TechnipFMC plc (FTI) Earnings Call Transcript & Summary

Over the last 4 years, TechnipFMC has been far and away the best story in energy services. Trading at under $10 of stock is now up almost 8x since the period when Upstream spending globally has been flat. They did it by establishing itself as the premier offshore equipment company, reshaping the subsea market and integrated offering an iEPCI approach to transform the industry and structurally lowered costs for the deepwater development. The market has recognized the rarity of capital equipment company having higher orders revenue and margins concurrently. And this window looks to be open for several more years. My pleasure to introduce Mr. Doug Pferdehirt, who's been CEO of TechnipFMC since 2016. Thank you, Doug.

Thank you, Dave.

So Doug, a year ago, you sat here with you win clearly at your back, stock's not had quite a run since then. Expectations are sort of a different animal today. Can you think about managing that story to kind of really establish yourself as a leader in there. How are you sort of approaching that now in terms of those expectations? Do you change any here? Or do you just continue to same way you've been going? Or does it require a different approach?

Sure. So I am not sure what you're feeling on your back right now, Dave, but I'm feeling the same amount of wind or perhaps a bit more. Just to play off of your -- the first part of your question. Really, a year ago, first today, a whole lot of things have come together. So I would say we feel more wind at our back today than we did a year ago. We've certainly proven more both in terms of the market, the shift of capital flows to the offshore our continued high level of execution and our ongoing development and extension of our offering through our industrialization journey. Honestly, it feels really, really good right now. We're obviously singularly focused on execution and making sure that we continue to execute at a very high level. The team has done a tremendous job over the past year of delivering these projects, not on schedule but ahead of schedule. Building further credibility, which leads to our customers putting more trust and confidence in us, and that's most reflected by the fact that 80% of our business is now direct awarded to our company. So never sees any sort of a competitive environment or a bidding environment it's direct awarded. And that's hard to achieve. And it's certainly something we're focused on every single day to ensure that we continue to deliver to our clients' expectations. So yes, there's higher expectations from the market. There's higher expectations from our clients, and there should be. But rest assured, nobody puts more pressure on themselves or feels puts a higher expectation on themselves than the 22,000 women and men at TechnipFMC.

So all those orders have been kind of around that $10 billion level have been growing, yet FIDs have been going down all at the same time. Can you just help us understand a little bit how that math works for FTI. Is it just this direct award approach? Is it iEPCIs it all of the above? How can investors sort of understand that?

Yes. No, I think to really appreciate kind of the composition of the inbound is you have to start with looking at the market position. So we have over 50% of the world's installed base on the sea floor. We have massive, massive amount of equipment, but also very advanced equipment that is sitting anywhere from a few hundred meters to up to 2 miles deep in the ocean. So this is where no person can go. So it's all very, very advanced materials. It's all controlled by advanced automation and control, some of the most advanced automation and control in the world today. We partner with NASA in terms of our control systems. And then it's all manipulated by either resident robotics or remote robotics. So you've got this combination of things going on, managing not just a single piece of equipment. You have to appreciate what we're putting down there is -- it would look like a gathering system. I mean, there's all sorts of different things on the sea floor that we put to ensure that the hydrocarbon can be developed both economically and safely over 25 to a 30-year lifetime in a very harsh condition. You're obviously in a saline environment, controlling wellbore fluids versus a very cold ambient temperature on the sea floor. So it's exciting. That gives us somewhat of a like an annuity, not only from our Subsea services business, which is now a $2 billion business, OEM model, we service 100% of our equipment. We get these 20- to 30-year service contracts. But also as customers look to add incremental production or add incremental [indiscernible] because we have such a large presence that is typically direct awarded directly to our company. So what you've seen is a very, very resilient amount of activity that hasn't been dependent upon large project FIDs. There have been some in that period of time. But to your point, not the same cadence as we had experienced previously or will experience over the coming years through the end of the decade.

So I thought -- and leading into that, I thought on your last call, probably the most important thing you had talked about was the outlook for next year and that we're now seeing large greenfield awards. What's changed in your view? What -- that seemed to be kind of an important distinction.

