Q1 2022 TechnipFMC PLC Earnings Call
Good morning, and welcome everyone to the <unk> FMC first quarter 2022 earnings conference call.
All lines have been please on mute to prevent any background noise. There will be a question and answer session. If you would like to ask question. During this time simply press Star then the number one on your telephone keypad.
You would like to withdraw your question press the pound now.
Now I would like to turn the call over to your first for central for today, you sort of think humor.
May begin the conference.
Good morning, and good afternoon, and welcome to Technip Fmc's first quarter 2022 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.
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 Exchange Commission, we wish to caution you not to place undue reliance on any forward looking.
Statements, which speak only as of the date hereof.
We undertake no obligation to publicly update or revise any of our forward looking statements. After the date. They are made whether as a result of new information future events or otherwise.
I will now turn the call over to Doug <unk>, Technip, FMC Chair and Chief Executive Officer.
Thank you Matt good afternoon.
Thank you for participating in our first quarter earnings call.
I would like to start off by addressing the war in Ukraine.
With the world as witness has been truly heartbreaking.
I am extremely proud of the compassion our teams worldwide are showing through their support for refugees.
I want to personally recognize our employees in Poland.
Many of whom have been giving direct support to Ukrainian families by opening up their hearts and homes and providing much needed shelter and care.
As a company we continue to support their efforts through our global humanitarian fund providing.
Providing practical and financial health, where it is needed most.
The invasion has prompted energy security to become a global priority.
We remain committed to helping our clients address the essential needs for hydrocarbons today.
To ensure the continuity of affordable energy prices.
While also playing an essential role in the longer term energy transition.
Now turning to the quarterly results.
Total company revenue in the period was $1 6 billion.
Total company adjusted EBITDA for the quarter was $154 million with an adjusted EBITDA margin of nine 9%.
Total company inbound orders in the quarter were $2 2 billion.
Driving sequential growth in backlog to $8 9 billion.
Surface Technologies' inbound orders were $291 million.
With a book to Bill above one driven by strength in the U S market.
North America sales and profitability grew sequentially driven by increased drilling and completion activity and an improved pricing environment.
Outside of North America, we are investing in new manufacturing capacity to support the strong middle East outlook.
As previously highlighted we are transitioning to a new facility in Saudi Arabia, which was expected to be a headwind to our financial results in the period.
The qualification of the facility is extensive and the process has taken us more time than previously anticipated.
We are now undergoing final production testing and expect final certification of the facility by the end of the second quarter.
At which time, we anticipate an acceleration of orders in country.
We remain confident in meeting our full year expectations as we have secured plans to accelerate recognition of these orders.
Al will cover the near term financial impacts during his prepared remarks.
Our results in the period also reflected our ability to effectively navigate the ongoing challenges facing the global supply chain.
Inflationary pricing and logistical bottlenecks have resulted from a number of factors.
The energy transition.
The global pandemic.
And the Russian invasion of Ukraine have all played a role dish.
Disrupting access to key commodities and supply routes.
At a time when the global economy is quickly transitioned from a period of contraction to one of accelerating growth.
While we are not immune to all of the market dislocations, we have taken many strategic actions over the last several years that have mitigated the near term effects.
We are utilizing the lessons learned from previous growth cycles to drive simplification standardization and industrialization throughout the organization.
We have increased supplier diversification to reduce dependency on sole source supply, while adding supply chain capacity to ensure proper balance with internal manufacturing capacity.
And we are developing stronger relationships with our supply chain.
Much like the alliance partnerships and frame agreements, we have developed over the years with our customers.
We are working more closely with our supply chain partners to better integrate them into our planning processes.
Strengthening these long standing relationships will keep us well positioned in times of market volatility.
Our subsea two <unk> product platform is our most prominent example of industrialization.
Allowing for the successful implementation of a configure to order or CTO model.
CTO has enabled us to create a value stream that delivers a more competitive offering to the market when compared to an equivalent engineered to order products.
Resulting in a 25% reduction in cost and a 50% reduction in product delivery time.
Savings that are both real and sustainable.
And we have paved the way for other products to adopt a similar operating muscle, enabling an enterprise wide approach.
This resulted in three CTO principles.
