Technip Energies Nv

Hello to everyone, and welcome to Technip Energy's first quarter 2023 financial results. On the call today, our CEO, Arnaud Piertan, and our CFO, Bruno Weber, will present our business and financial highlights, as well as the outlook. And this will be followed by a Q&A session. Before we start, I would urge you to take note of the forward-looking statements on slide two. I will now pass the call over to Arnaud.

Thank you, Phil, and welcome, everyone. Welcome to our financial results presentation for the first quarter, where we have delivered solid operational progress that puts us firmly on track to deliver our full-year objectives. Revenues of €1.4 billion are in line with our expectations and reflect continued strong momentum in TPS and lower project delivery activity resulting from the maturity of the portfolio and our ongoing exit from Russia. Our execution remained strong, and we delivered 100 basis points of margin improvement year over year. We also benefited from sustained commercial strength in technology, products, and services with awards in ethylene, renewable fuels, and carbon capture. This builds on the very strong momentum established in 2022. In addition, we are executing our strategy to prepare our future core, and I am delighted to announce the creation of Rely, a new company to drive green hydrogen industrialization through standardized and integrated solutions. I will return to this later in my presentation. Finally, orders of $713 million were broadly in line with our expectations for the quarter, leaving period and backlog at $12 billion, equivalent to approximately two times our expected revenue for 2023. Turning to our execution, I am pleased to report that we continue to make strong progress delivering important milestones, de-risking execution, and completing projects. Margins remain at robust levels, demonstrating the strength of our delivery and a favorable mix, including the growing contribution from TPS. Overall, a very solid start to 2023, and I want to express my deep gratitude to our teams that continue to drive our leading performance. Now let's take a look at recent awards, market trends, and partnerships. As previously communicated, momentum in ethylene markets has continued into 2023, and we have secured a significant contract to supply proprietary cracking furnaces for a mega plant in Qatar, as well as important technology award for a low-carbon plant in China. Also in China, we secured a reference award for low-carbon LNG with an engineering design and key equipment supply contract for a liquefaction unit to be fully electrically driven. This highlights the market trend towards modularized and electrified mid-scale LNG. Our carbon capture presence in the U.S. continues to expand with an important feed for Calpine at their Baytown Energy Center. This unit will be designed to capture two MTPA of CO2 equivalent to 95% of plant emission. And this award is further evidence of the strength of our solutions for carbon capture, which we continue to invest in. In clean fuels, we were awarded several front-end studies, including the latest with Lanzatec, for what would be the UK's largest sustainable aviation fuel production facility. This plant... will utilize our proprietary Hummingbird technology, a vital technology brick in the production of SAFs. Hummingbird is also the focus of R&D investment for us. I do look forward to talking with you in the future about the product launch based on this technology. Finally, for Blue Hydrogen, we have announced an important partnership with Casale to jointly license ATR technology as well as providing front-end services, proprietary equipment, and entire plants. With a potential carbon capture rate of up to 99%, this technology complements 10 proprietary SMR-based solutions to give us the most comprehensive suite of blue hydrogen solutions in the market today. And as I will discuss later in my outlook, this will be complemented by a leading Green H2 offering. I will now pass over to Bruno to discuss financial highlights.

Thank you, Arnaud, and good afternoon, everyone. Turning to the highlights of our financial performance for the first quarter, adjusted revenues were down 13% year-over-year to $1.4 billion, impacted by the maturity of the project delivery portfolio and the ongoing exit from the Arctic LNG2 contract, partially offset by very strong TPS growth of more than 35%. Adjusted recurring EBIT was exactly flat year-over-year, despite the lower revenues, owing to strength in margins, which increased by 100 basis points year-over-year to 7.6%, and benefiting from strong product execution and growth in TPS. Adjusted diluted EPS grew by 10% year-over-year, benefiting from the strong operational performance and higher interest income. Adjusted order intake was $713 million, slightly higher year-over-year, thanks to sustained momentum in CPS order. Net cash at Périmènes was $2.8 billion. In summary, thanks to the performance of our teams in Q1, we are firmly on track to meet full-year guidance.

