Hello. Good afternoon. This is Joaquín Pérez de Ayala. Welcome to this results presentation of the Q1 of 2022 that will be conducted by our chairman, Juan Lladó, and our CEO, Eduardo San Miguel. It will take around 20 minutes, and you can pose your questions afterwards. Now, I give the floor to Mr. Juan Lladó.
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 has been granted to TR in this 2022 first quarter. Well, year to date, which I think they're very important, and it deserves some detail explanation. Secondly, Eduardo will take you through the Q1 results. Third, and this is new, Joaquín Pérez de Ayala, who is now TR's Head of Energy Transition, will give you an update on how we are developing the energy transition business. 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 five main strategic lines. Let me start off with our year-to-date awards.
Here we have INEOS. I mean, you have in writing the details, but I think there are a few things that are very important to stress for TR and for us. It's important for me in this job. First of all, the size. This is a huge project, and according to INEOS's numbers, the investment will be above EUR 3 billion. This will make. We 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. Secondly, I want to highlight the endorsement by INEOS of our engineering capabilities. It has trusted 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, we'll 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. We'll have to move, and in parallel, to the site and to the yards as this job is going to be, you know, through models. It is very important to stress the environmental features of this job. We're gonna 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 we'll be successful.
It is true, by the way we have structured this project, that we're not gonna be bearing direct construction risk. Which doesn't mean that together with our customer, we're not gonna be very much focusing on quality, the schedule, and obviously budget. The second major project awarded to us is the Qatargas package four. You know, I'm extremely happy with this job because this is the second job we have secured with Qatargas in the last nine months. It is extremely important for us to repeat with customers. It shows, and they had nine months to think about it and to see it, that Qatargas, extremely important investor, trusts our engineering excellence, which is something I'll be repeating through this presentation. Fully supports our goal of becoming a key suppliers of their large future investment program.
In this very large project, which amounts to $6 million, also includes an option to support sulfur production for the two additional LNG trains on the North Field South project of Qatargas. Obviously, you know, we have a structure and joint venture with Wison, with, TR will be leading this project with 70%, and, we'll be devoting here in Madrid, close to four hundred engineers working, again, together with Qatargas. It's extremely successful story for us. Finally, but not least, TR was awarded at the very beginning of February, four natural gas combined cycle with four different type, so sites. There are four different projects. There are four different, well, but they're in one, but there are four different contracts.
We work directly for Mexico Federal Electricity Commission, the largest company in electricity in the sector in Latin America, for a total amount of $670 million. We have done combined cycle in Mexico very successfully, but for independent power producers, for investors. This is the first time that we work directly for Comisión Federal, and we're extremely proud of working for them. How we have structured this job? We have structured the job, you know, with the Spanish company, electromechanical company, TSK, that we know well, and we have very successful stories with them together. We'll use 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.
Why we have to structure this job this way? We have to structure 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. Finally, ourselves, that we are gonna be focusing in these four projects as well on the engineering. The objective here is not volume. The objective here obviously is quality, is schedule, and profitability for our customer and the three of us. This is an example of how we're moving towards a profitable business.
As you know, having gone through these three awards, which I think they were very important and very significant, I leave the floor to Eduardo San Miguel.
Okay. Thank you, Juan. Good afternoon, everyone. Let's move now to the financial section. In this first slide, you have a brief summary of the main figures for the Q1 . Starting with sales, we have delivered EUR 773 million, which means an increase of 10% compared with the previous quarter. Growing, but still far from our pre-COVID levels that were substantially above EUR 1 billion per quarter. In terms of operating result, the EBIT figure is EUR 7 million, and a margin of 1% over sales. This is 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. I'm sorry for that. All our projects are booked following the percentage of completion method. As projects impacted by COVID in the last two 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, but I believe adjusted EBIT provides good information about the underlying profitability of the business in this Q1 . 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 message 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 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. Third, and finally, all other projects that are advancing faster since COVID disruptions are disappearing, tend to deliver better margins and better sales. 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 supply chain and workforce disruptions linked to the confinements in China. This context is resulting in some unprecedented facts, like suppliers or subcontractors rejecting to provide firm quotes or quoting at prohibitive prices to cover themselves against the background volatility. In any case, TR is working hard to tackle the situation, but 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 advanced it in February, the improvements of the cash profile is one of our main targets for this year.
As you can see in the slide, with the SEPI support added to our balance sheet together with our cash preservation policy, we have enhanced our financial situation. We are still facing tensions. Although oil and gas prices are standing at much higher levels, payment practices from some, just some of our clients are not yet fully normalized. As EPC contractors, we intend to pass to our subcontractor these payment terms. However, this is not always possible or even desirable. When this big 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. I also believe this tension will ease progressively the second half of the year.
Now, let me give the floor to Joaquin, who will drive you through an update of the energy transition business in our group.
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. We are studying if and how to be in methane 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 zero 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 investors, which are our clients.
