Q3 2019 Earnings Call

October 24, 2019

Team earnings Conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be question and answer session, if you'd like to ask a question. During this time.

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We had said you please limit yourself to one question and one follow up question. Thank you I'll now turn the call him to Matthews Seinsheimer. Please go ahead Sir.

Good afternoon, and welcome to Technip FMC third quarter 2019 earnings conference call.

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.

No and 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, the French I M S and the UK financial conduct authority.

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'll now turn the call over to Doug 40, hurt Technip FMC is chairman and Chief Executive Officer.

Thank you Matt Good morning, and good afternoon. Thank you all for participating in today's call.

Joining me today, or Maryann Mannen, Chief Financial Officer.

In Q3, Mcgregor President of New ventures.

And the CEO , we like where spinco.

In the third quarter, we announced the transaction that will create two diversified pure play market leaders.

Remainco.

Which will retain the technip FMC name will be fully integrated technology and services provider that we'll continue to drive energy development.

And Spinco, our leading and see player poised to capitalize on the global energy transition.

The separation wont able both companies to benefit from distinct and compelling market opportunities across the energy value chain.

Dedicated focus and management resources and capital.

And unique value propositions with differentiated investment appeal.

Our balance sheet will support the creation of true financially strong companies.

The capital structure, both companies will be tailored to their specific business needs.

And we remain confident that both will have investment grade metrics.

We believe strongly that providing independence for these two world class high performing businesses will unlock further opportunities and value creation for all stakeholders.

When thinking about the two companies it's helpful to understand where are the operational leverage resides.

For remain co 89% of the trailing 12 month revenue mix has been driven by sub sea projects in surface technologies outside North America.

We believe these international markets provide the best opportunities for growth.

More specifically, we expect the middle East will continue to lead our international growth in surface technologies.

And we produce anticipate future subsea activity will be driven impart by emerging markets, such as Mozambique, and Guiana, whereas an industry leader in first mover focused on sustainability, we have created a strong footprint to help on marked a tremendous resource potential in both.

Both regions.

We also expect activity to strengthen in Brazil, as a result of the development of Freecell assets.

First spinco, we're providing additional insight.

Into the significant backlog in hand today.

Which currently equates to nearly three times the revenue projected for 2019.

Looking at the backlog in greater detail approximately 56% of the 18 billion of total backlog is related to future work on LNG projects, including Yamal, LNG Prelude, LNG Grill, LNG and Arctic LNG too.

Our recent it also know there were Boomer LNG Award, which declined has suggested will likely be sanctioned next year is not included in these figures.

You know some of our intention to create two distinct companies has also refocus the market's attention on the appropriate peer group for both entities.

For Remanco, we believe Largecap service companies and equipment manufacturers are the most relevant peers.

This includes a select group of companies that have capabilities in subsea equipment installation and services or capabilities and drilling and completion equipment and services a global franchise across major upstream basins and a capital structure that provides the financial strength required by our customers.

We consider the most relevant appears to be Baker Hughes.

Halliburton.

And Ob.

And Schlumberger.

In addition to these large cap peers. There are few companies with smaller market capitalizations that could also be considered including offer solutions Oceaneering sub sea seven into where group.

First spinco the company will be one of the largest global you'd see pure plays with leading positions, notably in the LNG market.

Spinco strong competitive position in the marketplace is driven by leading capabilities and LNG.

A differentiated portfolio process technologies.

The ability to successfully execute the industry's most challenging projects.

Capabilities and services, particularly around front and project management consultancy and proprietary products and equipment.

Evaluation of the global peer group identifies only a handful of players with demonstrated LNG capabilities.

Including floor.

Did you see.

KBR insight Pam.

There are many other companies with whom we compete but we firmly believe that this more limited set.

Most appropriately reflects the key differentiating attributes and leadership positions of these two unique pure play companies.

Turning to sub sea.

Orders in the third quarter reflected continued strength driven by the integrated awards services activity and the award of the industry's first 20 case sub sea system.

The momentum of the integrated commercial model continued as we embedded several new MPCI projects in the period.

The value of integrated project Awards in 2019 has increased by more than 90% from the levels reported through the first nine months of 2018.

