2023-07-28 08:44:06 ET
Técnicas Reunidas, S.A. (TNISF)
Q2 2023 Earnings Conference Call
July 28, 2023 05:00 AM ET
Company Participants
Eduardo San Miguel - Chief Executive Officer
Antonio Alonso-Muñoyerro - Head of the Investor Relations
Juan Lladó - Chairman
Joaquin de Ayala - Head of Truck Energy Transition
Conference Call Participants
Ignacio Doménech - JB Capital
Roger Kevin - Kepler Cheuvreux
Robert Jackson - Banco Santander
Presentation
Eduardo San Miguel
Hello. Good morning. This is Eduardo San Miguel. Before entering into the presentation, I would like to introduce you all Antonio Alonso-Muñoyerro, who is the new Head of the Investor Relations Department of the company. He replaces Joaquin de Ayala, who from now on is the Head of the Truck Energy Transition unit. Thank you. Joaquin is with us today as well. Thank you. Thank you for your support this five, six years, Joaquin. And now Antonio, you have the floor.
Antonio Alonso-Muñoyerro
Thank you. Thank you very much, Eduardo and good morning, everyone. It's a pleasure to have a chance to say hi to all of you. I will do my best along with Thomas, which you all know to provide the best quality service you expect from this position. So thank you very much. And now, let me welcome to you to this results presentation of the first half of 2023. It will be conducted by our Chairman, Juan Lladó; and our CEO, Eduardo San Miguel. It will take around 20 minutes. And afterwards you will be able to address all your questions. So Juan, please you have the floor.
Juan Lladó
Hi, hello everyone. Let me congratulate, Antonio, Joaquin, for the new challenges, which are good challenges but also fine challenges, and I'm sure they're going to do great. Let me start in today's presentation. Eduardo and I will be driving you through a summary of TR results for this first half of 2023. And then I will start with a review of our commercial activity. And what you can expect for the upcoming quarters? I will also adapt you on the recent evolution of track, which is our low carbon technologies new business unit. Eduardo then will move on to give you an update on the most relevant milestones, recently achieved on our going projects, our production, our execution, very important to us. And as usual, Eduardo will explain to you the financial figures for the period. And then finally, I will conclude the presentation with a guidance for 2023.
Start with the commercial activity. This is to me a rather large and complex slide. So let me walk you through this slide. As I want with it to share our conviction that this is going to be a great year for TR on the commercial front. The year, in which high-quality awards will comfortably surpass around your sales. A year that will confirm our good times ahead of us, with what we call the investment super cycle. And we call that way when we did our capital increase not that long ago and it's happening.
In the slides that we showed to you three months ago, we started or we stated that we were facing the three largest pipeline ever had. We were reaching and we're still there close to €70 billion for the next couple of years and that's the pipeline that we maintain. So let me do a further analysis. Only in 2023, TR is expected to submit bids for a total of €26 million. And let's do a breakdown of this. The breakdown is that €13 billion in natural gas projects that are already presented. More than €10 billion in petrochemical and refining development and almost €3 billion in energy transition projects. Those are the €26 billion, altogether that we have to present and we are presenting in 2023. So out of this, what are we now? What we have already done?
As of today, TR has already submitted bids for a total of €11 billion, altogether with the three weeks. Debates follow the expected sequence of investment waves that we have showed to you in our last presentation. We have the first wave of natural gas, petrochemicals and low-carbon technologies. And even more important as of today, I can confirm and this is very important that within this €11 billion that we have already submitted, this is very important. First, we have been declared preferred bidders in projects for a total of €1.8 billion. Being selected for preferred bidders signifies that we are already negotiating final terms with our customers.
And second, as important as the first point, we have been declared front runners in additional bids for additional amount of €2 billion. Being a front runner really -- as I said to my team is for us to lose, we should win. I mean, we have to get those jobs. Therefore, I can be very optimistic and I am optimistic to deliver to you good news in the upcoming months from the bids that we have already been presented. We are being selected as preferred runners and preferred bidders.
There is more is also important that this is this not the end. We're still going to submit bids for another €50 million from now to the end of 2023. So in this regard let me stress that TR is not a short-term business. This is not a trading business. This is a long-term business. And we have to manage it as such. It pays to be -- it pays to the company to our shareholders all the stakeholders to be patient and we will be patient and selective.
Patient and selective to be well selected and we are being well selected and we're striving to get a high-quality and profitable backlog. We have been patient because we think that the projects we're currently negotiating this is very important are the right ones for TR. The projects that we want to have that the ones that better fit our know-how or capacity and they are consistent with our derisked strategy and therefore there the ones that we deliver stronger and more stable margins.