Therefore, we have a structure, a dedicated business unit that will coordinate all our efforts in decarbonization projects. With this step, we will accelerate our positioning in low carbon technologies. When we combine this portfolio of technologies with our services, we become an attractive partner for the execution of low carbon projects. Our core activity will be providing our already known services for all the products, from conceptual assessment to full EPC execution. We are seeing a lack of maturity in this new scenario. We have decided to do development efforts to make projects happen and secure FEED and EPC jobs. We want the investors. We just develop 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.
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 recurrent service lines related to decarbonization. We have already identified two: carbon capture and storage as a service and methane emissions control and management. We are now in the final process to decide to move ahead. 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 two good contracts for two early-stage hydrogen and biomethanol projects that, if converted to EPC, will represent jobs of hundreds of millions EUR. Now, we are also involved in the development of five projects in different maturity states. You can see them with a red line. In these opportunities, we are partnering with large and renowned industrials, energy companies and infrastructure investors. Let me explain the pie 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 three slides. We are in the energy transition business.
We are very well-positioned, and we are actively managing our growth on it. Now I give the floor to Juan again.
Thank you very much, Joaquín. Before concluding today's presentation, as I said in introduction, I'd like to spend a few minutes recapping the scorecard this quarter in terms of the five main strategic lines of TR that we have already outlined in previous presentations. 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 three major projects in petrochemical and gas. These are traditional segments that will require bigger investments under this very new energy scenario. The second and very important strategic line is the reduction of construction risk.
Obviously, as 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, diversification towards new segments and new customers. In this regard, in this quarter or year to date, we have managed to gain two major customers, Comisión Federal de Electricidad, CFE, and INEOS. As important, we repeat in business and strengthen our relationship with Qatargas, with whom we had a very limited relationship in the past. At four and five, efficiency, digitalization, and Spain as a technology hub goes together. Four, the increase of our efficiency and the digitalization of our process are key ingredients for our TR Transformer program, which is already entering its second phase, and our customers have seen it.
Five, Madrid as 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. I've said before, our customers, our new customers are seeing it, and that's one of the main reason of the awards. We're doing well. We're doing well, and frankly, you know, I personally believe and I personally feel comfortable that with this quarter, we have made substantial progress in these five strategic lines, and therefore, we're in the right path to accomplish our midterm target. Very important target. A target of achieving EUR 5 billion of awards and EUR 5 billion of sales while earning a very well-deserved 4% EBIT margin that we had before. I finish with this.
I finish with this positive message, and thank you very much for your attendance. Now we'll be very happy to answer any questions that you may want to address. Thanks a lot.
Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please dial zero one on your telephone keypad. Thank you. The first question comes from Francisco Ruiz from BNP Paribas Exane. Please go ahead.
Hi. Good afternoon. I have three questions. The first one is, probably you have said in the past, but as you have qualified the participative loan as an equity, do you have any strike price in order to convert it into real equity in the future? The second one, Eduardo, you mentioned the new environment with the crisis in Russia and Ukraine and increase in 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? The third one is, Juan, you have commented on the new transformation or plan. When are you going to be able to give us more detail about that?
Thank you.
Hi, Francisco. This is Eduardo. Hi. I'm afraid we have not understood fully the first question, but let me tell you what I understand is the correct answer to the question you have posed. You know, the participative loan is a hybrid. It's a hybrid product. It has features of equity, and it has feature of debt financing as well. So it's something in the middle. What is clear for us is that this is something that the government granted us for five years, and in the meantime, it's a kind of equity. So we consider it is an equity, okay? In many ways or in one way, the.
What the government is doing is they are anticipating the money we are all expecting to earn in the forthcoming four years. You know, it's a kind of anticipation of the money received, of the money to be earned in the immediate future. 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-Ukrainian war should have some effect. There is lots of uncertainty these days, but we still believe that working hard, as I said, we can achieve the margins we have in our guidance. Probably will take some more, a few more months to reach this level of ordinary execution.
We still expect to be able to do what we told the market was going to be done this year. For sure, in the medium term, it's clear that this 4% margin is not being affected by the current war or whatever. Probably has an impact in the very short term, but not in the medium term for sure. Regarding the third question, the Transformer plan, when is delivery results? The Transformer plan, you know, look, it's obvious the war and the effects of COVID in China are affecting the operation. I think there are two clear ways to be protected versus those effects. The first one is we have to talk with a client, and we have already done it.
We have been talking with all the major clients in the last two, three weeks, and all of them have communicated to us that they have the willingness to collaborate with us, to support us in the current circumstances. That will be the first hedge against any potential risk regarding this cost increase. The second one is the TR Transformer plan. The TR Transformer plan. You know, TR Transformer plan is very ambitious, and it has two different steps. First step has to do with the short term. We already are seeing the effect in the numbers we are providing you.
When we talk about a 2% margin this year, it is because and thank you to the existence of this Transformer plan that is offsetting some of the potential deviations that we are currently seeing because of the facts we have commented before. The Transformer 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. I will see more intense effects of this Transformer plan from 2023 and onwards. Today, in my figures, there are savings due to the new way of doing things because of this new Transformer two plan.
Okay. Thank you very much. We're very clear. Thank you.
Thank you. Ladies and gentlemen, let me remind you again, if you have any questions, please press zero one on your telephone keypad. Thank you. Thank you very much. The next question comes from Kevin Roger from Kepler Cheuvreux. Please go ahead.
