Tecnicas Reunidas SA

MAD:TRE

Earnings Call Transcript

[Unknown]

Hello, good afternoon. This is Joaquin Perez de Ayala. Welcome to this results presentation of the first quarter of 2022 that will be conducted by our Chairman, Juan Llado; and our CEO, Eduardo San Miguel. It will take around 20 minutes and you can pose your questions after that.

And now I give the floor to Mr. Juan Llado.

[Juan Arburua, executive]

Hi. Hello, everyone. Let me start this presentation, and let me go through with a quick summary of today's presentation, as I've said.

First, I will review the main awards that have been granted to TR in this 2022 first quarter -- well, year-to-date, which I think are very important, and it deserves some detailed explanation. Secondly, Eduardo will take you through the first quarter results. Third, and this is new, Joaquin Perez de Ayala, who is now TR's Head of Energy Transition, will give you an update on who and how we are developing the energy transition business.

And we'll finalize with me again. I'll do a quick presentation with a review on how we are progressing, and we are progressing with discipline and success along our 5 main strategic lines.

So let me start off with our year-to-date awards. And here we have the names. I mean we have been right in the details. But I think there are 2 things that are very important to stress for TR and for us. It's important for me this job. First about the [ ties ]. This is a huge project. And according to INEOS numbers, the investment will be above EUR 3 billion. This will make -- will be the largest capital investment made in Europe chemical sector over the last 20 years. This is a job that has been awarded to us, to TR.

So secondly, I want to highlight the endorsement pioneers of our engineering capabilities. It has trusts TR on this very important -- this key ethylene plant that will be the heart of a very important petrochemical complex. For this purpose, TR with the support of INEOS team together, will have to mobilize more than 700 professionals. Out of those 700 professionals, close to 500 will be in Madrid here, our center of excellence together with INEOS team. And then we'll have to move, and in parallel to the site and to the yards, as this job is going to be through models.

It is very important to stress the environmental features of this job. We're going to be advancing -- I'm sorry, we're going to be using together with INEOS advanced technology that will be applied to this project, to make it the most efficient energy project. It will be the most energy-efficient environmental, sustainable facility of its kind in Europe. We'll do it together and will be successful. It is true by the way we have structured this project that we're not going to be bearing direct construction risk, which -- it doesn't mean that together with our customer, we're not going to be very much focusing on quality, schedule and obviously budget.

The second major project awarded to us is the Qatar Gas Package 4. I'm extremely happy with this job because this is the second job we have secured with Qatar Gas in the last 9 months. It is extremely important for us to repeat with customers. It shows, and it had 9 months to think about it and see it, that Qatar Gas, extremely important investor trust -- is trusting our engineering excellence, which is something I'll be repeating through this presentation, and fully supports our goal of becoming a key suppliers of their large future investment program. In this very large project, which is about $6 million also includes an option to support sulfur production for the 2 additional LNG trains on the North Field South Project of Qatar Gas.

And obviously, we have a structure and joint venture with Wilson with -- TR will be leading this project with 70% and we'll be devoting here in the grids close to 400 engineers working again together with Qatar Gas. So it's extremely successful story for us.

And finally, but not least, TR was awarded at the very beginning of February, 4 natural gas combined cycles with 4 different type sites. So there are 4 different projects. They are 4 different -- pulling into one, but there are 4 different contracts. And we're working directly for Mexico for all Electricity Commission, the largest company in the electricity in the sector in Latin America, for a total amount of $670 million. We have done combined cycles in Mexico very successfully, but for independent power producers, for investors. This is the first time that we worked directly for Commission Federal, and we're extremely proud of working for them.

And how we have structured this job. We have structured the job with the Spanish company, electromechanical company, TSK, that we know well, and we have very success stories with them together, and will be used the turbine technologies provided by Siemens and Mitsubishi. You all know that we have extremely good experience with these awards, but it shows, and we have the trust of the leading cutting edge technology providers in this combined cycle sector.

So why we have structured this job this way. We have structured this job this way because we need and we want to focus on quality and profitability. We have what we consider one of the best electromechanical companies in the sector, happen to be Spanish, and we know well. Obviously, we have to partner with the technology provider, Siemens on one side and Mitsubishi in the other. And finally, ourselves, that we are going to be focusing in our reviews for projects as well on the engineering. So the objective here is not volume. The objective here, obviously, is quality, schedule and profitability for our customers and the 3 of us. So this is an example of how we're moving towards a profitable business.

And having gone through these 3 awards, which I think they were very important and very significant, I leave the floor to Eduardo San Miguel.