Turning to our segment reporting and starting with project delivery.

Revenues are materially down year-over-year, reflecting the absence of Yamal LNG and the ongoing exit from the Arctic LNG2 contract. As a reminder, the Arctic LNG2 project contributed a significant proportion of revenues in the first quarter of 2022. Execution remains strong, and projects experience notable strength in margins at 8.1%, up 110 basis points year-over-year. The absence of major new awards, which are dilutive in their early phases due to conservative recognition, was a benefit to margins in this period. As new awards materialize in the coming quarters, the portfolio maturity will become a more balanced blend of early and later stage projects, bringing margins to a more normalized level. Turning to orders, the strong commercial outlook we see ahead of us should drive a considerable improvement in book-to-bill trends in the coming quarters, driving backlog higher. Turning to technology products and services, TPS, where our investment and commercial strategy to grow this segment is yielding very positive results. Financials are robust, with revenue growth of 37% year-over-year, Boosted by strong order momentum, we achieved through 2022 a notable improvement in several areas, including consultancy and engineering services, licensing and property equipment, notably for ethylene, and growth in renewable fuels work. These higher volumes, combined with an improving mix of higher technology and product revenues, enabled EBIT margins to reach the double-digit threshold at 10.2%, up 100 basis points year-over-year. As a result, EBIT has improved more than 50% versus the prior year period. Commercially, we have sustained a positive trend in orders, as demonstrated by the trading 12-month book-to-bill heading up to 1.6, which has driven a substantial 84% expansion in segment backlog versus Q1 last year. In summary, TPS is building strong momentum, and we continue to invest and explore growth opportunities to fuel this remarkable trajectory.

Turning to other key performance items, of course, are financial statements, beginning with income statements.

Corporate costs of $16 million represents an increase compared to the underlying run rate for 2022, reflecting costs of strategic projects and pre-development initiatives, which will likely continue in the coming periods. When contemplating the full year outlook for corporate, these incremental investment costs, as well as the recently announced AESOP 2023 program, should be taken into consideration. This program is an employee share offering with the objective of sharing long-term value creation with employees. These two factors will likely drive corporate costs for 2023 towards a range of 60 to 65 million. But in subsequent years, we'd expect these costs to normalize at a lower level, closer to 50 million. For net financial income, the central bank decisions an increase in global interest rate through 2022 and early 2023, are now positively impacting this slide, and the 20 million net benefit clearly boosted our earnings per share in the period. To conclude on the PLL, we incurred a non-recurring cost of 11.5 million. This represents the technical accounting and non-cash charge associated with our orderly exit from Russia and the sale of our main Russian operating entity. Turning to balance sheet, where our structure remains solid, net cash and net contract liabilities trended slightly down year on year, reflecting portfolio maturity and the absence of rewards. Before passing back to Arnaud, let's take a closer look at cash flows, where there has been a continuation of many of the trends seen in 2022. Pre-cash flow, on an underlying basis, or excluding working capital, was 122 million, and consistently strong as we executed across our portfolio. Cash conversion from EBIT on this basis is very high, at more than 100%, and above what we would consider a normalized conversion, owing to the positive impact of interest income. As we had indicated with our full year results presentation, Working capital was an outflow in the period, reflecting portfolio maturity, the absence of large awards in recent quarters, as well as our orderly exit of Russia. But we anticipate this trend will reverse as the order momentum improves across the balance of the year, notably in the second half. We end the period with more than $3.5 billion of cash and cash equivalent.

I will now turn the call back to Arnaud for the outlook. Thank you, Renaud.

