Q4 2020 TechnipFMC PLC Earnings Call
[music].
Ladies and gentlemen, thank you first time being by and welcome to the technique at M C.
So any 'twenty earnings conference call at.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any pregnancy sense. Please press star zero I would now like to hand, the conference over to you on.
Our first speaker today, Mr. Matthew sign finally, thank you. Please go ahead Sir.
Thank you Nico.
Good morning, and good afternoon, and welcome to Technip Fmc's fourth quarter 'twenty 'twenty earnings Conference call.
Our news release and financial statements issued yesterday can be found on our website.
I would like to caution you with respect to any forward looking statements made during this call on.
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, the French M S and the U K financial conduct authority.
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 pretty art, Technip, FMC is chairman and Chief Executive Officer.
Thank you, Matt good morning, and good afternoon.
You for participating in our fourth quarter earnings call.
I am delighted to be joined by ultimately our Chief Financial Officer.
Today I'll start by highlighting the tremendous successes of our company over the course of 2020 in the face of one of the most challenging years on record.
First we protected our people.
Our success has always been the result of the tireless efforts and unwavering commitment of the women and men of Technip FMC.
What they accomplished in 2020 was nothing short of exceptional given the hardship and difficulties that occurred across the globe.
Health and safety is our top priority and drives every decision we make.
We took the steps necessary to protect our workforce as well as our fellow employees of our customers contractors and suppliers.
And these actions one praise from clients and ensure that their projects move forward safely.
Second.
The initial outlook, we provided last February which clearly impacted by a multitude of events.
But our teams quickly responded with a revised view that we provided in July.
Our aggressive cost reduction plan.
Focus on project execution, and resilient backlog provided us the confidence and visibility to issue issue guidance at a time when few others in the energy sector, we're willing to guide for the next quarter.
And we delivered on our revised plan with full year revenue and adjusted EBITDA margin meeting or exceeding guidance for all operating segments.
And third we protected our backlog.
Importantly, this speaks more to the relationships we share than the contractual terms of any one project.
We all face challenges, our suppliers, our customers and Technip FMC bye.
By working together, we found solutions that help mitigate if not eliminate many of the obstacles we face together.
Well no projects were canceled from backlog.
More enduring impact to our company will be the strength and relationships that have resulted from the collaborative engagements with our partners. During this unpredictable operating environment.
And beyond these successes, where many other notable achievements with regards to our ongoing business transformation.
First was our separation thrilled.
Throughout 2020, we continue to work to separate Technip FMC into two industry, leading pure play companies with the transaction now completed through the partial spin off of Technip energies.
We took specific actions in response to investor feedback that were incorporated in the final spin process.
We accelerated the spin timeline.
Closing the transaction just 40 days after announcement.
We added an ADR that will trade over the counter in the U S. Broadening the base of eligible shareholders for Technip energies, while also creating additional liquidity.
And we address investor concerns regarding share of flow back and capital structure with the addition of BPI, France as a long term reference shareholder and our near term retention of a minority stake in the new company.
February 16th Mark day, one for an independent technip energies, but its real significance is the expanded opportunities and enhanced focus of management resources and capital that will serve.
Two benefits stakeholders of both organizations.
Beyond the separation, we also accelerated our cost reduction efforts across the entire company in 2021.
We announced targeted cost savings of more than $350 million, which we achieved on an annualized run rate basis, well before the end of the year.
Additionally, we delivered on our commitment to reduce capital expenditures for the full year by one third versus our original plan with the current spend at a level that is sustainable over the middle term.
In November we provided a comprehensive overview of our efforts around E. S. G.
Technip FMC was created with the vision to drive real and sustainable change in the energy industry. This included the introduction of a three year sustainability Road map that has resulted in a number of successes for our company.
We have progressed, well when reducing our own emissions of greenhouse gases and are committed to helping our customers reduce their carbon footprint with innovative solutions and technologies like subsea 2.0, and I production.
We are driving inclusion in the workplace as demonstrated by our initiatives advancing fear and diverse representation and ensuring equity of our rewards.
We are supporting the development of the local communities in which we live and work through educational programs focused on science technology Engineering and mathematics.
And we will continue to ensure that our actions are aligned with shareholders through executive compensation programs that are focused on driving behavior that creates sustainable shareholder value.
We also established an extensive set of new commitments to be realized through 'twenty 'twenty three that we'll have real impacts and we'll be measured using an annual scorecard to provide transparency on our progress.
At the core of our environmental initiatives is 50 by 30.
A bold commitment to realize a 50% reduction in scope, one and two equivalent emissions like 2030.
That's a 50% reduction before the end of this decade.
Well, where there's very same time period, we will continue to deliver real solutions for the energy transition.