So after this complex and dense slide let me do a wrap-up with a simple one. Now with a simple slide let's do a recap of the full picture of a commercial situation. And sorry for repeating myself on and on, but I think it is important to have a crystal clear picture of this commercial outlook for the year.
In the first month of the year, we had -- we were awarded the new fertilizer plant that KazAzot is developing in Kazakhstan. We will also develop a new regasification plant in Germany very important one. And that was €0.5 million, but if you remember well we put together the deal with the two construction companies that we trust more for both civil and mechanical. And we have to put together a very good and which will be a very successful deal.
And furthermore, we secured to track several key energy transition projects for clients very important to us or long always all-time clients such as Cepsa, Repsol and Atlas Agro. All-in-all, we have already secured €1.8 billion in awards.
On the other hand within the €17 billion pipeline we have already put forward bids for €11 billion. And the outlook looks very positive. We have been selected as preferred bidder for €1.8 billion in awards and we should be announcing awards -- those awards very soon. And we were very well placed we're extremely well placed in more than €2 billion of other new projects which we have to really focus with our customers because as I said to my team is for us to lose.
In conclusion, we are very comfortable. I am very confident in surpassing the €5 billion threshold in terms of new awards for 2023. If and I – we will be stating later, this confidence will lead us to include this figure as we haven't done it before as part of our guidance for this current 2023 year.
Let me now move, which I think it is important to the last wave. It is very important, the last wave and eventually become a truly important wave. Let's move to Track. And later I will explain how the hardwork [ph] of Track here now with his low-carbon technology business unit, is already bearing fruit in all many different fronts and technology.
With this slide, as we are extremely busy. You can see we're extremely busy in all dimensions of the low-carbon technology. In this slide, we have selected a sample of the result of our intense work in this business -- in these waves. Up to the first quarter, results presented back in May, we had already announced three important awards that I'd like to repeat is that I do believe is very important.
We were awarded a bit potentially converted into a large open book for a green fertilizer company Atlas Agro to develop a zero carbon nitrogen fertilization plant in the USA, which would include TR's technology in metric Técnicas and fertilizers. Two very important as well in this case is engineering, is not volume but quality. We've been awarded the engineering procurement, management and construction management to develop for Cepsa, our good customer the second-generation biofuels plant in Huelva. And this happens to be the largest project in this kind in Southern Europe.
We happen to be an engineering company, working intensively with them. We have already started. And finally, with a good customer Repsol, we were awarded the engineering the procurement and management of all the electrification, of two very big petrochemical complexes for Repsol, one in Portugal Sines, and the other one in Spain, which is the first step to recoveries petrochemical sites.
And you may be wondering, what have we done over the last two months and things are happening and happening very rapidly and that's the message that I want to expressed in this presentation. A memorandum of understanding, we have signed a memorandum of understanding with the IFC, which all of you know, that is the World Bank subsidiary for the private sector and the objective is to develop carbon technology projects in Eastern Europe.
IFC is one of the biggest financiers in developing the private sector, all these industries and we put together a very intense and collaboration memorandum of understanding. The collaboration seeks to support the development of projects, and facilitated transition in low-carbon technologies, which will promote decarbonization, carbon in all the intensive industries.
Obviously, we'll have to work very hard in the things that we are very strong, will include hydrogen and all its derivatives, biofuel and all its alternatives, in the different technologies for low-carbon units. This agreement is relevant as the investment in Eastern Europe countries, see no carbon technologies are expected according to external analysis to be more than €35 billion in the coming years.
And also, it's important to say that all these countries produce about 35% of the total CO2 emissions in Europe. So, we have a lot of work to do and a very good memo of understanding in time. We're working hard.
You might be wondering what happened with the US, that we talked to you before. We already have the premises we have opened the premises. We're extremely busy and growing and we have already hired a new leader, and we are building up the project circulation team to take advantage of the attractive regulation that US has already put in place. So, we are already there. We are up and working.
And finally, we have another award, but unfortunately I cannot disclose the client. It's a good client. It's a client with whom we have worked before, and we know extremely well and we have been awarded the engineering services for a very green ammonia -- very green, I'm going to say a very big ammonia project in Europe. We will be announcing this award soon as customer allows us to do so.
And having done so, now it's time for Eduardo to move on with our production and numbers.
Eduardo San Miguel
Okay. Thank you. Thank you, Juan. Good morning, again. It's true the immediate future is a familiar promising as Juan has explained in detail, but we cannot miss the focus on executing properly the current projects of our backlog. This is why I would like to devote this part of the presentation to give some color about a few relevant milestones that have been achieved within the last quarter in different projects.