That serve as the fundamental basis of how we operate in this environment.
First we are eliminating design engineering.
Second we have redefined our sourcing strategy by utilizing preapproved suppliers and standard configurations.
And third we are transforming manufacturing flow by leveraging Configurable assemblies.
With CTO, the greater predictability of product manufacturing and high volumes of pre engineered components has allowed us to completely redefine the supply chain.
Removing significant inventory from our balance sheet and cutting up to eight months of lead time.
Ultimately our success is determined by our execution.
Our client relationships and our contractual arrangements.
Project execution remains a core competency and oftentimes a point of competitive differentiation.
But it is also dependent upon the partnerships, we established with both our customers and our suppliers.
We're seeing strong support from our customers to ensure we can address their needs both today and throughout this evolving period of increased activity.
An example of which is a new framework agreement with total energies that will utilize subsea to point out to address their future technology needs.
And we are seeing improvements in contractual arrangements that more appropriately balanced the terms and conditions needed to support this growth be it through more favorable payment terms or supplier investment and risk sharing.
In subsea we had a very strong start to the year with inbound orders of $1 9 billion and a book to Bill of one five.
This included two announced awards in the period Petrobras is Busying, six Greenfield development and winter Scholls Maria revitalization IEP Ci project.
This is our first <unk> with Wintershall DEA and award built on our ability to leverage our I feed model.
Through early engagement, we optimize the field layout to maximize the benefits of integrated project execution.
Our involvement help reduce the project's carbon footprint by modifying existing infrastructure.
Eliminating the need for an additional 4000 meters of pipe.
Okay.
Which stands out most in the quarter is the breadth of the inbound.
Nearly 40% of which came from smaller unannounced project awards much of which was direct awarded to our company.
This is a very diverse source of inbound.
These smaller awards in the quarter included projects for more than 30 operators.
From all major basins across the globe.
Beyond project activity Subsea services remained resilient in the quarter, despite the impact of weather related seasonality.
Activity trends remain favorable and consistent with our view that subsea services revenue will grow to approximately $1 2 billion. This year.
With energy security now a clear global priority, both operators and suppliers are working more collaboratively in the current environment.
Our conversations with clients today are focused on balancing the need for new and different sources of supply with the challenges are more scarce resources.
Be a commodity inputs skilled labor supply chain logistics for physical capacity requirements.
This increase in constructive dialogue supports our view that we are in the midst of a multi year up cycle for oil and gas.
Our subsea opportunity list continues to highlight a very robust market outlook reps.
Representing an opportunity set of larger projects that totals more than 20 billion for the industry.
Led by Brazil.
And West Africa.
Looking ahead.
We expect increased activity in other regions of the world in order to meet the growing global demand for feed gas used in LNG facilities.
The majority of which is supplied by subsea wells.
We expect these volumes to be supplied by increased activity in major basins from Africa to Asia Pacific.
We have a strong track record with large gas developments and are well positioned as an agnostic provider of integrated subsea projects.
The expanding LNG market gives us an even greater confidence in the intermediate term outlook.
We continue to anticipate subsea inbound order growth of up to 30% in 2022 with IEP Ci direct awards in subsea services together approaching 75% of our inbound orders.
I will now turn the call over to <unk> to discuss our financial results.
Thank you Doug.
Total company inbound orders were $2 2 billion in the quarter driven by strong subsea inbound of one 9 billion.
Total company backlog grew sequentially to $8 9 billion at the end of the period.
Revenue in the quarter was $1 6 billion adjusted EBITDA was 154 million, which included a foreign exchange gain of $28 million.
Yeah.
First quarter reported loss from continuing operations was nine cents per diluted share, which included after tax charges and credits that netted to an expense of $29 million or <unk>.
These charges included the following expenses totaling $1 million related to impairment restructuring and other charges and a loss of $29 million on our equity ownership in <unk> energy.
When excluding the impact of charges and credits are adjusted loss from continuing operations was <unk> <unk> per share adjusted loss also included foreign exchange gain.
Okay.
Turning to segment results in subsea.
Revenue was $1 3 billion up 4% from the fourth quarter adjusted.