Achieving the world's net zero target requires significant investment to develop and scale decarbonization solutions. Emerging stimulus packages from global policymakers will serve to break initial cost barriers. And although full alignment across the ecosystem is taking time, global ambitions demand that affordable solutions and sustainable products for industries and consumers alike must be developed. Technip Energies is committed to meeting this challenge. At our full year results in March, we discussed how we would prepare our future core through positioning for leadership in fast growth markets, which are fully aligned with our net zero goals. Creating rely is one key component of our strategy. And today, I am really delighted to present to you a new company which will accelerate industrialization in the emerging market for green hydrogen and its derivatives, such as green ammonia and e-fuels. Rely is a highly complementary partnership of Technip Energies, an engineering project delivery and integration leader for the hydrogen industry, and John Cockrell, the leading provider of pressurized alkaline electrolyzer technology and equipment. Rely will have robust foundations and from day one with access to over 200 hydrogen specialists and more than 50 hydrogen technology items. Headquartered in Belgium, the company will have global reach with entities across four continents and in countries spearheading green hydrogen market development. The combination will create a Technology and project delivery company providing integrated Green H2 and Power2x solutions. Rely will be asset light with preferential rights for electrolyzer stack supply with an offering that spans the full value chain from front-end engagement through to operations and maintenance. And unlike any other commercial partnerships that have been announced in this space, what clearly differentiates Rely is 10 engine coque reels combined R&D platform that will deliver technology enhancements, develop new products, and accelerate improvement in economics for green hydrogen projects. Looking at realized scope and market positioning in more detail. Green H2 and Power 2X are highly promising markets, which could ultimately deliver decarbonization across many industries, including traditional downstream industries, steel, and other hard-to-abate industries, as well as transport and power storage and production. Leveraging TENS process technology integration and molecule transformation capabilities with John Cockerell's extensive manufacturing and aftermarket expertise, RELI will provide a highly differentiated offering to the green hydrogen market. This will cover electrolysis, optimization of balance of plant, molecule transformation, and O&M. Digital services and the intermittency management systems will, of course, also form an integral part of the realized offering. Currently, of course, there are cost hurdles for green hydrogen. But in the long run, this industry like honey, will need to stand on its own two feet. Today, the electricity represents about two-thirds of the cost of green hydrogen projects. In other words, through optimization of the electrolyzer stack, balance of plant, and the OPEX, Rely has the ability to influence about one-third of the cost. But as the market matures to utility-scale projects, This picture reverses, and the cost components that RELI can impact will form the majority of the economics of a green hydrogen project. Put simply, RELI's potential to positively impact projects will increase as this industry scales up. Finally, on RELI, let's consider the value proposition. TEN's front-runner spirit has often seen us delivering many world-first and finding solutions for the industry's most complex engineering challenges. By combining the partners' technology and engineering resources, RELI will provide integrated end-to-end solutions for plants at industrial scale and an optimized and standardized off-the-shelf blueprint offering for the green hydrogen market. And when combined with TEN's ability to effectively structure projects through technical and financial advisory, we can accelerate the development of our customers and their projects. This is why R&D and standardization are critical. RELI's innovation platform will be instrumental in driving better project economics through lowering the levelized cost of hydrogen and shortening time to first molecule. Through this platform, we expect to develop technologies that we can license and proprietary products that we can sell. We will develop the technologies of the future, not simply the electrolyzer, but everything around it. The balance of plant and the energy and molecule management system and technologies across the derivatives required to transport and transform the green hydrogen to another molecule. In the long run, This will enable gigawatt-scale projects while addressing intermittency and power-to-x innovation. We truly believe that Rely has the necessary ingredients and financial ambitions to be the market leader in green hydrogen. We are targeting a $1 billion-plus revenue company by 2030 that can generate margins at least in line with our TPS trajectory, supported by proprietary technology and product development.

In summary, through RELI than is bridging green electrons to molecules. Before closing, let's turn to ESG.

