TechnipFMC plc (FTI) Earnings Call Transcript & Summary

[Audio Gap] chair and Chief Executive Officer.

Thank you, Matt. Good morning and good afternoon. Thank you for participating in our second quarter earnings call. I'm pleased to share with you another strong set of financial results, driven by robust execution across the entire organization. Total company revenue in the period was $2.8 billion. Adjusted EBITDA was $601 million with a margin of 21.8% and when excluding foreign exchange impacts. We generated free cash flow of $488 million and distributed $440 million through dividends and share repurchase, delivering on our commitment to return the majority of free cash flow to shareholders. Now moving to Subsea orders. We achieved $2.5 billion of inbound in the quarter, including four announced awards. Much like greenfield developments, Clients are now applying a portfolio approach to brownfield expansion opportunities to improve outcomes across multiple projects. These projects leverage the significant infrastructure investment already in place as clients look to prioritize their most economic opportunities. By developing projects utilizing a consistent methodology and standardized solutions, TechnipFMC can help reduce cycle time across the portfolio of assets, significantly improving overall economics and helping clients advance projects more quickly. VAR Energy's recent iEPCI awards for the Ophelia and [Goa Nord] projects in the North Sea is a great example of this approach. We will utilize our integrated model across multiple fields through coordinated portfolio execution to help deliver first oil within two years. In the quarter, we were also awarded Subsea production systems by Equinor for a portfolio of subsea tiebacks, leveraging our standardized solutions we can deliver these projects with scheduled certainty and lower cost for Equinor, which has plans to develop a total of 75 subsea projects on the Norwegian continental shelf over the next nine years. Looking ahead, we will continue to benefit from a resilient and expanding offshore market. We see a strengthening order trend in the second half of the year, providing us with confidence in achieving $10 billion of Subsea inbound in 2026. Our Subsea opportunities list once again stands at a record level, providing a robust pipeline of opportunities for projects that will extend beyond the end of the decade. Our visibility is further enhanced by deeper client collaboration and earlier engagement that bring TechnipFMC into the project development process much earlier than ever before. In the quarter, we signed an integrated global collaboration agreement with a long-standing partner, which builds on the principles that have made our iEPCI integrated commercial model successful, combining early engagement, field optimization, and execution capabilities within a single framework. The expanded collaboration engages TechnipFMC up to a year earlier in the project development cycle before critical subsea architecture and investment decisions are made. The global model will extend beyond individual projects, enabling optimization at the portfolio level. for also providing greater visibility into future development opportunities. In Subsea, we consistently demonstrate our ability to execute at a very high level. This has brought certainty back into subsea projects giving our clients greater confidence in moving forward with final investment decisions. We expect this will drive further strength in capital flows to offshore markets. In Surface Technologies, our execution continues to support margin improvement in 2026 despite lower revenue versus the prior year. Here, our strategy has been to focus on the right customers in the right geographies and with differentiated technologies where we can achieve higher returns. In the Middle East, our Surface Technologies team was recently recognized by ADNOC. For our significant role as a local manufacturer and partner within their in-country value program. This program is central to the UAE's plan to redirect significant investment into the local economy in the years ahead. Being a recognized partner positions TechnipFMC well as the program expands and reinforces our commitment to growing alongside ADNOC, and the UAE's industrial ambitions. This is a visible endorsement of the investment we have made in the country and the trust they have placed in our people and local operations. Let me close on a few points. I'm extremely pleased with our second quarter results. The strong financial performance in the period clearly demonstrates the solid momentum in our execution, thanks to the dedication of the 22,000 women and men of TechnipFMC. This gives us the confidence to raise our full-year expectations for total company EBITDA. Our order outlook for Subsea remains robust. And with a book-to-bill above 1 in the quarter, we see a strengthening trend in order activity in the second half of the year. We also reiterate our expectation for a step-up in inbound orders in 2027 and extending through the end of the decade. This growth will be supported by iEPCI, Subsea 2.0 and Subsea services, much of which will be direct awarded to our company. And as our clients move toward more collaborative approaches to develop their offshore portfolios, we will leverage our iEPCI execution model and our configurable solutions to drive further efficiencies and higher capital returns for both our customers and TechnipFMC. I will now turn the call over to Alf to discuss our financial results and importantly, our strengthened financial outlook for the balance of the year

