Q2 2019 Earnings Call
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Good afternoon, and welcome to Technip FMC second quarter 2019 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 subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements.
No and material factors that could cause our actual results to differ from our projected results are described in our most recent 10-K.
Most recent 10-Q and other periodic filings with the U.S. Securities and Exchange Commission, the French en masse.
In the UK financial conduct authority.
We wish to caution you not to place undue reliance on any forward looking statements, which speak only as of the date hereof.
We undertake no obligation to publicly update or revise any of our forward looking statements. After the date they are made.
Whether as a result of new information future events or otherwise.
I'll now turn the call over to Doug Flutie hurt Technip, FMC is chairman and Chief Executive Officer.
Thank you, Matt good afternoon, and good morning.
Thank you for participating in our second quarter earnings call.
One month ago, we announced the resolution of investigations into conduct <unk> dating back over a decade ago, resulting in a settlement of $301 million with authorities in the United States in Brazil.
This brings to close the compliance matters under investigation by Oh, you asked in Brazilian authorities.
This chronic taken by former employees does not reflect the core values of our company.
We have zero tolerance for such behavior and are committed to doing business the right way.
Our foundational belief of integrity dictate how we operate.
Everywhere all the time.
In recognition of a robust compliance program there will not be a monitor assigned to the company in conjunction with this settlement and we expect no impact to our ongoing business operations.
Turning to our business highlights.
Strong order momentum continued throughout the second quarter.
At over $11 billion total company INBONE orders represent an unprecedented level setting a new record for our company.
Subsea orders of 2.6 billion were in line with the robust levels experienced in the first quarter.
In fact subsea orders for the first half of the year exceeded the levels achieved in all of 2018.
And we are well positioned for full year subsea order growth of over 50% when compared to the prior year.
For onshore offshore second quarter inbound of 8.1 billion was also unprecedented.
A new record for this business segment.
The award of Arctic LNG to drove quarterly inbound orders to levels that exceeded all of 2018 in the second quarter alone.
And the impact of the strong first half orders to our backlog is substantial with total company backlog approaching $26 billion, an increase of more than 75% from year end.
This remarkable growth in backlog provides us with even greater confidence in our 2000 or 19 outlook, which we have revised higher today as a result of the continued strength in inbound and operational execution.
The new order backlog received in the period also provides improved visibility as we look to 2020 and beyond.
Over the last 18 months there has been considerable market focus on the LNG wave.
The LNG market growth continues to be underpinned by the structural shift towards natural gas as an energy transition fuel.
Helping to meet the increasing demand for energy, while lowering greenhouse gases.
Our demonstrated leadership in this important growth market will continue as we anticipate additional LNG awards in the coming quarters.
There is a structural transformation code I MPCI that is occurring within the sub sea industry as a result of the creation of techniques FMC.
This paradigm shift was pioneered by our company, resulting in an entirely new commercial model that creates value for both the operator and ourselves.
This unique integrated capability is now having a material impact on both the total market and our business.
We have seen growth in integrated award activity every year since our introduction of this model in 2015.
The industry remains on track for continued growth in 2019.
Having exceeded $3 billion in integrated project awards in the first half of the year and we are referencing actual project awards as opposed to feed studies that simply have the potential to convert into an award.
Even more compelling is the fact that Technip FMC has secured two thirds of all integrated projects awarded over this time.
With that number reaching 100% for the first six months of 2019.
During the quarter, we were awarded our largest integrated sub sea project today for Anadarko's go Pheno development in Mozambique.
Mozambique as a frontier region in the development of hydrocarbons significant offshore natural gas reserves have made the country, a clear beneficiary of increasing LNG demand.
Technip FMC was a first mover in Mozambique.
And this award further strengthens our leadership position in the region.
For the country's initial LNG development, we are progressing well with the construction of a floating LNG structure.
The first for Africa, and third for our company.
On the same project, we're also executing contracts for much of the sub sea scope.
And now we are honored to have been selected by Anadarko to execute the country's next sub sea development.
Using our unique integrated model.
These projects are all benefiting from our expanded local presence having opened the first oil and gas Engineering center in Maputo earlier this year and we will make further investments to ensure we have the capabilities needed for continued participation in the countries expanding set of opportunities by further developing local expertise.
Go Pheno is also our first project undertaken in strategic collaboration with all season.
This partnership enables enhanced access to world class opportunities like go Pheno for both companies.
We view this approach is the most efficient way to secure access to complementary assets and delivery capabilities, while avoiding significant capital investment and driving through cycle returns.
Most importantly, the go Pheno Award.
Is a part of the broader structural trend towards greater levels of integration on subsea projects.
We have clearly seen an acceleration in market adoption since the first project was awarded in 2016 with this year's activity, representing 20% of all sub sea industry Awards.
