TechnipFMC : Q3 2021 Conference call transcript

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FTI.N - Q3 2021 TechnipFMC PLC Earnings Call

EVENT DATE/TIME: OCTOBER 21, 2021 / 12:00PM GMT

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OCTOBER 21, 2021 / 12:00PM, FTI.N - Q3 2021 TechnipFMC PLC Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Alf T. Melin TechnipFMC plc - Executive VP & CFO

Douglas J. Pferdehirt TechnipFMC plc - Executive Chairman & CEO

Matt Seinsheimer TechnipFMC plc - VP of IR

C O N F E R E N C E C A L L P A R T I C I P A N T S

Arun Jayaram JPMorgan Chase & Co, Research Division - Senior Equity Research Analyst

Ian MacPherson Piper Sandler & Co., Research Division - MD & Senior Research Analyst of Oil Service

J. David Anderson Barclays Bank PLC, Research Division - Director and Senior North America Oilfield Services & Equipment Analyst

Vaibhav D. Vaishnav Coker Palmer Institutional, Research Division - Oilfield Services and Energy Transition Analyst

Waqar Mustafa Syed ATB Capital Markets Inc., Research Division - MD of North American Energy Services & Head of U.S. Institutional Equity Research

P R E S E N T A T I O N

Operator

Good day. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the TechnipFMC Third Quarter 2021 Earnings Conference Call.

(Operator Instructions)

I would now like to turn the call over to Mr. Matt Seinsheimer. Please go ahead, sir.

Matt Seinsheimer - TechnipFMC plc - VP of IR

Thank you, Lisa. Good morning and good afternoon, and welcome to TechnipFMC's Third Quarter 2021 Earnings Conference Call. Our news release and financial statements issued yesterday can be found on our website.

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 risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements.

Known 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 and the French AMF. 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 Chairman and Chief Executive Officer.

Douglas J. Pferdehirt - TechnipFMC plc - Executive Chairman & CEO

Thank you, Matt. Good morning and good afternoon. Thank you, all, for participating in today's call. Joining me today is Alf Melin, our Chief Financial Officer.

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OCTOBER 21, 2021 / 12:00PM, FTI.N - Q3 2021 TechnipFMC PLC Earnings Call

Results in the quarter reflect continued strength in operational performance and further support our confidence in achieving full year financial guidance. Total company revenue in the period was $1.6 billion. Total company adjusted EBITDA was $141 million, with an adjusted EBITDA margin of 8.9%.

Total company inbound orders in the quarter were $1.3 billion. Subsea inbound orders were $1.1 billion, bringing the year-to-date segment total to $3.9 billion. The strength of our inbound in the quarter was driven by direct awards, subsea services, alliance partners and several long-term vessel charters. Additionally, our Subsea opportunity list expanded for the fourth consecutive quarter and now shows project opportunities totaling $19 billion for potential award over the next 24 months when assuming the midpoint of the project ranges.

Inbound orders for Surface Technologies were $250 million in the third quarter. It is important to note that we expect a significant increase in order activity in the fourth quarter as we anticipate several multiyear awards will be made in the Middle East.

Subsea inbound growth in 2021 partly reflects the momentum we are seeing in Brazil. This has always been an important region for TechnipFMC. We have been present in the country for over 5 decades with a well-established supply chain at over 98% local content, contributing significantly to our success.

Additionally, an important part of our global research and development is carried out at our technology center in Rio de Janeiro. This year, our Brazil teams have achieved several impressive milestones. We received 2 contract awards from Petrobras. The first for the Marlim and Voador fields where we will provide subsea manifolds utilizing our second-generationall-electric robotic valve controller. And the second award to supply equipment and services for the Buzios 6 through 9 fields, extending our backlog well beyond the first scheduled delivery in 2023. Karoon Energy awarded us with our first iEPCI project in Brazil, another significant step in the global adoption of our integrated model. And we delivered our 700th tree manufactured in-country, reflecting a leadership position that has been built upon a long history of innovation and strong project execution.

During the quarter, we also signed 3 long-term vessel charter contracts with Petrobras. These awards will serve the Brazilian market for the next 3-plus years. The first 2 charters were for pipelay support vessels owned and operated through our joint venture with DOF Subsea. The third was for a wholly owned vessel that provides us with the ability to install flexible pipe in any water depth up to 3,000 meters and one that has consistently been awarded the client's highest rating for operational performance, quality of work and health, safety and environment. These awards also serve as a leading indicator of the strong demand for the flexible pipe market in Brazil.

