Técnicas Reunidas, S.A. (OTCPK:TNISF) Q2 2022 Earnings Conference Call July 29, 2022 6:00 AM ET
Company Participants
Joaquin Perez de Ayala – Head of Energy Transition
Juan Arburúa – Executive Chairman
Eduardo San Miguel – Chief Executive Officer
Conference Call Participants
Kevin Roger – Kepler Cheuvreux
Robert Jackson – Banco Santander
James Thompson – JPMorgan Chase & Co.
Alvaro Lenze – Alantra Equities
Joaquin Perez de Ayala
Hello, everybody. Good afternoon. This is Joaquin Perez de Ayala. Welcome to this Results Presentation of the First Half of 2022 that will be conducted by our Chairman, Juan Lladó; and our CEO, Eduardo San Miguel. It will take around 20 minutes and you can pose your questions after the remarks.
Juan Arburúa
Hello, everyone. Welcome to Técnicas Reunidas, first half of 2022 results presentation. Let me start by going through a quick summary of today’s presentation. First, I will be making an update – I’m sorry, some initial remarks on the second quarter of the year followed with an update of TR’s pipeline opportunities and some recent energy transition awards. And then Eduardo, will take you through the second quarter results, then he will provide you with an update of the operating environment for the sector and about, which is very important, guidance for the second half of the year. And then finally, I will close this presentation with my final remarks.
Now let me highlight the main messages that we want to leave with you with regards to this last semester’s performance and how we see the upcoming future in terms of our new opportunities. If I have to use a single word to summarize how our business operations stand right now, that word would be normalization and let me underline that word normalization. We have to manage TR during this semester through an extremely volatile period, but now we started to move to normalization throughout the company operations. And what do I mean by normalization? Normalization in the execution of both our recent and other projects as well normalization in how that execution is being reflected in sales and is being reflected in our operating results and even normalization in working capital and cash generation as the dialog with our clients is bringing faster agreements and better payment practice. In general, normalization of the underlying business.
So then you will have to understand why I’m particularly disappointed to see these improved trends being clouded at the bottom line by the effects of this one-off litigation provision. Nonetheless, Eduardo will discuss later the important message, which is that the positive trends are clearly here and they will be fully appreciated in the second half of the year. We’re also getting ready for a normalized medium-term future.
In our traditional business, we have had a string of major awards in the first month of the year. We have already announced those awards as you may remember our four combined cycles in Mexico, very important, our second job for Qatar Energy, a natural gas processing project; and very important, extremely important, a world scale ethylene plant for INEOS. The cumulative size of these awards is €1.2 billion.
However, this might bring some confusion because this figure does not tender justice to the quantity and the importance of the awards as just the INEOS project by itself implies managing a project between €3 billion and €4 billion. Managing a project obviously with lower risk on a cost-plus basics in which INEOS and ourselves together here in Madrid – from Madrid, we’re going to have to manage the engineering, the procurement and the construction of the largest ethylene plant or petrochemical project being done in Europe over last 20 years, which is extremely important. You have to remember that our future now is in petrochemicals.
On top of traditional business, opportunities in energy transition keep coming up and coming up more significantly in more significant quantity and more significant times. So let me highlight two key projects awarded this last quarter.
First, the award of the basic design for Europe’s largest integrated renewable hydrogen hub made by HyDeal España as the JV companies such as Arcelor and Enagás. Probably this is one of the most strategic projects within energy transition in Europe. Técnicas Reunidas will work along with VINCI and PowerChina to carry out the technical design, architecture and supply chain of the highest performance and most cost effective solar to hydrogen system to produce renewable hydrogen here in Spain and this is very important.
Secondly, only some weeks ago TR obtained an engineering contract for a power project which is a combined cycle with carbon capture and storage for SSE Thermal and Equinor. That project will be located in Peterhead, Scotland and we’ll be collaborating here with Mitsubishi and Worley for the design of the plant, which is going to be first of its kind in this country and will allow us to capture 1.5 million tons of CO2 emissions per year and then storing them in the wells of the North Sea. So those two very important and significant awards. So those awards obviously is an example of the business opportunities that are lying already in front of us and they’re going to be translating into awards in the next couple of years.