In our sustainability report, which we published in March, we strengthened our commitments and recentered our focus on impact-driven targets to accelerate our sustainability journey. As part of this, we revealed that we are on track to be net zero by 2030 for Scope 1 and 2 emissions. And we reported, for the first time, our Scope 3 upstream emissions, in other words, the emissions from our footprint as a project delivery company. And in 2023, our Scope 3 downstream targets, or the emissions from our clients' plant operations, will be refined and published with means to decarbonize. We will also report on avoided emissions, sometimes referred to as Scope 4. This is measuring the emission reductions of our clients achieved through our sustainable by design solutions. For Scope 4, we are targeting to avoid 15 million tons of CO2 equivalent by 2025. As evidenced by RELI, our strategy to offer decarbonized solutions at the heart of our future core is in action. And delivering on our long-term strategy will be critical on our path to net zero by 2050. In closing, with our solid first quarter performance, we are on track to deliver on our full year guidance. We have made a significant move in preparing our future core. RELI is one of the key initiatives that we will be launching this year. And we are focused on securing the right project delivery prospects with strong potential for material improvement in orders in the coming quarters. And with that, let's open the line for questions.

Thank you. This is the conference operator, We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. We will pause for a moment as callers join the queue. The first question is from Sazinkant Chilukuru with Morgan Stanley. Please go ahead.

Hi. Thanks for taking my questions. I had two, please. First, I was just wondering if you could talk more about the strong 10.2% EBIT margin in the TPS segment. If you could highlight what the key drivers were behind this, particularly this quarter or in 1Q, and how much of that will likely be replicable in the future quarters of 2023 as well. I was just trying to understand. the sustainability of these margins in the segment at double digit levels. The second was I was just wondering if you could provide more clarity on the 4.5 billion euros revenue backlog that is expected to be executed for the remainder of this year. Again, how much of that kind of comes from the TPS segment and if you could talk about the risks associated with executing this backlog. It seems like a strong backlog cover for me for 2023. Thanks.

Thanks, Sachie, and thanks for the question. So I will start and hand over to Bruno. First of all, on the TPS margins, and allow me to actually insist on what we insisted during the full year earnings call and as well as last year as we were building up the TPS backlog and TPS forming now a key part of our strategy as a company. What you're observing here with the margin level for TPS is the realization of choices that we've been making over the past 18 months. and an emphasis that we have decided to put through the commercial models, through the commercial teams, and through our offering towards TPS in order to accelerate this hybrid model that is, I would say, then signature in terms of the business model of the company, the product delivery long cycle and the shorter cycle TPS with higher margins. So it is, I would say, you know... A key example of why the level of margin, a key example of why we have decided to accelerate into TPS TPS, as you know, is a blend from services to products to technology. The more T&P we find into the TPS blend, the higher the margins. And we have been fairly successful last year in particular in the domain of SELN, selling more products than services and more technology than services. So it's a favorable mix. I'll hand over to Bruno who may want to add a little bit of color, but it is important to me to highlight the fact that this healthy level of margin is a result of you know, choices that we've made as a company in terms of the strategic orientation to pivot towards more TPS without abandoning product delivery. But it speaks to the strength of the choices that we've imposed to ourselves and the ability of the commercial teams to pivot together with a message.

Oh, sure. Thanks, Arnaud. And hi, Sachie. No, I think Arnaud covered most of it. I think it's basically across the portfolio of TPS that was quite strong. Reaching double-digit margin is something we had in mind. We had insight and we communicated on that at the last earnings call. Now, it's true that we benefited from a couple of, let's say, tail-end projects, which has a bit more positive contribution this quarter. As we continue to grow this segment, benefiting from the top-line growth, we are able to sustainably be close to double-digit, be beyond double-digit. And this is what we want to continue to do, continue to invest, and continue to differentiate across the portfolio from technology, product, services, from PMC, advisory, to engineering services. We have the capacity to differentiate and then deliver high-value services to the client. If I switch now to the second part of your question around backlog, it's true that on both segments, we have great visibility for the year. We started the year at 1.4 billion, slightly on the lower side of the projected range. We have the capacity to step up as new awards will come in. So we are not obviously, you know, we're confirming the guidance for the full year from 5.7 to 6.2. We consider as this will roll out, we will be possibly in this range. Now, you could have projects accelerating, some projects shifting a bit to the right, It's the nature of the work, but yeah, it's well on track versus what we were forcing in building blocks to get to the full year guidance we released a couple of weeks ago.