Including lower carbon alternatives, such as our all electric production system for subsea and I production per surface markets, both of which are available today.
We will also introduce zero carbon alternatives, such as our deep Purple initiative, which I will discuss shortly.
Technip FMC has a strong history of challenging industry convention to develop design and integrate new innovations and digital as a key enabler for continued success.
We introduced elements of our digital transformation over the course of 2020 with a particular focus on subsea studio.
Subsea studio was initially developed solely for subsea system design, but.
But we have since extended the platform beyond the front end to incorporate the execution in field management phases of a project.
Once fully implemented will have a seamless digital thread from concept design to tendering manufacturing and delivery and continuing all the way through the life of the field.
These digital initiatives improve economics enhance performance and reduce emissions driving sustainable change that makes us the partner of choice for our customers.
And once again, we are leveraging our subsea expertise by bringing digital innovation into the surface arena.
That enhance the customer experience for both I complete and I production.
I complete as a fully integrated digitally enabled well site operations and control system.
It creates a seamless digital experience with fully autonomous maintenance and remote data access initially from the completion space and ultimately extending through the production phase.
I complete significantly improves efficiency with 50% faster rig up and rig downtime.
66 per cent reduction in the personnel required on site and cost savings that exceed 30 per cent for our traditional work scope.
More importantly, it also increases safety by eliminating thousands of redzone interventions on a typical completions pad by using automation and control to engineer all risks and hazards.
I complete has already achieved significant market penetration since its introduction in the third quarter with 10 customers utilizing the new integrated system.
I complete is a real example of business transformation and its early success supports our expectations for growth in our completions revenue in 'twenty 'twenty, one to outperform the overall market.
Turning to the key drivers of our 'twenty 'twenty, one on outlook for surface technologies.
International revenue has grown to become an even more significant portion of our business mix for.
For the current year, we expect a gradual and steady recovery and well count to drive modest international market growth.
Spending increases led by national oil companies, particularly in the Middle East.
Our unique capabilities in this market, which demands higher specification equipment global services and local content provides a platform for us to extend our leadership positions.
For North America, we anticipate full year revenue will likely be flat to down modestly versus 2020.
Overall surface technologies continues to benefit from the adoption of our digital solutions and the broader market recovery.
We remain levered to more resilient international markets, where we expect to source approximately 65 per cent of our full year revenue.
Moving to the subsea outlook.
The subsea opportunity list has expanded since our last update reflecting our view of renewed customer confidence given the improved economic outlook lower market volatility and higher oil price.
There are new projects were added in the period, increasing the total estimated value of the opportunity list by more than 15%.
Two of the projects came back on the list after being extended would be on our 24 month view during the height of the pandemic.
We experienced strong momentum in front end activity in the second half of last year and we expect this to continue throughout 2021 creating.
Creating an environment for a more sustainable deepwater recovery.
Additionally, we expect at least 60 per cent of the projects undergoing feed studies in the current year to include and I E. P. C. I solution, many of which will be direct awarded to our company.
As we have said before we are increasingly less dependent on the larger publicly tendered projects.
In 2020, just over 25% of our inbound came from projects on the opportunity list and in 'twenty 'twenty, one that number will likely be lower.
Much of our 2021 inbound search beyond the opportunity list.
We expect we will be awarded more I E. P C I and more subsea services.
And we expect we will see more direct awards to our company than in the prior year.
This will include project work from our newest alliance partner Repsol Sinopec, where are we.
We have recently formed an exclusive five year alliance to support oil and gas development in the United Kingdom, deploying both IP and I P C I and leveraging our extensive installed base across the region.
For 'twenty and 'twenty. One we are very confident that orders will exceed the 4 billion achieved in 'twenty 'twenty.
We anticipate Brazil will be the most active region of the world for new projects driven by continued investment and we see additional market growth potential coming from the North Sea Asia Pacific and Africa.
The strong front end activity, we are experiencing today should support our multi year outlook driving our expectation for continued subsea order growth in 'twenty 'twenty two.
Looking beyond the near term subsea outlook. We are excited for the road Technip FMC will play in the energy transition with significant opportunities, including novel wind and wave energy carbon storage and green hydrogen.
With over 70 per cent of the world surface covered by water, we view offshore and more specifically subsea as the next frontier for the energy transition.
Offshore opportunities will require more technology innovation involve an expanding list of players and necessitate a higher level of collaboration.
Our core competencies allow us to transform new technologies into commercially viable renewables projects.
We are well positioned to serve as system architect.
From technology development to.
The project delivery and life of field services for these large scale renewables adventures.
Last year, we introduced deep purple.
Deep purple is a collaborative effort between Technip FMC, our clients and partners.
