TechnipFMC plc

Ladies and gentlemen, thank you for standing by and welcome to the Technique FMC first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Matthew Seinheimer. Thank you. Please go ahead, sir.

Good afternoon, and welcome to Technip FMC's first quarter 2020 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 risk and uncertainties that could cause actual results to differ materially from those expressed in or implied by these statements. Known material factors that could cause our actual results to differ from our projected results are described in our most recent 10-K, most recent 10-Q, and other periodic filings with the U.S. Securities and Exchange Commission, the French AMF, and the UK Financial Conduct Authority. We wish to caution you not to place undue reliance on any forward-looking statements which speak only as of the date hereof. We undertake no obligation to publicly update or revise any of our forward-looking statements after the date they are made, whether as a result of new information, future events, or otherwise. I will now turn the call over to Doug Ferdihert, TechDeep FMC's Chairman and Chief Executive Officer.

Thank you, Matt. Good morning and good afternoon. Thank you for participating in our first quarter earnings poll. With me today are Marianne Manin, Chief Financial Officer, and Katherine McGregor, President of Technique Energies. I also note that we have dialed in from different locations across the globe, another sign of the impact that COVID-19 continues to have on our daily lives. Two months ago, we provided our initial view of 2020. Over those two months, much about the world has changed, including the spread of COVID-19, the shift in OPEC policy, and the sharp sell-off in equity markets. Most of these effects will normalize, while others will lead to real, lasting change. Today, I want to share with you some of the specific actions we are taking in direct response to the market environment and how these actions will further reshape technique FNC as we transition to the new energy landscape. Over the short term, we're taking immediate actions to protect our people, reduce costs, and preserve liquidity. First amongst these is the responsibility we all have to protect the health and safety of our employees, contractors, and customers we serve. And we are taking a number of specific actions in this effort. These include on-site prevention measures, such as social distancing, staggered shifts, and health screening to ensure a safe work environment, and strict self-isolation procedures for employees who may have been exposed to the virus that extend beyond recommended guidelines. We are also maintaining business continuity by providing our employees with the appropriate equipment and services to work remotely when possible, establishing protocols that allow for remote inspection of manufacturing processes, and leveraging our global footprint by transferring lessons learned. Collectively, these actions have allowed most of our vessels, manufacturing, and service locations to operate throughout this period, providing us with the ability to advance many projects and meet customer requirements, albeit at a reduced productivity. Second, on April 1st, we announced a series of cost reduction initiatives that will result in an annualized savings of at least $130 million from our surface technology segment and corporate. And we have now identified actions that will result in additional savings of more than 220 million that will extend across the entire company. The total annualized savings are now estimated to exceed $350 million, and we anticipate achieving the targeted run rate by the end of this year. Additionally, we have announced the revision to executive compensation, which includes a 30% reduction to my salary and a 20% reduction to the executive leadership team through the end of the year. Our directors are also reducing their cash retainer by 30%. And the third measure we are taking is intended to further preserve our cash and liquidity. The company's board of directors announced earlier this week that it has chosen to lower the annual dividend by 75% to 13 cents per share, reducing the annual cash outflow by $175 million when compared to the previous year's distribution. Back in March, we also announced our decision to postpone the company's separation into two diversified pure plays. This was a very difficult decision. particularly given the late stage of separation activities. However, the strategic rationale remains unchanged, and we are fully committed to completing the transaction over the medium term. And to further emphasize this point, we have renamed the onshore-offshore segment to Technip Energies and have completed nearly all of the work required to ensure that the two companies are ready for separation when the market's sufficiently recovered. Looking longer term, it is clear that the energy industry must continue to evolve. The challenges we face will not resolve themselves. Things will be different, and companies must adapt. Technique FMC has been an agent of change from the beginning, and in the current environment, we will look to accelerate our own agenda for change by protecting our core competencies, investing in new technologies, and expanding our digital platforms. and we will continue to play a key role in the energy transition. Importantly, we will further strengthen our partner relationships and more closely align with those clients that demonstrate a willingness to embrace the new commercial models and new technologies that are critical to success. The change will be most profound for us in sub-seed. We are taking additional actions to further streamline our organization in support of our vision towards simplification, standardization, and reduced cycle times. We are playing to our strengths. Our success is evident by the strong order growth in 2019 and the clear adoption of our integrated model, IEPCI. We anticipate as much as 40% of new equipment orders will come from SOCI 2.0. with nearly half of our customers now focused on 2.0 as their system of choice. And our Subsea Studio digital platform will host 70% of our front-end and system engineering studies, transforming conventional concept, feed, and tender phases into ultra-fast digital development. IEPCI, Subsea 2.0, Subsea Studio, these are not conventional solutions Only those that adapt will stay ahead in the new energy landscape. Meeting the needs of individual customers in a bespoke fashion requires too many resources, introduces too much cost and project risk, and creates too much organizational complexity. Our recognition of the need for change resulted in the creation of TechniqueFMC, and our pioneering culture will ensure that we remain an industry leader. Looking ahead, We will accelerate change where possible, and we will align with those clients and partners that see the shared benefits of our way forward. Technique FMC is well-positioned to manage the