As you can see in the first and second graphs in front of you, oil and gas natural investments have not yet recovered from pre-pandemic levels. However, the energy demand is well, well above those pre-COVID levels. This explains why energy availability is again a major concern worldwide and why prices have skyrocketed and it also explains why a major investment wave is highly needed and it has already been announced by most of our clients. We are already working with them and getting ready for this investment wave. We’re talking and working with all our customers.
As shown in the third graph of the slide, you can see that we have one of the strongest pipelines we ever had in terms of size and also quality. In fact out of the total €48 billion in the pipeline, more than 80% is in petrochemicals, we talked about petrochemicals just before; and natural gas, which has been awarded some important gas jobs or as well in the area of energy transition, we’ve already talked about that as well. Under the scenario we have just outlined, we could probably have expected a stronger bidding in the world market this last quarter.
However, we also remember that the market volatility has plagued this quarter and that explains that final investment decisions have to be delayed and have been delayed for a few months. The projects have not been canceled. It’s just postponed for a couple of quarters. In fact I think that the risk for our clients now and we’re talking to them about that is that the future bidding will get too concentrated and that will put undue pressure in the engineering and execution resources of the whole sector.
So with this introduction and these remarks, let me pass the presentation now back to Eduardo.
Eduardo San Miguel
Thank you, Juan. Good afternoon, everyone. Let’s move now to the first half figures. Juan has been talking about normalization and the main driver of this normalization is to recover our ordinary level of revenues. In this first slide, as you can see, we have delivered €1.6 billion in the first half of the year, which represents an increase of 16% compared with the same period of 2021. It is the fifth quarter in a row that shows growth. And finally, this is the quarter where we all agree that sales recovery is already here.
Moreover, our financial projections for the second half show a return to revenues above the historic €1 billion per quarter. This development is key for moving towards fully normalized profitability. But obviously first half EBIT is not yet normalized since it is impacted still by COVID and by €75 million provision accreted for litigation, which has mainly to do with the recent bond call execution in Algeria.
Excluding these one-off impacts, operations show a positive margin around 1.7% over sales. This underlying margin is quite in line with the guidance provided at the beginning of 2022 despite sales being slightly lower than initially expected. The current litigation provision, you will allow me not to get into details, since we have started an arbitration process with our client in June because of what we understand an inadequate use of their performance bonds. We are still trying to reach an amicable solution. But if eventually we don’t reach it, we expect an arbitrator judgement in two years’ time.
Let me now move to the net cash position of TR. In the slide you can see that we have improved the cash figure in the second quarter by more than €70 million up to a level of €134 million at the end of the semester. As you can see, half of this improvement is due to the recovery of cash and duly return four years ago by our client in the group project in Australia after the favorable arbitrator’s judgment issued this year.
I am talking about the plus €38 million of noncurrent cash in the slide. But on the other side and to be transparent, €80 million out of this €134 million have gone to pay the bond execution of Touat Gaz project. The result is a net cash figure still standing at positive levels and very similar to the first quarter numbers. We believe that gas tensions will continue progressively easing during the second half of the year benefited from the gradual normalization of the payment practices of our clients.
Let’s now talk about the market environment and how we see our performance for the second half of the year. I have to be cautious with this slide. The consequences of the geopolitical turmoil are a bit unpredictable, but it is a fact. We see how the big challenges regarding our cost base we faced months ago are not that big now. I have selected three major inputs of our industry, copper, nickel and carbon steel.
As you can appreciate, a major spike took place during the last semester, which have peaked in the second quarter. The good news is that these shocking prices is gradually fading and that we are in the right direction to return to more ordinary levels. Prices are still higher than one year ago, but we have implemented multiple policies to absorb them at least partially such as finding new providers in different geographies or rescheduling the timing of procurement trying to find the cheapest windows.
Regarding the construction manpower. During the first half, we saw new COVID confinements in China and we actively worked in the search of alternatives to compensate this situation. As of now, these confinements are progressively easing and Chinese contractors are willing to work outside the country. To summarize, we finally see a progressive normalization of our cost base. We have to be cautious, but we see this normalization already coming.
And finally, I want to elaborate about what we expect from the second half of the year. We estimate sales for the second semester will be in the range of €2.1 billion and €2.3 billion implying an increase of at least 27% compared to first half figures. This guidance for the second half is solidly supported by some developments. First, the active older projects in our backlog are progressively speeding up and getting to its normalized execution pace.