Our common goal is to integrate offshore renewable electricity and subsea hydrogen storage to provide power to subsea infrastructure and when at scale to provide clean energy to consumers.
We have made significant progress with the conceptual on technical phases of this project. This includes the optimization of our hydrogen flexible flow line and riser qualification.
We have secured an innovation grant in Norway for a three year pilot project, where we will lead the efforts to develop and optimize offshore wind hydrogen and advanced energy management.
And we will also develop a dynamic model and digital twin further contributing to our overall digital strategy.
And deep Purple is just the beginning for us.
Further success in the energy transition will come from collaboration.
Partnerships will be instrumental in this transformation.
We recently partnered with floating power plant are clean technology company for an EU Grant deal application to fund an offshore green hydrogen pilot for the Canary Islands.
And we have also partnered with E. D. P energy is to Portugal on the beyond hydrogen project study offshore Portugal.
The ultimate path to commercialization for these and other opportunities will be driven by our ability to provide innovative and proprietary technologies that are unique to technip FMC.
Partner with our clients as the architect and integrator of the new energy system and build new partner alliances that leverage our expertise in integrated project execution.
Importantly, these are the same core capabilities that have driven our success in the traditional energy markets.
And we will also invest in early phase projects and solutions that accelerate the roll of our technologies in the energy transition as we continue to redefine offshore energy.
I went on I'll turn the call over to <unk> to discuss our financial results in more detail and provide you with our outlook for 2021.
Yeah.
Thanks, Doug.
It'll company revenue was $3 4 billion in the quarter with adjusted EBITDA of 301 million.
Total company inbound orders were $4 2 billion in the quarter with subsea meeting our expectation of approximately 4 billion in orders for the full year.
Backlog increased sequentially to $21 4 billion backlog for subsea was $6 9 billion of which $3 6 billion is scheduled for execution in 'twenty and 'twenty one.
Cash flow from operations was 555 million in the quarter capital expenditures were $41 million, resulting in free cash flow of $514 million.
Net cash more than doubled sequentially to $854 million.
Adjusted earnings per share were five cents in the quarter when excluding after tax charges and credits on 14 cents per diluted share.
Okay.
Let me now discuss the segment highlights fourth quarter subsea revenue decreased 10% versus the prior year to $1 3 billion, primarily driven by lower project activity in the North Sea and Brazil. The reported revenue decrease was partially offset by increased activity in the Gulf of Mexico Africa and Asia.
Civic Subsea services' revenue was largely unchanged from prior year quarter.
Subsea adjusted EBITDA margins.
Eight 7% decreased 370 basis points, driven by lower activity and COVID-19 related impacts.
Adjusted EBITDA for all operating segments included direct COVID-19 expenses in the current quarter. As a reminder, these expenses were excluded from adjusted results in previous quarters in 2020.
It took me been a Gs revenue of $1 8 billion remained largely unchanged versus the prior year quarter and benefited from the continued ramp up of Arctic LNG and higher activity on projects in Africa and Asia Pacific.
Which largely offset the decline in revenue from Yamal, LNG and lower activity on projects in the Middle East and North America.
Adjusted EBITDA margin of 10, 6% declined 360 basis points versus the prior year quarter due to a reduced contribution from Yamal LNG, partially offset by continued strong project execution.
And in surface technologies, I will focus on our sequential performance to demonstrate the underlying improvements in the quarter surface reported fourth quarter revenue of 262 million.
A 16% sequential increase.
Driven by an expanded services offering and strong international backlog conversion as well as increased drilling and completion activity in the United States.
In the quarter international represented more than 65 per cent of total segment revenue.
Surface technologies reported adjusted EBITDA margin of 11, 8%.
410 basis points increase versus the third quarter with North America, posting a positive contribution for both the quarter and the full year.
Significant improvement was driven by higher activity and the benefit of our cost reduction activities throughout 2020.
Yeah.
Turning to cash flow operating cash flow improved sequentially to 555 million driven by a significant improvement in working capital capital expenditures were $41 million in the period for the full year capital expenditures on $292 million were within our guidance of approximately 300 million.
Free cash flow for the period was $514 million with full year free cash flow on $365 million exceeding the high end of our guidance free cash flow in the quarter benefited favorably from timing of targeted collections on expenditures.
Including advances from recently awarded projects.
We ended the period with cash and cash equivalents on $4 8 billion net cash improved 470 million sequentially to $854 million.
And finally, let me provide you with our 2021 outlook our guidance is based on continuing operations and does exclude the impact of Technip energies, which will be reported as discontinued operations.
In subsea we are guiding full year revenue to be in the range of five to $5 4 billion.
Backlog scheduled for execution in the current year is $3 6 billion.
Subsea services' revenue is expected to exceed $1 billion.
