Técnicas Reunidas, S.A. (OTCPK:TNISF) Q3 2022 Earnings Conference Call November 8, 2022 12:30 PM ET
Company Participants
Joaquin Perez de Ayala – Head, Energy Transition
Juan Arburúa – Executive Chairman
Eduardo San Miguel – CEO
Conference Call Participants
Mick Pickup – Barclays
James Thompson – JPMorgan
Kevin Roger – Kepler Cheuvreux
Operator
Hello. Good evening. This is Joaquin Perez de Ayala. Welcome to this Results Presentation of the Third Quarter of 2022 that will be conducted by our Chairman, Juan Lladó; and our CEO, Eduardo San Miguel. It will take around 15 minutes and you can pose your questions after that.
And now, I give the floor to Mr. Juan Lladó.
Juan Arburúa
Hello, everyone. This time, I promise, it’s not going to take more than 15 minutes for us to get. So let’s get to report. Let me start this presentation with a quick summary of who are going to be the initial remarks, which I summarized right afterwards, the quarter highlight following with an update, which I think is necessary of TR’s engineering capacity and capabilities as well pipeline opportunities that’s continuing to start. After I finish, Eduardo will brief you on our financial results of this third quarter and he can also brief you with our guidance before opening the floor, obviously, like every quarter, to questions-and-answers.
I’d like to start this slide with the uncertain volume of investments that are forthcoming. You may think that I’m optimistic, I’m not, I’m being realistic. If you analyze the market, all vectors are pointing to the same direction. We have a growing energy demand, fast decarbonization plans of the main energy companies, or even a strong interest in diversifying.
Everything points to that in that direction. And that direction is investment, investment, and investment. Where do we think that investment is taking place and is going to take place? We do expect the Middle East is going to be leading this upcoming investment, let’s call it, super cycle. And I do believe, and I’m convinced and I do expect ATR is going to be extremely well-positioned in the advantage of this very positive scenario.
Moving to financial results. Let me do a brief introduction, and Eduardo will explain in more detail later on. I’m very happy to highlight the quarterly sales are back to the €1 billion, approaching already pre-COVID levels. With quarterly EBIT, EBIT margins reached 2%, indicating a revision to normalized times.
We’re talking about super cycle, and we’re talking about compressing investments that are forthcoming. So, let’s get down to business. And let’s analyzed this slide based on data from McKinsey that summarizes the global investment trends of our industry.
First, one hand, we have a very — investment still needed only — just only need to address the depletion of current oil and gas wells in the market. Two, secondly, this is not only depletion, but the investment has to take place in traditional energy, but also the volume of growth. The market investors have to supply the growing energy need both developed and less developed.
And finally, but in parallel, we’re facing an enormous investment effort in the acceleration of the deployment of low-carbon technologies. As have already been assured by the investment plans of major industrial in both industrial and financial players.
If we follow the slides and we add up these three investment reasons together, we estimate an addressable market for TR. The stocks currently on more than $600 billion and is expected to grow close to $1 trillion by the end of the decade.
In this amount of investment, I think you all will agree is already creating is going to create different bottlenecks. But in our case, we have to anticipate as one of the big bottlenecks we do believe as we are ready facing it is going to be a scarce engineering capacity of the market. The scarce engineering capacity to cope with all the projects that are going to be announced. And we’re being ready and we are already anticipating that issue.
In this context, TR over the last month — and when I said the last month, it was another last two months versus over the last year, been working hard, preparing to tell to give the best response for this investment load expected already in the coming years.
We have more than 4,000 engineers, more than 4,300 engineers. We centralized operations in Madrid as we’ve always done. From Madrid, we do — most of our engineers from Madrid, where we managed risk and coordinate of engineering centers.
And with the support of all the engineering centers all across the world, we’re going to be able and we’re already able to offer the best engineering expertise to our customers. With strengthening Madrid, we’re strengthening within Spain, Cartagena, that many of you know that we have a small — a small today is more than 200 engineering center in Spain. We’re strengthening India and we’re growing in India. We strengthened very much the Middle East. Our engineer offices, in South Arabia, Abu Dhabi and Oman. And obviously, we strengthen in Chile. You might be wondering why Chile, it might not be the center of action, but you have to remember, as an investor, for us, an analyst that we Spanish, and we had a strong presence in Latin America.