Adjusted EBITDA was $129 million, we didn't and adjusted EBITA margin of 10% in line with the fourth quarter fourth quarter revenue increased sequentially, primarily due to higher project activity in Australia, North America, and Asia, partially offset by reduced activity in Africa.
In Africa Subsea Services' revenue was largely unchanged from the fourth quarter due to the seasonal impact of weather in both periods.
The increase in adjusted EBITDA was broadly in line with the sequential increase in revenue.
In revenue.
In surface technologies revenue was $267 million down 7% from the fourth quarter.
Revenue decreased sequentially, primarily due to lower international activity, resulting from our transition to the new manufacturing facility in Saudi Arabia.
The decline in segment revenue was partially offset by growth in North America, which benefited from the continued increase in drilling and completion activity and completion activity adjusted EBITDA was $22 million at 24% decrease sequentially.
<unk> were negatively impacted by lower international revenue and the impacts of the manufacturing transition, partially offset by higher activity and an improving pricing environment in North America, North America adjusted EBITA margin.
Eight 2%.
Okay.
Turning to corporate and other items in the period corporate expense was $30 million, which included $3 million of restructuring and other charges.
Net interest expense was $34 million and is expected to decline during the year as we achieve our stated objective to reduce gross debt.
Tax expense was $26 million and 26 million.
Cash required by activities from continuing operations was 329 million 129 capital expenditures were $27 million.
This resulted in free cash flow consumption.
<unk> hundred $57 million in the.
First quarter.
The outflow, which we expected and highlighted in February .
It was largely largely due to a working capital consumption related to the timing of project milestones and the payment of annual incentive.
As discussed when we provided full year guidance, we expect free cash flow to be weighted to the second half.
Major milestone collections throughout the second half.
Generation generation, we ended the quarter with cash and cash equivalents of $1 2 billion and net debt of $802 million.
Yeah.
During the first quarter, we sold $17 8 million Technip energies shares for total proceeds of $239 million in April we sold our remaining 4 million shares.
Following the partial spin off in February of last year, we retained ownership of 49, 9% of Technip energies outstanding shares we have now fully exited our position or total proceeds of $1 2 billion points.
Continuing with our focus on debt reduction last week, we commenced a tender offer for $320 million of our outstanding six 5% senior.
Senior notes due in February 2026, 2020, when combined with the retirement of additional debt maturing in June we expect to reduce gross debt by up to $400 million in the second quarter and the second quarter. This would imply gross debt of approximately $1 6 billion at the end of the second quarter end of the second quarter and would represent.
Sam nearly a $1 billion reduction in gross debt.
Spinoff in the first quarter of 2021 2021 .
Lastly, let me provide some thoughts on the second quarter.
Our subsea we expect the second quarter to benefit from typical seasonal uplift.
Sequential revenue growth of approximately 10% driving margin expansion of up to 200 basis points.
For surface technologies, we expect revenue growth in the high single digits with incremental EBITDA margins of up to 30%.
I would also note that our second quarter results continued to be negatively impacted by the transition to our new facility.
I will now turn the call back over to Doug for his closing remarks.
Thank you.
Before moving to Q&A I would like to reiterate a few key points.
First.
We are in the midst of a multiyear up cycle for oil and gas investment.
In subsea, we are experiencing improvements in pricing and contractual arrangements that more appropriately balanced the terms and conditions needed to support this growth.
In surface technologies, we will continue to prioritize technology integration and cash generation.
Growth due to the structural changes in this evolving market.
And we are confident in our recovery in surface international orders in the back half of the year.
Second the separation of Technip energies is now fully complete.
With the final sale of our remaining ownership stake just 14 months from the date of the partial spin.
And lastly, our $1 2 billion cash position and our confidence in generating strong free cash flow in the second half of the year are allowing us to take aggressive steps to further reduce our gross debt another important milestone on our path to shareholder distributions.
Operator, you May now open the line for questions.
Thank you.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we request a limit the questions to one main and one follow up in order to accommodate the other question.
Your first question comes from Ian Macpherson.
<unk> Sandler your line is now open.
Right.
Thank you very much good morning.
Good morning, Doug.
You mentioned.
<unk>.
40% or so of your.
Your $1 9 billion subsea inbound coming from your smaller.
Direct awards from 30 or so operators.