Vast majority of which is not included in backlog today.
Taken together close to 90% of revenue at the midpoint of our guidance range is fully supported by services and scheduled backlog.
We expect adjusted EBITDA margin to improve to a range of 10% to 11% driven by the execution of higher margin backlog, improving vessel utilization and the benefits of cost reduction activities.
For surface technologies, we expect revenue in the range of 1.15 billion to one point to 25 billion with international revenue representing around 65 per cent of total segment revenue for the year.
We expect adjusted EBITDA margin to improve to a range of 8% to 11% driven by the benefits on the lower operating cost base and a favorable revenue mix.
Turning to the other guidance items, we expect corporate expense of 105 to 150 million, which includes depreciation and amortization of approximately $50 million.
We expect net interest expense of $130 million to $135 million.
We expect our reported tax provision for the full year to be between 110, and one on $20 million.
<unk> provision is impacted in the year by approximately $40 million of separation related items and approximately $20 million of withholding taxes sales taxes, which are taxes paid on revenue.
We expect capital expenditures of approximately $250 million.
Free cash flow, which we define as cash flow from operation.
Less capital expenditures is expected to be between $50 million and 150 million for the full year importantly, I want to highlight that approximately $70 million of nonrecurring separation related expenses are included in this outlook and this figure includes the $40 million in tax related items just mentioned.
Yeah.
Lastly, I want to provide further comments regarding the capital structure on Pickney book from C. L.
Our filing made at the time of separation on February 16th we indicated that our pro forma capital structure consisted of approximately $2 2 billion on net debt looking to the remainder of this year, we expect a reduction in net debt to be driven by the following.
200 million in proceeds from the sale of shares and Technip energies to BPI, France, which we now have received.
In early March we will receive approximately 80 million in settlements associated with foreign exchange hedges related to debt repayments made at the time on the spin.
Free cash flow on approximately 200 million to be generated post separation when assuming the midpoint on free cash flow guidance for the year.
Additionally, at the time of separation and prior to the sale of shares to be P. I, France, we hold a 49, 9% stake in Technip energies that is currently valued at approximately $1 2 billion.
Which we intend to monetize subsequent to the 60 day lockup period and continuing over the next 18 months.
Yeah.
Thank you <unk> before we move to Q&A I, just want to close by expressing once again, how much excitement has been generated by the creation of both technip energies and Technip FMC.
We are very optimistic about the future for Technip, FMC and uniquely positioned as an international company with over 90% of revenue generated outside North America.
And industry pure play highly levered to the subsea market, which we believe is poised for a multiyear recovery.
A thoroughly integrated technology and services provider supporting both the traditional and renewable energy industries.
And a company that is focused on providing innovative solutions to meet the worlds demand for energy with innovative low carbon offerings like I production and all electric subsea.
As the partner of choice leveraging our extensive references as an architect and integrator as our customers look offshore and subsea to achieve the scale required for the new energy system.
And through investment in early phase projects and solutions that accelerate the roll of our technologies in the energy transition.
And we will remain we will maintain an intense focus on capital discipline and cash flow generation to accelerate the improvement in our capital structure as we continue to drive material and sustainable change in the markets we serve.
Operator, you May now open the line for questions.
As a reminder to ask a question you will need to press star one on net telephone Subito. Your question press the pound.
Your first question comes from the line of Larry.
Yeah.
Your line is now open.
Good morning, guys.
Afternoon.
Just wanted to start off with my competitive landscape.
You guys have seen.
In a word yes.
In the press release and the presentation.
Yes.
On the gaming PC and console.
And on kind of.
On a media technologies.
Like our competitors have stagnated.
So I was just curious.
Truly most DD international paradigm in Atlanta, you guys, taking share in that market in a changing paradigm there or.
Yeah.
Or is it just kind of dropped the ball how do you view that competitive landscape overall.
Thanks, George for the question no look I'm not going to comment on the competitors and their strategy I think it's just important to reflect back on our strategy, we had a very clear vision.
What you're seeing is the manifestation of that vision.
First and foremost it begins with our people.
Looking out for the health and wellbeing, providing the tools necessary to do their job and letting them execute in just a phenomenal way.
Secondarily, it's our partners and you notice on I'm, not saying clients I'm, saying partners. Many of our clients are our partners in either alliance agreements or frame agreements Ah that they give us a unique capacity in the marketplace that others simply don't have access to.
And then again, it's really just seeing the vision become a reality you know they started with force of subsea quite some time ago. When we first launched the concept of an integrated feed study.
Then the transition to create the company on the 17th of January two 2017, allowing us to actually be due to deliver integrated projects. The only company that can deliver an integrated project as a single company, having all the leavers within their own control and we call that I E. P. C I.
