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Executives

Paul Gooden – Investor Relations

Jean Couzak – Chief Executive Officer

Ricardo Rosa – Chief Financial Officer

Analysts

Phillip Lindsay – HSBC

Frederik Lunde – Carnegie

Andrew Dobbing – JPMorgan

Goran Andreassen – RS Platou Markets

Ian Macpherson – Simmons & Company International

Robert Pulleyn – Morgan Stanley

Erik Tonne – SB1 Markets

James Evans – Canaccord Genuity Limited

Henry Tarr – Goldman Sachs

Subsea 7 SA (OTCPK:SUBCY) Q1 2013 Earnings Conference Call May 16, 2013 7:00 AM ET

Operator

Thank you for standing by, and welcome to the Subsea 7 S.A. First Quarter’s 2013 Results. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions). I must advise you this conference is being recorded today Thursday, May 16, 2013.

I’d now like to hand the conference over to your speaker today Mr. Paul Gooden. Please go ahead, sir.

Paul Gooden

Thank you, and good afternoon. This is Paul Gooden, Investor Relations Officer at Subsea 7. Joining us today are Jean Cahuzac, our Chief Executive Officer; Ricardo Rosa, our Chief Financial Officer and John Evans our Chief Operating Officer.

Today’s results for the first quarter, which ended on 31 of March, 2013.

The press release can be found on our websites along with the presentation slide we’ll be referring to in today’s call. Before we start the presentation, I’d remind you the certain statements made in the course of this conference call, which expressed the Company’s intentions, beliefs and expectations are forward-looking statements. Future results and trends could differ materially from those which are in such statements. Details of these can be found on the Company’s filings including the Company’s Annual Report.

May I also draw your attention to the more detailed disclosure on forward-looking statements that appear in today’s press release? The call will run for about an hour. And with that, I’ll hand you over to Jean.

Jean Cahuzac

Thank you, Paul. Good afternoon and welcome to everybody. I would like to reflect briefly on the quarter and the market, then Ricardo will run through our financials and before we take your questions, I will make some observation on the outlook.

Q1 was a solid quarter. In the North Sea, we saw a return to more normal activity levels compared to the prior year when vessel utilization was unusually high. Vessel utilization was 67% in the North Sea, down on the 82% in Q1 2012, but in line with the seasonal norm.

Despite lower utilization, it was a good quarter in the North Sea. Project execution was strong and we benefitted from commercial settlements. Resources have been mobilized on Martin Linge, the largest ever EPIC project in the North Sea and on Aasta Hansteen, a technology project awarded during the quarter. Offshore operations on both projects will commence in 2014 and 2015 respectively.

In West Africa, we continue to see good project execution. Seven Borealis continues to operate successfully on CLOV project, offshore Angola. As we have noted before, CLOV was tendering in a different environment and has lower margins. This project mix explains the moderation in AFGOM margins. A good start has been made on Lianzi, offshore Angola, and on Ehra North, offshore Nigeria. Operation on both projects will commence in 2014 and beyond.

In Asia Pacific, we also saw a good project execution. The Sapura 3000, the vessel owned by our SapuraAcergy joint venture recommenced offshore operations on the Gumusut project, offshore Malaysia. Meanwhile, good progress was made on the ONGC G1 project offshore India, and on the Gorgon development, offshore Australia.

In Brazil, results were impacted by the Seven Oceans being in scheduled dry-dock and by Petrobras notifying the Group of their intention to remover the offshore scope of the UOTE project due to delays that they have experienced in obtaining environmental license. In Corporate, we saw a benefit from lower administrative costs and the positive contribution from Seaway Heavy Lifting despite the seasonal bad weather.

Turing to Slide four; the backlog exceeded $10 billion, a record for the Group and I’m encouraged by the quality of our new awards. On Slide five, we have highlighted the key projects awarded in Q1. So North Sea has been very active, but we also won our first award in Mexico, and order flow improved in West Africa. One trend to highlight is the growing importance of technology. We are demonstrating ourselves to be one of the key technology leaders in the Subsea industry and our ability to develop and implement new technologies plays a key role in contract awards.