Thanks, Doug. Inbound in the quarter was $2.7 billion, driven by $2.5 billion of subsea orders. Revenue in the quarter was $2.8 billion. Adjusted EBITDA was $601 million when excluding a foreign exchange loss of $19 million. Turning to segment results. In Subsea, revenue was $2.5 billion, a 13% increase versus the first quarter. The sequential revenue improvement was driven by increased project activity, particularly iEPCI projects in the North Sea and the Mediterranean, partially offset by lower activity in Africa and the U.S. Gulf. Adjusted EBITDA was $577 million, up 31% sequentially. The due to strong execution and higher project activity. Adjusted EBITDA margin improved to 23.2%. The -- in Surface Technologies, revenue was $276 million, a decrease of 3% from the first quarter. The decrease was driven by reduced activity in the Middle East due to the ongoing conflict. -- and lower activity in North America. This was partially offset by strength in other international markets. Adjusted EBITDA was $5 million, an increase of 1% sequentially. The -- adjusted EBITDA improved sequentially due to strength in international markets despite the revenue decline in the Middle East. Adjusted EBITDA margin was 18.1% and up 70 basis points from the first quarter. Turning to corporate and other items. Corporate expense was $26 million Net interest expense was $4 million and tax expense was $114 million. Cash flow from operating activities was $548 million, with capital expenditures totaling $60 million in the quarter. This resulted in free cash flow of $488 million. We repurchased $420 million of stock in the second quarter when including $20 million of dividends, total shareholder distributions were $440 million. Cash and cash equivalents was $992 million. We ended the quarter with a net cash position of $590 million. Moving to third quarter guidance. For Subsea, we expect revenue and adjusted EBITDA margin to be in line with the second quarter. For Surface Technologies, we anticipate revenue to increase mid- to high single digits sequentially with an adjusted EBITDA margin of approximately 17.5%. Moving to our full year outlook. Beginning with Subsea, we now expect both revenue and adjusted EBITDA margin near the top end of their respective guidance ranges. For Surface Technologies, we now see revenue closer to the low end of the guidance range with adjusted EBITDA margin just above the midpoint. We continue to expect corporate expense of approximately $120 million. With these updates, we are increasing our expectation for total company adjusted EBITDA to approximately $2.19 billion for the full year when excluding foreign exchange. And finally, we now see full year free cash flow tracking towards $1.45 billion, which is the high end of our guidance range. In summary, we delivered strong second quarter financial results with Subsea margins exceeding 23%, helping drive total company adjusted EBITDA to $601 million, excluding foreign exchange and free cash flow expanding to $488 million. We returned $725 million in total shareholder distributions in the first six months of the year, which equates to 95% of free cash flow. Given our long-term expectations for the company's financial performance, we continue to see share repurchase as an attractive use of free cash flow. We have increased our expectations for total company EBITDA for 2026. And lastly, we remain confident that in 2027, we will grow Subsea inbound revenue and adjusted EBITDA margin. Operator, you may now open the line for questions.

[Operator Instructions] Your first question comes from the line of Derek Podhaizer with Piper Sandler.

I guess maybe, Doug, let's start with your opening comments around the brownfield opportunities that you're seeing. You talked about delivery of first oil in 2 years brownfield or step-outs. I know previously, you've talked about electrification of the brownfield being able to step out that radius 4x more than typical hydraulics. So -- is that what you're seeing now? Or is that still an opportunity in the future? Maybe just some more comments around the brownfield step out and potentially electrifying these operations as you move forward?

Thank you, Derek. So in these peer cases, they're not necessarily enabled by the all-electric solution, but what we are seeing is our customers scour their portfolios, looking for marginal fields or brownfielter tiebacks, all somewhat synonymous opportunities because in this case, the host facility exists, which allows them to really through a single contract with us because of our fully integrated offering be able to deliver a very short cycle project and accelerate time to first oil. What's exciting is and where the behavior has changed is in the portfolio approach. We saw this and talked about this in prior quarters in greenfield activity where customers are coming to us and through discussions working with us not only on a current project, but on future projects tying in and leveraging that consistency of approach and our unique iEPCI and 2.0 capabilities. So we're now seeing that spill into the behavior in the brownfield markets, and we gave two examples of that, both with Var Energy, which is a great example as well as with Equinor that are looking at a portfolio approach. So multiple projects under a single portfolio approach. That will allow consistency, greater certainty in scheduled delivery and shorter cycle times that has a vast improvement to the clients' project returns and economics and obviously benefits us as well. So that's very exciting. The opportunity that lies ahead is exactly what you said, growing the brownfield market. How do we grow the brownfield market is by being able to in an efficient, short cycle and economic way tie back from further distances from the host facility. And with the all electric solution, we now can go and increase that radius around the host facility by 4x and hence, reach a much greater feel -- a much greater opportunity set in terms of marginal fields and tieback opportunities. In that case, we've done a lot of work with the all electric system. We have many electric systems deployed around the world, and we're really now working with our clients to look for those greater opportunity set. But as you said, that is a future opportunity for us and one that will further grow the brownfield market.