Keeping in mind. This whole time, we were developing the next generation of subsea equipment subsea 2.0.
And I gave updates.
In the many quarters preceding this they talked about how we were progressing and how much of the feed studies, where integrated how the increase in the integrated projects and the delivery of those projects. How subsea 2.0 was beginning to saturate and become a large portion of our backlog.
So with all that in hand, and a whole lot of discipline, because let's not forget in 2018 I was having to defend why we werent chasing market share for vessel utilization and we made it very clear at that time, we believed in our vision, we believe that our model. It would show up and we did not want to load our backlog.
With a low priced no no profit or very low profit backlog as a result of chasing market share, particularly on vessel only contracts where vessel day rates were at an unacceptable level in our opinion.
So we suffered for a short period of time lower utilization, but now we're beginning to see all that manifest into the margins of the company and our and our ability to.
Set ourselves up for continuous outperformance as you have indicated earlier.
And that's really it I you know it sounds simple, but this was a multi year journey. It was difficult at times, but we are we could not be more thrilled into position. We have put our company in right now and we also believe and obviously outside of our control, but that certainly welcomed an inflection point for the offer.
Sure and subsea market that we believe will have a more multi year runway ahead of us.
Great. Thanks.
And then.
Thinking about the surface business you guys provided the margin targets a range on a 2021 timeframe M I.
I assume through time, even the top end of the range you want to get EBITDA margin.
What's your long term target from an EBITDA margin perspective.
It's kind of a roadmap on your mind to get you on it.
Yeah very good question, you know again as I always talk about when I talk about the surface business and the surface market. It's really a tale of two cities are international and North America. As we've indicated we continue to progress our differentiation market share and presence in.
The international market, we actually added two key markets.
Markets in the Middle East and our presence in the middle East through two very strategic contracts and continue to benefit from the activity going on in the Kingdom.
We have a very important a long established relationship footprint and local content.
So if you will that side of the equation is doing well and when we look forward. We see it's always been quite stable much less cyclical a much higher margins why is that the equipment. We provide is just at a much higher standard than the equipment, we supply in the North American market and.
That's just due to the demands of the market the demands of the types of reservoirs flow rates et cetera are very different between the international most of the international market in the U S market.
And much less competitive are we are much further or much further differentiation the north American market as we pointed out in the prepared remarks.
We see the market, having some signs of recovery, we are transforming the market with our I complete offering which is having significant market penetration and continue to.
Drive our eye production initiative in the North American market as well when.
When we look forward and our ambition around the margins will continue to do the right things and expand the market the margins in the international market, but in the U S market, we're going to need a whole lot of help in terms of higher level of activities absorption of the capacity et cetera before.
See any real expansion in the North American market.
Great. Thank you Doug.
Your next question comes from the line of Amy Wong from UBS. Your line is now open.
Hi, good morning, Doug.
Had a few questions about all of that check subsea production system are firstly I'd like to understand from a pricing perspective or kind of more discussions with your clients on how how different is the pricing of using an electric system persons who are more conventional traditional desktop and when you're on.
Discussing with your clients what else what are the key kind of.
Pressure point on.
Getting them to adopt and electric subsea production system.
Good afternoon, Amy. Thank you look we're super excited I think I said this.
Last quarter, maybe two quarters ago, we think this transformation that could and should happen very quickly first and foremost that will come to pricing I'll answer your question, but first and foremost a discussion with the client is around greenhouse gas emissions.
And it's not just greenhouse gas emissions, but there are other admissions associated when you're using hydraulic power versus electric power.
There's a lot more generation on the top side in terms of greenhouse gas emissions.
And then there's also the reality of using a hydraulic fluid versus versus electric and associated risks of such.
Operationally its preferred because you removed the latency that you have with hydraulically operated systems.
And from our point of view, where it gets really exciting Amy is we can increase a tieback distance up to four times.
Four times, so imagine the opportunity set when we have flipped over 50 per cent of the world's infrastructure on the seabed today and growing as our market share continues to grow imagine that capacity did that brings to our company for a very high return projects for our clients the tie back satellite fields.
Their own or others like in the recently announced alliance, we formed with Repsol sinopec back to their producing a platform.
So again.
The discussion is around helping them reach their ambitions are around the energy transition. This is a key enabler, allowing us to move forward and expand the opportunity in the markets that leveraging our installed base and helping our customers improve their returns and then finally pricing when you put it altogether you were.
Would expect that we would we would receive.
We receive a higher level of pricing on these type of our projects because our customers are receiving significant benefit so it's a win win situation.
Very clear just a quick related follow up.
Care to take a stab at it and I think by 2025 are from timeframe you Patrick What's your penetration is gonna be on her new system for the book.
I'll, let take Murphy non electric.
