Q2 2021 TechnipFMC PLC Earnings Call
[music].
Good day and thank you for standing by what can get effective F. M. C second quarter 'twenty 'twenty 1 earnings conference.
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 1 on your telephone if you require any further assistance. Please press star zero I don't like to handicap Greens over to your speaker today in that timeframe. Please go ahead.
Good morning, and good afternoon, and welcome to Technip FMC second quarter 2021 earnings Conference call. Our news release and financial statements issued yesterday can be found on our website.
I'd like to caution you with respect to any forward looking statements made during this call.
Although these forward looking statements are based on our current expectations beliefs and assumptions regarding future developments and business conditions. They are.
Our subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements.
Known material factors that could cause our actual results to differ from our projected results are described in our most recent 10-K, most recent 10-Q and other periodic filings with the U S Securities and Exchange Commission and the French M S.
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 for any heart 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 is all from <unk>, our Chief Financial Officer.
Second quarter results reflect another strong quarter for our company.
Total company revenue improved sequentially to $1.7 billion.
Adjusted EBITDA for the quarter was $144 million with both subsea and surface technologies reporting an adjusted EBIT margin of 11%.
Total company inbound orders were $1.6 billion.
In subsea, we demonstrated our ability to continue winning with inbound totaling $1.3 billion for the quarter.
The strength in the first half of the year has been indicative of the continued market progression, we outlined last year.
This includes 10 announced awards.
50% of which will be executed as integrated or I E. P. C I projects.
The strong start to 2021 is clear evidence of our leadership position and as highlighted by significant milestones achieved in the second quarter.
These include the addition of 2 new <unk> clients.
Karun, where we will execute our first I E. P C I in Brazil for the particular field.
And Tullow, where we utilized our subsea studio digital solution to optimize field layout for the Jubilee development in Ghana.
Also in the quarter, we announced an award from equity to work for the Christian sur field.
Where we leveraged our early engagement capabilities and will utilize the deep Arctic which is equipped with a hybrid battery solution that reduces greenhouse gas emissions.
And an award from Petrobras for the supply of production equipment installation services and intervention support for field 6 through 9 of the <unk> project.
Importantly, the surf opportunities for these fields remain on our subsea opportunities list.
Each of which have been identified with values and a range of 500 million to $1 billion.
Our long history of partnerships and collaboration continues to benefit our inbound orders.
Direct awards in the quarter.
We're nearly 60% of inbound orders.
Which came from IAA PCI.
Direct awards in subsea services.
In surface technologies inbound orders were $268 million up 32% from the first quarter.
By region International orders increased by more than 50% as well completion activity continued to recover from the prior year decline.
Growth was led by the middle East, including Saudi Arabia, the United Arab Emirates, Bahrain, Qatar as well as the North Sea in China.
Orders in the Americas increased by approximately 10%, reflecting continued momentum in drilling and completion activity and the success of our I complete offering.
Our 2021 revenue guidance for surface technologies anticipates further order growth in the second half of the year when compared to the first half.
Fueled by increased market activity.
New customer alliances.
Expansion of our manufacturing capabilities in Saudi Arabia.
And the continued market penetration of new technologies.
In total our second quarter results demonstrate that our business that are businesses and end markets continued to improve.
Subsea inbound orders of $2.8 billion in the first half of the year were very strong.
We continue to see a healthy list of prospects and remain very confident in our full year guidance of more than $4 billion.
Furthermore growth in 'twenty 'twenty, 2 is supported by an increasing set of opportunities.
When using the midpoint value of our subsea opportunity list. The project award potential was increased by nearly 20% to $17 billion over the next 24 months.
Looking beyond the strengthening of the traditional market, we believe that offshore will play a meaningful role in the new energy mix.
Last quarter I introduced the 4 pillars underpinning our approach toward new and novel energies.
Wind.
Wave.
Hydrogen and carbon transportation and storage.
As we look at them today, we are making steady progress in our partnerships focused on wind and wave opportunities.
The market momentum for wind development continues to support increased investment this abundant source of renewable energy.
And when combined with wave technology, we can generate even greater energy output and reduced intermittency utilizing the integrated offshore solutions.
Our deep purple solution is centered around technology development and integration capabilities that convert this renewable energy into hydrogen.
Enabling economies of scale that were previously unattainable by offshore renewables projects.
Our client conversations are now centered on commercial projects utilizing deep purple technologies.
Last week, we announced our partnership with Portuguese energy utility ETP as well as several notable research partners in a concept study for the development of a new offshore system for green hydrogen production from offshore wind power.
This project is called beyond.
Working with our consortium partners, we will leverage our extensive experience in subsea engineering.
Technologies developed on deep purple Andy.
And essential integration capabilities.
With a goal to develop a standardized solution that can be implemented worldwide.
Allowing for large scale hydrogen production from renewable wind resources.