[Eduardo San Miguel Gonzalez De Heredia, executive]

Okay. Thank you, Juan. Good afternoon, everyone. Let's move now to the financial section.

In this first slide, we have a brief summary of the main figures for the first quarter. Starting with sales. We have delivered EUR 773 million, which means an increase of 10% compared with the previous quarter. So growing, but still far from our pre-COVID levels that were substantially above EUR 1 billion per quarter.

In terms of operating results, the EBIT figure is EUR 7 million and a margin of 1% over sales. This still small margin has to be very positively evaluated as it has been achieved with a level of sales that is well below our fully normalized levels. As I stressed in my previous presentation, sales increases are the key to deliver higher margins in line with our medium-term objectives.

The EBIT adjusted by the costs of COVID is EUR 13 million. To understand this adjustment, I need to elaborate a bit about accounting rules, and sorry for that. All our projects are booked following the percentage of completion method. And so as projects impacted by COVID in the last 2 years continue to progress in 2022, some past COVID effects are reflected in the current quarterly figures.

The management of the company obviously is only focused in maximizing the non-adjusted EBIT. And I believe, adjusted EBIT provides good information about the underlying profitability of the business in this first quarter.

And finally, moving to cash. We finished the quarter with a net cash position of EUR 61 million. I will talk about this figure later. Last quarter, my method was the effect from COVID on sales and margins would gradually subside throughout 2022, and that would translate into better sales and margins, especially in the second half. Now I can confirm that recovery is real, and I can -- the reason basically are the following.

First, the project we programmed during COVID period are now moving to its ordinary pace of execution. Second, projects awarded during COVID, which are moving now to the procurement stage, always deliver higher sales. And third and finally, all other projects that are advancing faster since COVID disruptions are disappearing, tend to deliver better margins and better sales.

But we still have to be very cautious. The world's perspective have changed quite a lot since we last talked in February, and not for the better. Events in Ukraine and China in the last month have created major challenges to the operation in our sector. Inflation of raw materials that came after COVID has deepened because of the Ukrainian war, and we also face chain and workforce disruptions linked to the confinements in China. This context is resulting in some unprecedented factors, like suppliers or subcontractors rejecting to provide [ FIM ] quotes or quoting at prohibitive prices to cover themselves against the background volatility. In any case, TR is working hard to tackle the situation, that we believe it will improve across the year, and is working hard as well to reach the goals targeted for 2022 in our guidance.

Let me now move to the financial profile. As I announced it in February, the improvements of the cash profile is one of our main targets for this year. And as you can see in the slide, with the [indiscernible] support added to our balance sheet, together with our cash preservation policy, we have enhanced our financial situation. But we are still facing tensions. Although oil and gas prices are standing at much higher levels, payment practices from some of our clients are not yet fully normalized.

As [indiscernible] contractors, we intend to pass to our subcontractor these payment terms. However, this is not always possible, or even desirable. When the speed project execution is impacted or when subcontractors are financially weaker, we have to advance as much cash as we can to those subcontractors. I personally believe this cash tension will persist this second quarter. And I also believe this tension will ease progressively the second half of the year.

And now let me give the floor to Joaquin who will drive you through an update of the energy transition business in our group.

[Unknown]

Thank you, Eduardo. I am very pleased to be today here with you to explain our activity and our achievements in the energy transition landscape.

First, I would like to review with you our offering in low carbon solutions. As you can see in the slide, we provide an ample portfolio of products. We are in hydrogen and its main applications. We are in different bioproducts and circular economy schemes. We are in carbon capture and storage, and we are studying if and how to be making emission control and management through new services.

With all of them, our offering will cover more than half of the technologies that will be needed to be net 0 by 2050. On top of that, you already know that there's a lot of investor appetite towards the energy transition, and we want to support these investments, which are our clients. Therefore, we have structured a dedicated business unit that will coordinate all our efforts in decarbonization projects. With this step, we will accelerate our position in low carbon technologies.

So when we combine this portfolio of technologies with our services, we become an attractive partner for the execution of low carbon projects. Our productivity will be providing our already known services for all the products, from conceptual assessment to full EPC execution. But we are seeing a lack of maturity in this new scenario. So we have decided to do development efforts to make projects happen and secure FEED and EPC jobs. We want the investors. We just developed projects to accelerate our growth. For these services, we are working for companies of the energy industry, for energy-intensive companies and for the investors in energy infrastructures, and sometimes for a mix of all of them. And as an upside, we help companies and investors to successfully move energy transition related technologies to industrial scale.

Finally, we have been actively working in the last year to see if we can build new recurring service lines related to decarbonization. We have already identified carbon capital and Storage as a Service and methane emissions control and management. We are now in the final process to decide.

