Técnicas Reunidas, S.A. (TNISF) CEO Juan Lladó on Q1 2020 Results - Earnings Call Transcript

Técnicas Reunidas, S.A. (OTCPK:TNISF) Q1 2020 Earnings Conference Call May 25, 2020 10:00 AM ET

Company Participants

Eduardo San Miguel - Chief Financial Officer

Juan Lladó - Chief Executive Officer

Conference Call Participants

Mick Pickup - Barclays

Francisco Ruiz - Exane

Luis de Toledo - BBVA

Nitin Bhalotia - Praxis Partners

Eduardo San Miguel

Hello, good afternoon. This is Eduardo San Miguel. Welcome to this First Quarter 2020 Results Presentation that will be conducted as always by Juan Lladó, CEO of the group. We will take something like 15 minutes, and you can pose your questions in the Q&A session that comes after the speech. And now I give the floor to Mr. Juan Lladó.

Juan Lladó

Hi, hello. I don't know whether you can hear me well, I have a speaker a bit farther, so let me get a bit closer just in case. Okay. This is a presentation. As I can tell you that -- a Brazilian presentation because times are different and difficult. So the message here I'm going to within this context where are we going to go through this presentation, which is going to be brief is how are we managing TR within this contexts, this pandemic context. We'll do a review of our results, our balance sheet position and our results. And then we will do bit of some reflection about how do I see the future position or the outlook.

Obviously, we’d be caught by surprise, like everybody. It’s been a surprise to everyone with this big huge crisis with oil prices not only collapse that market were absolutely broken, customers are scared, nobody really knew what was going to happen the day after. And now we're facing and it's true, we don't know when we'll come back again to normal market. So, we’ll have to manage over the recession. And how are we and how do we with TR facing these circumstances. Very often I use the term lucky, because it's true, we’ve been lucky. Napoleon wanted to have lucky generals, and I think I can have a really lucky management as well, bright and lucky, because we faced it with a very solid backlog. As solid as ever. We faced it with all the projects, which from one day to another, we thought they could be terminated and they both have continued at different paces that continued. In some cases, we're doing preservation and maintenance in others that have just started we’re just doing the kickoff meeting, but all of them has continued.

As you remember very well and we will get into details further in the presentation at the end you know when I was presenting the year-end result I said that we already launched, not -- we already had an optimization program in place, the efficiency optimization, those are beautiful names, but at the end of the day what we have is a strong optimization-cost reduction program, that we launched more than 12 months ago. When we start the market with positives as we really thought that cost reduction efficiencies, optimization, they have to be done in good times, to be ready for bad times. In this case, the bad time came earlier than expected. But I'm happy to say that, today, the whole TR from top management to our engineers, retail engineers, they have been great, very happy and very optimistic to this plans, this programs.

We're lucky because we’ve planned and we've been planning to have a strong balance sheet and strong financial position. And as you've seen on the results, we have the balance sheet and we have also big credit support to manage a difficult situation. And number five is more of a view of the reality somehow none of our customers have to canceled their project. And that the pipeline, I mean all of them staying in the Middle East, some of the biddings that were going to take place in March have been postponed to July in those bits of public. The same has happened with Aramco. The same is happening in Kuwait and the same is happening with some large international and integrated companies.

So while those five points that you have here on the right and then we’re going to go in detail and further up, but is allowing us to manage this crisis with rather optimism. Why do I say that have a solid backlog, let me pass the slides here. First of all, because of our customers. I mean it is truly have close to €1 billion backlog and because of our customers and then you start by Sonatrach. I mean as you remember very, very well Sonatrach, it was in the market that has done a temporary award by the end of last year. Then by January, we went over there and did a formal signature, presenting the bonds and then they send us in writing the notice to proceed.

But it could have been a good example of cancellation and it has not been a cancellation. Last week we had the first, we never had it before, the first kickoff meeting between Sonatrach, Samsung and TR telematic. So the project engineering is launched and we’ll be adjusting the project to these new times that is a priority for the customer. We have extremely supported customer in this case and project is moving forward. So this is via our first and very important award of the first quarters 2020.