unprecedented uncertainty due to our strong foundation, one built on the strength of our backlog and balance sheet. $22 billion, that's the amount of total company backlog in hand today. We are not immune to the impacts of reduced capital spending. However, the effects have been largely limited to changes in project scheduling, not project cancellations. This has reduced our near-term revenue from backlog, but it also extends the backlog duration. We have over $8 billion in backlog scheduled for execution over the remainder of 2020, with the remaining $14 billion scheduled for 2021 and beyond. The size and duration of our backlog, in addition to net liquidity of $5.6 billion, which Marianne will cover in more detail, provide us with the flexibility to take aggressive and bold actions that will better position our company for the future. Turning to the market outlook. For Technife Energies, LNG accounts for more than 50% of our current backlog and provides us with very good visibility That extends over several years. Today, we have three LNG projects that are contributing to our financial results. Yamal LNG, which is largely complete and is successfully progressing through the warranty phase. Corral Floating LNG, which is now more than two years into project delivery and over 60% complete. And Arctic LNG2, our largest project currently underway. whose revenue contribution will grow in 2020 and extend well beyond. While the near-term outlook for new LNG prospects to reach final investment decision has changed because of COVID-19 and the challenging macro backdrop, the long-term fundamentals for natural gas, and LNG in particular, remain strong given its critical role as a transition fuel. We continue to be engaged in a range of additional LNG projects. These include Semper's Coastal Azul, which the customer has indicated will be sanctioned in the near term. Revuma remains an important project for Technic Energies, and despite ExxonMobil's recent decision to delay the project's FID, we continue to engage with the customer to further optimize the project development, and we are continuing with our scope under limited notice to proceed. In addition to these projects, we are involved in the commercial process for a major LNG prospect in the Middle East, and we have recently secured feed roles on several new prospects. But whether the ultimate project count stays at three or grows to four, Technique FMC remains a partner of choice with project selectivity foremost in our mind as we consider future opportunities. Turning to downstream. This sector typically proves to be more resilient through a downturn. Over the course of 2018 and 2019, we secured nearly $9 billion of refining and petrochemical inbound, and we remain laser-focused on executing these projects. We see potential for additional prospects to be awarded to us during 2020, one of which could exceed $1 billion. And our strong foothold in energy transition markets beyond LNG continues to increase. In the first quarter, we announced an alliance with Neste to provide front-end loading services for future next BTL projects, which also covers our participation during the execution phase. We are proud to be Neste's partner of choice for renewable diesel projects. We have we have also had notable recent success in the area of recycling, including an extension to our long-held alliance with BP to include the Infinia technology that enables circularity for difficult-to-recycle plastic waste. Moving to surface technologies, in North America, the quick and significant cuts to industry capital expenditures have impacted the services across the board. Market expectations now call for the rate count for the second quarter to be down by approximately 50% from year end. Outside North America, investment continues to move forward, but it has been constrained, mainly due to logistics. In light of recent events, additional deferrals are likely. We also expect to benefit from our differentiated capabilities, our high level of vertical integration, provides us with more control over our manufacturing and product deliveries and less dependency on external supply chains. This differentiation has helped mitigate delivery disruptions and afforded us new opportunities where industry supply has been challenged. We therefore anticipate that international revenues in 2020 will prove to be far more resilient than North America. Moving to sub-C. We believe that deep water will become an even more prevalent piece of the energy mix as project economics remain attractive, particularly for brownfield developments. In the near term, we continue to assess the likely impacts of lower capital spending on major project FIDs. Many of our clients are still reviewing their plans and prioritizing their projects. Based on currently available information, we believe that approximately 50% of the nearly $15 billion in total project value reflected on our sub-C opportunities list is still likely to move forward over the next 24 months. All other projects remain active, but potentially extend beyond this 24-month timeframe. When we think about the next 12 months, we believe as much as 20% of the project value is likely to reach FID, and we are well positioned for many of these opportunities. We will provide updates to the list as we gain greater clarity from our clients over the coming months. In addition, as we have demonstrated, Technique FMC has access to a proprietary set of opportunities. These come from our alliance partners or from our unique integrated feed capabilities, which often lead to direct IEPCI project awards. And beyond project activity, we generate additional revenue from subsea services activity where we benefit from the industry's largest install base of subsea equipment in operation today. We anticipate resiliency in services activity as a result of the expected shift by some clients from greenfield developments to brownfield intervention. In our earnings release yesterday, we provided an updated view on guidance for 2020. Although market uncertainty remains, and clarification around client capital expenditures is ongoing, I want to offer some additional thoughts in support of these updates at this time. All of the guidance items we have provided assume no further material degradation from the impacts of COVID-19 on our current ability to execute on our project portfolio. In sub C, where we are benefiting from near record levels of imbalance, a strong backlog, and our resilient subsidy services business, we have a solid foundation to navigate through the near term. We continue to engage with our alliance partners and customers in order to align on project scheduling and new capital expenditures. Given this dynamic situation, in lieu of traditional guidance, we have provided our expectations for the major inputs that continue to influence our outlook for subsidy revenue and margins. Turning to revenue first, our current estimate for backlog to be converted into revenue