Sub sea services continued to benefit from the Industrys largest and expanding installed base with growth in the quarter, reflecting increased installation asset refurbishment and well intervention activities.

Subsea services remains on track for double digit growth for the full year.

Also in the quarter, we received the industry's first award of a high pressure high temperature system for El Morro Shenandoah project in the Gulf of Mexico.

This new technology was the result of a joint industry program led by Technip FMC that included five major operators.

This was the first time the industry collaborated to develop a new sub sea system.

Focused on the delivery of a single part number and designed to handle hydrocarbons under the industry's most extreme pressure and temperature conditions to date.

Taken together.

We reported inbound orders of 1.5 billion in the quarter, which again exceeded revenues in the period.

Inbound through the first nine months totaled $7 billion.

Reflecting a year to date book to Bill of 1.7 times.

We continue to believe that order growth for the full year will exceed 50%.

Significantly better than the total sub sea market growth, which we estimate.

Closer to 20%.

This high level growth is coming in the third year of a market recovery and is the highest annual growth rate, we have experienced in a decade.

This year's order growth has been driven by increased adoption of the integrated model.

And the success one reduction of Ipi was only possible due to the creation of Technip FMC.

Well, 50% growth will be difficult to repeat we do see potential for next year's inbound orders to match the absolute levels, we anticipate for 2019.

Moving to the LNG outlook, the supply of new Liquification capacity coming online today reflects investment decisions made as far back is seven years ago.

Well, we acknowledge near term market sentiment, we continue to believe that natural gas is critical to the energy transition and that there is a need for significant new capacity to meet future gas demand.

It is also important to remember that the decision to sanction projects today is based on gas first gas and 2020 three and beyond.

The demand scenario at that time will be very different than the one we currently face.

Five projects over the last five months have either been sanction.

As I highlighted in public disclosures move closer to if I'd in 2020.

Two of these have progressed to the benefit of Technip FMC.

We announced the first project Arctic LNG to back in July .

And just two weeks ago, we announced the contract award for the rumor LNG project in Mozambique through consortium, including Technip, FMC GC and floor.

There were Boomer project includes the construction of to natural gas Liquification trains with total nameplate capacity of 15.2 million metric tons per annum.

As well as associated onshore facilities.

The award builds upon our expanded capabilities in the region, where we already present through our work on the Corral LNG project and the goal Pheno integrated subsea project.

This serves is further confirmation of Technip FMC his leadership in LNG and our strong capabilities in the delivery of remote projects.

Selective but to your projects like were boom is paramount to our success.

To emphasize this point, we have reprioritized previously targeted projects, where the commercial terms fell outside our acceptable limits.

We remain focused on securing the right projects, where we can leverage our differentiation.

Those that have the right contractual terms for us and those with the best project economics for our customers.

I will now turn the call over to Marianne to discuss our financial results in the quarter.

Thanks, Doug.

Our third quarter highlights included solid orders in sub sea.

Long execution in onshore offshore and double digit international revenue growth in surface technologies.

We continue to build backlog for execution in 2020 and beyond providing further confidence in our medium term outlook and a solid foundation for our upcoming separation into two well capitalized companies.

We also generated positive operating cash flow in the quarter.

Which has now been positive for five consecutive quarters.

Moving to the results.

Adjusted diluted earnings per share from continuing operations were 12 cents in the quarter when excluding after tax charges and credits of seven cents per diluted share.

Their pre tax items impacting the quarter for which we do not provide guidance included 22 cents per diluted share related to an increase in the liability payable to joint venture partners that is included in interest expense.

Nine cents per diluted share of foreign exchange losses included in corporate expenses.

Total company adjusted EBITDA with $379 million with cash flow from operations totaling 92 million. We ended the quarter with net cash of 596 million.

Turning to the segment results.

Dempsey delivered third quarter revenues of $1.3 billion, an 11% increases increased versus the prior year quarter driven by increased activity in subsea projects in solid year over year growth in subsea services. The increase in services revenue was driven by higher installation well intervention.

In an asset refurbishment activities with notable strength in Asia Pacific and the North Sea.