But all the customers, they have started projects. I mean the Aramco projects are critical for them. We're going to have to adjust to the newest schedules for the critical, the Exxon projects we're going to have to adjust to newest schedule as we don’t allow right now to continue mechanical erections in Singapore, but we will in a few weeks but all of them, you know there's solid investments. And if you look at it in a rather solid market with 55% is downstream and 40% is upstream, but most of it gas, which is a bit more resilient than fuel oil. So you know all of this together in this crisis, I wish it had been better but it's given us minimum two plus years of visibility.

And that said before that we have continue this backlog with our customers. That said, the first one we were talking about Sonatrach has started project working from home while we've done it, a task force of 250 Spaniards with close to 200 professionals from Samsung, from a project management team from Sonatrach we’ll all work together quite nicely for the recommendation and then we've already organized the job and we've started, we've started quite nicely and very successfully.

As a number of examples in less than a week, we have more than 5,000 engineers working from home, designing from home and the rate of problems that we were having, there was less than 200 a day. So while -- and when you compare the advance on a weekly basis, it was surprisingly, sometimes it was quite similar as we were working in our offices. It doesn't mean that now we're going to continue working from home forever, but I mean, we will move it -- it's not working, which is a fancy thing to say nowadays, quite nice with a very high productivity.

Procurement, we had huge challenges. To give you an example in some of our big projects in February, we moved the source from China to Italy, not very -- we didn't get it right. So, we have to in sometimes wait in some others do our telemetic inspections, virtual inspections quite successfully. And in some cases alternative sourcing and in some others with reprogramming the job and do, and work what can be supplied local waiting for the Italian, Chinese or American equipment for a later stage in the project. But it's in our DNA to reprogram our jobs together with our customers to whom I like to thank as well in this presentation.

And with the construction, construction has been extremely difficult in some cases. It has been stuck in some, for weeks in some countries. But we have demobilizations, quarantine, but all of them at one stage or another we will have continue. So while it has been difficult it's factored to another -- we're not in a very comfortable situation. I like to as well and all our subcontractors scared, working, complying with local regulations, they've all worked and we have at different a pace. Obviously, at different pace than we had expected. But we have given continuity to the construction operations quite successfully, very successfully.

And now I move forward to what we call the TR-ansforma project, optimization and efficiency. This is not a reaction to the COVID. I mean when COVID came, we were already here. I mean, the whole process is started more than 12 months ago, but it started to become last fall to reality. Well organized by teams and flowing down through the whole operations up here. I'm not very happy to throw numbers, because we want to be and we are extremely ambitious in all the cost reduction and optimization schemes I like to outline here.

Obviously, the corporate reduction is very important and is already done half, we've seen the impact in results. In procurement, I mean centralizing, standardizing, negotiating procurement. I mean, you have to realize that we procure more than €3 billion a year. I mean if we put together a profound scheme of optimization opportunity and capacities, there is money to be save, and that is money we're going to be saving for sure. And obviously, we’ve always claim that we were the best engineers but once we -- we went through the oil crisis of 2014, and we were developing our full resources in 2018 and '19, and I think it was time to review whether we could optimize our engineering, both our home office engineering and field engineering. A lot of inefficiencies in home office engineering translate to field engineering, a better design of our shops here and there translating to huge, very important efficiency in terms of timing, which is money and in terms of costs, which is money.

In all of that, it couldn't be done with a management team, a solid management team that is already in place, where we have to make the good ones like in any company and we would not -- and identify then it's efficient, like in any company with thousands of engineers. The [Indiscernible] skills as I said before it has to be done in good times to be ready when bad times come. We launched it at the end of 2018. It was fully in place by the end of 2019 and 2020 bad time scheme and already, that's the message.