For example, the Aasta Hansteen project represents the number of first in the Norwegian continental shelf in terms of water depth and technology solutions. The project will see the reinstallation of the first Steel Catenary Risers in the Norwegian Sea and also the installation of mechanically Lined Pipe by Reel lay. This method is a very cost effective pipeline technology, that Subsea 7 has developed together with Butting and forms a part of the technology development program for pipeline and riser system that puts Subsea 7 in the forefront when it comes to complex steel development projects.

Turning to slide six, and the markets, we have not seen any direct impact from oil price volatility on clients plans and tendering activity remain high. However, in recent months, we have seen some industry projects around the world postponed for various reasons, we have seen this in the U.S. Gulf of Mexico with a postponement of Mad Dog 2 and Hadrian. In Asia, (inaudible) and we’ve seen a couple of example in the North Sea.

In a context, where customers are experiencing, inflation pressure, our ability to collaborate with clients and propose optimizing technical solution is a clear differentiator. (inaudible) this project performance the fundamental driver of our market remain robust and we remain positive about the medium-term and long-term prospects despite these delays.

Turning to slide seven, as I shall give you some flavor by territory, in NSC tendering levels are strong and we see more project being awarded to the market on a EPIC model, this business model suite our capabilities. And we believe that with the correct risk profile, we provide superior added value to both our clients and ourselves.

Turning to AFGOM in West Africa, we’ve seen long awaited projects sanctioned and awarded to the industry. There is uncertainty on the timing of further market awards in West Africa. But this is not unusual for the region. In the U.S. Gulf of Mexico, we’ve seen some project delays, but equally expect some project to be awarded to the market in the months ahead. In Mexico we are seeing improving activity level with the deepwater Lakach development currently going through the prequalification phase.

In APME there are increased activity levels, including two significant projects in Indonesia, but pricing conditions remain challenging in this competitive market. Finally, in Brazil there continues to be delays in the award by Petrobras for project in the pre-salt, there is confidence that project will be awarded in due course and there will be a mixture of both Flexible and Rigid pipes solution for these developments.

However, there is uncertainty as to when the tenders have to be released and when the sub-segment awards will come to market. On the PLSVs Petrobras continue to negotiate both contract renewal for the existing fleets and to evaluate new contracts put with industry. In summary, we see growth opportunity in all our markets, but there are variation in the Petrobras and there are timing uncertainness.

And with that, I shall pass it to Ricardo, who will talk to you through the numbers.

Ricardo Rosa

Thank you, Jean, and good afternoon. As Jean has stated, the results for the first quarter 2013 reflected a generally positive trend. I will now discuss the consolidated income statement and the territory’s operating results for the first quarter and comment further on the balance sheet and cash flow. I will conclude with an update to our financial guidance for 2013.

As shown on slide eight, first quarter revenue was $1.5 billion and first quarter operating income was a $154 million, both are broadly unchanged on the prior year period. Net operating income margin in the North Sea improved slightly up 80 basis points compared to the prior year period despite lower vessel utilization, and driven by strong project execution and the commercial settlement of the Shell on cancellation of the Fram contract. Net operating income margin was down a 150 basis points in Africa and Gulf of Mexico, on the same revenue, driven by the change in project mix that Jean referred to earlier. It was a strong quarter in APME, driven by high activity levels and a good contribution from our SapuraAcergy joint venture.

Brazil reported a net operating loss in the quarter this is largely driven by the planned dry-docking of Seven Oceans and by Petrobras notifying us of their intention to remove the offshore scope of the UOTE project. Lastly, the corporate segment delivered an improved performance, due to lower administrative costs resulting from the absence of integration costs, the release of a provision on the successful resolution of certain legal cases and the positive contribution from our joint venture Seaway Heavy Lifting.