We have operations. We have operations and recent awards in Mexico. We operate in Peru; we operate in Dominican Republic. We operate in Colombia. And obviously, we have announced this year we operate in Argentina. So, we are also strengthening our engineering center in Chile.
And you might be asking, wondering where are the awards. We have not announced any awards over the last quarter. However, we continue to be and we are very optimistic over the future evolution of the backlog.
For major clients are publicly announcing an increase and also an acceleration of the investment plan. Obviously, on a daily basis, monthly basis, we talk to our customers. In those talks, they’re keenly requesting us to keeping capacity available as they do think that this could be the scare resource who wants all these investment wave and forwards.
We are very positive also about timing. We are already seeing and we see how many your projects are getting ready on the final investment decision. And we’re seeing and I’m sure you as well have seen how front-end engineering design contract television to speed up the investment — talent investment decision.
In the same slide, on the right-hand side, we see — you can see we’re working on a total pipeline of $48 billion just for the next month. It’s not a three-year pipeline, it’s just next month. Within that pipeline, we’re very much concentrating — we’re focusing our efforts for more than $20 billion.
[Indiscernible] is what we call key opportunities. And we are optimistic, and we all think that we are very well placed for more than €5 billion of awards. So, you understand now why I’m positive. And obviously, you have to understand where we’ve been working over the last month to strengthen our capacity and we’re doing so.
So, with this brief message and a positive message, let me now go to Eduardo for the financial section.
Eduardo San Miguel
Okay. Thank you, Juan. Good evening, everyone. Let me move now to September figures. I will go briefly over the quarterly results. My main headline to summarize those results is that they are fully aligned with the guidance we provided in July.
With regard to sales, let me underline that we moved back above the €1 billion threshold, regaining a volume of activity that we saw last time in the first quarter of 2020, when COVID started. Our quarterly EBIT is €27 million. That is one in the last two years and is due to three reasons. First, bigger sales due to the smoother execution of projects under less stress environment. Second, the operational leverage of the company as overhead spread up over the higher turnover. And third, our continuous effort devoted to contain our costs.
I also want to highlight the positive evolution of the underlying cash generation. As you can see in the graph, we had a positive operating cash of €50 million that compensated a big portion of the payment related to cost, that took place at the beginning of July.
Moving to our guidance. As guided in previous presentations, we expect to end the year with quarterly sales above €1 billion and margins moving towards percent. With regard to 2023, it’s still not easy to predict the timing and speed execution of future major awards. Thus, we will provide formal guidance for 2023 in February when we expect to have more visibility.
In the meanwhile, and I believe it’s extremely relevant, let me anticipate that just only with our current backlog, we have already secured a level of revenues of €4 billion in 2023, with an EBIT margin of 4%. And given these projections for 2023, we understand there should be little doubt about the fact that our midterm targets are highly achievable. Considering our abilities and the expected growth of demand in our sector, reaching €5 billion in awards and revenues does not look a very challenging task. And the 4% EBIT margin is a figure we will already see next year with only €4 billion of revenues. I can assure you that, we are working hard to reach those goals and that we will take all the necessary steps to get there and to stay there.
So thank you very much. And now we will be happy to answer any questions you may pose.
Question-and-Answer Session
Operator
Ladies and gentlemen, the Q&A session starts now. [Operator Instructions] Thank you. The first question comes from Mick Pickup from Barclays. Please go ahead.
Mick Pickup
Good evening, everybody. It’s Mick here. A couple of questions, if I may. So firstly, I think in your press release, you mentioned new ways of working and new business models. I wonder if you could elaborate on that. I’m assuming that’s the preconstruction support agreements out of Abu Dhabi. So can you just talk about that new clients? And secondly, you seem to be indicating a very, very strong market, which looks like if I look at everything that’s going to become very tight. So can you talk about the terms and conditions that you’re seeing on contracts, what clients are saying about cash? How are you going to handle it on that in if it does get as busy as you’re saying, it’s going to be a better world?
Juan Arburúa
Hi, Nick, I’m Juan Arburúa, and I am going to be answering to you. As I’ve always done for the last, I don’t know — 15 years.
Mick Pickup
I’m only 21.
Juan Arburúa
When you say new ways of working in construction with clients in Abu Dhabi, I don’t think it’s just only Abu Dhabi, I think is worldwide. I think as market tightens and the quality of design, modulized design develops, I think modularization in this business is taking a very important — very important role. And in Abu Dhabi, we’re really doing so. I’m not going to put it here, but I was watching this week, a little short movie, which shows how it’s huge 10-store building models are going into the vessels and from the vessels to the I don’t know. And I think we’re very good at that.