That just seems certainly unprecedented in recent memory.
That is that bucket of orders more reflective of the recent improvement in pricing.
That youre, describing than say, the larger orders or or or as you are.
Language around price improvement more representative of the entire pipeline of new orders.
Thanks, Ian and interesting question.
Let me start by.
Agreeing with you that the breadth of clients both geographically.
And just the sheer number.
<unk>.
It was a very strong indication.
The offshore outlook.
Going forward and we still had contributions from all the big IOC easing from the NOC, but what we saw was just an ever expanding group.
Smaller independent operators.
And they're attractive they are attracted to the <unk> model because it allows them to move projects forward in a very short order.
Proving the overall project economics significantly with a company that has a proven track record in delivering these ie PCI projects that we pioneered back in 2017.
So in that response you could.
Gathering, there's a real value recognition by those clients.
In that off in the offering.
And the uniqueness of our position within the marketplace that being said the pricing is not us.
Solely dependent on any one of those groups. It is more general across the board.
But we are really really excited about what this ever emerging client base offshore and our ability to capture that.
Actually quite remarkable.
Yes, indeed and so.
With the improved.
Conditions with pricing in your subsea business does that.
Impact your view on the 15% subsea margins mid cycle margins that you described at the capital markets day.
In November does that does that look like it could materialize sooner than you thought.
Five months ago because of that.
The increased volume coming into the market now.
Yes.
Okay.
Alright good.
If I can ask one more al you mentioned that with surface, 30% incremental margins in Q2, but still with.
Some headwinds from the new facility ramp.
Would you care to quantify what that impact is so we can roll forward our thoughts on second half service margins.
Sure I'll give you some color to that so.
We clearly signaling maybe fourth quarter call that we expected an impact from this facility transition I would say that we signaled at the time that it would be up to 200 basis points I believe.
It's in that range the impact that we're seeing in the quarter.
And if you were to kind of dialing ahead, you think about Q2 performance I think you need to look at it I think surface segment.
As a function of North America progress, where we are seeing the activity continuing to ramp up and continuing to be.
Favorable as well as as we mentioned also that we do see pricing and pricing is a focus definitely focus for us in the north American market as well.
Immediately that Q2 will continue to be soft on the on the international side.
Saudi facility will still impact the second quarter. So really you will not see the major.
Margin ramp up in surface until the second half.
2022, and again based on those dynamics of North America market, continuing to do well and we expect to fully.
Taking actions today to be ready to handle all the middle East orders that we are expecting that will come our way here at towards.
During second quarter and onwards, and we are ready for that and we're going to be seeing significantly improving revenue and EBITDA performance.
Second half of 2022.
Okay.
That's perfect thanks very much.
Your next question comes from Irene Xyrem of Jpmorgan Chase. Your line is now open.
Yes, good morning, good afternoon team.
Wanted to add.
Doug to zero in on some of your comments around pricing improvement and improving terms and contracts.
You booked $1 9 billion of inbound awards in subsea I was wondering if that commentary was reflective of the order of your <unk> order book.
Or is this more on the come and just thoughts on what the margin profile could look like relative to the 11% to 12% Guide you have for this year would you expect the new orders to be kind of accretive to that outlook is.
Work on the path towards 15% margins as Ian mentioned in that 2025 timeframe.
Okay. Thank you Arun let me.
Take this opportunity to kind of breakdown the pricing environment for us between our businesses and globally. If you don't mind in doing so.
I'll be able to answer your question. So let's start two businesses surface and sub sea, so let's start with surface.
Two very different markets that we serve the north American market in the international market.
In the North American market, it's almost like a tennis match at this point, it's a constant volley.
Reising goes up inflation goes up pricing must go up again to maintain that pricing is that active.
When you go into the international market, there tends to be longer term contracts frame agreements.
And in this scenario, we are actively looking those contracts have pricing mechanisms in them.
But we are also looking to supplement that with incremental pricing given the current market conditions.
Those are ongoing and we would expect to see the impact of those more in the second half of the year.
Moving to subsea.
There's really two different approaches.
That are unique to our company and.
And let me explain those as the 75 and the 25.
So the 75 is the percentage of our market that is direct awarded this is through our unique <unk> offering our alliance partners and our services.