For Technip and see the impact of MPCI has been even more profound integrated projects exceeded 50% of our inbound orders in the first half of 2019.
More broadly the integrated model has been adopted across multiple regions and with multiple clients.
Several integrated awards have come as a result of our high EGPC alliances, which can lead to new market opportunities.
Most of which are exclusive to technip FMC and subject to direct awards upon achievement of targeted financial returns.
Today, we are proud to announce our latest LPC on alliance.
With Wintershall D.A.
One of the largest DMP operators in Europe .
This further expands our already successful partnership by creating additional value through integrated feed integrated MPCI integrated life of field services for the newly formed Wintershall D.A.
In the second quarter, we inbounded, the Arctic LNG to LPC contract.
We are honored by the confidence and trust of Novatek and the opportunity to contribute to this exciting development.
This is novatech second major LNG project in the Arctic region.
An example in an award that exemplifies our experience in the delivery of large scale modularize fabrication for harsh environments.
The project, we bring on stream nearly 20 million metric tons per annum of new capacity.
Comprising of three LNG trains on gravity based structures.
This is an innovative engineering solution, we worked on extensively during the feed stage of this project.
We will leverage our recent successes from Yamal LNG.
Through the continuity of leadership.
Execution model and lessons learned.
We will also benefit from our extensive experience in complex module fabrication and integration obtained from projects such as floating LNG and gas fpsos that utilize a confined footprint.
The detailed engineering scope is well advanced and procurement activities will continue to ramp as long lead items are being ordered.
The execution phase of the project will extend for several years with launch of the first train currently expected in 2023.
Looking ahead, the future LNG opportunity set remains substantial we continue to be very selective focusing on a strategic set of projects that we're pursuing today.
Some of which could reach Jeff I'd over the next 18 to 24 months.
In closing this was a very strong quarter for Technip FMC the unprecedented level of order activity experienced in the quarter demonstrates that we're winning with an intense focus on project selectivity and commercial differentiation.
Operationally total company revenue increased 16% versus the prior year to 3.4 billion with growth in all three business segments.
And total company adjusted EBITDA increased 19% versus the prior year to $450 million highlighted by the notable strength in onshore offshore and sequential improvement in adjusted EBITDA margins for both subsea and surface technologies.
The strength of these results and significant growth in backlog across all segments gives us even greater confidence that we will achieve our increased full year guidance and provides us with improved visibility as we look to 2020 and beyond.
I will now turn the call over to Maryann, who will cover the financial results.
Thanks, Dan.
We are very pleased with our second quarter results.
We continued to benefit from both strong execution as well as risk mitigation on several of our key major projects.
This is evident in our total company and segment results.
Total company, adjusted EBITDA was $450 million and compared to $377 million in the prior year quarter with an increase in adjusted EBITDA margin to 13.1%.
Adjusted diluted earnings per share from continuing operations in the quarter were 39 cents.
When excluding after tax charges and credits that 18 cents per diluted share.
Total after tax charges and credits were $78.6 million.
Primarily related to legal provisions.
Business integration cost and severance charges.
The legal provisions.
Which net to 55.2 million in the period, including the filing included the following.
At $70 million provision to maintain the probable estimate for the settlement of an investigation related to historical project in Equatorial Guinea and gone.
A $21.3 million charge related to the final settlement with the U.S. and Brazilian authorities to resolve investigations related to Brazil and unit.
And net litigation credits.
That included a favorable settlement.
For a commercial dispute.
Adjusted earnings per share also includes other pre tax items impacting the quarter for which we do not provide guidance.
These include $140 million or 31 cents per diluted share related to an increase in the liability payable to joint venture partners that is included in interest expense.
And $18 million or three cents per diluted share a foreign exchange losses included in corporate expense.
On an after tax basis. These two items totaled 34 cents per diluted share and again. These items are included in our adjusted diluted EPS of 39 cents.
Turning to our operational performance by segment.
See delivered second quarter revenue of $1.5 billion, an increase of 24% versus the prior year quarter.
This was primarily driven by increased project project activity, including work associated with the recent MPCI Award.
Adjusted EBITDA margin was 12.3%.
Primarily driven by strong project execution and further risk mitigation on projects nearing completion.
And for utilization in the second quarter was 69% in line with the prior year quarter.
In onshore offshore EBITDA margins improved to 18.7%.
600 basis point improvement from the prior year results.
This outperformance on full year guidance was driven by continued strength in execution and risk mitigation, most notably on the Yamal LNG project.
Further we benefited from the receipt of an incremental bonus for successful completion on key milestones on your monitoring three.
And in surface technologies revenue of $421 million increased 5%.
Versus the prior year quarter.
Driven by higher wellhead sales globally.