Lastly, while the energy industry is devoting significant attention to carbon reduction there is still much work to be done.
Importantly, the.
The carbon has to be stored somewhere.
We believe 1 of the safest and most efficient locations for the storage can be found offshore.
Where it can be maintained and naturally occurring reservoirs that exist in many regions around the world.
We are well positioned to be the leading provider in subsea carbon transportation and storage.
We have been investing in this space for some time and they are also partnered with others in the development of new technologies.
We look forward to further showcasing our progress, including several new technologies and integration capabilities being utilized across the new energy space at our upcoming Investor event.
Scheduled for November 16th.
With the development of New energy solutions, we are still it while the development of new energy solutions are still in their infancy. Our fundamental belief is that clean energy will be increasingly sourced and stored offshore given the anticipated volume and scale required.
To meet future energy demand.
As the subsea architecture.
We are building partnerships in support of new energy, leveraging our differentiated technologies and capitalizing on subsea expertise and integrated project execution.
Our 4 pillars are not mutually exclusive.
And yet it is not clear, which single pillar or combination will prove to be the market's preferred choice in the energy transition.
Regardless Technip FMC is well positioned to play a material and successful role in their development driven by our core competencies collaboration innovation and integration.
I will now turn the call over to <unk> to discuss our financial results and to provide an update to our full year financial guidance.
Thank you Doug.
We had another solid quarter as total company inbound orders were 1.6 billion.
Revenue in the quarter was $1.7 billion with adjusted EBITDA of $144 million.
Total company backlog increased sequentially to $7.3 billion at the end of the period backlog force for backlog for subsea stands at $7 billion of which close to 5 billion is scheduled for execution beyond 'twenty 'twenty 1.
We ended the quarter with cash and cash equivalents from $855 million and net debt of $1.6 billion.
During the quarter, we recognized a loss of 147 million related to our equity ownership and Technip energies.
This primarily relates to the change in market value during the period.
Loss per share from continuing operations was 39 cents per diluted share in the quarter when excluding the impact of the change in fair market value of our Technip energies steak and other charges that netted to an after tax charge of 33.
The adjusted loss from continuing operations per share was 6 cents.
We also reported income from discontinued operations of 2 cents in the quarter. The income is due to a tax benefit related to that would be enough of technip energies.
Now, let me turn to the segment results I will focus on our sequential performance comparing the second quarter to our first quarter results in subsea revenue of $1.4 billion was essentially unchanged when compared to the first quarter with a seasonal improvement in installation and services largely offset.
Bye.
<unk> project activity in the period.
Subsea adjusted EBITDA margin of 11, 1% improved sequentially by 140 basis points benefiting from higher margins in backlog and increased installation and services activity.
Inbound orders were $1.3 billion in the period, demonstrating our second consecutive quarter of orders strength.
In surface technologies second quarter revenue of $275 million increased 12% from the first quarter. The increase was primarily driven by higher activity in North America increased international services and strong project execution.
The segment also benefited from further adoption of the eye complete ecosystem.
Adjusted EBITDA margin of 11% was unchanged from the first quarter.
Inbound orders for the quarter were $268 million, an increase of 32% sequentially driven by strength in the middle East the North Sea and North America.
Yeah.
Turning to corporate and other items in the period, our corporate expense was $30 million.
We incurred an $11 million loss from foreign exchange and tax expense totaled $35 million.
Moving to cash flow cash required by activities from continuing operations was $86 million in the period capital expenditures were $40 million. This resulted in a free cash flow consumption of 120 to 126 million in the second quarter.
Importantly, the Q2 outflows from our expected and we remain on track to meet our full year free cash flow guidance of $120 million to $220 million with subsequent quarters to benefit from strong working capital inflows.
More specifically these Q2 outflows included the scheduled and concluding payment of $53 million related to a previous settlement with the Doj and Brazilian authorities, primarily related to legacy activities, where we no longer participate and that occurred over a decade ago.
As well as typical quarterly variation in working capital, resulting from our predominantly project based business.
Capex for the second half of the year will include spending related to previously announced project awards and we do see potential for full year expenditures to come in below our guidance of approximately $250 million.
Other items favorably impacting our net debt in the period included in net inflow of $258 million related to the sale transactions of a portion of our ownership stake in Pickney vintages.
Proceeds from assets totaling $84 million, including a further rationalization of our fleet with the sale of the <unk> 1200 vessel.
And the full repayment of the 200 million outstanding balance on our revolving credit facility.
Taken together net debt was reduced by $155 million to $1.6 billion when compared to the first quarter.
Before I discuss the changes made to our expectations. Let me first share with you how we intend to communicate our guidance and updates with you in the future.
As most of you know, we do not give quarterly guidance and keeping with historical practice, we will continue to give our initial guidance for the upcoming year with our fourth quarter earnings release moving.