While we experienced solid revenue growth over the prior year period. This growth was impacted by the timing of key project milestones shifting recognition of some anticipated revenue into the coming quarters.

Revenue growth was also impacted by foreign exchange translation adjustments, which reduced the growth in revenue by $44 million versus the prior year period, adjusted EBITDA was 139 million with a margin of 10.4%.

We remain confident in our full year guidance for subsea.

Onshore offshore reported third quarter revenue of 1.6 billion, an increase of 4% from the prior year quarter. This was our second consecutive quarter of year over year revenue growth benefiting from the significant expansion of our backlog.

Adjusted EBITDA was 304 million with a margin of 19.1%.

The solid margin performance in the period reflects the Yamal LNG contribution and the continued strength in execution across the portfolio.

Following quarter end, we announced the award of an EPC contract for Mozambique struggling <unk> LNG project.

While we will perform some early work on the project in the near term the impact on our backlog will not be material in the fourth quarter. The full contract value will be included in backlog when full notice to proceed is given the client has indicated that the final investment decision is anticipated in 2020 .

Surface technologies revenue of 397 million was down modestly in the quarter versus the second quarter with continued strength in international markets nearly offsetting the headwinds in North American activity.

Adjusted EBITDA margin of 11.2% was largely unchanged sequentially, primarily due to lower volume and further pricing pressure in North America.

Turning to cash flow, we generated positive operating cash flow in the period of 92 million.

Which would have been 256 million excluding settlement.

This included a 9 million contribution from Yamal LNG.

This marked our fifth consecutive quarter of positive operating cash flow.

Year to date, we generated operate operating cash flow of 288 million and we expect cash flow from operations to be positive again in the fourth quarter.

Beyond the operating line capital expenditures were 98 million in the period and included investments that will support for future growth.

Please note that our full year guidance of approximately $350 million.

Exclude the 80 million impact of the sale leaseback transaction, we recorded in the first quarter for the dive support vessel.

And lastly on the Q2 earnings call I stated our intent to distribute the majority of the 413 million liability to Yamal LNG joint venture partners before year end.

In the third quarter, we made a cash distribution of 223 million and expect to make an additional payment in the fourth quarter.

Turning to our full year outlook, we have provided updates to our guidance for surface technologies and corporate expense.

Our surface technologies, lower North American activity continues to negatively impact both volume and price.

Many of our international markets remain healthy and we now expect our international revenues, which account for just over half of the segment total to grow at a low double digit rate for the full year.

This trend supports our full year revenue guidance of $1.6 billion to $1.7 billion.

However, we are reducing our margin guidance to at least 10% down from our previous guidance of at least 12% due to the market challenges we are facing in North America.

A majority of the FX impact was driven by the devaluation of the Angolan kwanzaa as a country Central Bank took steps to more closely align its published rate with those offered and less traditional foreign exchange markets.

As a reminder, if you'd like to ask a question simply press star one I know telephone keypad.

Good morning show.

So.

Maybe just start by addressing one I think is driving some of the weakness in the stock in Europe . This morning.

That slipped in Threeq, you anything else that you'd call out and.

But otherwise is there any change to your broader sure if that laid out heading into next year.

Thank you for the question Sean.

Yes, absolutely the way you summarize it is what we had previously stated and we remain committed to.

That statement and nothing has changed in our outlook for the subsea business or its ability to be able to continue to deliver improved results.

As a matter of fact, a very strong inbound levels that we've enjoyed this year year to date, a book to build 1.7 times only gives us greater confidence is it gives us.

Greater revenue coverage and allows us to improve and accelerate the utilization of underutilized assets in the company as we move forward. So you're absolutely right nothing has changed.

The timing in the.

When we actually achieve certain milestones is not entirely within our control and it's very difficult to predict on a quarter to quarter basis, which is why we give full year guidance. We remain fully committed to the 2019 full year guidance and our outlook has remained unchanged if anything strengthened by the core.

That's very helpful. I appreciate that.

As we think about with removal of making its way into.

Into your project Q.

Well here.

How does how does capacity you look for incremental projects for the on off business overall, it specifically for LNG.

You'll be working now on several projects at once execution of course is critical and can you talk about.