Great. That's very helpful, Doug. Thank you. And then I guess, next, you've talked about collaboration with your customers starting in the development life cycle. A year earlier, obviously, it helps your visibility, which you've already went over in your prepared remarks. But maybe operationally, could you help maybe expand on that comment? I mean what's the benefit for you operationally the benefit for the customer operationally? And how does this translate whether it's in time to first oil or overall earnings profile, the power there. Just maybe some more color around now moving up in the development cycle by a year with your customers.

Derek, this is an all of the above. And the reason why it is, is being at that table because when we say a year earlier, we're now -- in the prepared remarks, I referenced -- this is well be for any traditional contractor would be invited into the discussion well before even decisions around which type of subsea architecture might be used. So we're going in as a trusted consultant or a trusted adviser, trusted partner, they're inviting us to the table because they see the value that we bring, they want us to be part of that conversation. And by being part of that conversation, the objective for the client is to be able to further accelerate time to FID, so faster time, shorter cycle time to FID. And then from our point of view, it's not only securing that project and having the visibility and in many cases, as a direct award because of that proprietary nature of our relationship, but it also means delivering a shorter cycle time projects. So within the company, we have the saying that we all live by every single day, which is the relentless pursuit of reduction of cycle time. That's the unique capability that allows us to win while at the same time, our customer wins. So this increased earlier engagement is really, really critical and is giving us a level of visibility and insight that we've never had as a company.

Your next question comes from the line of Arun Jayaram with JPMorgan. Please go ahead.

Doug and team. Doug, I was wondering if you could talk a little bit about the trajectory of orders that you expect this year and how you see the inflection point in orders playing out in 2027. On a year-to-date basis, you've booked $4.4 billion of subsea orders book-to-bill of just below 1. So wondering if you could discuss expectations for the back half and perhaps give us some insights on your pipeline of direct awards that may not be on the Subsea opportunity list.

Sure. So clearly, there's momentum, as you pointed out from the first quarter into the second quarter and further momentum expected in the second half of the year. We see a clear line of sight to the $10 billion target for 2026. What we're seeing is a lot of smaller projects. If you recall, even in the first quarter, very few announced projects, we did have four analoged projects this quarter, but it's a lot of smaller projects. What you see in 2027 is the inflection and the return of some very large greenfield opportunities, which will not only drive the total opportunity -- the opportunity set as we published and we pointed out in the prepared remarks, is now achieved another record level and increased again this quarter, largely driven again by those greenfield-type projects. So that will just get further strength and confidence in 2027 and what we have referred to and are fully committed to a step up of orders in 2027. So it's a bit of a mix question in terms of the type of projects in 26 versus the type of projects in 2027. 2027 will be larger projects, more greenfield opportunities 2026 being more of these marginal field tieback brownfield opportunities, some greenfield opportunities as well, but customers are really, really focusing on getting these shorter-cycle projects out the door as fast as they can. And that's where we have the natural ability to be able to help them do that. And that's why I can confirm that our proprietary list of opportunities that result in direct awards to our companies, to our company, some of which we obviously announced this quarter is growing and is a very healthy set of opportunities and one we will continue to benefit from as the company moves forward.

Great. My follow-up, I was wondering if you could give us any bread crumbs on your SURF 2.0 initiatives, where are you in terms of your efforts to industrialize the other 2/3 of a subsea project, the installation, the water column, any bread crumbs you could share today?