Net income for the quarter was a $132 million up 42% on the prior year period driven by gains on both foreign exchange and asset disposals totalling $21 million and a low effective tax rate for the quarter of 16%, which more than offset the higher interest charge.

Diluted earnings per share of $0.37 compares favorably with the prior year $0.25, despite an increase in the average diluted share count for the quarter. Turning to slide 9, and the territories operational performance in Q1, North Sea and Canada delivered revenue of $596 million up 3% from the prior year period with work progressing throughout the quarter on Laggan Tormore, West Franklin, offshore UK, Svalin [Jetta], Eldfisk and BG Knarr offshore Norway and Siri Caisson offshore Denmark. Project substantially completed in the quarter include (inaudible). Resources were mobilized on Martin Linge and Aasta Hansen, but both were below the 5% of completion threshold and so, did not contribute to the quarter’s result. As previously mentioned, net operating income margin rose despite lower utilization due to strong project execution and the commercial settlement relating to the Fram project.

Africa and Gulf of Mexico delivered revenue of $529 million broadly flat compared with the prior year period. There was good progress on CLOV, Block 31 PSVM and Lianzi. Lower margins on CLOV, which was tendered in a more difficult environment, explain why the territories margin was slightly lower than the prior period.

Asia Pacific and Middle East delivered revenue of $123 million up 44% from the prior year period, progress was made on ONGC G1 offshore India and Gorgon offshore Australia. The territories net operating income improved significantly driven by high activity levels and the strong contribution from the SapuraAcergy joint venture, as Sapura 3000 moved into the offshore phase on Gumusut.

Revenue in Brazil at $217 million, was 17% lower than the prior year period, reflecting reduced activity in the post-salt largely due to the suspension of the UOTE project, the territory incurred a net operating loss of $22 million in the quarter, mainly due to the reversal of the cumulative margin recognized to-date on UOTE project, following Petrobras’s notification of their intent to remove the offshore work scope from the contract. The uncertainty surrounding that final outcome of this decision drove this profit de-recognition, also contributing to the loss in the quarter with the planned dry-docking of the Seven Oceans.

Turning to slide 10, I’ll comment on some specific line items relating to the first quarter of 2013. Administrative costs amounted to $76 million lower than the prior year period due to the absence of integration costs and the release of a provision related to successfully resolved legal case. The contribution from associates and joint ventures rose to $16 million due to higher activity levels at SapuraAcergy and an improved contribution from Seaway Heavy Lifting.

Net operating income of $154 million is stated after depreciation and amortization expense of $87 million which increased 12% on the first quarter 2012. Other gains and losses of $21 million included net foreign exchange gains due largely to the strengthening of the U.S. dollar against most currencies in the quarter and a $13 million net gain on the disposal of three vessels and shore-based facility in the quarter.

Sale proceeds amounted to $9 million the Acergy Harrier, the sale of which was affected through a finance lease structure was the largest contributor to the net gain. Net finance cost of $18 million have increased by $14 million compared to the prior year period, mainly reflecting our recent $500 convertible bond issue and some non-recurring charges on early repayments of the Seven Havila loan following the recent acquisition of our joint venture partners 50% interests in the vessel owning joint venture.

The effective tax rate of 16% for the quarter reflects an underlying effective tax rate of 31% reduced by certain discrete items mainly comprising adjustments prior year estimates.

Turning to slide 11, cash generated from operations totaled $402 million, including $237 million in working capital inflow, partially attributable to a reduction in trade receivables in the quarter. Working capital optimization remains an area of management focus.

Net cash used in investing activities was $167 million, the key capital expenditures in the quarter with the acquisition of the Seven Sisters renamed to Simar Esperanca and the continued construction of our new pipe-lay support vessels at Seven Waves.

Net cash used in financing activities was $283 million with the key items being the early repayments of the Seven Havila loan of $158 million and the loan of $115 million granted to our asset earning joint venture with Eidesvik to finance the construction of the Life-of-Field support vessel the Seven Viking. Both of these transactions are expected to have a beneficial impact on our net financing costs going forward. We finished the quarter with a cash and cash equivalent balance of $1.2 billion.