And Frac rental services in North America, partially offset by reduced flow line sales.
The decline in North America completions activity resulted in weaker pricing and unfavorable product line mix.
Negatively impacted adjusted EBITDA margin.
On a sequential basis revenue increased 7% from the first quarter as growth continued outside of North America, where activity is trending toward the low double digit growth.
Adjusted EBITDA margin increased more than 340 basis points to 11.1%.
Our margins reflect the actions we took to address the internal items that impacted our first quarter results. The challenges faced in North American market remain however, the underlying improvement in operational performance helped our margins recover sequentially.
Turning to cash flow, we generated positive operating cash flow in the period of $97 million benefiting from the receipt of customer prepayments on key project Awards.
We have now generated positive operating cash flow in each of the last four quarters.
Beyond the operating line, we remain disciplined with our capital spend.
Capital expenditures were 92 million in the period and we remain on track to meet full year guidance of approximately $350 million.
Excluding the impact of the sale leaseback transaction of $80 million, we recorded in the first quarter for the Dod support vessel.
We ended the period with net cash of $840 million.
Given the strength of the first half and our outlook for the remainder of the year.
We have increased confidence in meeting our full year guidance for positive cash flow from operations.
Looking to the back half of the year, we will incur a $164 million in cash payments.
Related to the settlement with authorities in the us in Brazil.
In the third quarter.
However, we also expect there will be additional prepayments associated with expected inbound awards.
While the timing of operating cash flow will vary by quarter, we do expect the second half in total to be positive.
This quarter, we have shared additional disclosures for the Yamal LNG joint venture in exhibit six of our earnings release.
As a reminder, we consolidate 100% we consolidate 100% of the JV in our financial statements.
Although our ownership is just over 50%.
When we think about the future profit. It is project, we look at contract liabilities as an approximate for revenue.
At the end of Q2 these amounted to 1.7 billion.
As we reach project completion.
This amount will be extinguished in one of two ways.
As cost paid to vendors.
Net profit for our partners and for Us.
Looking ahead to the rest of 2019, we expect to reduce this liability by approximately $4 million to $500 million.
If we continue to execute well.
As we have done for each of the last 10 quarters.
A significant portion of this amount will become incremental profit shared between our partners and us.
For all of 2020 , we anticipate another reduction of $400 million to $500 million in contract liabilities.
The remaining balance post 2020 would be available to fulfill any warranty obligations that may arise.
And should we continue to see strong execution. These anticipated reductions in the liability should also result in incremental profit versus incremental costs.
Similarly, with the warranty period, the absence of warranty claims would also generate incremental profit.
Once we have recognized profit we record our partner's share the mandatory redeemable liability also called the MRL.
The current balance of the Mrls $413 million.
We expect to pay the majority of this current MRL balance in the second half of the year.
When combined with the first half payments to our partners at $221 million.
2019 will be the highest level of partner distributions for the project in any one year.
We will see a significant step down in payments in 2020 .
Turning to our 2019 financial guidance.
Given the strong first half inbound we now forecast subsea revenue of $5.6 billion to $5.8 billion for the full year 2019 versus previous guidance of 5.4 to 5.7 billion.
We're also revising our adjusted EBITDA margin guidance to at least 11.5%.
Versus previous guidance of at least 11.
The revision is driven by the strength in execution in the first six months of the year.
And driven by the achievement of the milestone on certain projects.
For onshore offshore we are increasing our adjusted EBITDA margin guidance from at least 14% to at least 16.5% to reflect the strong first half results as well as our expectation for continued strength in the second half of the year.
We are also reducing our expectations for net interest expense. We now expect net interest expense to be in the range of $30 million to $40 million for the full year, excluding the impact of the MRL versus the previous guidance range of $40 million to $60 million.
This revision is primarily driven by higher than anticipated interest income earned on our cash balances.
We have modified our tax rate guidance to 26% to 30% for the full year. The rate now includes the discrete adjustments primarily associated with the valuation allowance recovery and provide provides the ability to use tax assets in certain jurisdictions in the future.
And finally, we have now achieved the remaining $50 million in synergies related to our merger, bringing the total synergies to our commitment of $450 million.
In closing this was a very strong quarter for Technip FMC.
Our operating results demonstrated strong execution and risk mitigation in those sub sea and onshore offshore.
And a significant sequential improvement in the operational performance of surface technologies. Despite the challenges faced in North American market.
Order inbound momentum accelerated in the second quarter.
We achieved a record total company book to Bill of 3.3 supported by an acceleration in integrated award.
Including our largest PCR to date, both pheno and our largest single project inbound to date.
Arctic LNG too.
All these factors give us even greater confidence in our outlook for the remainder of the year, which is reflected in our upgraded guidance for both our sub sea and onshore offshore segments.