Before entering into the milestones achieved, I would like to highlight two messages. The first one is that, after three difficult years, we are almost back to full normality. And the second one is that, under this scenario of normality, we have secured the delivery of at least €1 billion of sales per quarter. And this is the minimum threshold we believe the company needs to deliver consistently solid margins.
Let's go to the slide now. At the top of the slide, we see our AtGas project for Amnok [ph], an expansion of its gas treatment facilities in that island for around €1 billion. As you know, the project is being performed by JV, where we are the leaders. The main scope of TR in this project was recently achieved with the completion of the load out of the last module, as you can see in the top right-hand picture.
At this point, the engineering, the procurement, and the module shipment is fully completed. The construction now is in charge of Técnicas Reunidas Partner at the JV and has 50% progress completed.
And now at the bottom, and regarding our petrochemical segment, I want to focus on one of the biggest projects in our backlog, the Olefins project for ORLEN in Poland that we are constructing together with Hyundai. In the same week, TR completed the transport of the Wash Tower to the site.
As you can see in the picture, this transport was very challenging. Due to its huge size, transport was done through the Vistula River, and we crossed by truck the city of Clutch during night hours to avoid disruption of traffic in the city. Engineering and the procurement are almost fully completed, and the construction phase is currently under development at full speed.
Let's take now a look at the refining segment. In this case, we have chosen two of the largest projects carried out by Técnicas Reunidas in its history, the DUQM Refinery in Oman and the CRISP Refinery for Exxon.
The DUQM project was awarded to the consortium formed by Técnicas Reunidas and Daiwa in 2018 for an amount of almost $3 billion. And during this third quarter, DUQM has started its initial operation and is currently ramping up to full capacity. We are particularly proud about the delivery of this project since a big part of the construction works were executed during the pandemic. The CRISP project for Exxon at the bottom of the slide is an expansion of the Singapore refinery and was awarded to TR in 2018 as well.
One of the big challenges of this project is that the process units are to be constructed as modules outside Singapore and have to be assembled at the site. During the first half of the year, several shipments with modules have already been sent from Thailand, and most of them are already installed in the site.
The project is also a good example of our continuous effort on improving the safety, both at the AtGas [ph] and at the construction site. We want to emphasize, that we have reached 24 million safe manpowers in this project.
Let me now give you an update on the evolution of Técnicas Reunidas engineering capacity in recent quarters. As we indicated during the capital increase presentation in April the engineering resources available in the sector front and dramatically over the last decade.
We also explained that, on the contrary, Técnicas Reunidas kept intact its core engineering base during that period. And now I want to strengthen the message that Técnicas Reunidas is ready to address the large investment supercycle.
We will not only keep intact our core engineering base, but we are also reinforcing our engineering team in Spain and stepping up the growth of our offices in the Middle East India and Chile. This will allow us to have capacity available at competitive costs.
The number of professionals, as you can see has increased 50% year-over-year, since June 2022 to reach a level of 8,700 employees today. And the growth is totally consistent with the commercial outlook that Juan, presented to you. Major waves of investments are coming. And we are getting ready to address them all.
Okay. Let's move to the figures of the first semester of 2023. In terms of sales, TR continues to record quarterly sales of more than €1 billion, reaching €2.2 billion in the first six months of the year. The figure implies an increase of more than 31% versus the same period of 2022.
The margin from our operations continues to grow quarter-after-quarter getting closer to the 4% guidance for 2023. The margin for the second quarter stood at 3.7%. This is the fourth quarter in a row, that sales are above €1 billion and that EBIT margin grows versus the preceding quarter.
Moving to balance sheet figures, as you can see in the slide, the net cash position at the end of June stood at €241 million. This figure includes obviously the €150 million inflow coming from the capital increase that was closed at the beginning of the second quarter.
And during the second quarter, as advanced to you in the capital increase presentation, we have put to work some of this cash. They both you need to repay about €48 million of our financial debt and to incentivize our suppliers to accelerate the project as fast as possible.
We are sure this is a wise use for the cash available. Revitalizing our supplier's cash cycle is the best way to reach on time new milestones to be envisaged. And that generates further cash to feed this positive look. Our financial goal is obviously to be certain to deliver on time projects to full satisfaction of our clients.
And now, I will hand over the floor to Juan, for the guidance.
Juan Lladó
Thank you very much, Eduardo. I have a very simple slide here. You see. So let me conclude today's presentation. Rate to rate in our confidence, on the positive commercial outlook ahead of us, using an additional unit expression, we can graphically say that the investment superrecycle is alive and peaking.