If you put all that together, you know we are pandemic crisis surprise that. We are facing it with a strong balance sheet position, strong financial position. Our net cash it was expected because it was somehow announced on a pro rata to you, you're asking me one way or another with different words whether I could anticipate an improvement in cash, and I was saying timid-weighted maybe. The reality is we've ended up probably because we have good customers, good customers and we need to say they pay well. We have ended up this quarter with a solid net cash position. But most importantly, the net cash we have ended up with a strong liquidity position of. If you put them all together, about $1.2 billion liquidity, which is if you are together, the gross cash, which is the 600 million you see in the balance sheet versus 400 million you see net cash, together with the lines of credit that we have not used.

So again, this is good news that we have to have this, uncertainty is uncertainty and we have to manage making huge projects. We have to find ways to improve, to satisfy customers, to manage cash together with customers as most of the jobs has to be reshuffled somehow. In many cases, we're going to have to support some of our suppliers, which are not as strong and they're qualified and not as strong as us. So, we're going to run a difficult year, but I think we can run a successful year in terms of balance sheet management and liquidity management.

And after that, we have the first quarter results. The first quarter results could have been slightly better, it could have been slightly better too. I mean, I don't want to be very proud of the results. There has been already some delays translated in the turnover, which has its margins and some costs but we've been able to finalize March with 24 million EBIT, which I think is quite accepted, which is neighborhood of 2% EBIT margin. We have a bad number. It's not important, that it’s bad, because of its size. It's not important because it’s quarterly, which are the net financial results. I mean, in order to explain or running rate of financial costs is give or take is million plus a year -- a quarter.

And then we have, depending on the picture, ups and downs having to do with the picture of appreciation or depreciation of weak currencies that we have debt and cash balances that we have dollars, and that's what we have shown in the numbers about $3.8 million, which is a picture, the mark-to-market of our FX balance. And the bad news is it’s not very important either, but it is bad news is our financial assets. The picture of financial assets in the middle of the pandemic, markets comes down and have a hit, which doesn't have to be multiplied by four. If anything, we'll recover, which is close to €6 million.

That's why our net results that’s nice as I would have expected, because of that impact but definitely it’s not recurrent, which I mean is definitely is not multiplied by four. That gives us the profit before taxes of 12.4, which you compare to what we had a year ago is still quite good. And the net profit of close to [$29 million], which again is quite good comparing to fiscal 2019. And I think you've done your analysis of the P&L.

So I'll move forward to outlook and pipeline. I think I can not talk about outlook without talking about pipeline, I guess everybody -- so what comes next. I think we're going to have to wait, I mean, we have to let's be prudent. I mean when I say that, there is no cancellations, truly there is no cancellations. On the other side, there have been project are being postponed or delayed. Sanction of investments are being delayed. But on the other side, we're getting more than expected awards and brief qualifications to bid on FEEDs, which is still competitive FEEDs with rollover on sort of wait that that investments are coming. So, that's the second good news that allows me to be optimistic.

And third also with criticized is that 65% of our pipeline is in the Middle East, and I do believe that all of that is the Middle East who's going to come first. I mean, the first investment is we'll see the investments in all the Middle East countries. There were plans they're moving forward into petrochemicals. They need it and they're very much advanced into investments actually, in some cases we're already did it. So, this is slight move forward to the last one, which at the end of the day is quite similar to what I've said at the very beginning, and a lot of you may wondering, why we've not given the guidance. And as said that can not be doing, I mean uncertain things are still to-date to give a quantitative guidance.

But if you take into account where are we today with our backlog, our project, our cost structure, financial position and the pipeline, I can give you a qualitative methods, you know, we're doing good. We're going to end this year with acceptable results for sure but uncertainties are too great to quantify that. So the last sentence is a very important sentence that I'm optimistic, but I have to be prudent. I mean, if I would not put the term prudent here before optimism, you would have seen that I would have lost credibility. I mean today costs for prudent, we all have to be prudent managing the jobs, in billing, in managing the cash flow for project and trying to anticipate what's going to happen next, nobody knows. But as I said before, customers, balance sheet, pipeline backlog and all of our professionals allows me to call for optimism, prudent but optimism.

Thank you very much. And I'm looking forward to answer any questions you may pose.