While total company backlog growth of 80% from the year end provide us with much improved visibility we look beyond 2019.
Operator, you May now open the call for questions.
If you have a telephone question. Please press star followed by the number one as a courtesy to all participants please limit yourself to one question and one follow up question.
The first question comes from Angie Sedita from Goldman Sachs. Your line is now open.
Thanks, Good morning, Doug Marianne.
First congratulations on a very impressive corridor.
Really amazing first start to the year on your inbound orders.
Thank you very much changing you're welcome so on the on the integrated Subsea awards in the Subsea awards in general.
Certainly this model works and very few can compete with what you're offering.
So we think about the pace of inbound subsea orders into the second half of 2019, and even the pace into 2020.
Given the very strong order rate here in the first half do you think that we will see some slowing in inbound orders in the second half of 2019 first and then if we think about 2020.
Good 2020 be as strong as 2019 as far as inbound total subsea orders.
Thank you very much Angie.
And just before I start I want to do recognize all of you who have participating on the call today I realize it's a bit of a I guess technically called a super Thursday of earnings and particularly for the entities in Europe . So thank you all for taking time to be on our call. We're we're humbled by your by your support for our company.
Angie.
So, let's talk a little bit about kind of how things have materialized, thus far so.
It was a similar question on Q1, how could anything stack up to Q1, and then we delivered Q2 in line with Q1.
Whereas now the first six months of orders for subsea business has exceeded all of that of the prior 12 months last year.
As we look forward into the second half.
We continue to see strong order activity.
The two absolute value will really be a function of one or two very large awards theres a few billion dollar plus subsea awards that are out there right now.
Could come in the second half of the year or in the beginning or the first half of 2020.
Obviously, the timing of those awards would have a material impact.
Both in our inbound and on the total market activity in terms of new orders, but we continue to see a very resilient market. We publish our view of the market, including the major opportunity set as you will see that has increased not decreased.
As a result to be activity this quarter, where there were some very strong awards for our company.
But we have that opportunity set has largely been replenished and you can see that in our backup materials. So we continue to have.
Very strong outlook in terms of the second half of 2019 as well as 2020 again, its a function of the timing of a couple of these very large awards if they occur in the end of 2019, where if they move into 2020.
Beyond that opportunity set that we publish on our subsea outlook I remind you we have a proprietary opportunity set that we have been developing for several years through our integrated feed activity.
Many of which when converted our exclusive to our company.
Including the announcement of another.
Airlines this quarter with Wintershall da which we're very proud of.
So we have the market outlook, let's see that is.
Available, we know others participate in and then we have that price proprietary opportunity set so.
We'll see based upon the timing of a couple of big orders, which could occur in the first half of 2020 versus the second half of 2019.
But we remain.
We see the market is very constructive and in no way do we see this as a.
As a isolated event, we see this as a trend that will continue.
Okay. Thank you guys very helpful. And then maybe I can ask maryann on the margin side first for 2020, and then maybe even beyond that at a very high level with the Arctic LNG to award how does that change or does that change your margin progression in 2020, and again with the high level integrated awards on this side could that imply that margin, maybe actually often 2020 versus 19.
And then longer term I think Doug we've had a conversation about this as we go into 21 and beyond is it possible to return close to peak margins and sub sea add near 20% given the integrator awards, but also with vessels coming on in 20, 122, and beyond and higher utilization levels.
Yeah, Angie, let me start with a few high level comments, and then Marian will add additional color.
Look we believe that we have done.
We have taken the necessary steps to provide.
A structural one sustainable change in sub sea project economics that is unlocking the potential of these projects and making them economically viable and competitive to other investment choices for our clients and meaning other geographies and other types of investment.
With that has obviously been working very well and we're seeing the benefit of that we've also taken the necessary steps in benefited as a result of the merger is Marion indicated we've now delivered the full.
The full guidance around.
Pre tax operating synergies six months earlier than planned. So we've now delivered the full $450 million of pre tax cost synergies as a result of the merger. So when you put all of this together.
And we continue to innovate and develop the next generation beyond the current generation. Our current generation. The next generation of of sub sea assets, we remain very constructive on the outlook for the progression or for the.
Expectations of our subsea margins I will add to that though it's a question of the progression of that margin and what is true is as you point out we are seeing capacity.
Utilization improving in the out years, 20, 122, which will certainly help with the expansion of the of the momentum of the margin at that point in time I think it's just we have to be prudent in the way that we model out the margin progression in sub sea, but it's but it's clearly moving in the right direction in our very strong inbound a very high quality projects, mainly being sci representing over 50% of our inbound in the first half alone gives reason to have increased confidence in our margin outlook I will just again caution to temper a bit on the progression of that margin.
