TechnipFMC plc (NYSE:FTI) Q3 2023 Earnings Call Transcript

TechnipFMC plc (NYSE:FTI) Q3 2023 Earnings Call Transcript October 26, 2023

TechnipFMC plc beats earnings expectations. Reported EPS is $0.21, expectations were $0.2.

Operator: Thank you for holding, and welcome everyone to the TechnipFMC Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s 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 third quarter 2023 earnings conference call. Our news release and financial statements issued earlier today can be found on our Web site. I’d 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 risk 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.

Doug Pferdehirt: Thank you, Matt. Good morning and good afternoon. Thank you for participating in today’s earnings call. We delivered solid results in the third quarter. Subsea inbound orders came in strong, at $1.8 billion, and adjusted EBITDA improved sequentially for both Subsea and Surface Technologies, exceeding the guidance we provided on our second quarter call. This momentum is also driving our expectations for full-year results higher. Continuing with total company financial highlights in the quarter, revenue was $2.1 billion, adjusted EBITDA $284 million, with an adjusted EBITDA margin of 13.8% when excluding foreign exchange impacts. Total company inbound was $2.1 billion, total company backlog ended the period at $13.2 billion.

In Subsea, we received significant orders for flexible pipe in the period. These included an award from Petrobras for the pre-salt fields in Brazil and our largest-ever flexibles contract in the Gulf of Mexico for Woodside’s Trion project. As both pioneer and market leader of this technology, flexible pipe provides us with the unique capability to design fully integrated end-to-end subsea systems for our clients. We have the unique ability to integrate flexible technology into our iEPCI offering, which greatly simplifies field architecture. This enables a further reduction in project cycle time, improving economics, and driving greater differentiation in our integrated offering. Beyond flexibles activity, we also experienced an exceptionally high level of unannounced project awards in the quarter, which speaks to the ongoing strength of the market.

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Q&A Session

In Subsea Services, inbound was robust, driven by installation and life of field activities. Given the continued strength in our inbound, we are confident that subsea orders will exceed $9 billion for the full-year. And if we extend the view to include our current expectations for 2024, we now believe the next five quarters will approach $11 billion. With this near-term update, we now expect to exceed the guidance for $25 billion of subsea inbound through 2025, and we will provide an update on this extended outlook on our fourth quarter earning call. The durability of this cycle is driven by both an expansion in the number of active basins, which has nearly doubled versus the prior cycle, as well as a growing and more diverse customer base.

Additionally, this cycle was supported by a robust and strengthening pipeline of FEED activity. In the third quarter, FEED studies increased nearly 40% when compared to the number of awards in the first-half of the year. Importantly, more than half of the studies awarded to our company in 2023 have the potential to be direct-awarded upon project FID. This provides us with extended visibility and confidence that subsea opportunities will remain resilient beyond 2025 even before we consider new frontiers that are likely to present themselves in the second-half of the decade. Subsea backlog ended the period at $12.1 billion, a nearly 60% increase year-over-year. An increasing proportion of this backlog is coming fro iEPCI, Subsea 2.0, and other direct awards, reflecting the high quality of our order book.

Year-to-date, we have been awarded the industry’s three largest integrated contracts; Equinor’s BM-C-33 project in Brazil, the Rosebank project in the U.K., and Aker BP’s Utsira High project in the North Sea. While integrated execution will certainly shorten cycle times, the size and scope of these awards provide us with multiyear visibility as a significant portion of the project revenues extend beyond 2025. In Surface Technologies, international activity increased sequentially. We continue to ramp up production in our Saudi Arabia facility, as well as successfully execute on our multiyear framework agreement with Abu Dhabi National Oil Company. Activity in North America was moderately lower in the period, however operating margin improved sequentially, benefiting from the strategic actions previously taken to reduce our cost structure.

In closing, our commercial and operational success continues to drive improved financial results. And Alf will discuss how the strength in the second-half should drive our full-year results higher. Additionally, the upward revisions to our Subsea order outlook are fueled by high-quality inbound driven by iEPCI, Subsea Services, and other direct awards, and which are now expected to represent more than 70% of segment orders in the current year. And more importantly, these results are further strengthening the foundation for higher and more sustainable performance in the years ahead. I will now turn the call over to Alf to discuss our financial results.