So as you can see in this slide, the market already recognized our capabilities. We have been awarded flagship projects by the known players, projects that cover the full range of low carbon solutions we provide. You can see them on the left side of the slide. Some of them are already completed, others still ongoing. Just in the last month, we have won 2 good contracts for 2 early-stage hydrogen and bio-methanol projects that, if converted to EPC, will represent jobs of hundreds of million euros.

Now we are also involved in the development of 5 projects in different maturity stages. You can see them with a red line. In these opportunities, we are partnering with large and renowned industrials, energy companies and infrastructure investments. And let me explain the slide on the right. The main prospects, not all but the main, that we are currently following amount, to EUR 3.2 billion in potential EPC contracts, EPC contracts that could be awarded between 2022 and 2024. Of them, 72% are originated by clients and 28% come from our development efforts.

Let me summarize these 3 slides. We are in the energy transition business. We are very well positioned, and we are actively managing our growth.

And now I give the floor to Juan.

[Juan Arburua, executive]

Thank you very much, Joaquin. Before concluding today's presentation, as I said in the introduction, I'd like to spend a few minutes recapping the score card of this quarter in terms of the 5 main strategic line of the company, 5 mini-strategic lines of TR that we have already outlined in previous presentation.

The first line is our focus on business that will accelerate energy transition. We have made major progress this quarter on the one hand, with the creation of a dedicated new energy transition business unit; on the other, with the award of 3 major projects in petrochemical and gas. These are traditional segments that they will be required, and there are required bigger investments under this very new energy scenario. The second and very important strategic line is the reduction of construction risk. Obviously, and has gone through the awards, the INEOS job is a good example as it is the way we have structured our jobs in Mexico.

The third line is too important is diversification towards new segments and new customers. In this regard, in this quarter or year-to-date, we have managed to gain 2 major customers, Commission Federal Electricity, CFE, and INEOS. And as important, we're repeating business and strengthening our relationship with Qatar Gas, with whom we had a very limited relationship in the past. Obviously, 0.5 and 5, and 4 and 5 efficiency, digitalization and Spain as a technology hub, goes together.

Four, the increase of our efficiency and the utilization of our process are key ingredients for our TR Transforma Program, which is already entering its second phase, and our customers have seen it. And five, Madrid is a technology hub for our operations, where clients are sure of having a deep pool of high-skilled professionals with the best engineering capabilities, is becoming already a success story. And as I said before, our customers -- our new customers are seeing, and that's one of the main reasons of the awards.

So we're doing well. We do well. And frankly, I personally believe and I personally feel comfortable that with this quarter, we have made substantial progress in these 5 strategic lines, and therefore, we are on the right path to accomplish our mid-term target, very important target, a target of achieving EUR 5 billion of awards and EUR 5 billion of sales, while earning very well deserved 4% EBIT margin that we had before.

So I finish with this. I finish with this message, these positive message, and thank you very much for your attendance. And now we'll all be very happy to answer any questions that you may want to address. Thanks.

[Operator]

[Operator Instructions] Your first question comes from Francisco Ruiz from BNP Paribas.

[Francisco Ruiz, analyst]

I have 3 questions. The first one is, probably you have said in the past that as you have qualified the participative loan as an equity, do you any strike price in order to compete into real equity in the future? The second one, Eduardo, you mentioned the new environment with the prices in Russia and Ukraine and increase on supply chain disruptions. Are you saying that this could delay the margin recovery? And if there is any specific project which has been impacted by this situation? And the third one is one you have commented on the new transformation plan. When are you going to be able to give us more detail about that?

[Eduardo San Miguel Gonzalez De Heredia, executive]

I'm afraid we have not understand fully the first question, but let me tell you what I understand you -- is the correct answer to the questions you have posted. The participative loan is hybrid. It's a hybrid product. It has features of equity and it has feature of fuel financing as well. So it is something in the middle. But it is clear for us is that this is something that the government ranked us for 5 years. And in the meantime, it's a kind of equity. So we consider it is an equity in many ways or in one way.

What the government is doing is, they are anticipating as the money we are all expecting to earn in the forthcoming 4 years. So it's a kind of dissipation of the money received -- of the money to be earned in the immediate future. So that's why we think it's fair to consider it as an equity. That's first.

Second, regarding the delay in the margin recovery. Obviously, the Russian war, the Ukrainian war should have some effect. There is lots of uncertainty those days, but we still believe that working hard, as I said, we can achieve the margins we have in our guidance. So probably, we'll take some more -- a few more months to reach this level of ordinary execution, but we still expect to be able to do what we told the market was going to be done this year. And for sure, in the near term, it's clear that this 4% margin is not being affected by the current war or whatever. So it probably has an impact in the very short term, but not in the medium term for sure.