For decades, flexible pipe has been the preferred solution in Brazil. The pipe's versatility has allowed the technology to evolve with the industry, adapting from shallow water to deep and ultra-deepwater. TechnipFMC has been a pioneer in flexibles since the early 1970s. We are constantly improving quality and reliability in increasingly harsh environments, and our Açu facility is a showcase for advanced manufacturing automation. More than 11,000 kilometers have been installed across the region, more than half of which was supplied by TechnipFMC, and we remain the market leader today.

High concentrations of CO2 in presalt fields has posed industry challenges for some applications of flexible pipe, particularly presalt gas injection risers, leading to a reduction in flexible volumes since the market peak in 2017. Outside of these limited applications, the low CO2 flexibles market in Brazil remains robust, supported by recent industry awards and tendering activity, which we believe will result in annualized volumes over the next 3 years that are more than double the current levels.

In 2018, to address the high CO2 industry challenge, we created a strategic alliance and made a minority investment in Magma Global, a leader in advanced composite technologies. With the ongoing success of this technology alliance, we were pleased to announce we acquired the remaining interest in Magma, and we are excited to welcome them to the TechnipFMC family. By combining their proprietary technology with our flexible pipe, we are advancing the development of a hybrid flexible pipe solution for use in the Brazilian pre-salt fields.

Our long history in Brazil, our research capabilities, our investment in disruptive technologies, our leadership in flexibles, our high-performing fleet, and most notably, the women and men that continue to drive our success, positions us well in what is expected to be the strongest subsea market this decade.

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OCTOBER 21, 2021 / 12:00PM, FTI.N - Q3 2021 TechnipFMC PLC Earnings Call

We have previously outlined our focus areas of wind, wave, hydrogen and carbon transportation and storage. And we are making real progress in all of these areas. Additionally, we believe that composite technologies from Magma will be a critical enabler to the new energy transportation system.

We were also pleased to announce a long-term strategic alliance with Talos Energy to develop and deliver solutions for carbon capture and storage, or CCS. This is an important step for both companies, combining Talos' offshore operational strength and subsurface experience with our long history in subsea engineering, system integration and automation and control.

The alliance will initially focus on the U.S. Gulf Coast, which is a major source of CO2 emissions with a heavy concentration of refineries, liquefied natural gas plants and emerging blue hydrogen facilities. The alliance provides a platform to address this growing market need, and we look forward to working with Talos in the conversion of these identified opportunities. This type of collaboration, innovation and integration will position TechnipFMC to be a leading provider in carbon transportation and storage.

I will now turn the call over to Alf to discuss our financial results.

Alf T. Melin - TechnipFMC plc - Executive VP & CFO

Thank you, Doug. We had another solid quarter led by total company inbound orders of $1.4 billion. Revenue in the quarter was $1.6 billion with adjusted EBITDA of $141 million. Total company backlog was $7 billion at the end of the period. Backlog for Subsea stands at $6.7 billion, of which, just over $5.7 billion is scheduled for execution beyond 2021. We ended the quarter with cash and cash equivalents of $1 billion and net debt of $1.2 billion.

During the quarter, we recognized charges and credits that netted to an expense of $16 million and included the following items: expenses totaling $44 million related to impairment, restructuring and other charges, primarily related to a $37 million noncash impairment to our initial investment in Magma Global. These items were partially offset by income of $29 million on our equity ownership in Technip Energies, which primarily relates to the favorable change in market value during the period.

Loss from continuing operations was $0.09 per diluted share in the quarter. When excluding the impact of charges and credits that netted to an after-tax expense of $0.03 per share, the adjusted loss from continuing operations per share was $0.06. The adjusted loss from continuing operations also included the following items: a loss on an early extinguishment of debt of $16 million and a foreign exchange loss of $6 million.

Now let me turn to the segment results. I will focus on our sequential performance comparing the third quarter to our second quarter results. In Subsea, revenue of $1.3 billion decreased 6%, driven by lower activity in the North Sea and Asia. Adjusted EBITDA was $141 million, with an adjusted EBITDA margin of 11.2%, a sequential increase of 10 basis points despite the revenue decline. Inbound orders were $1.1 billion in the period, demonstrating our continued commercial success.