As we get through the second half of 2019, 2020, and then see the overall market capacity tightening in 21, and 22 million did you want to touch on the Arctic LNG contribution for onshore offshore.
Sure. Thanks, Dan Hello, Angie and maybe just a little more color around onshore offshore as we think about it Angie.
With management's a critical piece of the way, we try to manage that project portfolio frankly across all of our portfolios, but in the very early stages of our contracts. We obviously take a very measured approach.
As we get through engineering phases in and heading to further placing project completion. So I think very similarly to the way that you see perhaps even if you look at your mall as a model as we reach that final completion, our ability to avoid risks in the project allows us to generate greater profitability I think thats a reasonable assumption Angie when you look at the way, we'll start that very large Arctic project.
We'll be cautious as we get through those early phases and that good risk management should allow us to have a similar profile.
In the future on Arctic.
Great. Thanks.
Your next question comes from the line of David Carroll from Credit Suisse. Your line is now open.
Hi, congratulations on the results.
I had a quick question on Arctic LNG too.
The comparison to Yamal LNG in terms of how the contract.
Yes, I think it was structured credit agency and therefore encountered very high tax rates on it.
I was just wondering how the Arctic LNG team.
Contracts as being structured and whether that potential for improvement.
Thank you David for the question and thank you for the congratulations but it really goes to the 37000 women and men of our company who generated to results.
Maryann and I, just have the owner of representing them here today.
Yes, indeed, the Arctic LNG to will also flow through the French entity from a taxation point of view at least a large portion of it will.
The overall structure of the contract is in many ways similar to your mall. Although it is a different technology that is being used but the way that we have structured the contract in terms of.
A large reimbursable scope into lumps and then the remainder as a lump sum scope is actually very similar to the remote control.
Hi, guys. Thanks, and then just as a follow up kind of those differing color the second wave of the integrated.
Models subsidy.
Just wondering when you kind of look at the client base do you seeing Mr like experiment with different.
And the supplies or do you think that kind of settled now on the on the companies they want to use.
Interesting question David.
You see the results right. So year to date 2019, we received 100% of those integrated award so.
I guess in some ways, we're confident that we'll be part of the part of the pack.
We're currently obviously will position.
I believe that the clients are looking to and as you said potentially experimenting with.
Other.
Our other opportunities to bring.
That same skillset through different companies.
I hesitate a little bit in my response, David because you.
It's very difficult in our opinion.
To deliver an integrated sub sea project due to the complexity and due to the trade offs between the manufacturing and the installation.
As a joint venture or in Alliance I remind you we tried that path we were unsuccessful.
We recognized that the way to unlock real sustainable demonstrated value to our clients was to come together as a single company remove the natural friction that occurs.
Between the manufacturing in the installation.
Activities and generate now as a result of having this incredible group of employees under one roof.
The total R&D capability of the next generation of ore in subsea systems.
I do believe and we encourage you to additional integration you see it happening the market is clearly moving in that way.
But I think it's very difficult to be able to deliver.
Through such a structure at least it was difficult for us we're much happier now as a single entity.
Okay, great. Thanks very much.
And your next question comes from the line of Daniel Boyd from BMO Capital markets. Your line is now open.
Hi.
Thanks, guys and fantastic quarter.
Congrats.
Marianne Mike quick question just for you on the cash flow outlook very clear on the second half of the year and we talked about this previously but as we think about the business normalizing.
How should we think about targets of net income conversion to free cash flow and given this order uptake and as things progress should we expect.
A higher level of free cash flow in say 2020.
As the order cycle continues to unfold.
Yes, Dan. Thanks, So so the answer to your question is yes, we should.
We talked about the unwinding of Yamal in 2019 is a significant piece of that it will it will take a step down pretty significantly in 2020. So we would expect from 2020 and beyond with the incremental addition of inbound awards both from the sub sea and the onshore offshore side to see a much higher conversion of net income to freak free cash flow I think when last time, we talked we were talking in range of about 80% to 85% I think the thing to keep in mind is we had some growth opportunities across the rest of the portfolio.
In certainly.
As we think about that growth and that would be part of the constraint there, but we certainly expect in 2020 and beyond much higher conversion net income to free cash flow.
Okay. Thanks.
And then just on onshore offshore margins, if we think about a normalized level I think you've talked around about 6% in the past, but now that you're through the full capturing of all the synergies on the deal and if I recall correctly, a large portion of those synergies were expected to be.
In the onshore offshore segment, you're also seeing a big wave of LNG as Doug talked about so.
Taking all those into account should we think about the lease for the next sort of.
Foreseeable future for the sort of non yamal margins to be above that.
That range that you've talked about in the past.
So Dan a couple of thoughts here are a couple of considerations.
First the contribution from emo is not complete as we.