Sure. So just for the entire audience, Arun, I'm going to maybe reference it slightly differently. When we talk about Subsea 2.0, so far, we've been talking about -- that's the industrialization of all the equipment that sits on the seabed. And that's something that happened many years ago in our company and that we're benefiting from today. So if you look at what is currently called Subsea 2.0, which is again the equipment on the seabed, about 80% of our new orders are coming -- are now Subsea 2.0. So the market has entirely embraced this new architecture, and it represents about 50% of our revenue. So you can obviously see the upside that we have from the further conversion of that 80% of orders into revenue. When we talk about what's left, I'm going to ask all of you, we're going to try to deviate the gaming architecture a little bit. It's really about industrializing the iEPCI. So it's really about making the iEPCI 2.0 because remember, the iEPCI has three components. It has -- which sits on the seabed -- it has all the things that are in the water column, the umbilical risers flow lines, fiber optics, telecommunications, electric -- all -- everything that's within the water column. And then it's the installation of all of that kit. So it's really three different elements. So if you think about it that way, as we go from the Subsea 2.0 seabed, configure-to-order architecture and we move to a fully industrialized iEPCI 2.0, the upside is significant because those last 2/3, the water column and the installation have yet to be industrialized. So think about it as going from Subsea 2.0 to iEPCI 2.0, and that is where we will get and that will be another major, major change to not only our company, but to the way that the industry operates. I will tell you this, I spent most of the quarter working on this. And we are getting some very, very exciting results. We continue to -- I'm trying to give you the bread crumbs you asked for without saying too much, but know that it's a major focus of mine, we've made quite a bit of progress in our understanding of some of these disruptive technologies and processes that will become part of iEPCI 2.0 in the future.

Your next question comes from the line of Victoria McCulloch with RBC. Please go ahead.

Thanks very much for your time. So if we could start on the Subsea EBITDA margin. As we look into the second half of the year, I guess, in the context of what you've delivered this quarter, can you give us a bit of an understanding how the split comes from delivery on project phasing versus fundamentally a structural step-up in higher quality contracts and the proportion of the entire I guess, revenue and the EBITDA that you're seeing being delivered from the business right now?

It's a great question. And obviously, there's a lot of market momentum out there. We are in a unique position as we have discussed before in terms of the relationships with our clients. But I will tell you this, we focus a lot more on those, as you would say, as you mentioned, those structural changes because we don't want to do this for today. We want to do this for a very long time. and we want to continue to be very successful. And again, when I say successful, it's our clients and TechnipFMC. And I think we're kind of unique in that manner. We're not selling fixed assets. We're not a commodity we are a technology company. So we're looking for ways to ensure that our customers are successful while we continue to be successful at the same time. So what we put most of our focus on are those internal changes to both our operating model as well as what we just talked about going from Subsea 2.0 to iEPCI 2.0, continuing to benefit from the better, the greater efficiencies we have in our manufacturing, the shorter cycle time, which frees up more assets, which is why you don't need to be building or buying assets right now. You need to be becoming much more efficient. That's how you're going to drive higher returns and create a sustainable model going forward. So we very much focus on those internal elements that are really changing who we are as a company and the way that we operate. I'll pass it over to Alf to add some more color.

No, just to complement what Doug said. So in all what he just said, when you specifically look over the evolution of first half, second half and onwards, it is very much a gradual improvement, right? Because these things are realized as we keep on taking on new backlog with iEPCI and 2.0, but also starting to mature all of our industrialization processes. So it's really hard to kind of pinpoint that it's a step up in any one quarter. It's a gradual improvement that we're seeing through our backlog as we're experiencing really in demonstrating strong execution.

Sure. I'll just add to Alf and say, it's not only a gradual improvement in the second half. But as Al said in his prepared remarks, we're already committing to 2027 improvement.

Yes. That's really helpful color. Just on the tender pipeline, it's great to see it grow every quarter and the color that you gave on the projects added and have been awarded. We don't know there are some sticky projects. These are not your projects but sticky projects that whether it's the economics or the offtake that become challenging to see sanctioned and reach that FID for the company. When you look at your addressable contracts that you see in the second half of this year and into next year, how much of that $30.5 billion is still kind of sticky and dragging a bit? And maybe could you use the iEPCI. Let's put it that way.

Well, thank you for that endorsement. I'm looking at the opportunity list as you just mentioned, we -- let me use a different word for sticky. We certainly know that some of these projects have lived on this list a bit longer than anyone originally anticipated. I will tell you, I think everyone will be surprised that we'll start to see some momentum in some of those projects. Some of those projects indeed the economics will be solved by iEPCI 2.0. We certainly would be proud to be -- if we could do that for our clients. But of course, there's always local challenges or reservoir challenges or partnership -- or partner challenges between different operators. So it's very hard to predict exactly when projects will FID, but I actually think the probability on this list over the next 24 months is greater than it's ever been.