Engineering capacity, how you think about managing to meet the incremental projects that you still have on your board for LNG in particular.

This is a very critical question and one that we put a significant amount of focus on and it's why selectivity is so important across our our portfolio, but I'm going to ask Cathree Mcgregor to talk a bit more about.

He is being done within onshore offshore and how we track that utilization and make sure that we're matching.

Capacity to our proven and demonstrated keep.

Yes, sure and good morning, Sean So at the way we look at I capacity in LNG is really not just in a number of project, but looking at different factors such as the type of projects. We didn't the project what schools are we looking at enough caused the timing because as you know.

We have demonstrated in the past as you know I capability to de lever and wept Siemens and you see on three very very large project at the same time and since then in any he sees then we really have increased in terms of 60 ability to our open mixing centers.

A multi country footprint, which we can leverage on so frankly, when I look at what do we have today.

Backlog and adding to that some of the opportunities that we're looking to integrating the future. We're very comfortable that we can take and delever and continue to execute on those projects that to that we are involved in this is really a topic that essential to just to discuss.

Your next question comes on line of antisense data with Goldman Sachs.

Helpful.

In terms of the continued activity in the brownfield and tie back area. So this just all points to the the continued strength in resiliency of what we've been able to do with our business and how we've been able to transform the market in terms of Sci looking forward quite frankly, it's becoming more wells more than 50% of our business.

Maybe we can tell them. It further with 2020 I will is it fair to think that big gains in margins would be relatively modest but in 21 as the installation process again that the margin gain to be even little bit greater.

Yeah, Angie I would agree with your analysis I think it's really important to remind people when we announced an Sci project or an integrated project that includes sub sea delivered installed on the seabed. The only company that can do that as a single entity and why we have been so successful to date.

20, 122 timeframe as you 0.0.

Great. Thank you I'll turn it over.

The process that we are undertaking is the finalization.

You're welcome teams and thanks for the comment on the disclosure what we're anticipating right now fairly consistent with what I think we shared last quarter in a range of about four to 500 million unwind in 2020, that's as we see today, that's what we're expecting not not much change from where we thought.

Thank you.

Your next question comes on line of David Anderson with Barclays.

Integrated strategy and what I was going to work or is there other self help measures that you're looking to implement in there.

Hi, David Good morning, and thank you very much for the question, so I'm going to I'm going to build up to the answer if you don't mind just for a minute I'd just remind everybody that when we talk about our service technologies business.

It is a very resilient business for us.

We certainly had a different expectation at this time last year for the North American market in 2019. Unfortunately that did not transpire that has led to us having to revise our margin guidance.

I think for it to the surface business, there's really three key activities that we're undertaking surface North American business, let me be more specific is the high grading of our contracts, which.

As most evident by the fact that you so our announcement.

Of of our products and services that we provide to them in the North American market.

That you'll see us do more of that that's very important for us going forward.

Secondly is.

And then finally the point that you made earlier, which is our strategy is to transform the business I really looking at it differently and taking all the lessons learned we've had from so sub sea, where we've been quite successful in changing that from a product sale business do now fully integrated services business and doing the same.

I will just start with a focus in North America.

Again, some of your smaller competitors on North American market.

But certainly having high level.

Thanks for taking my questions I've, just got a couple so just firstly on the onshore and offshore you'd see business I just wonder given the there was that you've seen if you could maybe catherine could could updates as shown on your views as to what Youre. So medium term margins will be for the for the portfolio.

So Michael I, just want to make sure that we're clear when we answer your question you're talking about the offshore portion of onshore offshore.

No in the business the division as a whole Doug.

Yes. Thank you for the question obviously, we're very pleased.

The recent inbounds beside both on the ticket Angie too as well as it might even though it's not going on numbers, yet, but very very easily the way the portfolio is shaping up the in the onshore offshore GPU.

Of our backlog, we have very comfortable we the guidance. We've given you fast forward to seek suite at 200 bps improvement based on the LNG contribution as we continue progressing through the transaction will have further engagement, we that investors community and of course, we will look.

Thank you and through an unrelated follow up really I guess is on the on the spin off I was wondering whether you can give any more color as to how you see the capital structures of both businesses. Please thanks.

