Transcripts
Técnicas Reunidas, S.A. (TNISF) Q1 2023 Earnings Call Transcript
Operator
[Operator Instructions] The first question comes from Mick Pickup from Barclays.
Mick Pickup
It’s Mick here. Very nice quick presentation that’s great. A couple of questions, if I may. So firstly, can you just talk about, I think maybe mixed messages and it’s not mixed messages from you. You’re talking about the beginning of one of the greatest investment cycles in the history of our industry, fantastic phrase. But we’re also hearing of your customers, your clients, looking at the cost of these projects, some projects being…
Operator
I’m so sorry, sir, for the interruption. This is the operator speaking, could you get closer to the microphone, please, to have a better quality of your sound. Yes. Thank you.
Mick Pickup
Is that better?
Operator
Yes, much better. Please go ahead, please.
Mick Pickup
Okay. Sorry. I’ll start again. It’s Mick here. Just wondering if you could just talk about mixed messages. Obviously, you’re talking about the beginning of one of the greatest investment cycles, but we’re seeing some of your clients push back on some of the pricing of contracts receiving, not for yourselves, but for others in the industry. So I’m just wondering if you can talk about your clients’ mindset about going ahead versus obviously an industry, which should be seeing better pricing and has been inflationary for a period of time.
Juan Lladó
I mean the reality is we are in the cycle. The reality is that customers are finding different ways of launching the investments, either with front-end designs and conversion, early engagement up and bidding, now we’ve seen all different activities. And it is true that customers at one point in time now they’re realizing that what we say already that there are scarcity of resources, so have to put together and we think what is going to be the contracted strategy because it is true that they want to contract. So probably in the last weeks, I’m not going to say months; weeks, we have seen some confusion in one part of the market, how those big investments are going to take place. Probably will be structure, restructure, split or continue the way they were. I don’t want to say about, but renegotiated in a different way. But what I’m sure is that it is a need for the market and they’re going to take place.
There is — so the bad news is that there has been a bit of confusion. But the good news is that there is the willingness of the investors to go ahead with investment. In one way or another, they’re going to go ahead. And that’s exactly what we’re seeing today in the market, one way or another, they want to go ahead. With the small investments here in Spain as well, we’re talking to our customers and said, well, we still have an issue here or there, but we had to finally to move forward and we are newly shifting ways to move forward.
So my answer is, despite confusion with some delays or rearrangement of how those big investments may take place, that is a commitment of the market, of our customers to go ahead with those investments. There can be some slippages, because have to be structured or restructured, but they’re going to happen. I’m very comfortable that they’re going to happen.
Mick Pickup
Okay. And secondly, just on your margin, obviously, nice to see you having confidence about 4% for the year. You’ve obviously started at 3.5%. To my math says, at some point, you’re going to be higher than 4%. Is that just a continuation progress on the normalization of the portfolio? And is that the sort of rate, we could be thinking of as we exit the year?
Juan Lladó
Mick, I knew you were going to ask that question. I am not sure that one was going to be you. I don’t know why but the answer, we feel comfortable with the 4%. And obviously, we have to have an average 4% through year. We do expect that as we progress in production, as we production delivery the backlog and we have to improve this 3.5% of this quarter to get a year round average of 4%. But we cannot jump from 2 to 4 from 1 to another because that’s not the way the business goes. But we do believe that we’re going to be able to make it.
Operator
The next question comes from Kevin Roger from Kepler Cheuvreux.
Kevin Roger
Yes. I was just wondering if you can provide us a bit more color on the top line guidance because you start the year at 1.1. You say that clearly €1 billion quarterly revenue is at least something that is projected for the coming quarter. So you should be above €4 billion top line, if I’m not mistaken. And you are still guiding around the €4 billion. So I was wondering if I’m missing something here in terms of top line forecast or if you are still being conservative.
And also on the margin side and maybe as a kind of follow-up to just what Mick said. So to be at 4% for the full year in that let’s make the stupid calculation, at the end of the year, you should have a Q4 EBIT margin around 4.5%, something like that. But your long-term guidance is still for around 4%, if I’m not making any mistakes here again. So how should we think about that? Is it the way that you want again to be conservative and at the end you will be closer to the 5%, something like that? Just to try to reconcile what we could see in the coming quarters and the messages on the €1 billion quarterly run rate at least top line with what you are guiding for, for the full year and long term, please.