And second, projects awarded in 2021 are entering now in the procurement stage which, as you will all know, always delivers higher sales. And the EBIT margin is also expected to move to a higher range between 2.5% and 3% mainly due to the recovery of the size of the sales we will deliver.
And now I will leave the floor to Juan for final remarks.
Juan Arburúa
Thank you, Eduardo. And I would like to finish this presentation and I don’t want to bore you, but I think I’d like to finish again with the word normalization because this is already the underlying trend of our operations and will be more so now that the context and macro level is gradually coming down. In the second half of the year reflected in our guidance, we expect to revert sales and margin levels that will be gradually approaching aspirational midterm target. That is again reflected in the right side of the slide, midterm target of €5 billion awards, €5 billion sales and a well-deserved 4% margin. We also expect that over 2023 and 2024 the big investment cycle is going to finally burst. That’s the pulse that we gain from our customers. And when that happens and it’s going to happen, I honestly believe TR will be well placed with the right strategy, well positioned to benefit with this very unique opportunity.
And thank you very much now and I will be very happy to answer any questions that you may want to address. Thanks a lot.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question comes from Kevin Roger from Kepler Cheuvreux. Please go ahead.
Kevin Roger
Good afternoon. Thanks for taking the question. Maybe I will take one by one to be clear because a very different topic. The first one is related to the commercial pipeline with the chart that you’re presenting in Slide 6. So clearly you show that clients are delaying final investment decision while the environment is currently very supportive for that. So I was wondering if you can give us a bit more explanation why they are postponing the FID and if it change basically your expectation in terms of order for the full-year because you were expecting to get an order intake of something like €4 billion this year to be able to at least replace your volume? So is it impacted by the delay of FID?
Juan Arburúa
I mean you’re in the market and you realized starting in February, March obviously because of the – basically because of the work, how crazy the market conditions were and it’s very difficult in wartime and with a crazy market condition, you’ve seen in the graphs as well, to make a final investment decision. But it is very clear, and that’s a feedback that we get from our customers and I’m sure we have gotten the same thing from our competitors because we all talk to the same customers or similar customers, is that they have to invest and that they will invest, but they will not give the approval in the middle of the turmoil. That’s very logical. So there’s going to be a delay and has been a delay, which didn’t happen until February, for let’s say quarter or two quarters.
Kevin Roger
But does it change basically your expectation in terms of order intake because you were previously guiding for €4 billion order intake this year and you did not mention this target in the presentation, et cetera. So you say now midterm €5 billion. Has it changed for 2022?
Juan Arburúa
I mean we have a lot of things that may be happening on the fourth quarter of the year. I mean we ended on July. So we do expect a lot of awards or things happening or investments to take this towards the end of the year. So it may happen at the end of the year or the beginning of next year, but it doesn’t change the overall picture.
Kevin Roger
Okay. Understand. And related to the provision that you are taking the €75 million related to the request from the client. What’s the likelihood that basically you will pay it? What do you see on your side because you clearly understand that you do not want to talk a lot around that? But on your balance sheet, €75 million will have quite an important impact. So what would be the likelihood that you will have to face it?
Eduardo San Miguel
Kevin, this is Eduardo. I am the former CFO of the company and I have to add that philosophy of being conservative. I mean provisions are just in case you face a potential problem in the future. Since most of this provision has to do with bonds in Algeria, I have to feel positive about the future. But I don’t want to elaborate a bit about that because unfortunately, there is a real risk of having to move this situation to an arbitration process and I don’t want to give hint to my clients or to anyone. I mean I have to provide the minimal information about that. But as I told you from the beginning, I have to be conservative.
Kevin Roger
Okay. I understand. Okay. That’s it for me. Thanks for the answer. Have a very good day.
Eduardo San Miguel
Thank you, Kevin.
Operator
Thank you. Your next question comes from Robert Jackson from Banco Santander. Please go ahead.
Robert Jackson
Hi, good afternoon, gentlemen. So first question is related to the Turkish project, the SASA Polyester project, bearing in mind that the inflation in Turkey and I know its probably the project is in the last stages. But are there any risks there in terms of the next few months seeing any inflation there – cost inflation there or any impacts that we may have to be aware of? That would be my first question?