Moving forward, we will also provide a midyear update to this guidance with our second quarter financial results. We believe that this modified approach will provide you with greater transparency and clarity of our projected results as we progress through each calendar year.
Turning to the midyear updates to our 2021 financial guidance as a reminder, our guidance is based on continuing operations and thus excludes the impact from Technip energies, which is reported as discontinued operations.
Our full year guidance for subsea revenue has been increased to a range of 5.2 to $5.5 billion.
Our full year guidance for adjusted EBITDA for surface technologies has been increased to a range of 10% to 12%.
Net interest expense has been increased to a range of $135 million to $140 million for the full year and our reported tax provision has been revised higher to a range of 85 to 95 million.
I will close by highlighting a few key takeaways are updated guidance captures the strength of the first half and further refined our view of the second half.
Free cash flow for the first half year was slightly positive and we remain on track to meet our full year commitment of $120 million to $220 million working capital improves in the back half of the year.
We ended the period with an improved balance sheet position with cash and cash equivalents of $855 million and net debt of $1.6 billion.
And lastly, we will continue to monetize our remaining 31% stake in Technip energies and utilized the proceeds to reduce our outstanding debt over the coming quarters.
I'll now turn the call back over to Doug for his closing remarks.
Thank you Alf.
Before we move to Q&A I.
I would like to close with a few remarks.
Our solid first half results were driven by our unique positioning as an industry pure play.
Levered to subsea in international land markets.
We see continued improvement in the broader market outlook as evidenced by the growing value of our subsea opportunity list as well as Proprietory I feed and I E. P C I opportunities.
And they support our full year financial guidance, where we have increased our expectations for both operating segments.
Our success is driven by our core competencies, having pioneered and delivered next generation subsea technologies and the industry's only fully integrated commercial model.
And we are demonstrating that these unique capabilities are 100% transferable to the renewables energy space, giving us confidence in our ability to extend our leadership in subsea to the development of new and novel Energy resources offshore.
Operator, you May now open the line for questions.
As a reminder to ask a question you will need new fresh.
Our 1 on your telephone because we got your question press the pound or Husky. Please standby, while we compile to Danny roster.
That's fine and they enable everyone on the call to participate please limit your questions to 1 question and 1 follow up thank you.
Our first question comes from David Anderson from Barclays. Please go ahead.
Hey, good morning, Doug.
Good morning, David.
A few contracts in house on Brazil.
Brazil has been kind of 1 of the few areas, where we're starting to see some signs of life. There recently I was just wondering if you could just kind of bring us up to speed on the contracts situation now with Petrobras around subsea trees. If I'm not mistaken. There was you were kind of working down a pretty big contract is that still the case are you expecting to see any tender soon and I guess also sort of the same question.
The flexible pipe would you be expect to see tenders announced with development. It looks like it's starting to pick up down there.
Yeah. Thank you David gives me a great opportunity to.
To let you know that we had a celebration this past quarter in Brazil, where we delivered our 700 tree.
700 trees out of Brazil. So yeah, we've we've been there a long time and as you said, we've been a leading provider.
Ryder to Petrobras and involved in many of the very large and significant tree orders in the past those are largely behind US now David we're really working on the new orders I.
In the prepared remark about the Buzzi OS.
Project, which was very interesting because it was for multiple phases and also provided where we'll be doing installation services for quite some time, which is you know very very important to us as well in our subsea services business.
Forward the tree orders are more focused around projects.
Some cases multiple phases of projects like our recent announcement for the Buzzi O 6 through 9 fields, but not just the large lump sum.
Tree orders, if you will that we had seen previously.
Previously so we think there'll be again more associated with specific projects or multiple phases of a project.
Flexible or a little bit different we're still seeing more lets say volume based orders.
And in the flexible are being used in multiple different applications on different fields in different projects.
And we certainly have seen and anticipate further large flexible awards.
In Brazil, where as you know are very important.
Differentiated product line for us in a very strong position in Brazil.
So that's a different contracting method on Petrobras I, because I know they did you see those big tenders before I'm, just I'm just kind of thinking about like why they made that change or is it just sort of just I guess their visibility what do you think is behind that.
I think a lot of it is exactly has to do with the visibility they've got a railroad relatively long queue of projects you can see that on the subsea opportunity list and I think their ability to be able to tie the awards to their specific projects as a dip.
Their preferred path at this time versus just the ordering 100 or 200 trees. If you will in a single tranche, yeah that makes sense that makes sense a separate question on the surface business. Doug If you could just remind us how much that business is international maybe it was in the release from sorry, I might have missed it but also if you could just talk about how you see the next 6 to 12 months play.
Out there I think a big chunk of that from the middle East So kind of when do you start to see that inflect with the chatter. We're hearing out of D. N O sees over there.
Oh, yeah, approximately 60% to 70% depending upon the quarter of the surface business is is surface international as opposed to surface Americas and spot on it's the middle East, it's really driving the activity that's important for us.