Eduardo San Miguel Gonzalez
This is Eduardo, regarding if we are conservative, I think you have said, we are trying to be fair. We have the projects in front of us and we estimate how much revenues we can deliver in the year. You have to be honest with you, probably we can be slightly above the €4 billion revenues, probably makes sense. We are doing 1.1 now. But we are expecting some relevant awards by the end of the year or by the second half of the year, and they will have an impact. So — and I don’t know how big this impact is going to be because not to have these awards now than in 3 months’ time. So I have to be a bit, as you say, conservative. So have in mind that we will be slightly above €4 billion but not — you will not see a big growth compared to this figure.
And regarding the profitability or expected profitability for the future, first of all, we are coming from a difficult times — from difficult times, and we all understand that. And we need to be — I don’t want to say conservative, but we need to be realistic. We have learned from the past that sometimes difficulties arise from nowhere. So we need to be careful. So I think the message of 4% is solid, it’s consistent, we can deliver it, it’s not a major challenge — it’s always a challenge, but it’s not a major challenge. So let’s use this 4% as the guidance for the future.
It’s a fact as well that if a huge wave of investment is to come in the next 2, 3 years, we will see more opportunities to be more selective, to opt for those best projects with smaller risks and we will be in conditions to deliver better margins. But this is something that has to happen in the future with the new projects to come.
So for the time being, let’s do what we are currently doing. Let’s offer you numbers that we believe that are solid and consolidated and €4 billion and 4% margin, I think, is correct.
Kevin Roger
Okay. Understood. And maybe one quick follow-up. You seems to be more and more involved on engineering, project management type of work instead of construction. Just yesterday, you announced the contract with Repsol for the electrification saying that this is a lot of engineering awards, et cetera. Is there any kind of tools that you can provide us to estimate the contract value that can be attached to those engineering work? And if it’s just engineering, is it fair to assume that we can compare it to the typical margin that are made by some of your peers, when it’s pure engineering, meaning a double-digit number?
Eduardo San Miguel Gonzalez
Kevin, I think your question is again quite fair. From now on, we will try to provide a kind of a split between those contracts that are pure services and those that are sold under different structures because you’re right, obviously, when you sell services, your margins are slightly higher — not slightly — higher and better protected. So this split is very useful for your understanding of the potential results of the company and we will provide it. I don’t have it with me now, but maybe Investor Relations can provide you this information with time or whatever.
Operator
[Operator Instructions] Your next question comes from Robert Jackson from Banco Santander.
Robert Jackson
First question is related to the sequential improvement in margins. Could we have any further granularity in terms of improvement. For example, raw materials have been coming down and we expect them to come down further during this year. Has that been — or will that — could that be relevant throughout this year? That would be my first question.
Eduardo San Miguel Gonzalez
Robert, I think we talked about that issue in the roadshow and it’s very relevant. No, it’s — we have been renegotiating the contracts the last 6 months with most of our clients. And regarding extra costs due to the inflation have been reflected in those contracts. So inflation is always a risk in this business. For the time being and as far as we know, we have properly protected our risk regarding inflation in these renegotiations. So we feel comfortable. And the margins we are predicting now have already included the impact of that inflation.
Robert Jackson
Okay. The second question is related to looking ahead the project in the Hanseatic Energy Hub project, which is a JV with other players. Could we be expecting to see more of those type of projects, which could be supportive again also in margins and also in the natural gas segment?
Juan Lladó
Robert, this is Juan. I’m going to give Eduardo a break. I mean, I don’t think we’re going to be seeing many more Hanseatic. We’ll see some, we’ll se some, but I mean Hanseatic reflects both the urgent need of Europe and, in particular, Germany of strength in regasification capacity, which Spain has for other reasons. And obviously, we’re there. They came to see us. We started the bidding process and they liked us, which is good, as we’ve done a very large percentage of the ones in Spain.
And then we put together a strategy ourselves with the partners that we felt more comfortable to manage the deal, civil construction and mechanical erection. But I don’t think we’re going to be seeing many more in Europe. But what we’re going to be seeing and that’s when I’d rather explain the gas wave, we’re going to be seeing not regas, the gas treatment plant, very big ones and very soon in many parts of the world, but very specifically in the Middle East, where the gas sits. There is a great need to invest in gas treatment plants. And there, I do believe we’re good. We’re good in the process plant. We have delivered the largest ones in the world and we are very well positioned.