Oh yeah.
You'll hear about some awards for sure in that time frame I won't go too far I don't want to get too far ahead of myself here, but you will definitely hear from US you know we we have the most you know let me back up just one second Amy.
We have electric in subsea today, you know we have electrically operated in controls and subsea today, and we have by far by far.
More than the rest of the industry combined times, a multiplier the number of all electric activated controls and subsea today and one that we've talked about before that we continue to be very excited about is not just all electric and not just you know, replacing the hydraulic with electric controls.
The inclusion of robotics and using robotics for actuation much further simplifying the the infrastructure as well we called out our subsea robotic manifold. They are on the seabed operating today in Brazil for Petrobras and we're excited to say, we just received another award to build a more.
Subsea robotic manifolds, where just you know what we're talking subsea 4.0 now Amy. This is just well ahead of 2.0 as we continue to expand on develop so you know you'll hear more awards, we'll call them out and in which the level of penetration.
Install base out there. So it's not something that you can just flip overnight, but I think anybody looking at greenfield projects today or any sort of long distance tie backs today would be well served and certainly our clients and our partners are looking at all the electric as an option.
Thank you.
I'll try it on there.
Your next question comes from the line of Sean May come from J P. Morgan. Your line is now open.
Thank you and congrats on getting the spin completed.
Well good morning, Sean and thank you very much we're excited for ourselves and we're excited for our friends at Technip energies.
So maybe just to start on the guidance on one of the biggest investor push backs.
Coming into this release was.
Our margin progression in 'twenty one after the challenges in 'twenty. So I think there's been a lot of skepticism regarding your ability to improve margins if revenue is down year on year and.
And so there are a lot of moving parts. We've got cost has been taken out COVID-19 impacts are hopefully receding as the year goes on.
Subsea services next can be of help you know vessel.
Calendar has been a challenge.
Can you maybe just help us unpack those pieces that drive the margin guidance, including.
The upside and downside of that range.
Okay.
Sure Sean.
It's a little I won't I won't repeat everything that I mentioned, when I was responding to Georges question a bit earlier, but the same playbook applies right. This is the manifestation of the vision and are steadfast determination to deliver it. So you know you heard in <unk> prepared remarks, I don't think you've heard that from us before.
We're certainly for many of anyone else that our margins in backlog are improving.
So this has to do with the fact of an intense amount of discipline not chasing projects at any cost walking away from the table you see this on the large public tenders that.
That are made public our you know the results are made public do you see where we were we typically you know fall you know.
When you have almost 50% of your revenue being direct awarded to your company through your Alliance partners Subsea services or the conversion of integrated feed studies to direct award on E. P. C. I, both of which we said will grow in 2021.
That's a very different environment than being out there bidding competitive day rates for vessels in a market that is is that there's too much capacity in the market today.
As I mentioned earlier you know we took a we took some hard comments are back in 2018 because of our surf market share, which was shrinking at the time. We said we were doing that because we believed in our vision. We believe that we would get the IV studies converted the PCI projects, which would flow through and provide a higher margin and <unk>.
Higher returns, but to do that we needed to maintain the capacity of the fleet and not fill it up with these low day rate no margin or zero margin contracts. So we passed on those and now what you're seeing is the benefit of that so I I look I. Appreciate what you said, Sean each each each it's the secret sauce.
It shows that we're doing something where we're not sitting back on waiting for revenue to recover for margins to recover. We're a company that is extremely discipline that has a vision that is absolutely unique operating model and an incredibly favorable client and partner base.
That we respect and honor and cherish and support every single day.
Yeah.
Yeah, I appreciate that and I think it's a it's certainly good to see the turn unfolding.
Maybe just turning to cash flow.
Some one time cash items are impacting free cash flow this year.
But the the Capex guidance is four per cent of revenue.
Is that a good run rate per capital intensity for the for the business now and how do we think about normalized free cash flow for this business I mean, it could be a free cash flow margin of sales it could be conversion of EBITDA.
On the metrics that you'd point us to to think about what this business can look like when we get through the transition period here.
And this out here. So let me start with I think the capital expenditure question that you might have mentioned I think it's a fair level that you're seeing it out of 250 million right now, where we can sustain a or our business model is as we see.
And you don't expect a significant gross capex of about that as we go forward in terms of cash flow I don't know that I can commit to a certain.
Level, Oh, as a ratio, but clearly what we are embarking on as a company given our profile of our balance sheet et cetera. You said, we are going to be committed to generating cash. So as you see us operating from this well you know you're on.
Onwards, we are going to be intensely focused on generating cash and in that we obviously expect to drive up these ratios over time is as we as we progress.
Okay fair enough. Thank you.
Your next question comes from the line of Mike Yankee from Cowen. Your line is now open.
