TechnipFMC plc (NYSE:FTI) Q4 2023 Earnings Call Transcript

TechnipFMC plc (NYSE:FTI) Q4 2023 Earnings Call Transcript February 22, 2024

TechnipFMC plc beats earnings expectations. Reported EPS is $0.14, expectations were $0.12. FTI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome everyone to the TechnipFMC Fourth 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] I will now turn the call over to Matt Seinsheimer, please go ahead.

Matt Seinsheimer: Thank you, Sarah. Good morning, and good afternoon, and welcome to TechnipFMC’s fourth quarter 2023 earnings conference call. Our news release and financial statements issued earlier today 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 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 our fourth quarter earnings call. I am proud to report our strong quarterly and full year results which really speak to the growth and operational momentum we are achieving. Total company inbound for the year grew to $11 billion. This included subsea orders of $9.7 billion, which was an increase of 45% versus the prior year and a book-to-bill of 1.5. These strong results benefited from a record level of iEPCI awards in the period. Total company revenue for the year grew 17% to $7.8 billion. Adjusted EBITDA improved to $939 million when excluding the impact of foreign exchange. This was an increase of 30% percent when compared to the prior year.

We generated free cash flow of $468 million for the year and we returned nearly $250 million to shareholders through share repurchases and dividends. While these are solid improvements, I am particularly pleased with the quality of the inbound received in 2023 with direct awards iEPCI and subsea services together exceeding 70% of subsea inbound. We’re also seeing tangible improvements in Surface Technologies. This has resulted in improved financial performance, higher cash generation and greater consistency in delivering on our annual commitments. Anyway, you look at it 2023 was a period of strong growth for our company and we see continued strength ahead, driven by the resiliency and durability of this cycle. The demand for energy will continue to grow.

A more than a decade unconventional resources in North America have provided a significant portion of the world’s hydrocarbon globe. The growth from the region will be more limited in the years ahead driven by Capital Frameworks that reward higher economic returns and increased shareholder distributions. This means that the incremental production needed to support global growth will come primarily from international markets driven by the Middle East and offshore. Looking ahead, the market for conventional energy resources will evolve differently than what we have experienced in the past, driven by three major trends, a shift in capital flows, an increased role for new technologies and an expanded role for subsea services, all of which will allow TechnipFMC to leverage the full capabilities of our integrated solutions, differentiated technologies, and the industry’s most comprehensive subsea service capabilities.

Looking more closely at these major trends, let’s start with the shift in capital flows. We expect to see continued strength in spending both in land and offshore markets. However, the dynamics will differ across the major markets as capital flows are typically a function of returns and access. In North America, the industry has access to resources, but economic returns will continue to be challenged outside the most prolific basins. We believe this will result in more modest growth in the region. Opportunities in the Middle East benefit from strong economic returns that will drive continued growth. That said, the number of operators that have access to these attractive resources is far more limited, which brings us to the offshore markets.

Here we believe much improved economic returns and broad operator access to deep water resources will attract a growing share of global capital flows. And with more than 90% of our total revenue generated outside the North America land market, FTI stands out as the pure-play equity to address this opportunity. While the strength of these trends is partly reflected in our current backlog and revenue guidance, we have high confidence in the durability of the market over the intermediate term. In 2024, we remain on track to meet our prior guidance for subsea inbound, with current year order expectations approaching $10 billion. Today, we are also increasing our expectations for subsea inbound over the three-year period ending 2025 to reach $30 billion, a 20% increase versus our prior view.

Looking beyond capital flows, we expected technology will also play a bigger role in spending behavior. Here TechnipFMC is focused on developing technologies for both conventional and new energies to drive market expansion. More specifically, we are using technology to drive further innovation in the offshore market creating new growth opportunities. A clear example of innovation is the Mero 3 HISEP contract, which we were awarded just last month. The significance of this project for the subsea industry cannot be overstated. It would be the first to use subsea processing to capture CO2 directly from the well stream for injection back into the reservoir. Importantly, this will all take place on the sea floor. In addition to reducing greenhouse gas emission intensity, HISEP technologies will increase production capacity by debottlenecking the gas processing plant that currently resides on the FPSO.

By moving the gas processing entirely to the seafloor, future FPSO topside designs can be further simplified driving significant improvement in project economics. HISEP is a major milestone for the subsea industry and for TechnipFMC. This project plays to our strengths. HISEP will allow us to demonstrate how technology innovation, project integration and partner collaboration enable our meaningful participation in the energy transition, while remaining aligned with our strategic priorities. It is the first iEPCI project ever awarded by Petrobras. And it builds upon Our strong order momentum starting the year with an iEPCI award that exceeded $1 billion. And finally, the third major trend driving subsea market growth opportunities can be found in services.

Today, subsea fields hosts more than 7,000 subsea trees and associated infrastructure, including manifolds, control systems, umbilicals and flexible pipe. This list is certainly not inclusive of all major components of a subsea production system. However, it does highlight the size and scale of the industry’s large and more importantly growing installed base. TechnipFMC’s global services organization plays a critical role throughout the entire life of the field, from system installation to maintenance intervention and production optimization and all the way through life of field. Our 2023 results clearly demonstrate that our strategy to enhance this resilient, growing, and high-return business is delivering real value with our services revenue having achieved over $1.5 billion for the year.