You know the type of product or trees production trees that we deliver in the middle east or approximately 10 times the value of what you would deliver in the U S. Much more sophisticated from a technology point of view, we have significant differentiation both in new technology, but we also.
Differentiation is we're fully integrated and we have the ability to be able to deliver the products are more or less entirely in house not relying on third parties.
Again allows us to capture more of the knowledge the knowhow and the differentiation.
The activities picked up you know we are in the prepared remarks, I mentioned that we had a 50% 5 zero.
The increase in inbound activity and we expect another strong Q3.
From from Middle East Awards.
That are materializing this quarter.
Alright, Thanks, a lot Doug.
Yeah.
Next question comes from Xyrem as JP Morgan. Please go ahead.
Yeah, good morning, Doug and team.
Half of your subsea orders this year had been integrated in nature and I was just trying to think about some of the margin implications on a go forward basis, given the mix because clearly.
With the integrated awards, you'll have more control over the project you know ideally, enabling some synergies and the lower cost of I suspect.
Okay.
Sure. Thank you room you know.
Let me just kind of go through like a typical integrated project.
And while yes, they tend to have a preferable.
The financial economics for our company.
First and foremost we don't start at the project.
We are bidding stage. If you will there is no bidding stage in most cases, we start at an integrated feed study. So we're sitting at the table with the client talking about an integrated full field subsea development, which we're the only company that's capable of providing.
A service to our clients.
At that point, we look at the project economics, and we are completely aligned in our objectives, which is to develop the most economical subsea.
Infrastructure or architecture that can maximize.
The value of the of the asset or the reservoir that's in place for our client.
So our objective again is around the project economics, not bidding, a particular product or product line or or.
Delineated kind of a bidding schedule. So we work on we work around those project economics. Once we achieve those project economics. We then move into the integrated execution phase and as you correctly point out that there's a lot of leverage for us in that phase because were now responsible for the engineering.
The manufacturing the delivery the installation and the commissioning of the subsea field, we can do it all at once we can do it in multiple phases, we can utilize the cadence of our manufacturing versus the availability of the fleet as an example.
We have a targeted date to achieve the final installation and commissioning, but the nature of how we actually go through the work flow in the process of doing so is within our control.
That has worked well again for everyone involved because in most cases by doing and I feed direct award I E. P. C. I, we've been able to reduce or reduce delivery times or accelerate time to first oil from our project economics perspective.
Between 12, and 14 months acceleration of first oil, which is a dramatic improvement in the overall project economics, so the client or partner our client is winning and we're winning and its much most definitely our preferred model.
As you point out it's an advantage because these are direct awards also avoiding a competitive tendering situation.
That's helpful.
My follow up is you guys have delivered a very very solid margin and you raised your your surface margin expectations for the year.
So, but my broader question I was wondering Doug if you could kind of comment.
On the state of your supply chain, given some of the Covid impacts and just kind of tightness in raw materials and just your confidence in dealing.
Some of these headwinds.
Headwinds without harming you know the margin profile kind of it kind of in the market, where we're seeing you know shortages and things like chips and things like that when you think about the automakers, but just wanted to see if you could comment on the supply chain.
Sure I'll cover it at a high level and then I'm gonna have else kind of walk through with US the you know what.
What is the typical contracting methodology that we use in and therefore, what is the exposure or a lack of exposure to some of the inflationary pressures.
You know first and foremost from the beginning we decided as a company that you know we were not only going to look out for the health and wellbeing of our employees throughout throughout Covid, which of course, everybody was dedicated to but also by working with our clients and with our suppliers.
It was clear that what we what we were going through was going to have a dramatic impact.
And we've seen that in.
In terms of those companies that came out.
M strong and several who did not come out at all so we've been working from the beginning being very open and transparent with our suppliers trying to understand what where their concerns.
I'm really proud of our supply chain and procurement team. They were ahead of it we have a reputation in the industry of being very collaborative being very transparent and being easy to work with so we sat with our suppliers just as we do with our clients, but in this case understanding from them.
What where their issues in some cases, we concentrated our spend in order to help them and in some cases, we had to actually spread out our spend because we knew that they were facing certain challenges be it with.
With.
The access to transportation and logistics or being able to get people into their facilities whatever it may be so.
The lesson learned there was you know treat people like you Wanna be treated yourself, it's the way our customers treated us because of our reputation and our relationship with our customers. We did the same with the supply chain as a result of that we feel we have a healthy supply chain.
That being said, we still work with them as you know COVID-19 and the impacts of Covid are different in different locations around the world. We are a global company, we have the ability to be able to shift activity, where there are concerns. We are also addressing probably the bigger issue right now which is around transportation.
In logistics and we're doing some really creative things there to using long rail as opposed to Oh Ocean freight and using shorter ocean freight which has really been helpful.