And regarding the third question, the Transforma plan, what is the level of results Yes. The Transforma plan -- look, it's obvious, the war and the effects of COVID in China are affecting the operation. And I think there are 2 clear ways to be protected versus those effects. The first one is, we have to talk with the clients, and we have already done it. And we have been talking with all the major clients in the last 2, 3 weeks, and all of them have communicated us that they have the willing to collaborate with us, to support us in the actual circumstances. So that will be the first hedge against any potential risk regarding this cost increase.

And the second one is the Transforma plan. Transforma plan is very ambitious, and it has 2 different steps. First step has to do with the short term, and we already are seeing the effects in the numbers we are providing you. So when we talk about a 2% margin this year is because -- thank you to the existence of this Transforma plan that is offsetting some of the potential deviations that we are currently seeing because of the fact we have commented before. But the Transforma plan is a bit more futuristic because it has a lot to do about how the company will do business and will construct plants in the future. And I will see more in more intense effects of this Transforma plan from 2023 and onwards. But today, in my figures, there are savings due to the new way of doing things because of this new Transforma plant.

[Operator]

[Operator Instructions] The next question comes from Kevin Roger from Kepler Cheuvreux.

[Kevin Roger, analyst]

The first one will be related on your expectation in terms of phasing for the top line improvement and then margin improvement in the coming quarters. Because you have confirmed the guidance, so we should expect a quite a nice improvement in the top line. So I was wondering if you can provide us a bit more color on the phasing should we expect a gradual improvement or a strong pickup as soon as Q2? And the second question is related to the COVID cost to make a kind of split between the adjusted EBIT and EBIT. You said in your presentation that basically, it's related to the percentage of completion methodology, et cetera. So what should we expect for the coming quarters in terms of COVID costs in addition to what we had in Q1? And when should we expect the end of those costs, please?

[Eduardo San Miguel Gonzalez De Heredia, executive]

I will start with the second question. The amount of COVID costs that were incurred in previous year, and to be booked this year 2022 is EUR 16 million, so kind of be more accurate. But that's a figure assuming there are no new costs coming from COVID problems today. I mean, if -- but today, what we have booked in our expected figures is an impact of EUR 60 million for 2022 million. And regarding the -- how the sales will evolve this year -- but today, I am exactly in EUR 4,000 million. That's the most accurate expectation I have. It's not just an overall guidance. It is exactly the figure I have in my clarification. So I don't know if there is any further question regarding that?

[Juan Arburua, executive]

Sorry. I don't worry because when we see the figure now we see now it's EUR 770 million. You probably say, okay, in the second half of the year, you will have to be delivering EUR 2.3 billion. That's right. That's what we expect to happen.

[Kevin Roger, analyst]

Okay. So it means if I well understand that basically the, let's say, increase in the top line will be mainly focused on H2 rather than Q2, correct?

[Eduardo San Miguel Gonzalez De Heredia, executive]

Absolutely. That's correct.

[Operator]

Your next question comes from Robert Jackson from Banco Santander.

[Robert Jackson, analyst]

Question related to the energy transition for Joaquin. You -- in the presentation, you highlighted the project development is -- in the pipeline, you have -- 72% is from -- tendered by clients. In the presentation, it's interesting to see that there's no Middle East clients there. Is that going to offer a lot more potential in the longer term or the -- why is that that there's none at the moment? And the other question is in terms of the project development. Can we have an idea of, is there any new industries in that pipeline, such as Brazil? I think I know you're doing a project with INEOS in the steel industry. And can that offer a new sector in the future?

[Unknown]

Yes, of course. I think that the pipeline in the energy transition or our achievements in energy transition has been focused mainly to date in Europe or in Spain, okay? Because this is where we are seeing more activity for now, okay? But it's true that we are also following some prospects all over the world. We are seeing opportunities in Canada. We are seeing opportunities in the Middle East, okay? But the most mature market currently for energy transition in Europe and Spain, okay? And that's where we are currently seeing the largest opportunity. What that means for us is that we see a lot of space for growth in the future when we are -- when we move or we say, are more -- our largest markets now in -- where we are not in the other products, okay? That will be one point.

And then talking about product development, yes, it's true. I think this is an opportunity for us to move to other industries. We are moving currently in the steelmaking industry, but we are also seeing prospects for the cement industry, and we expect to see additional ones, okay? So I think energy transition for us is an opportunity to move ahead to move ahead in other industries where we can build additional capabilities.