Sure. Thanks, Michael for the question, we will be providing some good color here coming as you see the perspective looking into the way that we are anticipating these structures for both Spinco and Remainco as we've said before our intent is to create too.

Investment grade companies, both Spinco in Remainco and that continues to be our goal and objective as we go forward.

Your next question comes on line of Dan Boyd with BMO capital markets.

Hi, Thanks, good morning.

Good morning.

Two to two different questions. The first one I just want to kind of go back to subsea margins and when you gave your guidance. This year I believe vessel utilization is running higher than you expected and that you're seeing a little better growth rates out of the service side of the business, which I also thought carries a slightly higher margin. So.

Sure, Dan and I don't disagree with the comments that you made so I won't repeat those.

When we look forward. So there's really two things one is you kind of got to predict the timing of when you're going to be critical milestones, which again you can't do on a quarter by quarter basis. Both in terms of as you're going to roll off a higher quality backlog from the historical backlog and then obviously the the new.

Projects in the new inbound that's coming in.

You know it is clear and I have said this repeatedly.

And I know it may be hasn't been consistent across the sector, but we're not seeing a material improvement.

In.

Competitive pricing when it is vessel only contracts or if you will day rate type contracts.

Instead, what we've done is we've decided to stay focused on.

Wrapping that capacity available for our integrated projects again, many of which.

Strong case of references. Thank you that's why we're seeing so many repeat orders from our clients.

I'll repeat again and I know it hasn't I know others are saying that different things, but we're not seeing.

When it gets out there in just a let's say a commoditized tender where your voting where you're.

Excuse me, where your tendering on just a vessel were just to vessel day rate that that we're seeing a strong a change in the pricing behavior.

Focusing is just on the cash return profile just given the backlog did you see.

How are you thinking about dividend growth or.

Bringing back the the buyback what would the looks that outlook over the next Navy.

In the 2020.

Thanks. Thanks for the question, obviously as we continue to work through the separation of our Q companies.

We'll be refining the capital allocation strategies for both Technip FMC and for Spinco.

Those policies will be clearly communicated to you as Kathleen said should be looking forward to providing incremental color on finco and certainly for Remainco, We'll give you greater color on the way that we see the capital allocation policy unfolding going forward.

Okay all right. Thank you.

Your next question comes on line of John look remain with CMC I see markets that solution.

John Luke perhaps you're on mute.

Your next question comes online as well as with RBC.

Hey, good afternoon, good morning.

Hey, Doug Bank that Doug Merritt, Thanks for the incremental color here. This morning is always.

I think some investors out there might think that.

Pretty much sub sea 2.0 in the benefit of that will have pretty much run its course in 2019 and.

Kind of wondering wondering out loud you know what what the encore is to sub sea 2.0, so any they perspectives on that I think would be would be helpful.

Thank you Kurt.

So I would.

Reassure the community.

That sub sea 2.0, certainly we'll have not run its course in 2019.

I think there's much more to be done obviously, we've talked before about the fact that the largest percentage of our feed studies are front end engineering studies now includes sub sea 2.0, we keep talking quarter after quarter about the deployment of additional sub sea 2.0 technology I think there were at least two references to that in the press release this call.

But the real beauty of it occurred is as it runs through our organization because the sub sea 2.0.

Philosophy is it's more than just about the equipment. It's about a change in the operating model for the way that we run the company and it gives us much greater leverage.

Across our cost base.

The clear vision that goes far beyond sub sea 2.0 sub sea 2.0 was just the beginning and I remind everyone that sub sea 2.0 was born the vision and most of the engineering was born before the merger and creation of Technip FMC. So now.

It is.

You know going if you will there's a whole lot left to be done and we're just in the early stages of it we're super proud of.

With the creation of Technip FMC, we're super proud of the Sci We're super proud of 2.0, but it's really just the beginning.

That 52.0, and maybe the next leg of what you just mentioned right.

What you would have historically seen in the subsea business.

Let me just stick to the facts.