And our team has done a great job of really getting ahead of it and building up the REIT the some of the more.
You know some of the more challenging materials that'll become quite challenge in terms of access and availability and we've been able to secure those in bulk ahead of time, which is a benefit of our subsea 2.0 technology offering where we're not building bespoke equipment, and we're able to buy materials in bulk.
Head of time, I'm going to pass it to elephant he'll go through kind of the contracting model. Yeah. Just just thank you Doug to add a couple of comments around how we manage inflation in general in our contracts first of all already at the bidding stage, we always make sure that we secure a back to back agreements with our suppliers. So meaning we know the pricing and we know the terms.
Already for the vast majority of what we will undertake at the time of the bid so.
Further for whatever portion that we do not necessarily looking at the time of day bed. We we really have a process to engage in early procurement to minimize the volatility in pricing and delivery of any any any procurement undertaking that we have as part of the projects. Additionally, when you look at the client contracts, we do have inflation.
Index clauses embedded in our contracts and those those classes. They they allow us to escalate contract price as our raw materials labor or other factors put pressure on the on the inflation. So overall, we have had this contracting mechanism in place for several years then it has worked very well.
For us and it continues to work well for us so from Sony and in General view, we think we're pretty well protected in both backlog and new awards from inflationary pressures.
Alright, thanks for the update.
Got it.
Next question comes from Nathan said package of Exane. Please go ahead.
Good morning, guys and thank you for taking my questions that income.
Coupling.
Doug you guys that I lived in a unique position in the name of the school with the partnerships that they integrate with more than show up he said you're getting a lot more about extra works, but 1 of your competitors spoke yesterday about the medium term, it's hard to get to that told him on the team love enough place a sustained Beth so it'd be kind of interested in understanding what does your view the meat.
On the new 1 position after the next couple of years. So hopefully there's some cyclical rebound and then secondly, I just want to touch on Brazil again.
I'm thinking just keep pressing on the cloud big issue I mean, very few companies come on that's slightly better than budgeted levels.
As long as you go.
A long presence there. So can you just give us a bit of a color on what's been happening to be sad eyes yourself model.
And what other medications and what you're doing that's new to mitigate the issue there is an issue.
Sure. So I guess I'll take them in the order that you asked the questions.
Just if you could clarify.
You said there was somebody provided guidance that in the near term or mid term.
Is that new tariffs accordingly, yeah.
Yeah, it'll be hard cash.
And I guess love enough that COVID-19 number of trees elledge.
Clearly that's not how we see the subsea market.
Market.
Not sure of the analysis, but.
You know we.
We talk a lot as you mentioned earlier that you know our success in creating alliances, which result in direct awards. The success of our I E. P. C. I R integrated offering the majority of which are direct awarded to our company.
Perhaps it's the difference of seeing the view of the total market. If you will the available market plus our proprietary market, but I can assure you we do not share the view that we will not return in the near or midterm to the 2019.
<unk> of tree count, that's we don't share that view moving onto your second question around the marrow project, Yes, I'm aware of the article.
M. I guess at this time, it's probably best if we provide the facts.
Which will allow everyone to understand what is happening on the Maryland project. So.
So first and foremost there is no impact to our forecast or to the guidance and as stated by Petrobras. There is no impact of first oil.
So those are the facts.
What is also true is that there is a very challenging pipeline system that includes what's called mechanically line pipe or M. L. P being used on this project. That's a result of the known industry phenomenon called stress corrosion cracking as a result of the <unk>.
Hi, C O 2 content of many of the pre salt reservoirs in Brazil.
So much like we had experienced as an industry around flexible pipe. The exact same phenomenon happens with rigid pipe.
Therefore, you run 8 you run a liner inside of the carbon steel pipe to protect the carbon steel from the corrosive environment that is inherent in a high C O 2 environment.
That mechanically line pipe think of it as running a stent inside of your an artery in your heart it needs to be secured to be held in place. So the way that it's secured to be held in place not with a few sutures, but in this case, it's through clad welding.
So it's a technique to add a stainless steel welding material to take that stainless steel liner and make it adhere to the the carbon steel pipe or the riser.
The process of doing that well it is very sophisticated.
It's largely a manual process.
And it requires a very high level of quality control.
What is true is that we had identified that in some cases, the quality or in more and more so the depth of the well that was a result of the resultant world did not meet our quality standards for the quality standard we had agreed with Petrobras.
So we are going through a process of rework on some of the wells to be able to ensure that we have the proper welding.
Proper finer world in place, which would therefore result in a very stable a riser system for the project. This is not specific to the Merrill 1 project. This is specific to all of the projects that are using rigid risers.
Which require mechanical line pipe and clad welding. So this is not common to a specific project.
We are well advanced we understand it where the most experienced and mechanically line pipe. We are experts in clad welding in this case, we're using a sub contractor to do the work.
