount in the water column and remember, when we talk about water column in subsea and this stuff just gets me super excited, and I might not get everyone excited, but we're talking 1 to 2 miles deep, 1 to 2 miles of water before you get to the seabed. So this stuff is pretty amazing. And down there where no man has ever been, all remote automation and control robotics. We have robots on the seabed working on stuff. You just can't go down there. And now we have the opportunity to take 2.0 and apply it to all of those -- that other part of the architecture. And we've been working on that, and we're making good progress, but that's an upside, and that's what I was referring to.

Okay. Great. Well, maybe to talk a little bit about kind of the market -- current market state, the outlook. So you've been -- you've guided to and have been delivering $10 billion of orders in Subsea per year. It's from an outsider, that's like a remarkably consistent number. Is there something that drives that? Is -- there's a certain amount of sales capacity to work through projects with customers, maybe there's the customers' capacity. Is there any reason that 10 is like a magical number? Or that's just maybe it's coincidence that we've seen 10 for 3 years?

So I'm just going to have a little fun, right? Better than 9, right? So -- but let's go back to how the 10 came to be because I think that's important. 2021, wouldn't have been as many people in the room and probably wouldn't have been as many people on the line. 2021 was a very different setup. There was a lot of skepticism. We're out there saying projects are there. We're talking to our clients. Capital is going to flow to the offshore again and a whole lot of doubt and a whole lot of skepticism. So in 2021, we put out a 3-year target. And the target was over the next 3 years, we would achieve $30 billion. Now we did that with a lot of science behind it, but we gave a $30 billion target over 3 years, never intending that it was going to be $10, $10 bill, $10, $10 million. And by the way, it hasn't been. It's been $9.7 billion, $10.3 billion. But we weren't expecting it to be as consistent as it was because these are -- some of the projects we do are $1 billion, $1.5 billion projects, and they could fall on December 31 or they could fall on January 2, and you don't worry to do on an annual basis. It has just so happened to have been actually quite linear beyond what I would have expected. But we set a 3-year target of $30 million, which is how -- I think it's important to go back and realize that. We weren't saying it's going to be $10 million -- did I say $1 million?

Billion.

We didn't say it was going to be $10 billion per year every year for the next 3 years. We just said it was going to get to $30 billion. Now we said for 2026, we've already said we expect it to look like 2025, which will be the $10 billion range. So we do expect that again next year. The market size is growing. We've talked about that because of the capital flows going offshore again. We see exploration happening. That's going to drive more capital flows and more projects. So that market is going to grow. So is there the capacity to grow? Yes. But I think we're in a good spot right now with revenue growing, EBITDA growing, solid inbound, meaning backlog continuing to grow, I think, is a good place to...

Maybe we just got a few minutes left, and I have a couple I want to ask on cash flow before we get there. Just in terms of the frontier market opportunities that you're talking to customers about. So I think we all know, all right, Suriname, Namibia, there's maybe West Africa starts to come back, maybe there's Equatorial margin in Brazil. But like what are the next -- we know the Subsea opportunity slide. What's the next stuff? When we update the subsea opportunity slide a year from now, 2 years from now, what's going to be on there that isn't on there now, like geographically-wise, not like customer-wise or anything like...

And I know we're going to run out of time, but I got to step back for a minute. Imagine what Marc just said. What he just said was 4 countries that weren't on the map before from offshore production or from production period. In my career, there has never been a period of time where in a couple of years, you've added -- it's just profound. So I just want to be careful, oh, Suriname, Guyana, Namibia, Mozambique. Holy heck, this is amazing. This is truly amazing. And I think we're taking it for granted, not you, Marc. But I just want to make sure that we realize this is significant and the growth in Guyana, where we are honored and humbled to be partnered with ExxonMobil and have provided 100% of their infrastructure in the country. Suriname, we will do the first project there, the GranMorgu project for TotalEnergies. We're very grateful for that. iEPCI 2.0. Mozambique, we're working for ENI in Mozambique today. Just -- it's profound. I mean don't understate Equatorial margin you even throw in there. Equatorial margin is potentially another massive development. Now this is in Brazil, which is already a large country, a large oil-producing country, but this could be another massive growth opportunity within Brazil. The Paleogene in the Gulf of Mexico, this is the 20,000 psi deeper horizon in the Gulf of -- I'm sorry, Gulf in the U.S. Gulf. I mean, this is dramatic and these are providing significant growth to the offshore that even without what are all those other countries that are potentially going to come online, just focus on those. Those are real. Those are material. Those are going to drive activity well beyond the end of the decade. Now to answer your question, I get interested in other countries in East Africa? I won't be specific, but there's other areas in East Africa that could potentially share the same geological feature as Mozambique. I get excited about the Eastern Mediterranean. I think both the activities from Israel to Egypt, but now in between, that could also come on. You could add 2 to 3 new countries producing in the Eastern Med. I get interested in the southern part of Africa beyond Namibia, which is obviously very exciting, but beyond Namibia. We didn't mention Indonesia. Yes, it's been a long-term producing energy country. But now with the gas projects in Indonesia, that is growing quite rapidly. There's other areas that are probably further out. There's large gas reserves offshore Colombia. It's very deepwater, but it's certainly something technically we could accomplish for our customers. So yes, there's a lot more to be excited about. But realize what the setup that's there already is significant and material.

Excellent. All right. I'm going to squeeze one more in, and we're probably going to go over. You just had a buyback reauthorization. You've been consistently buying back a lot of stock. And I think your message before had been we're really focused on buying back the stock rather than raising the dividend. But as something occurs to me, it could be a signal to send to the market about the stability of the business if you raise the dividend. How do you think about the decision process between buyback and dividend?

No, no, it's a fair question. And look, it is one that we discuss often with our Board. And certainly, last quarter before we announced the increase of the buyback program. But let me be very clear. What we announced was a $2 billion buyback. That's a large portion of the outstanding shares of the company. So the reason I'm emphasizing that is I think that exudes confidence, right? So it's not that a dividend would exude more confidence than a $2 billion buyback on top of what previously had been a much smaller buyback program. Look, we think it's a great investment. We look at -- just look at the numbers. Just look at the fundamental metrics of the company, it looks like it should be trading at a much higher multiple. If you do a blind test and put those numbers against any industrial company, you're going to get a very different result. We believe that. We believe the investment community is recognizing and acknowledging that. And therefore, we believe that's the best place to return the cash to our shareholders, and we are honored to be able to do so.

Awesome. I'll leave it there, Doug. Thanks a lot.