Here, our clients are truly looking for value creation and are very.
Comfortable and acknowledged the value that we contribute and they want to make sure that we are economically rewarded.
So it is a.
A ongoing discussion in a very comfortable and collaborative environment.
Which for us to continue to ensure that we are capturing.
And economic value that is appropriate.
In what we create as well as in the environment in which we.
The environment in which we exist.
The 25% is the open competitive market three bids and a buy if you will.
I hear the returns are improving but still not adequate.
We are addressing this with I would say an aggressive pricing position.
As well as the terms and conditions that.
Ive alluded to throughout my prepared remarks.
So when we think about.
How what does that mean for us.
Knowing that we have the 75% allows us to be very selective in the 25%.
And allows us to help the industry in general, but certainly ourselves by driving the appropriate terms and conditions given the current market environment.
And that can be.
And enhancement of the traditional indexes that are that exist in the contracts today.
But it also has to now be able to address supply scarcity.
In some cases their supply rationing going on we need to make sure that we're protected by that and our contracts or what I would call extraordinary inflation. When you have disruptions of the supply chain like for instance, what happened to nickel in this last quarter.
So we're enhancing those features within the terms and conditions of our contracts.
But it also allows us to simply no bid contracts.
So we have been no bidding billions of dollars of contracts and still recording a $1 9 billion inbound of high quality inbound.
And just one last comment on the $1 9 billion of high quality inbound.
That is.
Absolutely accretive to the margins in backlog, but it isn't just the beginning we started and the inflection actually occurred four quarters ago.
And I called out at the time that our margin in backlogs have inflected and they did inflect over the past year.
What we sold this quarter was a greater amplitude of that inflection.
In a positive direction.
Great. Thank you for that for that answer.
My follow up is I wanted to explore a bit more in detail this path to shareholder distributions.
Net debt.
Is that just over $800 million.
You plan to pay down about $400 million of gross debt in 10-Q, but I was wondering if you could frame.
How long the path.
Would get.
Maybe give us some sense of minimum cash requirements to run the business and perhaps the timing and how you think.
About just dreaming excess free cash flow to shareholders.
Oh absolutely.
So first let me kind of reiterate where we were.
What we said at our analyst day. So we clearly said that we are committed to shareholder distributions. We said at the time that we are looking for timing of the second half of 2023, but we said it was dependent upon reaching a certain target capital structure that target capital structure consists of gross debt the $1 3 billion.
And cash of $800 million.
So in that statement kind of we think at this moment in time, we need about $800 million to run the business now and longer term.
We can get into whether we can optimize that number further but at this moment in time, that's the target capital structure. So so again, that's that's the half a billion dollars of net debt.
Being described here.
If you look further out into this year, obviously, we are we had.
Fairly weak free.
Free cash flow generation this quarter, but.
We remain confident in our full year guidance and that implies that we're going to generate more than $500 million of free cash flow over the remainder of the year.
And when you take all that including considering the debt reduction we're going to get.
Fairly close to reaching that target capital structure by the end of the year now the exact timing for weather.
We can accelerate any shareholder distributions from that point on I'm not going to comment on the specific timing now, but clearly we are pleased with the progress that we've made.
The debt reductions that were needed to get there and the plans we have right now with the debt tender that we just launched here last week.
Going after $400 million of reduction as you said for this quarter. So we think the path to get towards a target capital structure as is to be there tried to be there by year end is kind of where we're targeting.
Yeah.
Great. Thanks, a lot.
Thank you. Your next question comes from <unk> <unk> of Society Generale. Your line is now open.
Yes, good afternoon, because I guess you are in the U K. This afternoon two questions last clarification, if I may 1st Doug regarding your comments regarding so great.
<unk>.
Yes.
Could you maybe give a few colo.
As you check if you experience that <unk> seen over the last few weeks last few months.
<unk> <unk> from <unk>.
And then.
Another question that we do it for us.
Maybe you have to at that time.
Yes.
Sure Gil.
Indeed, it's good afternoon sitting here in our manufacturing facility, where we make <unk>.
And it's actually a quite a beautiful day here in new castle. So thank you for that.
In terms of the Ioc's behavior.
I don't really.
I want to comment.
<unk>.
