TechnipFMC plc (NYSE:FTI) Q2 2023 Earnings Call Transcript

TechnipFMC plc (NYSE:FTI) Q2 2023 Earnings Call Transcript July 27, 2023

TechnipFMC plc misses on earnings expectations. Reported EPS is $0.02 EPS, expectations were $0.15.

Operator: Thank you for holding, and welcome everyone to the TechnipFMC Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions] Thank you. I will now turn the call over to Matt Seinsheimer, Senior Vice President, Investor Relations and Corporate Development. Mr. Seinsheimer, please go ahead.

Matt Seinsheimer: Thank you, Jack. Good morning and good afternoon, and welcome to TechnipFMC’s second quarter 2023 earnings conference call. Our news release and financial statements issued earlier today can be found on our website. I would like to caution you with respect to any forward looking statements made during this call. Although these forward looking statements are based on our current expectations, beliefs and assumptions regarding future developments and business conditions, they are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. Non-material factors that could cause our actual results to differ from our projected results are described in our most recent 10-K, most recent 10-Q and other periodic filings with the U.S. Securities and Exchange Commission.

We wish to caution you not to place undue reliance on any forward looking statements which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward looking statements after the date they are made, whether as a result of new information, future events or otherwise. I will now turn the call over to Doug Pferdehirt, TechnipFMC’s Chair and Chief Executive Officer.

Douglas Pferdehirt: Thank you, Matt. Good morning and good afternoon and thank you for participating in today’s earnings call. Our second quarter results reflect both strong operational performance and the achievement of several financial commitments. Subsea inbound orders were 4.1 billion in the period representing a book-to-bill of 2.5. We delivered strong sequential improvement in adjusted EBITDA margin for both Subsea and Surface technologies, including a 420 basis point increase in Subsea to 14.4%, the highest quarterly margin since 2018. Free cash flow was 103 million in the quarter and just yesterday we provided two updates to our plans for shareholder distributions. With the first being the initiation of a quarterly dividend and the second announcing the doubling of our previous share buyback authorization to $800 million.

Alf will cover these updates in more detail. When taken together, these successes demonstrate that we are clearly focused on what we believe to be the most important drivers of shareholder value. Continuing with total company financial highlights in the quarter revenue was 2 billion. Adjusted EBITDA was 254 million with an adjusted EBITDA margin of 12.9%, when excluding foreign exchange impacts. Total company inbound for the period was 4.4 billion. Total company backlog ended the period at 13.3 billion. Subsea backlog grew 29% sequentially to 12.1 billion, of which 81% will be converted into revenue beyond the current year. I would like to take a moment to highlight the quality of the inbound secured in the period. Subsea orders included six integrated projects, including the direct award of our largest iEPCI to date a contract from Equinor for the BM-C-33 development in Brazil year.

Year-to-date, iEPCI has accounted for more than 50% of our order intake. We continue to expect iEPCI to achieve its highest ever inbound in 2023, enabled by a record level of iFEED activity that often converts to a direct award. Importantly, 70% of our orders are expected to come from a combination of iEPCI Subsea services and all other direct awards in the current year. In the second quarter, we continued to drive further adoption of our Subsea 2.0 configurable product platform. Equinor was the first to adopt the integrated project model and on the BM-C-33 project, they will be utilizing both iEPCI and Subsea 2.0. Also in the quarter, we were awarded our fifth consecutive contract by ExxonMobil in Guyana this time for the URO development, which will also utilize Subsea 2.0. And finally, last month we signed a 20-year framework agreement with Chevron, under which TechnipFMC plc will provide Subsea 2.0 production systems for gas field developments off Australia’s Northwest Coast.

As evidenced by the addition of three new adopters in the second quarter more and more clients are recognizing the benefits of our configured to order product portfolio which reduces engineering complexity, shortens lead times, and improves certainty and project execution. With a strong inbound success in the period, Subsea orders for the first half of the year totaled 6.7 billion, and today we are increasing our full-year outlook for 2023 Subsea orders to reach nine billion. The backdrop remains very strong. The feed pipeline continues to expand with more projects in advanced stages moving towards FID. Our Subsea opportunity list, which only extends out 24-months, remains robust with an opportunity set of more than 23 billion based on the midpoint value of these Subsea developments.

And while these projects are typically available to the broader market, the strength of our outlook is predicated on our unique view into the offshore market. This is evidenced by the fact that over the last 10 quarters, only one-third of our inbound orders came from the opportunity list with the other two-thirds being the result of a proprietary set of project and service opportunities that are unique to our Company. And as anticipated, we have seen increased activity in Subsea services. In the quarter, we announced an award from Equinor Riserless Light Well Intervention services. This contract provides us with scope that extends out to 2025. It is also important to note that our order outlook assumes little to no benefit from new offshore frontiers.