I I hope.
Provided greater visibility in and made a big clear as a result of the increased.
Disclosure around the Yamal project. So number one it's it's hard to say.
From this point forward, it's hard to answer that question in that manner. Because again, there will continue to be a contribution from the Yamal project, which has been highly successful project.
In terms of the overall margin outlook without LNG again, we have run this business and manage this business around.
Quality versus quantity, ensuring that we match the projects with our demonstrated capacity to ensure a very successful outcome on the projects that we take on both for our clients ourselves and for you as our investors.
And that remains our our practice in our priority in terms of focusing on so the activity and ensuring that we have the capacity and the competency to deliver those projects. So therefore, I would stick with our prior outlook, which was $5 billion to $6 billion in revenue with a 4% to 6% margin for this business ex LNG, and we said with LNG and with the increasing.
Percentage of LNG, you could see 200 basis points improvement as a contribution of the LNG activity.
What is true is that the LNG SC providers remaining better fiscally sound and have demonstrated the capacity to deliver these type of projects.
He is more limited than it was in the past and the opportunity set is great.
So therefore, you should expect us to be very focused on ensuring that we have the right projects with the right terms, where that can drive to the best financial results for our company.
Excellent thanks for the time.
Your next question comes from the line of James Evans from Exane BNP. Your line is now open.
James Evans Your line is now open.
Sorry, that's looking cool in a row. Thank you for all the detail on on your mouth Maria I'm very very helpful. I wanted to ask a couple of questions about the future.
On on LNG.
So obviously, great to see Arctic to your bidding a lot of other projects, what's what's happening to the to the sort of underlying cost trends. It looks like you know somebody's fabrication yards et cetera could get quite busy if everyone tries to replicate your very successful approach on your model a materialization so.
Is there any danger of those sorts of yachts filling filling up and then sort of a second question sort of relates to the obviously some some concern about costs that I just expressed but obviously this downward pressure on longer term pricing in LNG were sort of hearing about and a lot of projects aplomb. So if there are any disquiet from from clients yet or is it still absolutely full steam ahead in your conversations with them.
Thank you James I'm sure a couple of things.
Many of the LNG projects that are being considered today.
We're still stick built they are not margin arise.
So yes, there is increasing activity in the fabrication yards because of the success that weve had not only on yamal LNG, but on other sub sea and onshore offshore projects, where we focused on Modularization I think we have.
Well, we have very we have demonstrated experience and we have very good relationships with those yards I believe they see us as a partner of choice when they're considering our projects versus other other potential projects are culturally.
Execution model wise and ultimately project success derives drives that alignment in that relationship. So.
Current year you are correct. The pointed out it is something that we are well aware of but we believe by having the experience that we have gained across multiple different yards in having optionality.
Across those those fabricators and a very good sense of partnership.
That we will ensure that we select the right yards and that we can therefore.
Deliver the deliver very successful projects if I captured the second part of your question correctly in terms of the client outlook.
How would I describe it I think there is an accelerated pace.
Realizing that not all LNG projects will be sanctioned this wave.
There's more projects than can potentially be sanctioned and because of some of the tightening constraints in some geographical markets for instance, the us Gulf Coast, where manufacturing capacity is becoming construction capacity excuse me is becoming a significant concern.
I think that you see some.
Projects and other parts of the World May be if you will accelerating into Q potentially just as a result of the overall capacity in the market.
So look we continue to be widespread as Ive indicated before we are targeted strategic projects are spread around the world are yos, if we have future announcements and we certainly intend to but they you would we would have different partners on the projects.
And you would see us have projects be announced in different geographies. We believe this is all good ways.
To mitigate risk and manage the portfolio approach and again in those more challenged environments, we would always partner with somebody who add those capabilities that could we could ensure that we would have access to the right talent.
To be able to deliver those projects, but if anything I would say I've seen a bit of an acceleration not a deceleration in terms of the.
The desire of especially our major clients to bring forward the sanctioning of LNG projects.
See pair very clear thank you.
Your next question comes from the line of Sean Meakim from JP Morgan. Your line is now open.
Thank you.
Doug you know we've been talking for the last few years about the integrated model as a way to grow the pie of potential projects.
And enable FDIC take a bigger slice. Despite the fact that you already had the largest market share historically.
And so it seemed like the first half of this year really validates that strategy. If you go back a couple of years I remember you were taking some heat for holding onto engineering talent ahead of this order cycle on air at the trough and so now that you've got $25 billion of backlog with still more on the way.
Could you just talk a little about the execution fairway and how you prepare to manage the throughput of the next few years in terms of engineering and manufacturing capabilities.
Thank you very much Sean.
Indeed, our engineering capacity, our engineering capability and competency along with our project management.