Well, the big change and the reason that I made that comment on the call was the question was about what gives you the confidence to be able to call an inflection in your inbound through the end of the decade. I mean it's not a lot of companies are in a position to do that. Well, we have -- we have visibility that is really unique in that we have these long-term partner relationships with our clients that are exclusive in nature, and allow us to have access to information 1 year, 2 year in advance of it becoming public knowledge or knowledge in the public market because we're working with them. We're helping -- we start as an [ architect ]. We're the architect for the builder and we're the service company where all of those now post the merger. So in the architectural phase, just as you would if you were building a home, you start that years or more before you engage the contractor to actually build or construct what you want to construct. So we are privileged to be and honored to be in that position where we're sitting there as they're looking at different assets, potentially where they're going to invest their money and how they're going to invest their money and with whom they're going to invest their money. And being at the table, obviously, gives us insight and a significant advantage. So [indiscernible] that we have visibility that, quite frankly, is unique. And we haven't always had that as a company. We've built that over time. And certainly, we're in a very privileged position as we sit here today. In addition to that, what we offer to our customers is unique. No one else offers to the market what we can offer to the market. So as a result of that, they're seeing a benefit. The benefit that they see is a reduction of cycle time or acceleration of time to first oil. And that's a big driver because offshore projects are longer cycle projects. And if you can accelerate the time to first oil, you can significantly improve the project returns. In addition to that, what they're looking for is certainty. Certainty in the outcome. If you're going to make a large capital investment personally or through your company, you want to know the result. You want to know you're working with somebody who's going to deliver to the standard that you've agreed to. That's who TechnipFMC is and we've proven that time and time again. This has actually changed our customers' behavior. In the past, they would secure 1 project at a time. because they kind of wanted to see how the company would perform on that project before they commit an additional project. Our customers are now moving towards a portfolio approach. They're actually coming to TechnipFMC and saying, here's my portfolio, here's opportunities, how about looking at these next 3 jobs? So in calendar terms, we're looking at stuff well beyond 2030 today. And our customers are committing work to us well in advance of that project that we're currently working on. And we're seeing this both in greenfield developments as well as in brownfield development.

You talked about that portfolio approach in brownfield. I'll get to that in a second. I just kind of curious with more greenfield projects out there, does that change the competitive dynamics at all just because it more like I would assume that more of these projects will be out for bid, whereas you've talked about direct awards being like 80% or [indiscernible]? How does that change?

No, it really doesn't, because the relationships we have with our customers are not specific to greenfield or brownfield, new projects or extension of existing projects. There are relationships between 2 companies. So be it a greenfield or a brownfield, if we're in an exclusive direct award relationship, which we are with many of our clients, -- and there will be more of those going forward. We're obviously building those relationships every day. It's irrelevant if it's a greenfield or a brownfield environment. The exciting part about the greenfield FIDs coming now through the end of the decade, it's obviously a significant volume of work on top of this very strong and stable activity that we've had around the brownfields. Now you're layering on top of that the greenfield developments. And there's many reasons why that's happening. But one thing for sure, is the intensity of the conversations and the cadence of them wanting to move projects forward is increasing significantly.

That cycle time. Is that your big advantage you think in all these, like are you -- maybe you don't know, but I'm just curious, are you like promising to deliver like a year ahead of your competition for what you can gather?

Yes, but it's not a promise. It's what we're doing. So they're experiencing that. So it's kind of -- they look at and they just say, this is real. And this is different. I mean we are a different company than we were in the past. And they're looking at this and saying, "I can have first oil 9 months earlier." When they talk to you, that's important, and it's obviously important to their company and also to the host countries in which they're working. So it's something that's very real. It's something that's proven. The exciting part for us is we believe we can reduce cycle time further. And that's within the company, we talk about the relentless pursuit of reduction of cycle time. Why is that important? It is the only scenario I have been in my entire career where you're in a win-win situation, your customer wins and you win. That's -- I don't know of any other situation. Certainly, I haven't been in many different activities in this industry where you've been able to be in that scenario. We've proven that the customer doesn't have to lose for you to win or vice versa. You get out of the supply and demand and you get out of the big swings on return on capital through cycle, we're eliminating all of that. We're a high-performing company with a high return on capital, and we're showing that, that can be sustainable. Why? Because we've identified what's important to them, which is cycle time. That's important to us because that means we're getting a lot more throughput our existing infrastructure. So we're not having to spend more to grow. And on top of that, we're obviously able to benefit from a higher portion of the economic value we create as a result of that. So a true win-win situation. The key to that, Dave, is we have identified and are confident that we're only 1/3 of the way there. So [indiscernible] it's just the first period intermission or baseball into the third inning. But that's where we are. We still have 2/3 left to go which is going to drive significant -- further significant improvement in cycle time, and we will obviously be a beneficiary of that as well.