If you analyze not only in Abu Dhabi, we’re working with models, in Singapore, we’re working with the big, huge job that we’re doing on a service basis for EMEA in the heart of Europe is going to be modelized. So models is important. And I think today, we’re very strong. It has to do also with quality of engineering. It’s not the same way you’d have to design a plan, if it’s going to be models. There is also a way to de risk construction and is also a good way to de risk for execution. And so we’re happy to say we’re good at that. And I must have to say there is room for improvement, but we’re very good at that.
The second question, terms, conditions, and contracts. Obviously, most of the jobs that 2020 were practically stopped in the first half of 2022. There has been rescheduled, rethought, and sometimes rewritten in many cases. Our customers today, they need to accelerate execution. Our customers today, they have ambitions, target for us to finish and to make money.
In that in a good agreement with our customers, I think it put us back with the market with before 2014 or terms and conditions, I’m not going to be optimistic, but they’re fair, they’re very fair. Payment terms are much fair and contract conditions are better. We’re not negotiating in the middle of the oil price and renegotiating with customers really is to the benefit for us to run and to deliver.
Mick Pickup
Okay. Thank you.
Operator
Thank you very much. [Operator Instructions] The next question comes from James Thompson from JPMorgan. Please go ahead.
James Thompson
Good evening. Juan, thank you very much for the brief presentation this evening after market closed. Much appreciated that. Just in terms of the 2023 guidance, you seem particularly confident, obviously, now in terms of the €4 billion revenue level. I mean, I think, obviously, what we can see in 3Q now is as you guided us, the progress through the projects has improved pretty significantly. But I wondered if you could maybe talk a little bit about some of the kind of risks around that 4% EBIT margin.
Again, it feels like you’ve sort of struck a more positive tone about achieving that, which is notably above, I think, probably where consensus is thinking right now for EBIT for 2023. So just some color about the confidence there and maybe some of the kind of risks associated with that 4% margin target would be helpful? Thank you.
Eduardo San Miguel
Hi James, it’s Eduardo now. It’s been a difficult time this period of post COVID. We have been working very hard with the clients trying to define the scope, the price, the rhythm of execution, the schedules and I honestly believe that we have a very deep knowledge of the cost base of the projects. And we have also agreed with the client how they are going to compensate us in most of the cases, all the relevant costs. So when we say 4% margin, we are quite confident that is, as I said, quite — I don’t want to say quite easy to achieve, but I think it’s not a very challenging target. I think 4% is quite consolidated. That’s my feeling.
James Thompson
Okay. Okay. Thanks. Well, interesting to the confidence there in terms of discussions. Secondly, this year has been, I think, a year of much higher activity in terms of tendering levels from a number of your clients, and it feels like they’re gearing up. I mean, obviously, there’s been a lot of volatility however we look at it, raw materials or just geopolitics in general.
What gives you the confidence that your clients are now kind of ready to move forward? Is there a window of opportunity now in the fourth quarter and the first part of 2023 that is actually going to link some of this pipeline, which has been slipping to the right can materialize or crystallize for you?
Juan Arburúa
I mean, if you go through the analysis, you saw that there is a huge trend of awards before the war. I think the world was sort of an inflection point any war, obviously, I mean if it’s an expected war. It scares the investors for a while, and that has happened. That it is true. But none of our customers have stopped their investment, none of them. It has been delayed. It has been deeply analyzed, and we do really expect that our customers, and that’s why the message that I said before that we have to anticipate and to get ready.
Our customers are launching — are going to be launching this year and we’ll see awards by the end of the year and by the end of the year, first quarter next one. So we’re going to be seeing awards, market is moving. We are placing bids, and we get in that already and there are Q&A questions on the bids. So we see a positive market.
And that’s why I started my presentation saying that — which is a message for you and for our customers for both. When I made this presentation, I think on the investors and in parallel, I speak on our customers that we had to strengthen and we continue to strengthen our capabilities, because in our capacities of engineering, quality and quantity because we do believe, we’re convinced as we pulse the market and bids that — investments are going to take place, very soon.
James Thompson
Very clear. Thanks, Juan. I’ll pass it over.
Operator
Thank you. [Operator Instructions] The next question comes from Mick Pickup from Barclays. Please go ahead.