for the remainder of the year is $3.1 billion. We are still in discussion with many of our customers over project scheduling, and there remains risk that some of this backlog could still be rescheduled for execution in future periods. However, the strong inbound booked in 2019 provides us with much greater flexibility to manage our business through this challenging period. If we had not generated the record end on last year, the planning scenario would look very different for us. It is also clear that the change in backlog scheduling will only defer revenues to future periods, providing more revenue coverage in 2021 and beyond. In subsea services, we provide aftermarket services on over 50% of the subsea installed base, generating a resilient revenue stream of approximately $1 billion for the full year. This incorporates our expectation for some modest level of activity deferral, a decrease from our prior expectation for growth. And lastly, with respect to book intern revenue, our current view is that inbound orders, which serve as the basis for this revenue source, could be down as much as 50% versus full year 2019. Next, the factors impacting subsea margin include our revised expectation for less inbound and therefore less book-and-turn revenue for 2020, which we will not be able to fully offset through cost reductions. Several of our manufacturing plants have been running at high utilization. COVID-19 presents real challenges to both the supply chain and our manufacturing workflows. Our prior margin expectation also assumed increased fleet utilization as we progressed through the year. We have several installation campaigns that are increasingly at risk of deferment to 2021 due to the impact of travel restrictions, leaving us with a limited flexibility to mitigate costs or find replacement work for these fixed assets over the very near term. Looking at the second quarter, we do anticipate a sequential decline and adjust the need at the margin. when compared to the first quarter, largely due to more significant impact from COVID-19. However, in order to navigate through these headwinds, we are advancing our restructuring plans in subsea, and we will begin to recognize the benefit of these actions in the second half of the year. In summary, having greater clarity on the duration of COVID-19 and the ultimate scheduling of our backlog will provide us the ability to more fully assess our subsea outlook for the remainder of the year. Moving to guidance for Technic Energies. We are relatively insulated in the current period due to the long cycle nature of the business, the resilience and maturity of the projects and backlog, and our diversified global footprint. To date, we have been able to mitigate a very significant portion of COVID-19 operational impacts, where the effects relate more to operational efficiencies, and timing issues, but not the stoppage of projects. However, the revenue outlook for the year has been impacted by first, the delay in a few key project FIDs and the impact of this lower inbound for execution in 2020, much of which we believe has simply shifted beyond the current year. And second, revised schedules on some of our projects within backlog for certain scopes of work originally planned for 2020 have partly shifted into 2021. Due to these effects, we are revising our revenue guidance to a range of $6.3 to $6.8 billion, which still remains at or above our 2019 results. Guidance for adjusted EBITDA margin is unchanged from our prior view of at least 10%. The resilience and margin, even with the reduction in revenue, is driven by the continued strength in project execution in this exceptional environment and some benefits from Project Mix. And finally, surface technologies. Our shortest cycle business has been most impacted by recent events. Outside of North America, our surface business is much less impacted by the global spending reductions. International markets are typically more resilient in a downturn, and we expect to benefit from the flight to quality associated with our higher tier products as we have experienced during previous cycles. We anticipate our business mix outside of North America will now represent as much as 60% of total segment revenue in 2020. In North America, the actions taken by our clients in response to the sharp decline in commodity prices are almost unprecedented. We are responding aggressively as evidenced by the prior announcement of our intent to deliver more than $100 million in annualized cost savings. Most of this will occur in North America, where the industry spending reductions have been particularly severe. With these actions, we believe that we can be modestly profitable in North America for the full year when excluding charges based on our current outlook. Moving beyond the operating segments, we have also provided updates to several other items that were included in our earnings press release and presentation deck. We will provide additional segment guidance and updates as we gain more clarity over the coming months. Without question, this is the most challenging business environment that our industry has ever faced. We are not simply responding to a health crisis. or a commodity crisis, or an economic crisis. We're responding to all three on a global stage at the same time. In the face of such extreme uncertainty, we are focusing on what we can control. We're taking steps to ensure that all of our employees and contractors remain safe. We're spending more time with clients than ever before, working with them to better understand their priorities, and working together to solve our collective issues, strengthening the relationships we have and building new ones for the road ahead. And we are focused on ensuring business continuity, working diligently and innovatively to solve problems and better anticipate new complexities that may arise from the unforeseen challenges of COVID-19. We're also taking swift and decisive actions in response to the near-term challenges. We are preserving our liquidity with the board's decision to revise the dividend policy. We have significantly increased our annualized savings target to more than $350 million. This includes additional cost reductions from all of our business segments, our support functions, and executive and director compensation. We're uniquely positioned with our strong balance sheet and backlog. This includes $5.6 billion in cash and liquidity and nearly $22 billion in total company backlog that extends out for several years. And we are doing all of these things with the support, dedication, and commitment of the exceptional women and men of Technique FMC. Through everything we have faced, they have shown a level of strength and resiliency that is nothing short of inspiring in these most difficult times. I will now turn the call over to Mary Ann to briefly discuss a few highlights of the first quarter and provide you with an update on our cash and liquidity position. Mary Ann?