We all see that the first major wave of awards is already taking place all throughout the industry not only with us. I am confident and TR is confident to take a big slice of this first wave. We've gotten ready for it.
As we discussed before, we have been the clear preferred bidders and front runners for clients on several major projects. We're bidding and making decisions are the very final stages. This makes us confidence through enough to conclude our 2023 guidance. The expectation to surpass the €5 billion of awards. This figure will imply that we achieved one of the highest levels of order intake in TR history. And probably let me just order intake with good and well-derisked quality.
However, we don't expect this to be the beginning, the beginning of further wave of awards coming through 2024 and beyond. Project in these waves will be comparable not only in terms of size, but also in terms of their great and greater quality, which is what we're very much focused.
As for the financial guidance, let me confirm our target for 2023. Given our current backlog, we think we can achieve the €4 billion sales and very important a 4% EBIT margin. And in the mid-term future, we have the determination to grow. If market allow us to grow, we will grow. And we are convinced that we will achieve our strategic goals for the benefit of all our stakeholders. We will grow in sales, consolidate our derisked margins, and thus grow our bottom line and cash generation in 2024 with the normalized overall operation and on international variables, we should get back to you on these medium-term objectives. We're optimistic.
And now we will be happy to answer any of the questions that you may want to address or post to us. Thank you very much.
Question-and-Answer Session
Operator
Ladies and gentlemen, the Q&A session starts now. [Operator Instructions] The first question comes from Ignacio Doménech from JB Capital. Please go ahead.
Ignacio Doménech
So I would like to get a sense on how the higher margins are being achieved, any particular dynamics there?
Eduardo San Miguel
Ignacio, we have lost the line for a while. Do you mind to start the question again?
Ignacio Doménech
Yes. I'll start again. So the first question is on EBIT margin. Your 4% guidance in 2023 will imply delivering margins above the 4% in the second half. So I would like to get a sense on how these margins are being achieved and any particular dynamics that you are seeing here. Is there's any particular division that is better positioned or contributing more this profitability.
And then my second question is on free cash flow generation, I believe this was affected by higher outflows plans in…
Eduardo San Miguel
Sorry, we have lost the line again. But this is something, I'm going to answer to the first question and you can call later and we can try to understand the second question and answer it.
Yeah, we still believe that the expected margin for this year is going to be at 4%. I want to be clear. It's a fact that we are now delivering around 3.7% per quarter, and it's a small challenge. But it's not a challenge if you analyze that we are today concluding a number of projects and we are closing final settlements with our clients and with our suppliers. And our idea is that the outcome of these final settlements will give us these extra points that we need to reach this 4%.
To be very honest, I don't know if I'm going to be in the 4% in 4.2% or 3.8% because we are talking about I think €10 million or €9 million. But my target and we believe it's achievable and we will be doing this 4%.
Operator
Thank you very much. Your next question comes from Roger Kevin from Kepler Cheuvreux. Please go ahead.
Roger Kevin
Yes. Good morning. As the kind of maybe for EBITA [ph] , if you make the math around your guidance, you are basically implying that the H2 EBIT margin should be around 4.5% while the top line should not materially increase on a quarterly basis. So, what makes you really confident in a way that you can jump from a quarter to another from 3.5% around to 4.5% around?
And if this guidance is correct in a way, what does it mean for 2024? Because if you are also refreshing the backlog with a new wave of orders coming et cetera, that should be also the sign that your margin would be better in 2024-2025 than in H2 2023. So if those maths for the H2 are correct, does it also imply that the EBIT margin at Técnicas should be at least 4.5%-plus for the coming year? That would be the first question please.
Eduardo San Miguel
Okay Kevin. As I have told you, this €4.5 million potential margin of the second half of the year has to do with something very specific. We are closing a couple of projects that can deliver some extra points in the very last minute but this is not the average. This is not the average. So, next year I think we should be waiting something around 4%, which is the overall guidance we have been providing for the last, I would say, one year. That's my message, okay?
Anyway, we also have to be a bit conservative. And I don't want to say we are going to be conservative next year. But by any reason, we see that the projects can deliver a better margin. We need to analyze twice if we want to deliver it or not. We have suffered a lot in the last years. And I think to provide a guidance for next year of 4.5 -- 4% is the wise guidance. We can do it and it's challenging but it is not a huge challenge. It's something achievable.
Roger Kevin
Okay. Okay, understood. And to understand also the dynamics around cash flow for the coming quarters. Is there any specific elements to mention for the cash flow in terms of working cap maybe some -- if you have a very strong extra order intake, does it mean that you should receive some prepayment and that then should be a support for the cash? Any color here?