And even without this optionality longer term visibility is improving. Our clients are securing capacity today for project inbound that extends execution all the way out to 2030. These are among the many tangible signs we see that support our view that this will likely prove to be a very extended market cycle. And even more importantly, it speaks to the level of confidence, our customers have in our ability to safely deliver their projects on time and on budget. In closing, we have strategically placed ourselves in a very differentiated position. More than 90% of our total company orders and revenue are generated outside the North America land market. We are fundamentally changing the way we operate our business to ensure that we create greater value for all stakeholders, and this is clearly being recognized by the market, given the continued adoption of iEPCI and Subsea 2.0. In fact, the quarter represented the highest level of inbound activity for both iEPCI and Subsea 2.0 in our Company’s history.

We look forward to sharing future milestones with you as we continue on our more ambitious journey ahead. I will now turn the call over to Alf discuss our financial results.

Alf Melin: Thanks Doug. Revenue in the quarter was 2 billion. EBITDA was 254 million when excluding, foreign exchange loss. The impact of the previously disclosed legal settlement and restructuring and other charges. Operationally, we delivered strong sequential results. In Subsea revenue was 1.6 billion, up 17% from the first quarter. The increase was largely due to higher project activity in South America, the North Sea and the Gulf of Mexico. Services revenue also increased when compared to the first quarter due to seasonal improvement, including higher installation and intervention activity. Adjusted EBITDA was 234 million with a margin of 14.4%, up 420 basis points from the first quarter. Results benefited from the higher revenue, improved margins in backlog and increased installation in services activity.

In Surface Technologies revenue was 354 million, up 7% from the first quarter. Revenue increased primarily due to higher activity in the Middle East and North America. Adjusted EBITDA was 47 million a 16% sequential increase. Results benefited from higher revenue and improved operational performance. Adjusted EBITDA margin was 13.3%, up 110 basis points versus the first quarter. Turning to corporate and other items in the period. Corporate expense was 154 million excluding a non-recurring legal settlement charge, totaling 127 million corporate expense was 27 million. The non-recurring legal settlement charge in the period was related to the resolution of all outstanding matters with a French National Prosecutor’s Office. As previously disclosed technique, TechnipFMC is responsible for 195 million of the legal settlement.

The charge represented an increase to the existing provision to now reflect the value of the total liability. Net interest expense was 30 million and lastly, tax expense in the quarter was 43 million. Cashflow from operating activities was 156 million. Capital expenditures were 53 million. This resulted in free cash flow of 103 million in the quarter supported by solid customer collections. We ended the period with cash and cash equivalence of 585 million. Net debt was 844 million. During the quarter we repurchased 3.6 million shares for $50 million. Under the buyback program put in place one year ago we have repurchased a total of $200 million of stock at an average price of just below $12 per share. Moving to our guidance. For the third quarter, we expect Subsea revenue and adjusted EBITDA margin to be in line with the second quarter.

For Surface Technologies, we expect revenue to be in line with the second quarter with the potential for modest improvement in adjusted EBITDA margin. For full-year 2023 we expect Subsea revenue to be modestly above the midpoint of the guidance range with adjusted EBITDA margin at the midpoint. For Surface Technologies, we now expect full-year revenue and adjusted EBITDA margin to be modestly above the midpoint of the guidance range. For corporate expense we still expect to land at the midpoint of the range. When considering our revised outlook, we now anticipate the range of outcomes for full-year adjusted EBITDA to approximate 880 million when excluding foreign exchange. Lastly, there is no change to our free cash flow guidance of 225 million to 375 million for the current year.

This includes a 27 million cash payment that was made in the third quarter as part of the legal settlement. The remaining portion owed will be paid in roughly equal installments over the first three quarters of 2024. Looking further ahead, our 2025 outlook calls for significant growth in EBITDA from current levels, which we expect will translate into strong growth in operating cash flow. Let me take a moment to discuss how we think about the allocation of that capital. First, there is the investment in our business. As we have stated before, we will maintain a disciplined approach to new investment. We have demonstrated for some time now that the strategic assets we own today can be managed and maintained in a capital efficient manner. We have established a long-term target for capital expenditures of 3.5% to 4.5% of revenue, and we continue to believe that the changes we have made to our operating model will allow us to remain at the low end of this range, even in the current period of growth.