We’re also very well positioned on regas, but we’re not going to be seeing that much. That was an opportunity where we’re good. We made a lot of money in Spain many years ago and now we put together a well de-risked strategy for our German customer.
Robert Jackson
But also, I mean, the structure of the project, JVs, should we be expected to see more JV-type projects and hence, again de-risking the outlook as well in different segments, for example.
Juan Lladó
Yes. Robert, you’re going to see that strategy more often. And you’re going to see when all of you analysts are looking growth in sales, are we going to go €5 billion plus, €6 billion or whatever? Well, we are going to be sacrificing volume for solid margins and that’s the message.
Here, we’re going to go by ourselves. When an investor needs regas plant, they look for TRs, they don’t look for construction companies. And then we’re the ones to decide whether to go by ourselves and have a turnover of €1 billion, and maybe some of you would have been very happy €1 billion, wow. Or go for just 50% of it, but with a very solid joint venture, probably one of the best construction companies with more experience in the civil work, which is not easy for the and the companies that we have worked with them before and a company with whom we have worked with them before and which is working in Germany now, that is very good on the erection part.
So that was — I think it’s a good example of the strategy that we tried to explain through the roadshow that finished 10 days ago. We’ll sacrifice volume for solid margins.
Robert Jackson
Okay. And just last question. Could we have any visibility regarding your growth potential in North America related to the energy transition? Could you give us any messages there? Any update?
Juan Lladó
I mean North America is — you’re not going to be seeing very short-term results. You might be seeing some short-term results with our traditional customers in North America and in North, North America, so I give you a hint what it is, which means customers are sitting with us, we’re bidding or trying to structure traditional energy customers, which we had worked before trying to structure deals.
But we’re moving forward, we’re putting together a team, we’re putting together — we’re hiring good structuring people, which is a step forward to what we’ve done before as we do believe we have a lot to offer. We have a lot to offer from the structuring side and then we will revert our engineering capacity and technology capacity. We have to offer both. But that’s not going to be — that, as Eduardo said, is second, third wave, but we’re going to be seeing maybe — I think the world is moving so fast that maybe third wave goes ahead of the first one. But we’re moving forward, we’re not being lazy about it, I can guarantee you that.
Operator
Your next question comes from Ignacio Dominic from JB Capital.
Ignacio Dominic
Just one question from my side, please. My question is related with Algeria. I believe you mentioned you are working with Sonatrach to find alternatives and solutions for the HassiMessaoud project. So I was wondering, how are these conversations evolving with the client? In general, in Algeria, what could we expect in the upcoming months?
Juan Lladó
Obviously, we’ve explained and we put in all the presentations. In the HassiMessaoud, the job that both comes from ourselves started the job. A very large percentage of engineering is done. Then we’ve gone through the pandemic. And now we’re exploring with the customer what is the most efficient way to restart or to reconvert and even not to continue. Everything is open, but I think the willingness of TR, the willingness of the contractor and many of our customers is to find a way to continue, which is I mean you have to realize that probably TR today is one of the best companies and I feel very comfortable saying that worldwide to do grassroot engineering. And we can put together different alternatives, values, saving, engineering ideas to restructure the deal. And that’s what we’re working with.
So we see that as an opportunity. We see it as a very good opportunity. But we have 2, 3, 4 months to find the best solution for everyone always in friendly good terms.
Operator
Your next question comes from Alvaro Lenze from Alantra Equities.
Alvaro Lenze
Hello, can you hear me?
Eduardo San Miguel Gonzalez
We can.
Alvaro Lenze
Sorry, I lost the line. Just a couple. The first one is on the margin expansion. If you could provide some more color because you have increased margin sequentially despite the slightly lower sales and your overheads being roughly unchanged. So I assume that the project from the margins has been increasing. So I wanted to know whether this is due to a change in the mix. So less profitable projects are contributing less to sales and more profitable ones are contributing more? Or is it just on a contract by contract that you are managing to increase the margins? I don’t know if that’s due to the change orders or due to cost management. So any insight on that and therefore, the main reason for the continuing improvement for the coming quarters in margins, that would be very helpful.
And the second question would be on the evolution of your cash position. It has been roughly flattish this quarter. Of course, you will now have the proceeds from the capital increase. But then how should we expect the net cash position to evolve through the year considering the expected deployment of the proceeds and the evolution of working capital during the execution of the backlog.