On their behavior other than to say.
We've seen we have maintained.
Activity both in terms of front end studies, both in terms of ongoing projects both in terms of.
We're looking at Greenfield opportunities in brownfield.
Tie backs to their existing infrastructure, most of which is producing below nameplate capacity and therefore can be the economics are very attractive to be able to do tie ins in tie backs and theyre very excited about our all electric offering and the attributes that it brings.
PCI offering because of the ability to be able to deliver nine to 12 months prior or earlier than you would if you <unk>.
Split the packages and.
<unk> approached it in a more traditional or more conventional business our contracts. So.
It's not necessarily a reaction over the last couple of weeks, just an ongoing very constructive dialogue and very attractive outlook with our IOC clients, who who we.
We cherish very much.
Yes.
Thank you very much.
Doug. So my second question is for I would like to try to reconcile Serbia I would thought the timing in terms of cash flow between Q2, where you.
You want to reduce gross debt by $410 million and each two where do you expect strong positive free cash flow.
Yvonne.
Your comments rheology subsea and to a lesser extent.
Sophistic synergies in.
Q2 should we assume that.
Q2 <unk>.
Already generates net free cash flow.
So thank you very much for the question so.
So maybe first to start off with.
<unk>.
We are sitting at this point in time, we had about a $1 2 billion of cash are clearly some will exist.
Existing available cash will be the primary source for the debt reduction for the second quarter in terms of free cash flow generation.
Four four for this.
Upcoming quarter versus the rest of the year.
It's always EBIT, even sitting here today, it's always a little bit unpredictable to say exactly how much we will get into the second quarter versus the rest of the year.
But I would I would say that we're at least going to be neutral or trending towards neutral in the second quarter, but it remains as I said in the prepared remarks, but the majority of the free cash flow generation is going to come in the second half of the year and to be Frank most levels in the fourth quarter. So so overall I mean.
The main source is going to be our existing cash in terms of the debt reduction.
Doing well.
So thank you very much so Q2 is an inflection point.
I don't need to have it all right.
Yes.
Thank you again I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad. We also request to limit your questions to one and one follow up in order to accommodate other questions you.
Our next question comes from Chase Mulvehill. Your line is now open.
Hey, good afternoon, everyone over there.
Okay.
Yeah.
So I guess first question.
Doug is when we think about inflation, we get a lot of questions from investors around your ability to kind of preserve margin in your current backlog just given raw material inflation I mean, it sounds like that youre trying to step up the terms and conditions.
The projects that you're booking today.
But maybe could you talk to your backlog.
What kind of terms and conditions you have to be able to preserve margin because obviously inflation.
On the raw materials is that is increasing quite a bit.
Sure Shane.
Good morning to you and welcome to the call. We're very excited to have you on the call.
I appreciate your interest in and dialing in.
In terms of the existing current well, let me back up what I was explaining to the response to the earlier question, which is given this.
New World order in terms of the supply chain and some of the very unique situation sit.
Situations that have occurred of recent.
Some of the <unk>.
Extraordinary actions that we're taking to ensure that those contracts sufficiently address those scenarios, if they should reoccur and thats what I was.
That's what my answer was focused on in terms of the existing contracts.
I wanted to be very clear, we have had a very disciplined approach.
Our contractual arrangements, where we first and foremost at the time that we actually inbound the order. We typically have 80 to 90 plus percent of the cost.
Committed so we have back to back with our suppliers to ensure that those costs are locked in if you will we also with our clients have escalation clause is typically tied to indices that protect us in.
In terms of an inflationary environment.
So those exist today.
I think you can see in the performance that we've had over the last.
Two and a half years now which is hard to believe that the period that we've been through.
They have been very resilient and I think it has been widely accepted that our ability to be able to manage.
The inflationary environment has been.
I think I am proud of the team and I think actually quite quite remarkable but let me talk about a couple of things that are unique to.
Our company because what I've described there I believe would apply to the majority of the industry.
Maybe why the last couple of years have worked out better for US is this path that we started on many years ago, which was to develop.
A product platform that would allow us to change and fundamentally change the way that we operate the company.
