Investment thesis
Following on my coverage on TechnipFMC plc (NYSE:FTI), this is an update on my view after reviewing the latest 1Q results. In my opinion, the results were very positive despite the company’s higher-than-expected cash outlay for a larger-than-anticipated increase in working capital. What was notable is that FTI brought in a record $2.5 billion in quarterly Subsea revenues. The quarterly cash outflow was larger than expected but given the frequency with which large fluctuations in working capital occur, I do not view this as a major risk. Although full-year guidance has remained unchanged since the outlook provided during 4Q earnings, I do believe there is room for a guidance beat due to the encouraging progress being made on the Subsea inbound front. My overall recommendation remains a buy.
Subsea updates
In 1Q23, FTI received $2.5 billion in Subsea orders, with management noting that iEPCI, Subsea Services, and other direct awards accounted for 70% of the order mix, with iEPCI awards accounting for more than 50% of the total. In my opinion, the higher mix of iEPCI is a positive one as it has shortened cycle times to first oil and decreased operational risk thanks to its emphasis on front-end integration. From the results and call, I also expect to see increased in productivity and ease in operations, which I expect to be margin tailwinds. Management has organized the Subsea 2.0 model as a whole in a way that cuts down on installation costs and speeds up delivery. Because of the changes made to the FTI business model for Subsea 2.0, every order is now treated as a custom order and begins with product engineering. Customers’ cycle times and costs are reduced while customization is maintained with this method. By implementing this approach, FTI can enhance its profitability through the optimization of the initial engineering stage, standardization of project execution, and advancements in supply chain management and manufacturing efficiency. In particular, management has mentioned moving the production plants to a dedicated facility, with the justification that 48 Subsea 2.0 trees can be delivered in such a location, as opposed to only 16 in a mixed flow facility. Management estimates that using this new method could cut down on cycle times by more than half and cut down on project costs by up to a quarter. Sharing these savings would be a great way for FTI to win more customers, in my opinion. Turning the clock back to February, management raised their long-term Subsea outlook, anticipating $8 billion in Subsea revenue and 18% EBITDA margins, which equates to $1.44 billion in EBITDA. This is a ~40% increase from the prior target of $1.05 billion. While I am confident on this forecast (as I have written previously), I acknowledge that it might sound too far-fetched for the conservative investors as this marks a steep increase from 2022 levels. Therefore, I think that the recent update provided by the management this quarter, which highlighted various enhancements in the way they provide services and their business model, has offered investors (including myself) additional grounds to believe that there is a possibility of improving the profit margin through structural changes, rather than relying solely on market rebound.
Guidance
Regarding the company’s guidance, management reaffirmed their FY23 projections, but the anticipated outlook for 2Q23 surpassed expectations, with the company anticipating a 15% sequential growth and a 400 basis points expansion in sequential margins. Personally, I perceive minimal risk to meeting the FY23 guidance, primarily due to the fact that 90% of the targeted $6.1 billion Subsea revenue is supported by scheduled backlog execution and Subsea Services. While revenue appears promising, the aspect of the guidance that carries a higher risk of falling short is the achievement of positive free cash flow, especially considering the negative free cash flow in 1Q23. However, it is anticipated to reach $300 million for FY23, implying that the subsequent quarters’ free cash flow would need to be significantly higher to compensate for this deficit. Nevertheless, I would like to emphasize that this outcome is not unattainable, considering the weak 1Q23 was due to a major swing in working capital that should not keep repeating.
Conclusion
My overall recommendation remains a buy. Despite the company experiencing higher-than-expected cash outlay for an increase in working capital, FTI achieved a record $2.5 billion in quarterly Subsea revenues, which is a notable achievement. While the quarterly cash outflow was larger than anticipated, the nature of working capital fluctuations suggests that it is not a significant risk. Although the full-year guidance has remained unchanged, I believe there is potential for a guidance beat, driven by the positive progress in Subsea inbound activities. Considering the enhancements in services and the business model, there are grounds to believe that FTI can improve profit margins through structural changes rather than solely relying on market recovery.
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