In summary, we close out a solid year having delivered many notable achievements. Subsea inbound orders increased 45% versus the prior year and included a new record for iEPCI awards. This growth in orders also drove a 50% increase in subsea backlog to over $12 billion with high-quality inbound supported with further improvement in our financial returns. And our growth in full-year operational results reflect strong momentum that continues into 2024. We have entered an unprecedented time for the development of conventional energy resources, driven by three major trends, a shift in capital flows, which we believe will largely be directed to the offshore and Middle East markets, an increased role for new technologies as shown by the MERO 3 HISEP award, and an expanded role for subsea services driven by the needs of growing and aging infrastructure.

Importantly, these trends underpin the 20% increase in our expectation for subsea inbound over the three-year period ending 2025, which had $30 billion will provide additional growth in backlog and further expand the execution of our project portfolio through the end of the decade. I will now turn the call over to Alf.

Alf Melin: Thanks, Doug. Inbound in the quarter was $1.5 billion, driven by $1.3 billion of subsea orders. Revenue in the quarter totaled $2.1 billion. EBITDA was $245 million, when excluding foreign exchange loss of $26 million and restructuring impairment and other charges totaling $10 million. Turning to segment results, Subsea revenue of $1.7 billion increased modestly versus the third quarter. The increase in revenue was due to higher productivity in the Gulf of Mexico, Asia Pacific and Africa, driven in part by accelerated conversion of several projects from backlog. The increased activity was largely offset by seasonal factors that impacted vessel utilization. Revenue for Subsea Services modestly increased due to strength in asset maintenance and ROE services in Norway, in the Gulf of Mexico.

Services revenue was also less impacted in the quarter by typical offshore seasonality, particularly in the North Sea. Adjusted EBITDA was $225 million, with a margin of 13.1%, down 200 basis points from the third quarter due to lower vessel-based activity and a mix of projects executed from backlog in the period. For the full year, subsea revenue grew 18% percent versus the prior year with adjusted EBITDA margin up 180 basis points to 13.3%. In Surface Technologies revenue was $357 million in the quarter, an increase of 2% sequentially. The increase in revenue was driven by higher activity in international and North America markets, both benefiting from higher wellhead equipment sales. Adjusted EBITDA was $52 million, a 5% sequential increase benefiting from increased contribution from international services and higher wellhead sales.

Adjusted EBITDA margin was 14.7%, up 30 basis points versus the third quarter. For the full year, Surface Technologies revenue was up 12% versus the prior year with adjusted EBITDA margin up 230 basis points to 13.6%. Turning to corporate and other items in the quarter. Corporate expense was $33 million, when excluding $5 million of charges. Net interest expense was $13 million and benefited from increased interest income in the period, driven in part by strong cash generation. Tax expense was $54 million. And lastly, foreign exchange loss was $26 million, the majority of which was related to the significant devaluation of the Argentine peso. Cash flow from operating activities was $701 million. Capital expenditures were $72 million. This resulted in free cash flow of $630 million in the quarter.

Free cash flow for the full year was $468 million, above the high end of our guidance range. When excluding impact of foreign exchange, we converted 50% of adjusted EBITDA to free cash flow, achieving the cash conversion rates we had previously targeted for 2025. Total shareholder distributions where $77 million in the quarter and $249 million for the full year. We ended the period with cash and cash equivalents on $952 million. Net debt declined more than $500 million to $116 million. In November, we announced an agreement to sell our Measurement Solutions business for $205 million in cash. We now expect to conclude the transaction by the end of the first quarter subject to customary closing conditions. Moving to our financial outlook, we have provided detailed guidance for the current fiscal year in our earnings release.

I won’t speak to all the details, but will provide some context for certain items for the full year and first quarter. I will begin with Subsea. At the midpoint of our full-year guidance range, we anticipate revenue of $7.4 billion with an EBITDA margin of 16%. This represents a 270 basis point margin improvement from the prior year. Our outlook also anticipates contingent growth in Subsea Services revenue to approximately $1.65 billion, achieving this level, one year ahead of our previous target. For the first quarter, we anticipate Subsea revenue to decline low-to-mid single-digits due to more typical seasonal activity patterns, and EBITDA margin to be in line with fourth quarter results. Turning to Surface Technologies, at the midpoint of our full-year guidance range, we anticipate revenue of approximately $1.275 billion with an EBITDA margin of 14%.

This guidance assumes we complete the sale of our Measurement Solutions business by the end of the first quarter. When excluding the impact of this sale, as well as the exit of certain geographies and portfolio rationalization in the Americas, our Surface Technologies revenue is anticipated to grow approximately 5% year-over-year. For the first quarter, we anticipate revenue to decline approximately 10%, when compared to fourth quarter results with an EBITDA margin of approximately 13%. We anticipate full year corporate expense of $115 million to $125 million. In 2023, the company initiated an ERP system upgrade. Our corporate expense now includes approximately $10 million in annual costs related to the implementation of the upgraded system.