As you know most of our awards and PC I had been direct awards again as a result of early engagement with the client working in an open and collaborative way to redesign to sub sea architecture, removing waste that was nothing the cost of the to the project and changing our execution model to where indeed, we can add.

Improvement in the time to first oil, which really drives the project returns and that's why we have been able to be so successful impossible to do unless you're a single company their controls all the leavers very very difficult to do otherwise thats why we couldn't be more happy happier and we're seeing the benefit in the market is right.

Recognizing the benefit of the creation of Technip FMC in the integrated sub sea solution. So.

More to come as I said, he has to be more leverage from it the greater the level of.

Penetration into our backlog in into our business.

We're we.

We are demonstrating our clients again.

On a repeat basis now the benefit of this type of method thought methodology and just if you think about the conversion rate I mean, it's just.

It's astronomical to think that we could in such a short period of time of such a significant conversion rate in my prepared remarks. It may not have been picked up on so I'll just repeat when we talk about 50% improvement.

In our inbound order rate and sub sea.

The highest in over a decade, but the market in the same timeframe or the one year timeframe with the 50% improvement only improved by 20% one can interpret.

With that means in terms of the way that the market is recognizing our success.

That's great color. Thanks, Doug.

Your next question comes from the line and Bertrand Hodee was kept pushing Brian .

Yes, Hello, Thank you.

Taking my question.

Subsea margin for 2020 this would be my first question.

I'm, sorry, I don't think I have a microphone on Burke for strong a good afternoon. Thank you for the question we will report.

The we will we will be providing 2020 guidance when we have our Q4 and year end.

Okay and in one.

One follow up on on subsea services.

You clearly have pointed that subsea services.

He's getting traction.

Because the slight plus 17% when I look now.

Backlog scheduling in sub sea.

For Q4, excluding subsea services looks.

Already very strong at above a 1.42 billion. So it looks like Suzy implicit we say a sub sea revenues for Q4 looks.

Around 1.7 billion, so quite a step up compared to Q suite, and then where do you see a subsea services going forward is it's well established now at about 1.2 billion.

Yeah, and you see physic close to that Nimbus, possibly.

Okay Bertrand I'll cover the first part and then I'll pass it over to Marianne.

Is actually a great benefit when you start to look forward at revenue coverage, where the outlook for 2020, so you're right to point that out although at Merian the additional color.

19, you're sitting at about 1.4 billion, but just keep in mind, our subsea services.

If not backlog so you would need to add the estimate for subsea services. You know in is as we've kind of talked about numbers that that's several hundred million of a backlog that you wouldn't see in that number. This nearly reflects the MPCI or the project element. So services will be inbound in the quarter just like it is every.

Third quarter, and that's how you would get to the full year range that you said in a range of one five to one seven.

Very clear.

Thank you.

And our last question will come from the line of marked the onto the Cowen.

Thank you.

And I appreciate that there was some ITD spending.

Previously, but even throughout the first nine months of the year. It was it was materially above that level.

Should we expect a 40 to 45 kind of run rate for the combined company beyond fourth quarter or could you talk to how you see that developing.

Yes sure appreciate the question and understand yes, you're right you know from a run rate perspective kind of underlying that's been our that's been our trend and that's a trend for the combined company Technip FMC I certainly don't want to try to give you color right now on what the combined corporate expense would look like for.

Spinco and Technip FMC, obviously, though that will give you some guidance around that but you know from a run rate perspective, it's been fairly consistent with the exception of that sort of unique vendor that discretionary spend.

This year.

Okay is there anything in that 40 to 45 that is related to preparation for the separation.

You know look at its hard to say unequivocally, yes, or no. Obviously, there's lots of people writing in the organization who are working on working on the spin, but I think it's reasonable to say that there are certain activities that we are targeted to get the spin complete and meet our accelerated timeline I think that would be affairs.

Option.

Okay, Great. That's all I had thank you very much.

I'll now turn the call back over to Mr. Seinsheimer for closing remarks.

This concludes our third quarter conference call a replay of our call will be available on our website beginning at approximately ATM British summertime today. If you have any further questions. Please feel free to contact the Investor Relations team. Thank you so much for joining US operator, you may end the call.

Thank you that's because this conference call you may now disconnect.

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