Thank you.

The next question is from Bernard Hody with Kepler-Shubro. Please go ahead.

Hi. Thank you for taking my question. I have two, if I may. The first one is on ALM Gasha. There was some press report that AdNoc change is, I would say, is beating strategy. You were awarded earlier this year a pre-agreement contract and there was some press report that it was canceled. So I hope if you can give us some color on that. And the second question relates to your net financial income. It was very strong this quarter, 20 million. Can you provide us with a guidance for the full year?

Thank you, Bernard. I will take the first question and give the difficult one to Bruno. Regarding Hélène Gachat, I will start with an important reminder. While we have been awarded, indeed, I would say a pre-agreement, Hélène Gachat never made it into Technic Energy's backlog. Hélène Gachat isn't, never was. in our backlog. The announcements that we've heard and that you've read about earlier this week will not translate into any cancellation of backlog for Technip Energies. Elengasha is a very large project. There are multiple packages. Our scope was only one part of the total scope for Elengasha. we've heard from the client that the price point for investment or FID had not been reached, therefore their decision to change stack. I am unable to say whether it is about the combination of the packages or one package in particular. Now, this is a very good reminder of something that I've been repeating and we have been discussing on those calls in the past. We as Technip Energies or other contractors, we can't totally influence FIDs, but we can partially as we do our job properly. And doing our job properly is finding solutions, doing value engineering so as to make the projects viable for our clients. Our duty. is obviously to be profitable on our projects and the projects that we execute, but it is also on the prospects to find solutions to bring the project to a price point that is acceptable for the client to take final investment decisions. So it looks like this has not been the case overall on LNGASHA. We are in dialogue with ADNOC, so there's no breakdown in communication or in being in contact with them. We will assess what that means for us in the coming weeks. But the situation is what it is, but it's a very good reminder again, of the importance of what we do in terms of making the projects of our clients fly. We do exist through our clients' projects, and it's an important reminder of that. While remaining disciplined in the margin levels and the execution and the choices we make, our duty and the contractor's duties are to find solutions to bring the price point where the project can fly for the client. Hello?

Yes. Hello, Bertrand. So, yeah, positive impact from the net financial income for the quarter, close to 20 million. Obviously, difficult for me to forecast what would be the reactions or the future steps of the European Central Bank or the Fed. It's difficult to give any firm guidance. It's not really on our hands. What can I say? You know, for The main impact, which is, okay, the deposits and what interest we earn, the amount that we've recovered or that we've been able to recognize in Q1 is probably not very different to the one we could project for the next quarter. Now, obviously, within the global mix of the net interest review or expense, you have other components, to market evaluation, of some investments, so it's not only you have things beyond that, but I would say if things remain the same and we don't control that, we can continue to incur double-digit revenue items as we execute across the remainder of the year.

Many thanks.

The next question is from Mick Pickup with Barclays. Please go ahead.

Hi, gents. It's Mick here. Quick question on your hydrogen rely coming through. Obviously, it teamed up with Cockrell now. You previously teamed up and invested in McPhee two or three years ago. Can you just talk to the difference between what those two offerings are? I thought McPhee was going to be developed up to industrial scale as well.