In Surface Technologies, third quarter revenue of $267 million decreased 3% from the second quarter. Revenue decreased primarily due to the timing of large multiyear international awards partially offset by increased revenue in North America. The continued growth in North America was driven by higher drilling and completion activity. Adjusted EBITDA was $28 million. Adjusted EBITDA margin was 10.6%, a decrease of 40 basis points from the second quarter, driven largely by lower segment revenue. Inbound orders for the quarter were $250 million.

Turning to corporate and other items in the period. Corporate expense was $29 million. We incurred a $6 million loss on foreign exchange. Net interest expense was $39 million. And lastly, tax expense, which came in at $12 million for the quarter.

Cash from continuing operations was $136 million with capital expenditures totaling $47 million. This resulted in free cash flow of $89 million in the third quarter. Free cash flow from continuing operations for the first 9 months of the year was $100 million, and we are on track to meet our full year free cash flow guidance of $120 million to $220 million. Cash flow in the quarter benefited from solid working capital inflows, which was in line with the commentary we provided on our second quarter earnings call.

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OCTOBER 21, 2021 / 12:00PM, FTI.N - Q3 2021 TechnipFMC PLC Earnings Call

Capital expenditures are anticipated to increase from the third quarter level, largely driven by previously announced project awards in Subsea. We continue to see the potential for full year expenditures to come in below our guidance of approximately $250 million.

In the third quarter, we made significant progress in the monetization of our remaining stake in Technip Energies, announcing sales totaling 34 million shares of Technip Energies in multiple transactions. We received proceeds of $326 million in the quarter from a portion of the sale with the remaining sale transaction scheduled for settlement before the end of October for proceeds of approximately $115 million. Upon completion of these sales, we will have reduced our ownership in Technip Energies by 75% and will retain a 12% stake, which is currently valued at more than $350 million. There is no lockup associated with our remaining position.

During the quarter, we purchased $164 million of our 6.5% senior notes due 2026, the highest coupon debt within our capital structure, through a tender offer.

With regard to investment activity, we acquired the remaining 49% of shares in TIOS, our joint venture with Island Offshore, for $49 million during the quarter. This transaction brings to the company additional subsea expertise that will enhance our Life of Field services capabilities and provide a complete range of well services to our clients globally.

And as Doug mentioned in his remarks, we also acquired the remaining shares of Magma Global in early October for $64 million. As a reminder, we entered into a collaboration agreement with Magma in 2018, which included the purchase of a 25% ownership stake. As a result of the acquisition, we recorded a noncash impairment in the third quarter to our initial Magma investment, reflecting the purchase price paid for the remaining stake. The cash consideration will be paid to shareholders on Magma in 3 installments.

Let me close by highlighting a few takeaways from the quarter. We delivered solid operational performance in the period with total company adjusted EBITDA of $141 million and free cash flow from continuing operations of $89 million. Given these results, we are confident that we will meet our financial guidance for 2021. Additionally, the free cash flow generation of our business and ongoing monetization of our ownership stake in Technip Energies are supporting several important objectives. First, that we improve our capital structure, which we demonstrated during the quarter with a $400 million reduction of net debt as well as $185 million reduction of short- and long-term debt. And second, that we maintain the flexibility to invest in our future, which we have also demonstrated with the strategic investments in TIOS and Magma.

I will now turn the call back over to Doug for his closing remarks.

Douglas J. Pferdehirt - TechnipFMC plc - Executive Chairman & CEO

Thank you, Alf. Before we move to Q&A, I want to close with a few remarks. Our third quarter results reflect a continuation of the strong operational performance that we demonstrated over the first half of the year, as Alf stated. We remain very confident in achieving our full year financial guidance.

Subsea orders have nearly matched the $4 billion inbound in all of 2020, and we remain on track to achieve solid double-digit growth. And the acquisition of Magma and our strategic alliance with Talos serve as tangible progress and further demonstrate the impactful role we will play in the energy transition.

Finally, I would like to remind everyone that on Tuesday, November 16, we will host our Analyst Day. During the event, we will demonstrate how we are leveraging and extending our core competencies of innovation, integration and collaboration to develop both new and novel energy resources offshore. We will provide updates on how we are using new commercial models and new technologies to further improve project economics and reduce carbon intensity in our conventional business while also transforming the way we fundamentally operate today. We will also have real examples on display to show you how TechnipFMC continues to drive change in the energy industry, and we hope to see you all there.

Operator, you may now open the line for questions.

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