Eduardo San Miguel
Robert, hello. My first reaction to your question is its good time providing equipment in Turkey. We are trying to maximize it because it’s not only a matter of inflation, it’s a matter of depreciation of the lira. So for us it’s a good market to be buying today. But for the specific project of SASA, we are still in a moment that we are only rendering services to the client so it has not major impact inflation – the local inflation. So I would say – I don’t want to say that, but it’s good news for us to see that macro situation in Turkey.
Juan Arburúa
Let me add up I mean this is a cost plus and is well advanced. It’s very much advanced in the general assembly and to the picture of how we are in that project and we procure almost everything. Construction is advanced and then we will have put together with the customer is keen to run. And if we are lucky, I think it’s going to be the PTA job done in the fastest pace ever, I mean second to none. So in a market that has been in terms of construction and procurement, as Eduardo said, quite good for both investor, obviously SASA and ourselves.
Robert Jackson
Okay. The second question is related to you mentioned that projects awarded in 2021, they’re passing on to the procurement phase. I mean is that the majority of the projects? I mean any idea of what level of those projects are going to be passing on over the next couple of quarters on to the procurement phase?
Eduardo San Miguel
Most of them, you can assume all of them.
Robert Jackson
Okay. And then the third question and final question, regarding the INEOS project and bearing in mind that it’s in Belgium, I know it’s a cost plus, but your experience in Belgium hasn’t been – or you have had some bad experience there. What can you tell us about the measures you’re taking to reduce any risks in that project? I know it’s again early days and bearing in mind it’s so important. But again you have had problems there. How can you comfort us that you’re taking all the measures possible to reduce those risks? Thank you.
Juan Arburúa
Okay. That project already has started. We already have here in TR the 300 professionals on engineering, procurement and even working – and logistics working with the customer. A very large number of professionals from INEOS is already coming and working with us here. We all realize how difficult it can be to build such – in Belgium and we’re working on it. It is cost plus, we’re working on it and it’s going to be – we’re working on it, it’s going to modelized.
We’re going to be working and construct through models. We have to decide together from where. We look in different – evaluating and interviewing different locations. We’re going to together minimize the direct construction there. We’re already working with them and how we are taking – I’m not going to say taking our time there. We have to define and construct the job on a cost-plus basis, yes. But with the responsibility of doing the best construction design so it can be constructed first of all with models and then finalize those models in site and install the equipment in the more constructable way. So I honestly believe that it’s going to be an extremely successful job for both INEOS obviously, who is the investor, and ourselves. So I’m not going to say we’re taking our time, but we’re working very hard for that to happen.
Robert Jackson
Okay. And just lastly, regarding you mentioned that there are a lot of clients are delaying final investment decisions a couple of quarters. I mean is it a couple of quarters or just one quarter? I mean, any messages there regarding that that could be – from your conversations with the clients that it could be just one quarter? And maybe it also sounds like that you may be able to be more selective in terms of the projects that you will tender for.
Juan Arburúa
Robert, we have good expectations for the fourth quarter of the year. A few customers we already presenting bids within the next couple of months, August and September. We’re presenting bids. Bids which have been presented in July has been delayed just a couple of months, but it could be some slippages. Slippages not because of uncertainties, just because they are big investment decisions so the awards take time, take a lot of time. They’re big investments; big investments in petrochemicals, big investments in gas; and they take time from the time you prepare the bid and we have it prepared. You send it to the market and we’re going to be sending it in weeks.
And then they do the tabulation and they do the awards. We already experienced three or four weeks of delay and that’s why we say that it can take one quarter and even some investments two quarters for that to happen. But last quarter – towards the end of the year and beginning of the next one, we are optimistic that things may happen.
Robert Jackson
Okay. Thank you very much.
Operator
Thank you. [Operator Instructions] The next question comes from James Thompson from JPMorgan. Please go ahead.
James Thompson
Great. Thank you. Thank very much for the presentation, gentlemen. Juan, I just wanted to ask a little bit around the kind of construction piece particularly in core markets in the Middle East. So I just wondered I mean obviously revenue started to pick up this quarter and you’re guiding to a pretty material pickup in the second half. I just wondered if you could talk about kind of mobilizing people to site. Clearly that’s been a problem with COVID over the last couple of years.