Yeah, Mick. So, turn it. is indeed a small minority investor in McPhee. This small minority investment that we've made, just as a reminder, we are holding 2%, was made for us to learn faster about electrolyzer and electrolyzer technologies. The nature of the relationship that we have been developing with MACFI is not to be compared with what we are doing and will be doing through RELI. It's a much different ambition. The ambition with or through the creation of RELI is to unlock something and unlock a few of the barriers to, I would say, an affordable green hydrogen or green hydrogen derivatives. In order to get there, you need to unlock scale, and you need to think industrial scale. It happens that John Cochrill electrolyzer solution is probably more advanced, certainly larger per unit and per stack, or per stack unit. So they are, you know, base case is 5 megawatts per stack, which is significantly today higher than what McPhee is able to deliver. And there's potential for, I would say, a lot more beyond the 5 megawatts. Hence why we have gotten closer to Joint Cochrane and have decided to enter into this venture with them. It's really about accelerating scale. When I look at what and why sustainable aviation fuels are being adopted so easily, it's because SAFs are easy to use. It's still expensive, but it's very easy to use. And there's no question of how to store and to use and to transport and the rest. We have to bring, if we believe that there is a net zero ambition for the world, we have to bring hydrogen and derivatives to a level of ease of use and price level That is similar to what is happening with the SAF, which, by the way, for the time being, are being blended with other fuels, but same story as a way to you know, make the cost more acceptable for the consumers. Same story. Hydrogen and derivatives may be blended tomorrow into other fuels or sources of energy so that it accelerates the adoption while ramping up the volume. So what we are trying to achieve through RELI is really to unlock or to break down some of the barriers. Some of them will be broken down thanks to subsidies But beyond that, we absolutely must accelerate the industrialization of the green hydrogen platforms and solutions. And the appetite that we found at John Cochrill and the, I would say, cultural fit that we found at John Cochrill to put in common what is an essential part of RELI, this innovation platform, is absolutely essential. in order to break down barriers, accelerate technologies, and invent, I would say, what will be an affordable balance of plant and balance of site. So what we found is very much, first of all, we're trusting the technology and an appetite to put things in common and to think differently in order to accelerate scale. And this is why we decided to team up with Junko Krill and to form this innovation platform, i.e. putting in common their innovation teams and our innovation teams in a joint company to accelerate 3NH2.

Okay, thank you. And can I ask a follow-up on the other partnership you announced during the quarter of Casale on the ATR? Now, you mentioned in that potential of 99% carbon capture rate on that. What does that say about the future of your SMR business?

It says that the ATR and the SMR will continue to be complementary. We have seen projects where our SMR technology has been selected by our clients for blue hydrogen in Australia recently. And it's a matter of basically being able to – we have a gap, if I may say, in our blue H2 matrix. And the very large-scale BlueH2, we couldn't totally tackle through our SMRs. We have to say that ATRs are more cost-efficient for super large-scale BlueH2, and we needed to complete the puzzle. And now that the picture is complete through the partnership with Casale, you must not see them as contradicting one another. On the contrary, They are complementary. And when you put SMR plus some of our solutions, such as the Earth solution technology or ATR plus Earth, we can really decarbonize blue H2 up to 99%. This is a very serious number. And so, yeah, that's why we're very pleased because now we basically have the complete picture and there's no more gap into the matrix. And we can, I would say, confidently decarbonize go and tackle the medium size as well as the extra large size for projects for BlueH2. Thank you very much.

The next question is from Jean-Luc Romain with CIC Market Solutions. Please go ahead.

My question relates to NSS. It appears, according to the press, that you have done the best proposal. In case Shioda couldn't participate with you to this project because of their financial difficulties, is it something you would take alone, given the big size of this project?

Thank you.

You know, you're reading the press like we do. NFS is a very important prospect for us because LNG continues to be part of our equity story and we continue to believe in LNG. Considering, I would say, the nature of the prospect and where we are, I'd rather not comment further on what has been published in the press, which may or may not be accurate. We will continue as Technip Energies to tackle those large projects through partnerships that are of a quality and predictability in terms of the delivery that is compatible with the principles that we've applied to ourselves for selectivity and discipline in execution. So, partnerships will continue to exist. They will continue to be necessary to then when tackling large projects. and the quality of the partnership is what truly matters. So I won't comment more on NFS, as we don't like to comment on prospects, as you may imagine. So that's all I say on the matter for today.

Thank you very much.

The next question is from Nikhil Gupta with Citigroup. Please go ahead.