And that subsea two <unk>, which led to this configure to order operating model Chase in the past every product was unique every project was bespoke there was no consistency and therefore, we were going out to the supply chain on each and every project and asking for something that was just a little bit.
Different than the project before so imagine the lack of ability or the strain that it put on the supply chain, let me put it that way.
With this new subsea two <unk> product platform and our configured to order model. We have a standard configurable design, we can take those configurable sub components and we can align with what we now call our CTO supply chain partners, where they have volume assurance.
And they can not only do they have the ability to be able to properly plan their business, but we then ask them to ensure that we have a consistency of supply. So if you will they stock the raw material, where those configurable sub components on consignment.
Then we are able to draw from that.
As we bring in these PCI to <unk>.
Awards.
And Thats something that is really unique to our company.
One that technology development, but it was to you also have to have the volume and the scale you can't do it if you don't have a significant market position.
Which we have.
Which we have secured.
Again through the PCI, Our alliance partners, which lead to these direct awards give us. This early early view and early engagement.
Like this quarter allows us to book $1 9 billion of inbound where we only had two announced awards and I just wanted to clarify I want to make sure. There's no lack of ore that we clarify.
<unk>.
Yellow tail project in Guyana with Exxonmobil that we are very excited to have been awarded was not booked in Q1 is in the final preparation for us to inbound and that will we will be inbounded imminently most likely in this quarter's Q2 not in Q1 so.
It kind of it all has to work together Chase I don't know how else to describe it but it would be really really difficult and I think it is very very difficult for others, who haven't made this transformation. This internal transformation, which then also applies to the supply chain.
Okay. That's very helpful. Appreciate all that color the real quick follow up is maybe for al.
If we kind of obviously free cash flow was.
A big burned in the first quarter driven by a big build in working capital, but it's been a few years since I've covered the stock, but I think historically, what's happened is when you've gotten large orders you've gotten a lot of prepayments now I guess a lot of the orders were may be smaller.
Orders as opposed to these large.
Orders that you get historically in the past so I guess, maybe when you talked about terms and conditions changing.
Is this more better more prepayments on some of the smaller orders.
Or what's changing on the prepayment side, if anything as we go forward.
Yes, no. Thanks for the question. So maybe first just clarify to be really sure. When we go backwards in time that obviously theres a big difference between when we had to keep energy as part of our business versus versus now to the size of these advances and prepayments on an individual order basis is going to be smaller.
In general, but they are still a significant part of what we do and it's correct that when we when we target New awards, we are always targeting to have in what we call it working capital neutral or better position throughout.
The life of the project now as you said this is an area where.
It has been.
Maybe.
Going in the wrong direction for us during these tough times and certainly part of what Doug described this is tightening up the commercial terms of conditions looking at the at the payment structure of our contracts is certainly part of that.
When you just look at the advanced payments or prepayments as you call them themselves.
I would kind of say they are not necessarily always awarded.
Totally concise to coincide with the signing of the contract so for some of them that could be dependent on a early activity. Some sort of early mobilization early engineering early procurement. So you sometimes see a lag between when the awards.
Awards are coming and when you actually see some of the impact to the working capital into the advances. So hopefully that helps you a little bit but it's true that this is a focus for us we look forward for prepayments and we look for them to be early in the contract, but again dependent on some milestones.
Okay, Alright makes sense I'll turn it back over thanks, everybody.
Yes.
Right.
Thank you. Your next question comes from Brett trend Hoodie of Catheters Humphrey. Your line is now open.
No.
Yes, Hello, and thank you for taking my question.
A question on E. A CTO model you are right he explained.
I.
Volumes is critical to which and delivers a full benefit.
Subsea order intake and when do you think you would be in a position to deliver.
Really fully deliver.
Yes.
Thanks.
Saying.
You have to go through the training of the developed technology go for the transformation to be able to have the ability to be able to realize the benefit then it really becomes a factor of two things one is gross volume.
And two is let's call it net volume or the volume associated with the most levered industrial industrialized product platform that we have which today is subsea two <unk> and.
And we started with trees, and we changed and we move to controls and removing two umbilical and so it will it will eventually grow across the whole platform. So it's an ever evolving.
Opportunity set for us and I think thats important that we.
We expect subsea two <unk> to represent 50% of our inbound over the next couple of years. So that's important.