And obviously if you are mobilizing people faster, I guess project progress can pick up from here. If that is the case you’ve got in mind – I mean obviously there’s been a bit of discussion here also around kind of FID delays. But if things are easing, do you see kind of more urgency particularly your core customers around taking some of these larger investment decisions in the second half and it looks like the pipeline is pretty good for the first half? So yes, a couple of questions there just in terms of actual kind of boots on the ground, what’s the environment like and what does that mean for kind of customer urgency to get things done? Thanks.
Juan Arburúa
James, I think when Eduardo was saying that things were getting normal and also he put an example for instance that our construction workers from China, they are already willing, bidding, responding to us and moving to the site which is obviously a big change. Construction workers from local companies. We have to bring workers from India and Pakistan for bidding. They’re competitive again and they are willing and moving workers to the site to the Middle East and that was an issue. That was a big issue so the question is very well addressed. That was a big issue a few months ago because COVID, because many things. Now what we’re experiencing is that we’re getting offers again. Our subcontractors are willing to mobilize. Our team is willing to mobilize and we’re already mobilizing.
And our customers and ourselves, both together, we’re in good conversations because they need to rush now. They didn’t want to rush in 2020, 2021 and now they need to rush. They need to – there is an opportunity for them if they rush and it’s an opportunity for us if we rush. I think that it’s an opportunity for both. It was not the same in 2020 or 2021. I mean we wanted to do it, we wanted to rush and it was impossible. So that’s the big change and it’s not – and that’s what we call normalization, which is good. And that’s what we call that we have a very positive dialog with our customers, which are all-time customers and sometimes new customers, within this environment to work faster and better. And I think we can and it’s being translated in higher revenue and better results just now.
James Thompson
Okay. Thank you. Thanks for that. And then just secondly, I mean, sort of following on from your very large pipeline and things stabilizing. Can you talk a little bit about your ambitions on pricing? I mean clearly you’ve got an ambition to return to that medium-term EBIT margin, but I’m sure you’d like to do better than that ultimately. So maybe you could talk a little bit about how kind of ambitious you’re being at the moment in terms of pricing on the jobs that you’re bidding for 2023 in particular? Thanks.
Juan Arburúa
I mean I think in this market and in these market conditions and that’s how we have been pricing over the last year and we had acceptable number of awards. I mean we not by any means down price anything and there is no need to down price. There is need and customers what they want are fair prices and good execution strategy and capacity. I mean customers are looking for engineering capacity, for logistic capacity and for construction management capacity. So that is going to give ourselves and our customers an opportunity to bid competitively because there is competition, but within acceptable margins.
James Thompson
Okay. All right. Thanks, Juan. I appreciate your answers. I will hand it over there.
Juan Arburúa
Thank you very much, James.
Operator
Thank you. Your next question comes from Alvaro Lenze from Alantra Equities. Please go ahead.
Alvaro Lenze
Hi, thanks for taking my questions. I wanted to know regarding the Touat Gaz project. Of course you’ve already recognized the provision for the payment of the warranty. I wanted to know whether there are any pending accounts receivable in your balance sheet that could be at risk due to the negotiations and the potential arbitration regarding change orders and claims. And also do we have any news flow on the other contract with Sonatrach for Hassi Messaoud?
Eduardo San Miguel
Alvaro, with the accrued provision, any account receivable in the Touat Gaz project is covered. I mean there is nothing left. So we are properly covered. There is no risk. And regarding Hassi Messaoud, there are very few accounts receivables in our balance sheet, I would say almost nothing,
Alvaro Lenze
Okay, thanks. And then any update on the projects for Gazprom and what could we expect from this going forward?
Eduardo San Miguel
Projects are terminated. We have collected the money from the client. I think bonds are coming back. We have not received them yet, but I’m not concerned about that because the termination has been in full agreement with the client and there are no problems at all.
Alvaro Lenze
Perfect. Thank you very much.
Operator
Thank you very much. [Operator Instructions] There are no further questions. So I give back the floor to the speakers. Thank you.
Juan Arburúa
Thank you, Alvaro, as you were the last one [indiscernible] questions. And thank you to all of you for listening to this presentation. We will finish. If some of you are taking some holidays now in August, enjoy your holidays. I’m going to try to skip as soon as I finish. Thank you very much for listening again and we’ll talk again in the next presentation I think will be November 16, I have it written here. Thank you very much to all of you.
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