Alf Melin: Thanks, Doug. Inbound in the quarter was $2.1 billion, of which $1.8 billion came from Subsea. Revenue in the quarter totaled $2.1 billion. EBITDA was $284 million when excluding foreign exchange loss of $46 million, and impairment, restructuring, and other charges totaling $4 million. Operationally, we delivered solid results. In Subsea, revenue was $1.7 billion, up 6% from the second quarter. The increase was driven by mid single-digit revenue growth in both projects and services. The largest drivers of the improvement were in the Norway and Brazil. Adjusted EBITDA was $258 million, with a margin of 15.1%, up 70 basis points from the second quarter. Results benefited primarily from higher volume and favorable activity mix.

In Surface Technologies, revenue was $349 million. This was a modest decline versus the second quarter, primarily driven by lower revenue in North America, which decreased 8% sequentially, partially offset by higher international activity. Adjusted EBITDA was $50 million, a 6% sequential increase. International results benefited from improved operational performance in the Middle East. North America results were largely unchanged versus the prior quarter despite the revenue decline benefiting, in part, from strategic actions taken in prior quarters. Adjusted EBITDA margin was 14.3%, up 100 basis points versus the second quarter. Turning to corporate and other items in the period, corporate expense was $24 million when excluding less than $1 million of charges.

Net interest expense was $27 million, and tax expense was $19 million. And lastly, we incurred a foreign exchange loss of $46 million in the quarter. Approximately 50% of the loss was directly related to actions taken that we believe will reduce the volatility in our foreign exchange exposure going forward. Importantly, we believe these were one-time elements of our results in the period. Approximately 30% of the FX loss was related to the current cost of hedging our euro-denominated debt and liability positions, with the remaining portion due to unfavorable movement in currencies that we are unable to economically hedge, with the Argentine peso having the biggest impact in the period. Cash flow from operating activities was $222 million, and included a $27 million payment related to the previous legal settlement with a French national prosecutor’s office.

Capital expenditures were $44 million. This resulted in free cash flow of $178 million in the quarter. In August, we completed the sale of the Apache II pipelay vessel for net cash proceeds of $54 million. The sale marks another tangible strategic step forward in our commitment to higher and more sustainable financial returns. We ended the period with cash and cash equivalents of $691 million. Net debt fell almost $200 million to $650 million. During the quarter, we repurchased 2.7 million shares for $50 million, and paid $22 million in dividends. Total shareholder distributions for the period were $72 million. Moving to our guidance, I will first provide an update to our segment expectations for the fourth quarter. For Subsea, we expect the typical seasonal impacts, with revenue declining approximately 10% sequentially, and adjusted EBITDA margin coming in at approximately 13%.

For Surface Technologies, we expect revenue to increase about 5% sequentially, and adjusted EBITDA margin to be approximately 14%. Turning to the full-year, we anticipate corporate expense to come in at the high end of the range of $100 million to $110 million. With these updates, we now anticipate the range of outcomes for total company adjusted EBITDA to approximate $950 million for the full-year when excluding foreign exchange. This represents a $35 million improvement versus the guidance we provided on our second quarter earnings call. Lastly, we reiterate our free cash flow guidance of $225 million to $375 million for the current year. In closing, I will share with you my three key takeaways from the quarter. First, given the strong Q3 results and improved outlook for Q4, we are increasing our guidance for full-year company EBITDA to approximately $915 million when excluding foreign exchange.

Second, free cash flow generation improved in the period as expected, keeping us on track to achieve our full-year guidance. And third, with the initiation of a dividend in the quarter and ongoing share repurchase activity, we distributed over $70 million, demonstrating our commitment to return cash to our shareholders. Operator, you may now open the line for questions.

Operator: Certainly. [Operator Instructions] David Anderson at Barclays, your line is open.

David Anderson: Great, thanks. Good morning, Doug. How are you?

Doug Pferdehirt: Very well, David. And yourself?

David Anderson: I’m doing great. So, a question on — may be just to start on the order outlook. So, there, over the next five quarters, you see $11 billion. What looks different about that $11 billion going forward or does anything look different in terms of is the customer mix shifting one way or another? I think you said 70% you’re expecting to be Subsea 2.0. With market capacity tightening, I would think pricing should also be firming up as well. Could you maybe just talk about the difference going forward with what you pulled in over the last year or so?

Doug Pferdehirt: Sure, Dave. I guess at the highest level, the way I would describe it is it’s just a much higher quality inbound. And there are several aspects to that, but most importantly for our company is the direct awards, which is now over 70% of our business being direct-awarded to us in subsea. That’s being driven by our unique iEPCI or integrated offering, our unique subsea architecture, the Subsea 2.0, and again our very long, strong client relationships. There’s also a bit of a mix shift in terms of the customer base. I talked about that for a few quarters now. We continue to see the customer base expanding and more people moving into the offshore arena because of the high-quality reserves and, quite frankly, the access to those reserves.