Eduardo San Miguel
Well, the cash flow probably would be one of the good news of the forthcoming quarters. I don't know about the quarter, but I'm sure in the fourth quarter we will see very relevant down payments in the balance sheet. And probably we will not have time enough to pay our suppliers with the non-payments received from clients. So, we will see a significant increase of cash in our balance sheet by the end of the year. That's for sure.
Roger Kevin
Okay, understood. Thanks for the time.
Operator
Thank you very much. [Operator Instructions] The next question comes from Robert Jackson from Banco Santander. Please go ahead.
Robert Jackson
Hi, good morning, gentleman. A quick question on -- related to the US and your development in that market. Can you give us any idea of what the challenges are for you having and more visibility in terms of timing or potential in the -- over the medium term?
Eduardo San Miguel
Maybe Juan, you can comments on what is developing out there.
Juan Lladó
Joaquin is going to answer this question.
Joaquin de Ayala
Hello, Robert. Yes well -- yes for the US I think we have very good expectations. We are -- we have already hired the head of product development for the United States based in Houston and he's working hard in making these first weeks to -- and having a deep impact, good conversations with product developers. We want to do some type of development with existing players there for hydrogen and for green ammonia projects, okay? And well, there when these two benefit from the IRA incentives that the US have put in place, it is something that we are studying, studying thoroughly. We are working hard with the McKinsey team that we have also there in Houston and we are also trying to see how we could enter into new industries like cement where we think that the carbon capital incentives under the IRA are going to be very attractive for this industry. So well, we are working. We are doing our homework and we expect to have good news in the coming quarters for them.
Robert Jackson
Okay. Thank you. And just another question related to the MOU with IFC. It sounds very interesting and a lot of opportunities there. Can you give us any more visibility in terms of where Técnicas or how Técnicas can see that MOU in their backlog over the coming quarters or coming year? And visibility there would be interesting. Any more visibility would be interesting? Thank you
Juan Lladó
Yes, with the IFC I think we entered into conversation several months ago and we have very good meetings. We are very aligned in the sense that we are going to develop projects, good projects for green hydrogen, for biofuels or carbon capture there. And we are trying to target I would say initially to largest meters there in the region. The geographical scope is -- the main countries around the geographical scope are Poland, Romania, Bulgaria, even Ukraine also of both is not at the moment I would say. But you know that here what we see is that there could be about from here to 2030 around €35 billion of investments, carbonizing the assets of these industries, okay? We are going to begin to identify as the first week of September, okay? We are had the kickoff meeting in the first week of September. And we are working I would say hard to prepare those initial meetings. We also expect to have good news in the coming quarters. We are -- we both institutions expect that we are going to have very good achievements under this collaboration.
Robert Jackson
Just a follow-up. Will you be competing with in those markets?
Juan Lladó
Let me answer you to that. I mean, we are moving into a new sector at the end of the day. I mean, we do have the know-how. We do have the engineering capacity. We have increased our capacity from engineering to structuring.
And the first thing you do when you develop, let's think it as a start-up you have to gain visibility. Not credibility regarded visibility. And I think that visibility together with the IFC it put us in a -- it's a jump forward very, very important. It's not the same to go by yourself knocking and doors. They're going together with the IFC, especially in those East European countries.
So what this is very important. That's why we wanted to announce it and make it public. It is extreme important. To be successful you not only have to be good you have to be seen good. And with them we're going to be seen good. The same as in the U.S., I mean we're good with Exxon. They know us. But we have to be seen good and believed good. And that's and identified a good project and that's McKinsey's wrong.
So I think we're working very hard in terms of visibility and visibility because we do have the know-how. Competition we don't know but probably our long-time competitors they're going to be there they're going to want to be there. I mean we're not -- I think we're very bright. So we have to compete in this world with also very bright companies and very bright managers and very bright initiatives.
Eduardo San Miguel
Let me add one thing to Juan. Going gives a lot of credibility to the investment proposals that we are trying to build okay.
Robert Jackson
Okay. Thank you very much.
Operator
Thank you. There are no further questions in today's conference. I now give back the floor to the speakers.
Juan Lladó
Okay. Thank you very much. It has been I know was not a good day Friday end of the month. And you all of you are very busy. So I have to thank you all of you the first thing in the morning is starting and walk up and do the reports.
So, thank you for your time. Thank you for your patience and understanding and thank you for listening to us. We'll be talking to you in November, I understand. Thanks a lot again.
For further details see:
Técnicas Reunidas, S.A. (TNISF) Q2 2023 Earnings Call Transcript