Our competency and capability are two of our differentiating strengths always have been and continue to be and as you pointed out we made a decision to.
Likewise, if I could extend the conversation for a moment.
Recall, we did the same with the fleet.
So.
Back when in the prior years when there were.
Vessel only or if you will see an AI type contracts that were on the market are very competitive.
How many many of our competitors, having larger a larger fleet sizes than ourselves and therefore, the the problem set being a bit more substantial for Reno for the industry.
We saw a very aggressive pricing and those projects will have to flow through we set that out as you recall and we said we were going to hold back the capacity and utilization of our fleet to put those on to integrated projects I think I remember, saying you know.
I will be.
It will be clear if I'm wrong, because if we don't announce integrated projects that will absorb the capacity of the fleet.
Then that would obviously have been a poor decision.
The good news is we have and we continue to and as you know since our last earnings call. We've announced three additional integrated projects again, representing now 50% of our total our our total awards to date and we have received 100% of those awards. We have a good line of sight on additional integrated projects that we will be awarded most likely in the coming quarters. So we we will see the benefit of that now that will flow through obviously in the 20 122.
Because we have to go through the manufacturing phase before we can go through the installation phase.
Of those contracts so.
Look we manage capacity very very closely we understand that at the end we already projects company. It's important that we have the right capacity to be able to deliver on these projects and we are quite comfortable because of that decision. The decisions that were made that we have that capacity to be able to deliver world class projects for our customers.
Got it thank you for that.
And then maybe a little more in the near term.
Something that's been a little more time on the puts and takes to the the implied 11% subsea margin guidance for the back half of the year. So I was a very good result in Twoq will sound like some project completions help that number vessel utilization was also quite good but maybe in line with what you'd expect seasonally so.
The factors that influence the shifting guidance for the back half and confidence you have in that floor.
Yes, Sean So you know you can see obviously, we raised our subsea margin guidance from at least 11 to at least 11.5.
And you're correct you know mathematically if you look at that it implies no back half guidance back half result of at least 11 to reach that guidance I'm not always good to get off always good to be ahead of the game always good to get a good early start to the year.
Both from a inbound point of view again, just staggering to to to look at our results.
You know six months of inbound exceeding the whole prior 12 months, which by the way was 27% above the trough so quite quite significant and the book to Bill, obviously, reflecting that as well and the growth in the backlog.
So you know all these things all give us increased confidence and we are always prudent.
In the way that we approach our the guidance into and how we set the targets and we believe at this time based upon what we can see and indeed as you point out the fact that the vessel utilization, we stick with our prior guidance of 50% to 55% for the full year. So that this was this was indeed a bit of a seasonal effect.
We think it's the right place to to maintain or to increase the guidance to offer 2019.
Audit lot of positive things happening, but it just takes a bit of time for those to develop.
For sure Thanks, a lot.
Your next question comes from the line of Gander Lobbies. Some society Generali. Your line is now open.
Yes, good afternoon and congratulations.
Two questions if I may 1st.
Doug regarding the surface business.
I would like to have your view regarding 2020 .
A decline in North America spending, which is like 18 to 2019 is it temporary according to you or do you see so maybe a little bit more structural.
Maybe a more balanced stream.
According to different milestones.
Two interesting questions. Thank you very much.
I wish I could reverse the order with Marianne because the answer answering to the first question as you well know no one will get it right. So let me let me talk about the North American market in the way that we see it so I'm going to step back and remind you that for our surface technologies business approximately 50% of our businesses outside of North America.
That business, we have seen an inflection in activity and we are now seeing an inflection in pricing. So we have a very constructive outlook for our business outside of North America, which comprises 50% approximately of the segment.
Now turning to the North America market.
We the way we will manage towards the market is I think quite unique.
Theres two two parts of our business that we see two parts of our business.
Serves the North American market, one is the support that we provide where we provide the very high end.
Consumable equipment to the pressure pumping industry in terms of.
They are approved to allow them to safely and efficiently.
Provide their hydraulic fracturing services and the second part is the conventional product business.
In the North American market.
We will plan conservatively that there will not be a significant recovery I'm not necessarily saying that I mean that I believe that will be the case in 2020 versus the second half of 2019 as you pose the question, but we're going to plan that way and let me explain why.
The reason that's important is that the production activity for their production span will continue to increase even when the drilling and completion market is flat and thats, just a function of which cold stacking the stacking effect in the North American market and we can talk more about that perhaps at a later date, but.
First and foremost it is clearly our operational objective as we set out for all of our projects that clearly for Arctic that we maintain obviously, a cash flow neutral or a cash flow positive position across the life of this very large project in the quarter. We were successful with receiving one of several payments that we expect in the very early phase of the contract that will also allow us to have a similar profile. If you will to yamal, having said that the size of these projects are a bit different and still may not have exactly the same profile as you may remember from the mall, but very similar in its structure and terms the early phase advanced payments and the cash flow mechanism. If you will.