[Robert Jackson, analyst]

The other question is, bearing in mind that the majority are in Europe, and that's where the higher costs are in terms of execution, what would the risks be, what sort of risks do you consider in this energy transition division?

[Unknown]

Well, the good point here is that in these type of projects, we are entering into in early stages, okay? So we are helping our clients to shape the projects, and we are getting a very good knowledge of the risks associated to those products, okay? So I think that we are quite well protected in this level.

[Operator]

Your next question comes from Alvaro Lenze from Alantra Equities.

[Alvaro Lenze Julia, analyst]

I wanted to go again to these new initiatives in energy transition. The first question on this one would be whether your engineering team has the expertise due to similarities with other projects that you have done in the past? Or whether to grow in these segments, you would need to go and hire more talent that has skillset that is adequate for these kind of projects?

The second question would be looking at the contracts like, for example, the one from INEOS, not asking for the specifics of the contract, but if you could explain us how the economics of projects in which you do not do the construction and procurement, but due to the management and oversight and everything. How the economics work in this kind of contract? Do they have a higher margin? I understand that they have lower risk, but do they have higher margin, the revenue recognition? How do all that kind of stuff work?

And then the last question would be stepping out from the energy transition -- sorry, again, on the transition. The services that you are looking for this recurring revenue type of business, when should we expect this to start contributing? And again, how the how the business works in this line? Do you have any peer or a competitor that we could look at to see how the economics of this recurring business works?

[Unknown]

I'm going to answer the questions about the energy transition. Well, regarding the expertise of our team, well, it's not only the knowledge that we have about different technologies that could be exported to these new ones okay? One thing that you can see in the slide that we have shared with you is that, we have an ample portfolio of technologies that we are currently following, not only in execution, but also in doing proposals and so on. Okay. So the market is trusting our capability in this regard. And it's not only a matter of technologies. It's also a matter of, I would say, procedures, knowledge, how to do business, how to do this type of [ work ]. So this is what is behind what we can offer to the market, okay?

And regarding the recurring revenues, this is something that we are building now, okay? So we should not expect a huge share of revenues in the coming quarters. This is something that we're building. But it's true that we are seeing other competitors that are doing similar services in the -- I see that you can follow them, I guess that [ ACRE ] has also these type of services, other companies for carbon capture, you can also see some others. And for methane where there are some U.S. companies that are also working in this space. So I think this is something that we are -- we can compete with them for these type of services.

[Juan Arburua, executive]

I'll answer the -- I was talking about in INEOS before. I'll answer the question about the economics. This is nothing new. I mean we're not being creative here. This is the way the world works. You can work lump sum EPC where everything is on price, it can be EP lump sum and then construction management, which means you render services to supervise construction, and it's the customer who decides and pays directly to the contractors and you supervise the equipment that you have bought, and it's been installed and engineering that you have developed, and is being constructed.

And the most traditional, the old times way is that, we do the engineering with the supervision of our customers on a cost-plus basis. We do the full detail of the engineering from the most sophisticated to the single pipeline, so provided by the customer on a cost-plus basis. So they pay us as we work, and we have to work together to do. That's why and said we have to have the most efficient -- because they've seen us how we work the most efficient shop here in Madrid, the most efficient tax force working together with INEOS. Together, we place the order and we'll do the technical analysis of the suppliers. And then we award -- the final award is done by the customer. And he's the one who pays for them. We render all the services before they make their final payment.

And then together, we select the subcontractors from civil to the one who do the final electrical installation. And we do the valuation. We do the supervision, and it's the customer, obviously, who has paid our services and who is paying the super -- who is paying the subcontractors. And that's what in this market is called EPC, cost plus. And that's how we're going to be working. And why is the way? Because customers -- this is a very large investment. It's a very large investment that probably is – you are in a hurry, you cannot define and go and try to get a large lump sum EPC that would have probably delayed a job 1 year or sometimes even 2.

And that's the way that most of the jobs are being done in the U.S. and most of the jobs have been done in Europe. It's nothing -- the good news here is what I said before, is that, INEOS came to Madrid. We have worked –- been worked together before in the smaller jobs, and had decided that from here from Madrid, together, we're going to be developing this mega investment.

[Operator]

[Operator Instructions] There are no further questions. Dear speakers, back to you.

[Juan Arburua, executive]

Okay. I see there is no more questions. So thank you very much again for listening to us and posting all these questions. It's good for all of us, and we'll be talking to you in July. I understand -- I think it's the 29th of July. So thanks again, and see you there.