Question-and-Answer Session

Operator

[Operator Instructions] Thank you. Your first question comes from Mick Pickup from Barclays. Please go ahead.

Mick Pickup

Good afternoon, and thanks for taking my question. A couple, if I may, just on the projects which are obviously going to see some form of delays at the moment. Can you just talk to me how your contracts are structured and how you cope with those delays? Do you end up squeezed against the deadline, do you have a contract that's flexible enough to allow you to extend the contract out? And secondly, I know you don't give the number at this stage, but when I looked back at the full year results, the big surprise was the big loss in power in the second half. Can you just talk how the power business is doing at the moment and obviously, with that comes how well is the oil and gas section doing?

Juan Lladó

I mean they've gone through the structure in all the contracts that is it was of course my year and of course my year allow us for extra time and indicated to customers accept there has to be of course majority in all of them. And in some cases as well, contracts are allowed to change the flow which is more difficult owners, changes, owners demand. I mean when a owner allow it, doesn't allow us to go into the site, you have allowed to claim. But we’re not only claiming the status.

Right now with our main jobs, say in the middle East, the big names in the middle East with whom we're working and we know working, I don’t want to start naming customers here. But we’re know working with the smaller ones, we’re all sitting down and saying, how are we going to do together analyze the impact obviously the schedule that is no -- I mean, I'm not going to say this contractual pressure. What we have is we have to do smart managing of the jobs. We're going to have less pressure on the delivery. So that we have to be ready and sit down with the customers to be ready. So when the customer says run, we'll have to run. But now it’s not for running.

Now its time for managing and trying to assert what is the new date that that job has to be in delivered, in extremity good -- all of customers from Northern Europe, Singapore and in South America and the Middle East, are sitting with us trying to analyze what is the impact on the job and how we can work together for a new date and in many cases a new cost.

Mick Pickup

And on the power?

Juan Lladó

And on the power, as we've announced before, we have -- and very importantly in the UK, we have problems and we had problems because of has nothing to do with COVID, had to do with Brexit, inefficiencies, unions and we were working and shuffling with a customer in deals to anticipate the jobs and run and we have close to 2,000 guys working for them to find ways so our customer could start making money be in operations by early this summer. Now COVID has come, I don't think we're worse than we were before.

But again, we’re working with customers in a way to now I'm talking the UK there from 1,500, we went down to 300 and now we have 800 guys working there, how can we restructure the job and move the job into a profitable one for the customer and it’s profitable. So we were not worse than we were before. We had Brexit impact and then we have COVID impact. And together customer and now we have to find a way to accelerate this whole thing. There’s a lot of uncertainty, let me tell you, because we thought that we could good launch the job this week, and now we've learned we cannot. But it's not this week, it will be in two or three weeks, it has to do with local norms and the day to day management of these unfortunate pandemic.

Operator

Thank you very much [Operator Instructions] The next question comes Francisco Ruiz from Exane. Please go ahead.

Francisco Ruiz

I have three questions if I may. The first one is regarding the working capital. If you could give us a reason of such a good improvement versus previous quarters? And as this level together with the level of cash is sustainable for the rest of the year. The second one is, if you could give us an idea of how much of the margin improvement this quarter is due to the TR-ansforma plan? And last, I understand the high level of uncertainty nowadays. But can we discuss already reaching above 3% margin for this year? Thank you.

Juan Lladó

I need to work here. On the last, I remember very well the all of you guys we’re trying to exactly anticipate that the working capital improvement of last quarter of 2019 will be reflected on the future quarters. And I was saying yes, no, maybe I didn't wanted to anticipate. Obviously, our feeling is that with the new backlog and our planning was showing and sometimes planned, it truncated that our working capital was improving and it has improved this first quarter. I cannot anticipate that it's going to be improving.

I mean, now we're going to have to go through different -- very difficult quarters, extremely difficult quarters with no awards that I can anticipate, important words, would get engineering, improvements of the job we already have but not important awards and managing jobs were in a difficult situation. So I don't foresee an improvement in working capital. And let me be clear about that, we have to manage cash very carefully. We have to -- when customers want to extended project, we have to negotiate with subcontractors and extend the same in exactly the same way, otherwise we'll have working capital problems.