Juan Lladó
Margin expansion. Well, there’s not a secret hidden anywhere. It’s — some projects have good profitability. Some others have smaller profitability. And I think we are finishing or the project with a smaller profitability have a smaller impact now in our accounts because they are about to finish. I think that’s probably the main reason of why little by little we see the margin improving. And that’s why we feel comfortable, again, with our forecast because the remaining projects in the backlog have a healthy margin. So what we won’t take this 4% shouldn’t be a big challenge. But there is nothing extraordinary happen, has no impact on overheads or whatever. It has to do with the profitability, underlying profitability of the remaining projects in the backlog.
Eduardo San Miguel Gonzalez
And regarding the cash, well, we have €150 million additional cash this year — this month. But well, as I have tried to anticipate in the presentation, we have to be very careful about piling cash in the balance sheet. It’s great for the picture, but it’s not good for the business. Today, clients are demanding us to accelerate everywhere around the world and the only way to accelerate is to use this cash received from the clients and from any other results to pay suppliers and to accelerate the project.
So my expectation for the end of the year is we will see a better picture of cash, but I assure you that I will try to avoid to have a large amount in my balance sheet because it’s nothing but a good picture. It’s not good for the business. So I will try to manage it in that way. I think it’s a wise way to do things now.
Operator
The next question comes from Mick Pickup from Barclays.
Mick Pickup
Again, just a follow-up and just practically. You’d say low carbon tech is 4% of your backlog at the moment, but it’s only €3 million of revenues in the quarter following on from Kevin’s question. Could you just tell me what sort of scale low carbon tech you expect to be this year?
And then just on the back of that, will we at the half year get margins by the new divisions as well in the full report?
Eduardo San Miguel Gonzalez
Mick, we will provide you next quarter results by segment, as we used to every half year and every year-end. And yes, today, the impact in our backlog and our revenues of this low carbon segment is still small. But by the end of the year, we are waiting to have the first conversion of a full EPC, you know it, it’s Amsterdam. And hopefully, you will see a jump in the revenues coming from this segment by the end of the year. I don’t know if we are going to convert it in July, August, September, October, so I cannot predict what’s going to be the exact impact, but you will see a jump in revenues finally. And I’m talking about year 2024, probably — sorry, 2023. In 2024, we will see, obviously, bigger volume — bigger volumes of bids. Backlog revenue is coming from the low carbon sector.
Regarding the margins, I think the idea is we should not expect higher margins than our traditional business, but we believe that they are going to be more secure because we have been involved in the project from the very beginning. In most of the cases, we are participating in the feasibility studies, fits, and we know well the projects. So when they are going to be priced, we believe that we will put the correct price and the right cushion inside that price to be protected versus any difficulty we could foresee. So that’s what we expect to happen.
Operator
Your next question comes from Francisco Ruiz from BNP Paribas Exane.
Francisco Ruiz
I have just one question, a follow-up on Alvaro’s. You commented that proceeds from the right issue and this sense of cash will be used to accelerate projects, paying suppliers. Is this something that you need in order to achieve the proper execution? Or this is something that you could be on top of your plans and this could imply a better margin at the end of the day?
Eduardo San Miguel Gonzalez
Francisco, the recent accelerate has nothing to do with inlay. It’s just our target, our common target. Both the clients and us, we are looking for accelerated projects because they want to have the plants operating the sooner, the better. That’s the idea. If we can get any additional profit from this acceleration plans, we will talk with the clients. We are not foreseeing any kind of improvements of our margins because of that.
But I have to be honest to you, it’s always difficult to reach the milestones to finish the project sometimes. So it’s always good for all of us to accelerate despite you get any additional profit or not. It’s just a way to secure the predicted margin. So that’s why, but there is not a delay we are trying to cover with acceleration plans.
Operator
Thank you very much. There are no more questions. Dear speakers, I give you back the floor.
Juan Lladó
Okay. I think we’ve been quite efficient this time. Joaquin is here, which has not answered any questions, who is very ready to answer, but Eduardo and I didn’t give him the opportunity. Joaquin is leading today the energy transition business. So I’d like to thank him for being here, being ready to answer any questions. But obviously, I’d like to thank all of you for, again, for this very successful support that we had from many of you and most of you on this rights issue. And thank you again for listening and posting important questions in this first quarter presentation. So we’ll be seeing and talking to you again in July. And so thanks a lot. Thanks a lot and looking forward to talking to you soon.