Mick Pickup
Hi, everyone again. Sorry, I’ll jump back in for this chance. A couple of questions, if I may. You mentioned the INEOS project of $4 billion of investments on a service basis. Can I just assume that’s the reason why you’re confident on margins, assuming that comes through low revenues and much higher margins than the rest of the portfolio? That’s the first question.
And secondly, on the [Indiscernible] project where you’ve had to pay out your 80 million. Where do you stand on that? Are you going through arbitration? Are you trying to recover it? Or is it gone and dusted?
Juan Arburúa
INEOS, as you know, it was announced by them, it’s a big investment in the heart of Europe is INOVYN and its ethylene plant. And this ethylene plant by which we started with the ethylene plant, and we’re moving forward together with them to do the wider plant, so to speak. And now we’re trying to expand our services. It is — as I said in my note, it’s a cost plus. It’s not an EPC — so have you been in EPC, our number of sales volume awards will be out of this world.
But it is — in fact, we’re not. We are working for them where we have way up of 300 engineers teaming up with the INEOS team here in Madrid in extremely good terms to focus in the design of the engineering, the models, the supervision of the models, the transport and the construction. But everything is going to be together with INEOS with an ambition and schedule — with an ambition investment for its customers. So margin is an issue.
Mick Pickup
And Algeria?
Juan Arburúa
Algeria? Algeria, we are — we have conversations with the customer. We have not broken conversations. We traveled back and forth, and we travel back and forth with the objective of reaching an agreement. It is a customer with whom we had worked together with ups and downs like in this business always happened for the last 25 years. And I’m convinced that is the — and that — it is my opinion, I am convinced and I do hope our customers is convinced as I am that sooner or later, we’re reaching agreement.
Mick Pickup
Okay. Thank you.
Juan Arburúa
Thank you, Mick.
Operator
Thank you. There are no more questions. We do have. Just a second please. The next question comes from Kevin Roger from Kepler Cheuvreux. Please go ahead.
Kevin Roger
Yes. Good evening. Two questions on my side, please. The first one is related to the net cash position. So we have a net cash position that declined a bit quarter-on-quarter. Can you explain as the driver for that?
And the second question is related to the order intake. You mentioned €6.5 billion [Technical Difficulty] €4 billion in leverage if we take [Technical Difficulty]
Juan Arburúa
Sorry, Kevin, there is a problem with the line. We cannot clearly…
Kevin Roger
The second question.
Juan Arburúa
The second question, yes. Can you repeat it please?
Kevin Roger
Yes, absolutely. It’s related — sorry, for the line. It’s related to the order intake [Technical Difficulty] maybe €4 billion plus number that you are giving us?
Juan Arburúa
Kevin, I think I can only answer the first question because for us, it’s impossible to understand the second one because of the line. So if you don’t mind, you can pose a question to the Investor Relations department, and I will answer you later. But now let’s talk about cash. You say that there is a reduction of cash in the balance sheet, and it’s a fact. This is slightly smaller than it was three months ago. But you have to bear in mind that Touat Gaz and amount of €80 million because of the execution of the bank warranties.
And also if you reduce this active money from the evolution, what has happened is we are seeing an increase of €15 million in the ordinary operations of the company. So I think the picture is just the opposite. We are improving our cash situation, and it’s a reflection of how the market behaves. I mean this message about a global improvement and moving towards a more ordinary situation, we can see that as well in the treasury side. I mean we see it in the cash. So I think it’s — my message for you is cash is improving, not deteriorating, that’s I mentioned.
Kevin Roger
Yes, understood. Thanks for that. And sorry for the quality of the line. Sorry for that.
Juan Arburúa
Yes. Okay. Thank you. Thanks.
Eduardo San Miguel
Thanks, Kevin.
Operator
Thank you very much. There are no further questions in the conference. Dear speakers, I give you back the floor.
Eduardo San Miguel
Okay. Thank you. Thank you all of you. Yes, as you know, this time, I promise it because it’s going to be 50 minutes, and I think I was watching my watch. It has been only 14. Thank you for being there this late. It was just — the reason why we have this meeting this late is that had to do with the troubles and board issues, so have to choose myself for that. So we’re always better to have it in the morning. But again, thanks a lot. Thanks for being here, and thanks for posting all these questions. So I’ll see you on the next quarter which I think will be on the February results. Thanks again.
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