That we or the profile that we that we will maintain over the life of that project.
Okay.
Hey, good afternoon, where you are and thank you so much for squeezing me in.
Congratulations on.
You know if at all will run over the last 12 months. So she knows everybody there on your organization and kudos to you guys as well.
And so.
Doug just maybe hit on one of the earlier topics.
With along with the.
Success, you've had on project awards and increased backlog.
Yes, Hi, how do you can you can you walk us through a little bit more about the dynamics at play.
On on the execution front and.
And how what you're driving within the organization to maintain that that execution profile that youve had in the past right. This a lot a lot of that is that you mentioned is it some of it's unprecedented in terms of the backlog that you have in excess.
That's one part of the question second part of the question is with that increase in activity and project Awards and so on you know what are you doing to.
Kind of mitigate.
Cost creep, if if thats possible at all.
Hello.
Hello.
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Hello.
Sorry, Kurt.
Hi, I didn't know my button on so thank you. Thank you. Thank you very much for the question.
Our I got to practice it there on mute so I'll start again.
The.
It's important to note that the activity levels, even though quite robust that we have reported in terms of inbound are below that of our demonstrated capacity both in subsea as well as in LNG specifically.
So we're very comfortable with the continuity, particularly of leadership and project management director. It that we will be able to convey that we will continue to provide.
Exceptional project execution to our clients, that's what our clients entrust us with some of their most important and complex projects in their portfolio and our commitment to them and to you as the investment community is that we will ensure that we only take on those projects, where we are confident that we can provide.
Excellent results in terms of execution and this was key to the earlier question of why we invested and maintained and developed our capacity during the periods of activity that were not as robust in terms of cost creep, we obviously consider that and all of our all of our contracts others either cost escalation built in tied to an index or there is just a general cost escalation.
Calculation that's done.
Great and if I have time for made what I want to follow up given the tremendous success you guys have had and capturing these project awards and as you mentioned kind of driving a paradigm shift in the way.
Your customers are kind of looking at these projects.
Im just curious.
You get a sense that the the competitors within the sub C space.
Our getting pulled in your direction or do you think there may be a dynamic here, where you know the the a lack of market share if you will or the market share gains on your part.
Might result in some questionable pricing behavior.
I'm here from your competitors like can you give us a general sense on how you might see.
That dynamic play out.
Our current briefly I think it's difficult.
To predict what the competitors will do we're focused on our strategy and being successful in the execution of our strategy.
Look I think the you know I'm not so much worried about.
You know are unpredictable type.
Behaviors I think people understand the opportunity set and I think there is you know maturing understanding of the growth of the market.
Well they will be will this lead to further restructuring or not.
You know I leave that up to our competitors, but I'll tell you what we're really glad we did ours back in 2017 versus considering something like that right now at this point in the growth cycle of of our major markets.
Okay. Okay always appreciate the insights thank you very much.
And we have reached the end of our Q and a session and our last question comes from the line of Amy Wong from you'd be asked your line is now open.
Hi, good afternoon, and thanks for squeezing me in I have two questions related to your subsea business. Please.
The first one is just <unk> <unk> and <unk>.
Updates on your sub sea equipment manufacturing facility east precisely more the subsea tree manufacturing and the flexible pipe manufacturing what the utilization rates. There are for this year and with the orders book to date, what do you think that utilization could be higher or lower in 2020 . That's my first question and my second question is just a bit more I'm going back to revisit the sub sea margins. A question. We asked earlier in the year was whether 2019 was going to be the trough for the margins in that business and at the time earlier in the year. You answered you know we got to kind of see how the order flow goes through 2019 now that we're halfway through the year and with all the bookings that you have you feel confident if you can answer whether 2019 is the cost for the margins. So those are my two questions actually agree question and with we don't give a utilization of our individual manufacturing facilities I will say, we've been very proof.
And in the way that we've invested in our manufacturing facilities, including moving and incorporating robotics into our plans to extend the capacity without having to extend roofline and indeed in addition to that or next generation of sub sea equipment, which we call sub sea 2.0.
Actually uses a much is a much faster cadence through the manufacturing facilities, that's allowing us to extend our demonstrated capacity through a similar roofline or even a reduction in roofline.
Specifically to your question, Yes, we expect 2020 utilization or absorption of our manufacturing footprint to be greater than 2019.
And indeed at this point in time, given the success that we've had in the first half of the year in our outlook. We would expect the 2019 is indeed, the trough for subsea margins.
Thanks, very much that's very clear.
Thank you next session has ended now I would like to turn the call over back to Mr. Matthiessen his time.
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