Let me backup let's start with the gross inbound so we've obviously seen the growth the growth in the gross inbound into gross inbound.
Since 2019, and we obviously delivered a strong inbound last year of $5 billion. We indicated $6 5 billion. This year, we booked $1 9 billion in the first quarter, we had a book to Bill of one five something we haven't experienced since.
Q1, Q2 of 2019, so for the past three years. So the grosses stacking up very nicely. Then there is the net where there is a portion of that that really benefits, mostly from the CTO model. So we're saying 50% of subsea two <unk>.
Over the next two years beyond that we will continue to expand the subsea two <unk> product platform across our entire product offering. So you will continue to build upon that and that is this ever.
Never ending draw.
Drive towards industrialization. So we have a very specific focus on this in the company in everything that we do and we're seeing some real benefits today, but we will see a cumulative and compounding benefit as we continue to move forward.
Yes, thank you very much Doug.
Follow up question on the frame agreement.
With.
Total linear Ge's battalion is especially in Angola and block 17.
As many many.
Tieback opportunity.
Yes.
Not yet convinced by the I <unk> O R.
I Miss understood, it's a frame agreement subsea 2.0, but.
Yeah in that building yet <unk> concept.
Hi.
Don't necessarily agree with you, but I don't think it's appropriate for me to comment I think I will leave that up to the customer and when we announce our awards.
Okay.
I was just speculating I have no view on on total choice I was just.
Thinking that because of this way Matt agreement it was not.
And <unk> approach, but I think you answered my question, telling me I was wrong.
Yeah.
Okay.
Thank you.
Thanks.
Your next question comes from Marc Bianchi of Cowen. Your line is now open.
Hey, thanks.
Just a quick clarification first and I think I think it's straightforward, but I just wanted to be sure.
The guidance for the second quarter the outlook for the second quarter was just at the segment level.
And if there's any FX.
Up or down in the second quarter that that wouldn't be reflected in the segment. So essentially the guidance you've provided excludes any any changes in FX is that correct.
That is correct.
Okay. Thanks for that.
And then on.
On the orders so 40%.
From these smaller smaller customers.
And then in the second quarter, you should get some benefit from.
From a higher services inbound and.
In recognition potentially yellow tail.
Being recorded in that quarter, it would seem that there's a chance you're.
Maybe flat sequentially on the order outlook or at least above what would be needed to kind of be on track for that 30%.
So I'm wondering if that if that's the right way to think about it or if there were some other unusually positive benefits in the first quarter.
That would cause the second quarter to be dramatically lower.
We at this point from what we can Oh.
Our view of the second quarter.
Absolutely.
Support the 30% improvement.
And our inbound orders so again Q1 clearly does.
Q1 times for I'm, not suggesting anything by saying that I'm, just saying it clearly supports that we expect Q2 to be above a one <unk> book to Bill again, and when we look at the second half we look at the second half in total to be above a one point or book to Bill. So we remain very confident in our inbound.
Yes.
Super Thanks, so much Doug I'll turn it back.
Yeah.
Yeah.
Thank you. Your last question comes from John Duke Romain of CIC market solutions. Your line is now open.
Good afternoon I was wondering.
All of Us show fuel.
In the first quarter comes from.
Kelvin and capture project.
When do you expect.
Your various collaborations with telos to bring about contracts.
Okay.
Good afternoon John .
Thank you for the question.
In the Q1 inbound there was no carbon.
Carbon capture inbound recognized in that number that we provided that was a pure subsea number.
The projects with Telos are advancing well the opportunity set is actually expanding and we are well into the feed study on several projects and the level of collaboration and market impact.
R R.
Relationship with Telus as having we're just really really glad to be partnered with <unk> and are looking forward to.
Announcing awards in the future.
And if you.
Thank you.
Yeah.
No more questions speakers. Please continue.
Yeah.
This concludes our first quarter conference call a replay of our call will be available on our website beginning at approximately eight P M. British summer time today.
Do you have any further questions. Please feel free to contact the Investor Relations team. Thanks for joining US operator, you may end the call.
This concludes today's conference. Thank you all for joining you may now disconnect.
[music].
Okay.
Okay.
[music].
[music].
[music].
[music].