Thank you sticking with cash the the bridge from the old the pro forma cap.
Capital structure to what was most recently announced you talked about now you've got an expectation for 200 million of free cash flow post close and I'm. Just wondering if you could square that with the guidance for the year of 50 to 100.
Our 150, excuse me 50 to 150 per year.
Yes, So let me try to keep it pretty simple and in this so first of all without going through maybe all the details on what I said before you know getting getting from that from the current capital structure that we had now with the BPI funds in hand, and then with some of the proceeds from the foreign exchange hedges that were mentioned.
The reality is that we have problems, we have had about $100 million of outflows in the first you know it repair in the year and you know, we're going to get $200 million in the back half of the year and that's the way we get back to the capital structure.
Got it got it that's very helpful. Thank you.
And then the other question relates to surface in the margin that you're guiding to here it's down from.
Fourth quarter or the range is down from where you were in the fourth quarter and you know.
Doug I know your commentary about the international being better margin and it looks like international is going to be a higher mix for you in 2021. So I'm just curious I would've expected net margin to be improving from from where you were.
So maybe you could provide some commentary around that.
Sure so low in the fourth quarter, particularly at on our International business are you know we had some very favorable you know settlements are reach some favorable milestones and therefore was able to recognize.
That in the fourth quarter, but really nothing to add besides the earlier comments were well positioned we have the right where we believe we're in the right locations at least that's.
Think playing well.
Playing out very well, we have very long term relationships, where we have very high levels of local content and expanding some of that local content in some of those key countries and again. It is really important emphasize you know of.
Surface trees, not a surface tree and you can have a surface tree in west, Texas, you can have one in the kingdom of Saudi Arabia, and you can want to have one offshore on top of the platform and they are very different very different in terms of their technical content.
In terms of who they the qualified companies that are able to bid on those type of projects.
And the fact that in the international business for our surface surface technologies, we are almost entirely vertically integrated everything flows through our manufacturing facility in Singapore, we're not relying so much on third party and certainly were out of the Commoditized market.
A lot of that that we face on a lot of North America. So.
Consider Q4, an exceptional quarter I don't think you can take Q4 times four and expected it could've expected us to deliver that versus the full year of 2020 of its already a substantial step up full year versus full year. We're real proud of the work that our team is doing in surface technologies not only around the international market, but as I said really.
Beginning to apply digital solutions and transform the North America market at the same time.
Great. Thank you.
Your next question comes from the line of Arshad from <unk> capital markets. Your line is now open.
Good morning, and congrats on a successful spin off.
So my first question is over the spec to Brazil looks like.
Subsea side in new orders, Brazil is going to be a big part of the new orders.
So as you look forward over the next 12 to 18 months do you think that if you win some awards than what that would be dilutive to overall subsea kind of margins in Brazil are neutral on editing how do you think think about that.
A great question Waqar and let me just start by saying you know, yes, Brazil is a country, but it's really South America and I and I've said this in prior calls you know for the next decade, it's really it's very much going for us and this is unique to us it's.
Very much going to be about Brazil, Guyana, and Suriname in other countries in South America, and why do I say unique to US I think you know our position in Brazil.
I think you know our position in Guyana, which we're very proud of and again makes it a bit on some of you know some of it.
Differentially beneficial to our company, we have a phenomenal capacity in Brazil photometer capacity.
We've installed a.
Manufactured installed more subsea equipment for Petrobras and the competition we.
We have a incredible services team.
That supports that and we have you know manufacturing for subsea equipment as well as for rigid and flexible flow lines that is best in class in the country. So you know, we're well positioned we understand the market we understand the client we have deep long term relationships with Petrobras.
Petrobras has been a leading adopter of our technology I, just I talked about subsea compact robotic actuated all electric manifolds earlier.
They've done some really amazing things, we're working on subsea.
Subsea sea bed C O two separation re injection, which will really be a key enabler for the future production and we're working on our hybrid flexible pipe.
Which is advancing very well in terms of the qualification along with Petrobras to address distressed corrosion issues that the industry has faced so you know all that being said I think they deeply respect us they understand that we have a certain expectation that we need to deliver to our share.
Holders and it has not created an issue for us to be able to do that now beyond Petrobras. We also have two other tiers of customers in Brazil, we have the ioc's, who have invested heavily heavily into assets Hum subsurface assets.
In Brazil.
They're moving pretty aggressively towards plans to develop those and I think you know this but I.
It might have stated this in the past, but we've pretty much done all the IOC subsea projects to date.
So we have a track record really across the board with all of them and experiences with all of them in Brazil, and you know they deep you know that is obviously beneficial when you move from the pre sold to the post salt now with those same clients.