Your next question comes from the line of David Anderson with Barclays. Please go ahead.

So you were talking about how the orders are sort of shifting in from 26 to 27 shorter -- more brownfield, shorter-cycle projection towards larger greenfield projects next year. Does that imply that we should see -- I would assume that means we've seen more -- many fewer direct awards, and it should be a lot more competitive tenders. Can you talk about the dynamics a little bit of that? I know a lot of the margin expansion has been structural, but there's obviously pricing is a critical factor here. Can you sort of talk about that? We haven't really seen this type of market in quite some time. So how are you approaching this obviously, some of your competitors have been pretty aggressive on certain projects we've seen lately.

Sure, Dave, and thanks for the question. So first of all, I wouldn't necessarily draw the conclusion that it would be -- well, almost -- I will say this. I would not draw the conclusion that it will be less direct awards in 2027. And remember, we've already announced some pretty substantial greenfield direct awards throughout the history of a number of our iEPCI projects and our direct awards -- so I wouldn't draw that conclusion. But just speaking more broadly to the 20% of our business that does -- we do compete in competitive tendering, remembering that 80% of our business is direct awarded to our company. So on that 20%, I think, Dave, the right approach is discipline. Keep in mind that we have certain obligations and making sure that those obligations are met and achieved. You all know the competitive landscape. It's rather concentrated. I think is maybe the word to use. So look, I think I set a very matured, disciplined companies in a market that's growing. And so we will be selective. We will focus on those projects where we believe to Victoria's question earlier, where we can use our magic and our differentiation to help unlock the potential. So then if it's a competitive tender, it kind of really doesn't matter if we're tendering something that is uniquely different than what the competition has because of their lack of capability or technology differentiation. So Yes. The market will be what the market will be, Dave. Again, as I said earlier to an earlier question, we very much focus on what we can do to create value for our clients and ourselves at the same time. And often that will lead to a direct award because of the differentiated nature of our offering.

So Doug, maybe we could take a little bit of a step back. I'm just curious how you're your customer conversations that go on. I'm particularly wondering about how do your customers make capital allocation decisions in this kind of market with all this volatility and obviously, the conflict going on. Where does off-store fit? Is offshore now becoming a bigger part of that? Do you think the shift capital allocation towards more offshore for a variety of reasons. Is that part of the reason why you're seeing 27% looking -- seeing a step up there?

So Dave, I don't want to speak on behalf of my customers. So I'm just going to give you my observations based on behaviors that I'm seeing in the industry. I would absolutely say that Subsea is becoming a more strategic consideration for our clients because of the geographical diversity that it offers, i.e., if you want geographical diversification, there's only one way to get it. There's the two poles, which is North America and the Middle East, and then there's offshore. And so I think, clearly, countries, NOCs as well as independents and IOCs are looking at their exposure in their portfolio and when they look at their risk analysis, I do believe that geographical diversification has always been part of that, but it may be a greater consideration. And as it's a greater consideration, it will most likely drive increased levels of focus on offshore assets. Keeping in mind that the reservoirs are exemplary. It's never been an issue of the quality of the rock. It was an issue of economics, and it was an issue of project certainty. Our clients demand certainty the offshore industry for decades did not deliver certainty. TechnipFMC has brought certainty back into our clients. It's given them the confidence as they move forward and look at their offshore, their broad offshore portfolios where they can actually move, diversify their project opportunities around the world. At the same time, and we've talked about this on prior calls, it's not just the traditional customers. We are seeing new entrants in the offshore at a rate that I had never experienced in my career. So many, many new offshore operators taking on deepwater subsea projects. Humbly, I will say they make only one phone call. because there's only one company that can deliver them everything from the architectural phase or the front-end engineering through the manufacturing, delivery, installation, commissioning and life of field service contracts of up to 30 years through a single entity and a single contract in Net TechnipFMC.

Your next question comes from the line of Mark Wilson with Jefferies.

Doug, your comments about industrializing i.e., iEPCI and iEPCI 2.0 is fascinating with the water column and then the installation side of things. My question, therefore, would be that in terms of the water colon and insulation, a big variable in that is whether we've got flex pipe or there is welded rigid pipe. Is there, therefore, an iEPCI 2.0 vision that covers both of those? Or does it require one of those two technologies to really outweigh the other to deliver that vision of iEPCI 2.0?