Just due to the nature of the diameter of the pipe, that's being cloud world and we're working with them to resolve the problem.
And again, it's just an issue of rework no impact again to our forecast or our guidance no impact to first oil as stated by Petrobras. So always good to have the facts I guess and those are the facts.
I will point out that ultimately.
Let's engineer out this potential quality concern and the way that we're going to do that is by going with hybrid flexible pipe hybrid flexible pipe will not require welding aligner to be welded.
It will be a permanent solution and a sustainable solution and it also benefits Petrobras in the Brazilian market as we can then use the ecosystem of the vessels and in technology and plants that are in place in Brazil.
To permanently remove this risk so again, it's known it's well under control we are actually sharing how we're learning with others.
Because others will are.
Are or will be faced with the same challenge, but ultimately this is about engineering out the problem.
Moving from rigid risers back to flexible risers, which will be done with which we'll be able to do when we have our hybrid flexible pipe fully qualified.
And using it for these applications in Brazil, and it's advancing quite well.
Thank you.
Next question is from Ian Macpherson of Piper Jaffray. Please go ahead.
Thanks, Good morning, Doug.
Yes.
Good morning.
I was intrigued by the beyond a project that you announced the Bpd last week and I was curious if you could talk about.
The Genesis of that project and really how you see it matriculating from concept study 2.
A practical application or pilot.
And how you see the time frame of that type of.
Technology coming into the market over over the course with that guide.
Thank you Ian we're pretty we're pretty excited we're very excited as well.
Love to partner with Edp is really a privilege and honor we've got a great group of other constituents that we're also studying this with.
Kind of where are we in the process.
When we talk about a concept study in this case, it's not like it.
Nickel concept study, meaning it's not a academic concept study I should say you know this is a this is now a project. So it's a project that starts with the concept phase just like an oil and gas project then it moves to the front end engineering phase, where you're really now starting to put in place you know material.
Material volumes and really starting to understand what would take what would it take to complete our final project.
Then it would go into the actual project sanctioning and.
Execution phase you know our approach.
Is to design, 1 and build many.
So the idea would be to really study this and understand how we can put in place a very unique very unique.
System that would leverage the knowledge and experience of of us as a subsea company in our development and technologies with deep purple along with ETP in their vast experience and knowledge of energy energy infrastructure in energy transmission to really put in place and overall unique.
<unk> of activity that could be deployed again in many different applications. So.
You asked about timing and that's fair and that's always the question when we talk about new energies and it's hard to say specific timing at this point, although that although I would say there's a you know all of the partners are very incentivized and very motivated and understand the opportunity.
And we're going to work through this in a collaborative way with when you do these things youll.
Some ideas will succeed and some ideas will fail and then there'll be filtered out and you bring in new ideas until you come up with that final a front end engineering design and.
And we're working through that process right now, but again couldn't be more pleased to partner up with M. D. P and the other research consortiums that are involved with us.
Great. Thanks, Doug.
Unrelated why not I'm surprised it hasn't come up yet already your outlook for subsea inbound this year greater than 4 billion, you're way ahead of pace in the first half.
Are there scenarios I imagine there are but maybe you should back off if I need to scenarios in which the second half orders could be comparable from the first half at this point.
Yeah.
Sure Ian look there's always scenarios.
And there is no doubt we are extremely pleased with the cadence that we've started off the first half of the year and the strength of the first half of the year inbound.
I think it speaks again volumes to the.
The differentiated position that we have in the industry again, keeping in mind that our Q, we just announced our Q2 inbound but no subsea opportunities were removed from the subsea opportunity list. So basically direct awards or proprietary work that came to our company, which is I guess.
Yes makes us really really proud of.
What we've accomplished at the same time, the subsea opportunity list has grown by 20% and now has a value of $17 billion with the potential to be awarded over the next 24 months there is no doubt.
There is no doubt the cycle is setting up very well we started talking about this 1 year ago, 1 year ago.
When it was not at all I guess.
Viewed by by most that we would be entering into this type of an environment.
That's because of again the proprietary access the information that we have the relationships that we have with our clients gave us that confidence to provide that outlook over a year ago.
When we look at what's out there right now you know the consensus number on inbound is is more than that.
4 and a half to $4.7 billion range.
Getting into that tricky part of the year.
And where you.
Our orders going to happen on December 31st or are they going to happen on January 3rd and I don't mean that sarcastically, we actually see that quite often where in some cases clients will want to accelerate spend into the current year, perhaps for budgetary budgetary reasons and in other cases, they want to defer the investment.
Decision until the beginning of the following year I don't have a clear line of sight on that the team's working on that right now.
Really trying to sit down and understand from our clients kind of what what is the most likely outcome.
But clearly with the timing of some of those awards coming into the fourth quarter, we would anticipate our inbound to be trending much closer to the consensus number that's out there than the than the greater than 4 billion. We are today.