In some cases, if this is more quality suppliers, we're going to have to support them. So, it's going to -- the term crafty is not very good. But now in the next two quarters, it's going to be quite craft, project-by-project, supplier-by-supplier and customer-by-customer, and very difficult to plan. So we have to do a bit of a defensive management, cash management defensive, but we have to maintain our suppliers and negotiate with our customers. And it's an equilibrium that we're going have to manage within the next two quarters.

So, if I have to give you a number, I couldn't give you a number but it’s going to be closer to last year working capital or net cash flows than what we’ve seen now. We can get to prices, because customers know. What was the --- you had another question, right?

Francisco Ruiz

The one on margins, or how much of the margin program comes due to the TR-ansforma plan, and if we could expect margins above 3% for the year?

Juan Lladó

I mean, we're going to be successful in TR-ansforma. I mean in this quarter we have seen any TR-ansforma practically nothing. I mean, this is the first quarter and it started this year. But I don't want all of us are growing expectations on TR-ansforma, or we going to start a company with a 10% margin. I mean, we've gone through extremely difficult times. We're going to start giving you as soon as we have some visiblity guidance. And the TR-ansforma is to make the TRs stronger to protect all our projects. So, we don't have to go and come back with bad news, and with profit warnings.

I mean, when you're optimizing you become efficient. I mean at the very beginning until at the very beginning for the first quarter, so for the first year, it has to protect the business and it has to protect the 3% margins that we would like to have and the 4% margins that we are very much looking forward to have. And if you see in the future that we're back in the 3% and 4%, is because we feel comfortable with the business and we feel very comfortable with the TR-ansforma efficiency program. But I'm not going to say this is TR-ansforma, it's all together. But we if we can protect TR’s project one-by-one with a strong contingency to be competitive and then translate into a rather strong and visible margins, I think we’ll be winning new battle.

Francisco Ruiz

Thank you very much Juan.

Juan Lladó

I mean, the third question is, if the margins, it is still possible. We'll have to see at the end of the year. I mean, the number of uncertainties is -- and I don't want to, I'd rather not to answer the questions, because I don't know what's going to be possible or not in the next six months, so I don’t know…

Operator

Thank you [Operator Instructions]. Next question comes from Mick Pickup from Barclays. Please go ahead.

Mick Pickup

Can you just talk about the conversations you're having with clients? I understand and I realize COVID has an impact. But the oil price has dropped significantly, a lot of your client's balance sheet and cash flows are totally different to what they did back in January. So given that they're likely to look lower costs on these projects. Can you talk about how they're coming to the engineers and the front end guys and asking you to do something different to make these projects work?

Juan Lladó

Nick, but if you can rephrase the question again. I got a bit lost.

Mick Pickup

The oil prices have come down, a lot of your clients don't have the cash they once had. They want to get projects significantly cheaper. I don't think you can do that by going after a contractor who makes 3%, 4%. So, I'm wondering if your clients have come to you and asked you if you could do things differently. Are they more prepared to listen?

Juan Lladó

I mean, in all their jobs, they're new. I mean they're less than 50% advanced. None of our customers have said now, can you get things cheaper and give it back to us, because they know what we have to negotiate with them is different milestone and payment structure as the whole priority has changed different schedule, which happens for costs. Where are the extra costs that we've got, we have to still decide for one more year, even though we can be very efficient instead of having 300 guys we may do it with 200.

So I think when we speak with our customers, none of us is coming us give me back the money that I think you’ve been saving, which in fact we could, not much we could. They're trying to see how we can restructure the job to a new date, to a new and different cash flow on their part. They're willing to pay you but at a different pace. It doesn't make for them to pay you the same pace if they're not going to get the job. So I mean, the good thing is that we sitting with them and restructuring the whole thing. We'd like to look efficiencies like an engineering company and with the newest schedule, and we'd like to look for those efficiencies and see whether we can manage the job. But those efficiencies, the way we're focusing is whether we can diminish the risk in the managing of the job.