Now, I will focus on shareholder distributions. We believe that returning capital to our shareholders should be viewed as fundamental to any investment thesis for TechnipFMC. In 2022, we initiated a $400 million share repurchase authorization, and yesterday we added an additional 400 million doubling the authorization to a total of 800 million. As I stated earlier, we have completed $200 million of share repurchases under the authorization to date. Additionally, we delivered on our commitment to a dividend announcing a quarterly dividend of $0.05 per share, which equates to a 1.1% annualized yield based on yesterday’s close. When the dividend and buyback are taken together, we are committing to distributions that will exceed 60% of our annual free cash flow generation through at least 2025.

We also expect shareholder distributions to grow in line with or better than the growth in total company EBITDA in 2024. While there is potential for the dividend to grow over time, our current expectation is that the majority of distributions will come from share buyback as evidenced by the significant expansion in the repurchase authorization. The final component of capital allocation relates to the balance sheet. We remain committed to achieving investment grade metrics and we are confident that our current financial plan can achieve that. The strength of our balance sheet today allows us to be more focused on capital investment and shareholder distributions. At the same time, we will retain the flexibility to reduce net debt. Importantly, this capital allocation framework is not aspirational, it is a commitment one that is supported by changes to our business and execution models, both of which are driving sustainable improvement in our financial performance.

Operator, you may now open the line for questions.

Operator: [Operator Instructions] David Anderson with Barclays. Your line is open.

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Q&A Session

David Anderson: So the massive Subsea order intake this quarter sort of speaks for itself in the wake of all the offshore FIDs we saw this quarter. So just curious in your view that incremental billion dollars that you are looking on the order outlook this year. Are these orders being pulled forward, kind of compared to what you were expecting or are these on top of what you internally forecast as it relates to that three-year order outlook that you provided earlier this year? Thanks.

Douglas Pferdehirt: Thanks Dave. I appreciate it. I think that is an important that we clarify. The strength of the first half is obviously exceptional including this quarter, which was truly exceptional. Not just in quantity but in quality. And that is why I really tried to emphasize that in my script. We continue to be very selective. We are humbled and honored to be in a position to do so. And we clearly demonstrated in the prepared remarks the quality of that inbound in the quarter. As we look forward, we remain deeply committed to the 25 billion by 2025. There’s no concern, if you will, about things being pulled forward. We are very confident, even more so obviously, but remain extremely confident in the 2025 outlook for 25 billion by 2025.

What’s kind of unique about the strength of the first half of the year is it is actually enabled us to take a view of 2024, which is a, I know a bit earlier than we normally would, but I’m actually going to let Alf share the good news.

Alf Melin: Well, thank you Doug. Yes, clearly the strong Q3 inbound, which primarily really will impact revenue in 2024 and beyond is going to be very beneficial for us to move forward with an outlook here. So this is an early look. So, as I mentioned in my prepared remarks, our updated company guidance for full-year 2023 is approximately 880 million of adjusted EBITDA excluding the foreign exchange component. And that implies roughly a 30% growth versus 2022. So now if you take that and look into next year, and given the strength of the first half of inbound and given, how much of that will actually impact 2024 and given how much, how the quality of that inbound and how much that helps the margin embedded in the backlog, my confidence in our ability to successfully meet our commitments. On top of that, I believe we can deliver growth in adjusted EBITDA of 35% in 2024.

David Anderson: So that was actually where I was going. My follow-up question I guess is sort of related to this. I’m just curious about manufacturing utilization and, and how that might change in the next coming 12 to 24-months. And maybe you just answered part of that just with the surge of orders in the first half of the year. Doug, I think you said 70% of the inbound this year is Subsea 2.0 or somewhere thereabouts. Even if the orders – even if the peso orders were to slow a bit in the second half, I’m just wondering, would you expect to be kind of close to full utilization or at least what you would consider optimal manufacturing utilization. How about the back part of 2024? Just sort of thinking about Subsea margin progression lighter the higher than expected throughput next year and into 2025?

Douglas Pferdehirt: Sure, Dave. So, we laid out already our ambition for 2025 to take Subsea margins all the way to 18%. We updated that I think just a couple of quarters ago. Obviously having these high quality orders and one way that we define that is, as you just described, which is Subsea 2.0, gives us that greater confidence. And it is not only the confidence to be able to achieve the margins, but also to be able to take the volume and give our customers the confidence to be able to give us the orders because they have seen the profound change that Subsea 2.0 or the configure-to-order operating model has had on our company. And they have all been on this journey with us. The vast majority of them have spent considerable time within our facilities.