Yeah.
Super That's that's why Paul Thanks, Doug.
Next question is from Marc Bianchi of Cowen. Please go ahead.
Thanks, perhaps continuing with this scenario discussion if I look at the subsea opportunities going up 20% I know those are you know awards that are go into backlog and take years to to convert but it is an indication that things are looking better.
I would think that maybe services has has some better momentum now and and also maybe some of your book in turn so I was a bit surprised that the the revenue guide for subsea didn't really increase a lot I think things. If you have if you hold things flat from the first half you kind of hit the high end of guidance and Youre down 13% to hit the low end of <unk>.
And so that would seem like a pretty pretty conservative outlook. There maybe talk to us about how you built that guidance up what scenario would need to happen to get to the low end and maybe thoughts on upside.
Yeah look I don't want to spend too much time on the subject are not that it's not critically important but but no. We're not we're not trying to.
There's no.
Hidden message here keep in mind, a couple of things as you pointed out there's very little book in turn in our subsea business. That's the advantage I mean, you can already start to look at how much backlog we have for for next year and beyond as we provide the backlog scheduling, which gives a lot of a lot of confidence and that's the benefit.
Of having this business this business.
As a primary business in the portfolio.
M <unk>.
So there's not a lot of opportunity to really ramp you can ramp inbound, but you don't get a lot of that in the current year, you'll get some but you don't get very much of that converted in the current year. In addition to that keep in mind that Q4 seasonality. It occurs every year and we would expect to have some Q4 seasonality this year as well.
Okay.
Okay. Thanks for that that's the next question is a bit 2 part and it relates to Capex. So.
In the prepared remarks talked about potential for you know maybe the full year to be below the $2.50 guide I'm curious if you could help us with some more color around that and then thinking about 'twenty 2 and beyond previously I think you said sort of that $2.50 level is the right number.
Is it possible that we could be tracking below that and then as you start building out this new energy capability, how does the capital intensity change if at all.
Sure so I'm going to pass.
Going to pass it to Els and he'll share with you you know kind of where we are on capex.
And what we see happening in the second half of the year, because it's actually quite exciting.
And then he'll talk about you know kind of the the beyond you were asking about also the capital intensity of the new energies is did I hear that correctly was that the last that's right that's right.
Right, Yeah, Okay, well why don't I take that 1 upfront look our approach as it is in traditional energy has to be a technology provider and as long as we're a technology provider. We feel we can do it without significant capital investment now that doesn't mean, there won't be some capital investment, but are we going to build the mother of all vessels.
To go out and install structures no that's not what we're going to do or are we going to engineer solutions that might not require the mother of all the structures that could be really unique and not require a big capital intensive asset base. That's the way we approach everything we do I'm going to pass it to <unk> to talk about the specific quest.
Around capex.
Thank you for the question and first of all commenting on the first half of it is true that it's light in the first half we have definitely had some timing with relation to some of the typical drivers for our Capex profile, which is the planning of around vessel dry docks as an example drove some capital more towards the second half.
As the first half we also have the timing of when we need service tools and manufacturing tools into our various to support our various project awards and that's really the key driver for the second half you look at the project awards coming into backlog that we have a we are investing for in both offshore service tooling.
As well as manufacturing tooling to support those backlogs and that includes the higher activity that we're seeing in Brazil, where we are also investing in service installation tooling that will drive our service business in Brazil. So so definitely there is a little bit of an anomaly in the first half to second half I will still stand behind the comment I made in the <unk>.
Initial remarks that we have an opportunity to come in below to $2.50 for the year and maybe I also want to emphasize that this new run rate for the second half is not really a new normal that you should consider.
We are going to be at a higher level. I think you can continue to use the $2.50 is a good indicator for the moment as you look ahead.
Great. Thanks, so much gentlemen.
Yeah.
Next question is from Britta annuity has got their chaparral. Please go ahead.
Yes. Thank you for taking my question.
I have to send me the first 1.
And when I see the list I really see.
A very strong needs to still yet available.
Probably some method.
So contract do you believe the SASSA contract from who use.
It would be awarded.
Not all of them, but before before you head and the second question also relates to Brazil you've.
<unk> talked about your.
New hybrid.
Flexible risers solution.
I would say a heavy content.
When do you think.
This new solution.
The fully qualified.
Sure. Thank you very much for the questions regarding the Circle awards in Brazil, Yes on the opportunity list. Its projects that are likely to be sanctioned in the next 24 months. So no not all of those would be awarded but we would not be surprised to see you know ace.
A surf award or potentially to surf awards in Brazil between now and the end of the year, obviously, that's up to our client to decide the exact timing of the award but just.
Looking at where we are in the tendering phases of some of those projects it would not be a surprise.
Regarding H F. P qualification. This is this is really important.
Important.