And then finally, the third tier is a group of our group at a fast growing group of independents are both Brazilian independents, and and and and non Brazilian independents that are beginning to look at deepwater developments in Brazil, where really the partner of choice for them.
Some have extensive footprints in Brazil, some do not some have extensive experience and deep water. Some do not so when they know they can come to Technip FMC is the only company who can provide them a fully integrated end to end solution from concept to pre feed all the way through to the life of field and supported their assets.
You know positions us very well so.
I know a long answer to your question, so I'll stop there and I apologize.
No that was a great answer. Thank you and then just a follow up on this.
On the subsea side subsea how do you think of a revenue opportunity in 'twenty 'twenty, one versus 'twenty 'twenty in terms of Directionally Oh, you know what the magnitude of the change could be.
So referring to subsea services correct record.
That is correct yes.
Yeah look I, we certainly expect that to grow.
And not only in 'twenty, one, but in 'twenty, two that's being driven by let's just face it our installed base is growing.
If you just look at the market share that we have gained since the creation of Technip FMC and the only company offering.
A true integrated offering I mean, it's it's been substantial as you know back in 19, yes. It was 50% of our inbound or $4 billion of just integrated projects and you know so all these projects come along with most I should say most if not all of these projects come along with a very long term service contract associated.
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We are installing more and certainly we'll be installing more in 'twenty. Two 'twenty three so that goes up we are servicing more of the installed base because it's growing our install base is growing plus its aging and on top of that we expect to see a lot more subsea well intervention well bore I should say subsea wellbore intervention, there's a lot of subsea.
C wells that are offline today, because something has failed in the Wellbore as you know, we don't do well bores, that's not our scope, but something down there under the ground something happened and the weighted to customer access is that is to we go out with them on either on the rig or on one of our vessels to be able to.
To retrieve the subsea tree put in place the controls so that they can enter into the Wellbore performed the remedy that's required and then reinstall our equipment and that's a that's a very important part of our subsea services. So.
Kind of what I'm alluding to is a lot of opex growth followed.
Followed by Capex growth are driving our subsea services group.
Thank you so I appreciate the answers.
Our last caller comes from the line of case volume from Wells Fargo. Your line is now open.
Thanks, Good morning, maybe just to try a little bit on cash flow one more time, so excluding the separation costs of $70 million I think guidance suggests about 20% to 40% of EBITDA conversion in 2021.
Lower interest expense and probably an opportunity for cost efficiency and maybe tax efficiency.
Future years, gravitate higher compared to that 20 to 40 or are there any kind of one time benefits. This year that maybe aren't visible that could be a headwind.
You know so so look let me start on say you know that there aren't any material one time benefits related to this year first of all.
M. I think youre right about that we have certain costs that are you know detracting, a little bit from our current ability to generate cash flow that we would like so if you. If you look at things like interest expense that you mentioned you know if we can if we can continue with our plan to deleverage our balance sheet to get the interest expense down that's.
An important component I think we have to work on optimizing our tax position is a little bit more those are a couple of items that are detractors at the point at this point, but there's no reason that we could grow our cash flow generation. After after considering those items. So as an example, and then of course on the back on a book.
We think the markets could be going in the long term and new generating further EBITDA, what would set us up for future cash flow generations.
And on <unk>.
Said it earlier, but I know how pleased we are that we've received another $200 million payment from BPI, France and in the 80 million on the on the reversal or the or the benefit from the hedges will be coming as you said in early March so so look at it.
It's not it's not in it's not something in the distance are it's right in front of US it's happening today, it's exactly what we said there was some near term short term capacities due to the fact that we accelerated the spin schedule from 90 days to 40 days, but we are getting back to exactly the.
The levels that we had discussed earlier and I couldn't be more proud of the work that is being done. So thank you will.
Okay. Thanks, that's helpful and maybe just specifically on corporate expense I guess, it's tracking about 90 to 100 million ex D&A. This year, how do we think about the opportunity to streamline those costs as you as you normalize in 'twenty 'twenty two plus.
Yes. So so first of all of course, if you if you look at the corporate expense for 'twenty and 'twenty one.
Obviously, we have you know streamlined M a little bit already from the day the removal of all the incremental expense associated with Technip energies.
We also further have had some cost reductions and as part of our programs. In 2020, we also have some headwinds into 'twenty and 'twenty one.
On a corporate expense that is not as visible maybe but that did include some increase in pension liability expense.
Actually is driving up the expand so when you kind of look at that there are you going to be continued opportunities to look at driving those costs I'm not going to give you an exact number but clearly it's a number that we're looking at to make sure. We continue to streamline as we as we run this business.
Great. Thank you.
Yes.
Yeah.
At this time I will turn it over to Ms per se.
Any closing remarks.
Okay.
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