Yes. Hi, good afternoon. Thanks for taking the question. 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 nice improvement in the top line. I was wondering if you can provide us a bit more color on the phasing. Should we expect a gradual improvement or strong pickup as soon as Q2? 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.
What should we expect for the coming quarters in terms of COVID costs in addition to what we had in Q1? When should we expect the end of those costs, please?
I will start with second question. The amount of COVID costs that were in queue in previous year are to be booked this year, 2022, is EUR 16 million, so.
I cannot be more accurate, but that's a figure assuming there are no new costs coming from COVID problems today. Today, what we have booked in our expected figures is an impact of EUR 60 million for 2022. Regarding how the sales will evolve this year, 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 planning. I don't know if there is any further question regarding that. Oh, sorry.
Yep.
Don't worry because when we see the figure now, it's 770, you probably say, "Okay, 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.
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?
Absolutely. That's correct.
Perfect. Very clear. Thanks a lot for that. Thanks. Have a very good day.
Thank you. The next question comes from Robert Jackson from Banco Santander. Please go ahead.
Hi. Good afternoon, gentlemen. Question related to the energy transition, so for Joaquín. In the presentation, you highlight that the project development is or 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 gonna offer a lot more potential in the longer term or why is that that there's none in at the moment?
The other question is, in terms of the project development, can we have an idea of if there are any new industries in that pipeline, such as, for example, I think I know you're doing a project with ArcelorMittal in the steel industry, and can that offer a new sector for you in the future?
Hello. Robert, thanks for your question. Yes. Yes, of course. I think that the pipeline in the energy transition or our achievements in the energy transition has been focused mainly to date in Europe and in Spain, okay? Because this is where we are seeing more activity for now, okay? 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? The most mature market currently for energy transition is Europe and Spain, okay? 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 move for our, I would say, our largest markets now in where we are now in the other products, okay? That will be one point. 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 steel making industry, but we are also seeing prospects for the cement industry and we expect to see additional ones, okay? I think energy transition for us is an opportunity to move ahead in other industries where we can build additional capabilities.
Okay. 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 will the risks be? What sort of risks do you consider, in this energy transition division?
Well, the good point here is that in this type of projects, we are entering into an early stage, okay? We are helping our clients to shape the projects, and we are getting a very good knowledge of the risks associated to those projects, okay? I think that we are quite well protected in this regard.
Okay. Thank you very much. Interesting.
Thank you. The next question comes from Alvaro Lenze from Alantra Equities. Please go ahead.
Hi. Thanks for taking my questions. 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 a skill set 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 you do 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 risks, but do they have higher margin? The revenue recognition, how do all that kind of stuff work? The last question would be stepping out from the energy transition.
Sorry, again, on the energy transition, the services that you are looking for, this recurring revenue type of business, when should we expect this to start contributing? Again, how the business works in this line? Do you have any peer or competitor that we could look at to see how the economics of this recurring business works? Thank you.
Hello, Álvaro Lenze. This is Joaquín Pérez de Ayala. 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, I would say, procedures, knowledge, how to do business, how to do these type of jobs, okay?
This is what is behind what we can offer to the market, okay? Regarding the recurring revenues, this is something that we are building now, okay? We should not expect a huge share of revenues in the coming quarters, okay? This is something that we're building. 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 Aker has also these type of services. Other companies for carbon capture, you can also see some others. For methane, well, there are some U.S. companies that are also working in this space.
I think this is something that we can compete with them for these type of services. Mm-hmm.
Hi, Alvaro. I'll answer, as I was talking about 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, you know, the world works. You know, you can work, you know, lump sum EPC, where everything is one price. It can be EPC 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 is being installed and the engineering that you have developed and is being constructed. 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, supervised by the customer on a cost plus basis. They pay us as we work, you know, and we have to work together to do. That's why, as 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 task force working together with INEOS. Together, we place the order, and we 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 the final payments. Together, we select the subcontractors from civil to the one who do the final electrical installation.
We do the evaluation, we do the supervision, and it's the customer, obviously, who's paying our services and who's paying the subcontractors. That's what in this market is called, you know, EPC cost plus, and that's how we're gonna be working. Why is that the way? Because customers, this is a very large investment. It's a very large investment that probably is, you know, when you're in a hurry, you cannot define and go and try to get a large lump sum EPC. That would have probably delayed the job, you know, one year or sometimes even two. That's the way that most of the jobs are being done in the U.S., and most of the jobs are being done in Europe. It's nothing new.
The good news here is what I said before, is that INEOS came to Madrid. We have been working together before on the smaller jobs. He has decided that from here, from Madrid, together, we're gonna be developing this mega investment.
Okay, thank you.
Thank you very much. Ladies and gentlemen, let me remind you again, if you have any questions, please press zero-one on your telephone keypad. Thank you. There are no further questions. Dear speakers, back to you.
Okay. I see there is no more questions. Well, thank you very much again for listening to us and posing all these questions. It's good for all of us. We'll be talking to you in July, I understand. I think it's the twenty-ninth of July. Thanks again, and see you there.