And kind of confidential to Petrobras, So I don't want to say anything out of context other than to say we are very pleased with the progress that we're making around the HFC qualification and.
Petrobras working hand in hand, with Petrobras every step of the way and we are we are quite advanced and they are very pleased with where we are in the process.
But I need to stop there because the rest is really.
Petrobras has asked us to maintain confidentially the confidentiality of the actual schedule.
Okay fair enough. Thank you.
Next question is from Walker head of capital markets. Please go ahead.
Yeah.
Yeah, I I believe.
That was my name and just Doug what.
Question on.
The the the surface inbound orders you gave some handover hit combativeness fun.
And knocked back international growth comparison could you provide some context on sequential growth that you saw in inbounds for for surface business and in North America and international.
Sure of a car I don't have the exact numbers in front of me, but the there was a rather material increase.
Sequentially Q1 to Q2, and our international orders and and I would say much less.
M pronounced in the North America orders from Q1 to Q2, but clearly Q2 was a strong strong order level for our subsea International and also just bear in mind, when we talk about inbound and moving to talk about backlog, it's almost exclusively in our international business almost everything we do.
In the North America business Falls under book in turn.
Okay, and then doing that the momentum that you've seen in second quarter in terms of sequential growth do you see the same kind of momentum carry on.
Into the second half as well.
For International we expect continued progression into the third quarter.
Most of the orders typically come in in Q3 and Q4, there's a couple of geographies, particularly in North Africa that tend to do large year end orders based upon inventory levels too early to comment on those but we would expect incremental middle east orders in Q3 versus Q2.
And again in terms of North America, we see somewhat of a week.
We were we're forecasting at least somewhat of a steady progression, but you know the north American market always remains the most cyclical in the most difficult to forecast and a very small very small portion of our business.
Okay and just 1 final question to the extent that you can you're unable to answer for next year given your outlook. This a revenue opportunity for them.
The $17 billion up to him he said.
Do you see the book to Bill for next year in subsea to be well above 1.
So I'm excited to say the book to Bill. This year is 1 our year to date. So that's important to note I probably should have emphasized that earlier on in the discussion just to make sure that that's recognized and I think we're in a unique position.
In that scenario are.
Do I see the book to Bill improving in 'twenty 'twenty 2 versus 2021, the answer would be yes.
Okay.
Thank you very much.
Yeah.
And our last question will come from the line of that's the base from Coker <unk> Palmer. Please go ahead.
Hi, Thank you for taking my question.
Maybe can you speak about how should we think about longer term free cash flow from the business.
Sure I think Gulf will take that question.
You asked about the longer term cash flow.
Yeah. So yeah. So so obviously, let me let me just start with.
We obviously have had a somewhat soft quarter. This quarter, it's not representative of what would typically happen in a quarter and as I mentioned in my remarks, we have some variability from quarter to quarter due to the subsea projects business because we're carrying I also commented on on the 1.1.
Specific item and in Brazil, but if you take it to the longer term clearly I do don't see 2020, 1 that's being reflective of the long term free cash flow performance our.
Your mission I think there are a couple of things that we would definitely need to do to manage differently. In its first day interest expense is an obvious item, where we are committed to debt reduction that has been part of what we've been saying all along and we expect that too to help reduce the interest expense. So as we go forward I think we also have some room to significantly.
Optimize our tax position and get a better ratio of tax expense relative to 2 cash flow overall, and then lastly of course I mean, we haven't been talking in this in this review here a lot about the prospects for subsea in particular and in the in.
And the opportunity we're seeing so we clearly are expecting to see a growing EBITDA profitability profile and continue to convert the larger portion of that into cash as we go forward.
So I guess maybe.
It doesn't lead you can help us think about longer term free cash flow margin. It can even go back to what we saw in 2013.20 funding levels.
How should we think about that.
You know I would I wouldn't go back to you.
Yeah, sorry from 2013 fourth 2013, and 14, we were a little bit different business also at that time. So overall I would I wouldn't comment on any specific ratios at this time, we will come back with more information on this also that's where you get into our Investor day that happens in November and we will definitely free cash.
Flow M and and other relative to net debt structures et cetera will will be a topic at that time.
And maybe if I can squeeze in 1 last question just when you think about $150 million of Capex.
Can you help us think about like is it more driven by subsea services, because I'm I'm, maybe I'm not even thinking that that the subsea trees business wouldn't require that much capex or is it more driven by the subsea services.
A combination of subsea services in the fleet.
Okay. That's very helpful. Thank you so much for taking my questions.
Thank you I would like to turn the call back from that Sunshine or for any closing remarks. Please go ahead.
Thank you. This concludes our second quarter conference call a replay of the call will be available on our website beginning at approximately 8 P. M. British summer time today. If you have any further questions. Please feel free to reach out to the Investor Relations team. Thanks for joining us he may end the call.
I think from today's conference call.
You may now disconnect.
Uh huh.
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