So I would imagine you would say that first 1/3 is probably has a lot to do with Subsea 2.0. So if I go back in the prior cycle, there were some instances, we had some execution problems here and there. This seems to kind of solve a lot of those issues on the execution side. You're now talking about a new technology, kind of a new initiative, which you're sort of teasing to the audience and maybe you could tease a little bit more, if you don't mind. I'd be really curious, is this that next part of it on that other 2/3, how much is that playing into that next 2/3? Is that what you're aiming for?

Yes. Let me try to be clear on this. So the first third, as I'm talking about, was done before the merger. So before the merger, FMC Technologies, as we were at the time, focused on the sea floor exclusively, equipment on the sea floor. And we started working on that 4 years before the merger. As a result of the merger and one of the reasons for the merger, other than being the only end-to-end solution with the integrated or iEPCI offering, was also the other products. So everything on the seabed needs to be connected to the surface of the water, and that's done through rigid pipe, flexible pipe umbilicals and [ risers ]. So all that needs to be done. And all of those products is what came to us as a result of the merger with Technip. And what we've done now is we've taken the same proven playbook that we did on the sea floor, we've marketed it as Subsea 2.0, and we're going to expand that across the rest of the offering. In addition to the water column, you have to get all of this stuff on to the seafloor connected and commissioned, call that installation. So that's the other 1/3. So there's the 1/3 of the water column, the 1/3 of the installation, meaning there's 2/3 left to work on, which was a result of the merger. And that's why I'm quite excited is, we have learned a lot from the first 1/3. Our level of confidence in delivering the second 1/3 is far greater than it was the first 1/3 and the first 1/3 is working today. And you can see the impact that it's having on our customers first again, improving their project economics, but also it's impacting us favorably. We will carry that through the next 2/3, hence, the relentless pursuit of reduction of cycle time. We believe there's significant runway left with those other 2/3, and we will benefit as we have in the first 1/3. So just think of it as it's proven, it's established, it's somewhat of an industry standard now, it's what leads to a lot of our direct awards because of how differentiated it is. But that's just the equipment we're putting on the sea floor. Do the same thing for the rest of the products and the installation services, I think we have a huge opportunity ahead of us, Dave.

So what excites you the most about this? Is it the ability to reduce that cycle time and therefore, get more orders? Is it more on the margin side of what you can do for your own margins? Is it both? Is that another win-win that you...

This may sound strange, and I've never actually said this, but I'm going to say it. What gets me excited is eliminating waste. If you go through this lean journey, and I've been on it now for 5 years, it wasn't easy for me to change. I was not a lean guy going into this. It is -- you have to change who you are as a person, you have to change the way that you manage the company and you have to change the culture of the company. We've done that. Then you get this absolute loss of [ patience ] for waste. Waiting for the elevator to go up and down drives me crazy because that's unproductive time. I'm not picking on the conference. I love the conference. But everything I see in life now is under this lens of waste. It drives my wife crazy. We can't enjoy dinner anymore. But everything is around this lens of waste. You've got 22,000 women and men who do it better than I do. I mean they are more passionate than I am about it. You unlock that magic. That's what gets us excited. So when I look at the other 2/3, you know what I see, Dave, I see waste. Now the industry doesn't see it because it's the way we've always done it. It's okay, Doug, there'll be higher oil prices. It's not okay. Let's change the way we work. We've proven that with the subsea equipment. It's been hugely beneficial. We're going to do the rest for the other 2/3. And I'll admit it openly on an open mic. There's a lot of waste in the way subsea projects are done today, and we're going to drive the waste out of it.