It is not the same thing a job that it was 43 months in and it was -- and now we have to adopt nine months, and maybe if you manage it well, you are far more efficient and being far more efficient, because we have more time, because the model arrive to site and many of our jobs are modeled for their rights better and more finished, because you've been able to structure with more time with a subcontractor, and that's as we call it de-risking of the jobs. You realize that very often in our business everything is beautiful. And then with the running to problems the last six months, while we try now is our advantage and its going to be an advantage for both, the customers and TR to restructure the jobs in a way that we able to de-risk in terms of procurement arrivals, subcontractor’s structure and models arriving better finished and better managing of the sites.

So it’s given us a breath and this breath is when we trying to negotiate, and it’s a fairly negotiation with the customers in order to come out with a better job at a different date. And that is very difficult to translate that into numbers, but just if you deliver the jobs with no other runs, it's a lot of money. And it’s good -- and there is never runs, no claims and is good for both customers and contractors. And I think that's the intelligent way of approaching it.

Operator

Thank you. Your next question comes from Luis de Toledo from BBVA. Please go ahead.

Luis de Toledo

Good afternoon. Thanks for the call. Two quick questions from my side and first one regarding the net cash, to be considered that first tax settlement for 39 million is including the cash figure for the quarter. I assume is at least the case. And second question regarding the divestment program, which in the TR-ansforma plan. Do you expect delays in your project at divestments, you see any risk on the one you completed over in the past?

Juan Lladó

Net cash to tax settlement, a very small portion of that has -- was paid in first quarter, and it was paid I don’t have the precise number, because you had -- the accumulative is that it was going to be paid in two years, so one portion was paid at first quarter of this, which is included but I cannot tell you the precise number that is not very relevant. The divestment plan is ongoing but again delayed. I mean we have divestment plan of some of the smaller businesses and some of the smaller assets, not very important, but it's ongoing. And in [Indiscernible] has been sound and not that risk, it’s been signed, it’s not at risk. It’s already told.

Operator

[Operator Instructions] Our next question comes from Nitin Bhalotia from Praxis Partners. Please go ahead.

Nitin Bhalotia

I have a quick question on the working capital, if I may. How do you feel working capital evolving over next six to 12 months? It's been great performance for the first quarter. But how do we see that in over next two, three quarters? Do you think that you will be as good as it has been so far and what has been the key driver for this? Clearly, as you've mentioned it's not advanced payments from your customers. Thank you so much.

Juan Lladó

The first question, let me be very clear and as I said before, it's going to be quite crafty as I said quarter by quarter, restructuring all the jobs customer by customer. In some cases, we have to support our suppliers and some others not. In some places, we’re going to have to support our subcontractors in some other cases not. So I do not expect a great working capital that's running company in a normal business models. Our business model has changed and is going to be different for at least for the minimum two quarters until we restructure all the jobs. And as I said, it'd be very unlikely that we get down payments or important down payments in the next two quarters as we had expected in our plans before. By the end of last year when I was making the presentation to you all, obviously, I had in mind my own personal planning, give or take a quarter important down payments of new awards.

So we have to manage the business without that and that's where when I made the presentation of the net cash position about at, what is our liquidity position and that was the message how we can manage in this crisis. And I think we can manage quite nicely but we may have ups and downs in managing on a quarterly basis our working capital. So our working capital number, although they have been quite nice over the last two quarters, they could -- we may have quarters closer to where we had in 2019 on average than what we had over the last two quarters. I was being more optimistic on that when you guys were asking me questions in February, but in February the world was different.

Operator

Thank you. There are no further questions in the conference call. I now give back the floor to the speakers for the conclusion.

Juan Lladó

Okay, this is done. Thank you very much. When we planned this conference, I have no idea that it was a holiday in the UK and many European countries sorry for that. Thank you very much for attending. And I think this time, you're being quite nice to me. You could have asked much harder questions, because times are hard and difficult. So thank you very much and I’m looking forward to talk to you on the next presentation.