We expect to incur a similar cost each year until completion of the project in 2027. We anticipate capital expenditures of $275 million, which is just over 3% of revenue at the midpoint of our guidance range. Finally, we are guiding free cash flow for the full year to a range of $350 million to 500 million. This includes approximately $170 million for the remaining payments related to the resolution of all outstanding matters with the PNF. Excluding these payments the midpoint of our free cash flow guidance would approximate $600 million. In closing when our guidance items are taken at the midpoint of the range, we anticipate total company EBITDA of $1.25 billion for the full year. This represents EBITDA growth of 33% percent versus the prior year, when excluding foreign exchange.

I also want to stress that we expect to achieve this significant growth, despite the impact of the strategic actions taken in Surface Technologies and the incremental spend related to the ERP system upgrade. This is also first second consecutive year for free cash flow conversion of nearly 50% when excluding the settlement payments. And we expect this to drive growth in shareholder distribution of at least 35% and a further reduction in net debt. Operator, you may now open the line for questions.

See also 13 Best Energy Stocks To Invest In According to Hedge Funds and 11 Stocks That May Be Splitting Soon.

Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Arun Jayaram of JPMorgan Securities LLC. Your line is open.

Arun Jayaram: Yeah, good morning, Doug. I wanted to first start with the increase in your long-term or three-year order guide, you raised that from $25 billion to $30 billion. I was wondering if you can comment on what drove the increase and perhaps give us a sense of how much of this was your expectation for more market share versus just the growing TAM in terms of Subsea and offshore FIDs?

Doug Pferdehirt: Sure, good morning, Arun. It’s really a combination of both. Clearly, both the total market size is increasing and as you know our – the share of the market, we continue to enjoy an increasing share due to the unique offering that we provide. Look, we are seeing, is just giving us much greater visibility into the durability of the cycle and much greater confidence when we kind of risk weight opportunities when you’re in a direct negotiation, there is no competitive tender as stated in my prepared remarks, which represents over 70% of our Subsea business. You just obviously have a much higher ability to be able to properly risk weight for those opportunities. You see the outlook slides that we provide and that the markets there, the size of the markets there, it’s solid.

It’s growing. It’s just really we’re in a privileged position which we are humble about it. We are honored to have this position and we offer our customers a clear line of sight to improve Subsea project economics that these are unique to our offering both in terms of our Subsea 2.0 architecture. And our and iEPCI offering that reduces their cycle time by 12 to 14 months on a deepwater project, thus vastly improving their economics. So it’s a privileged position to be in one we don’t take lightly and we continue to work really, really hard to deliver for our customers every day.

Arun Jayaram: Great. My follow-up, Doug, we’re intrigued by the MERO 3 project award I know you announced just a bit earlier in the quarter. But I was wondering if you could just talk a little bit about some of the unique technology that you’re bringing to table for this and it seems like a an application that could open up a world of new opportunities despite taking some of the processing and separation to the sea floor as you mentioned it would perhaps reduce some of the needs at the surface in terms of the design of the facility subsides. So I was wondering if you can maybe comment on the technology and perhaps the scope here of future opportunities and what this could open up for FTI?

Doug Pferdehirt: Sure, and thank you for the question because the award was announced earlier. We haven’t had a chance to talk about it here in this forum. This was the first opportunity. So very excited as I pointed out. I think it – we said it’s really, really unique both for the industry, as well as for our company. And I think understanding, as you said what are some of the actual award and then there’s with those what is it enabled by that? So, let’s start with just some of the highlights. Yes, one of the bottlenecks that we see in Greenfield developments as the offshore market continues to grow will be the delivery of the FPSO. The FPSOs are complicated and there are certain number of providers of those FPSOs and clearly they are becoming, if you will, the long pole in the tent in terms of the project cycle time.

Our approach to ensuring that deepwater economics remain privileged, i.e. drove our customers global capital spend. It is by really doing everything we can to in every way address the cycle time, as well as reducing the risk of delivering the projects and ensuring that they’re delivered on time. So an example of that would be, the FPSO itself is an intriguing unit. But let’s see, the complexity is really in the top sides configuration that you put on top. And you do that because, you either have to separate water from oil or you have to treat the gas or you have two separate, in this case high CO2 rich dense gas from the flow stream. If you can do that on the seabed, it has many advantages, one, simplifying the FPSO, therefore reducing that risk of that becoming a bottleneck in terms of driving even further improvements in cycle time.

Secondly, there’s obviously more real estate on the sea floor. We could do things, if you will horizontally, whereas if you’re on a ship you are pretty much constrained to doing things vertically Any sort of vertical construction costs more than horizontal construction. So in the simplest terms, we just have more real estate and to play with. And more and just as importantly than the economics is this is ACC has project. This is about reducing greenhouse gas intensity. This is about separating the CO2 on the sea floor and reinjecting it into the subsurface. It never sees the atmosphere. It is at the bottom of the ocean, on the sea floor in a closed loop system where we can separate out the CO2 and again re-inject CO2, hence the delivering a much lower greenhouse gas intensity for the project.