Turning to our financial guidance for 2013 on slide 12, we reiterate what we said in March. We expect some progress in revenue and adjusted EBITDA compared to last year, although the rate of progress will be tempered by delays in project awards and by a vessel utilization in the North Sea more in lined with historical levels.

I will reframe from running through our guidance line-by-line as it is unchanged from our March commentary, with the exception of the underlying effective tax rate, where we’ve lowered the range by 1 percentage point to 31% to 33%.

I will now pass you back to Jean.

Jean Cahuzac

Thank you, Ricardo. I would like now to provide some additional guidance by territory on slide 13. In NSC, the market is strong and tendering activity remained high. However, there is a two way pool in 2013 and the benefits of improved pricing will be somewhat mitigated by lower vessel utilization. In addition, the Seven Oceans is transferring from the North Sea to Brazil in Q2 2013, where she will operation on the Guará-Lula project. This redeployment will reduce the availability at Subsea 7 fleet in the North Sea in 2013.

In AFGOM, tendering levels remain high however CLOV is in the offshore phase in 2013 and this is a lower margin project. More recent awards like Lianzi and Erha North with improved pricing we move into offshore phase in 2014 and 2015 respectively.

In APME, we expect to see a positive trend as Subsea 7 will be in the offshore phase of two contracts under the Gorgon project, offshore Australia and the SapuraAcergy joint venture will be active on the offshore phase of Gumusut offshore Malaysia.

Finally Brazil, starting with Guará-Lula project book increased from 34% to 47% between Q4 and Q1 and in Q2 we have entered the critical offshore phase. It remains a challenging project Polaris is working on Buoy Foundation installation, two Buoys done in Brazil and two will be transferred up to Brazil during Q2 as per plan.

The Seven Oceans is being mobilized for pre-lay works, pipe fabrication is expected to expected to start to Ubu at the end of May.

In Brazil, we recently agreed the new five year contract for the K3000 on an improved day rate and we are in discussion to review a further three of our PLSV contracts which expires later this year.

As you know, we have participated in the tender for new-build PLSVs and we expect market award later this year. There is still a lack of clarity regarding the timing of tenders or award from Petrobras in relation to the pre-salt projects.

We believe some of these standards will be for flexible solution and some will be for rigid solution. We are taking a cautious approach to the standard of going forward and we’ll only participate if we can agree with our customer on an acceptable risk profile, taking into account local administrative challenges, local content and (to production) constraints. In the post-salt in the Campos Basin, we see opportunities with both Petrobras and the international operators.

Turning to Slide 15, we set out key changes in the fleet since 2011. We recently announced the commissioning of a new-build HCV heavy construction vessel, which will join the fleet in 2016. We have a number of 400 tons crane capacity, but we are increasingly seeing projects, where released our such as a size and weight that we are approaching the limits for these cranes. In the future, we feel growing market for larger list in deeper water, some associated with the trend towards Subsea processing. The high specification crane on our new heavy construction vessel will help us meet these challenges for our clients.

On Slide 16, we set out some of the key technologies we have already deployed or we are developing. As I mentioned earlier, we see technology playing a role of growing importance in our self-business as project move into deeper water and harsher environment. We view this trend as a positive development as it plays to our strengths in innovation and project execution.

On Slide 17, we highlight the successful collaboration between Subsea 7 and the manufacture of Butting, which resulted in the world’s first qualification of the use of mechanically lined pipe for reels installations of flow lines and riser globally and this a cost effective alternative to solid corrosion-resistant alloys. This technology has us win the Aasta Hansteen projects.

On Slide 18, we highlight the Buoy Supported Riser, an example of which is being installed on Guará-Lula. The photograph on the slide show one of the Buoys processing in the harbor in Brazil.

So, in conclusion, turning to Slide 19, it has been a good quarter. We are reiterating our guidance for the full year. We've got a record backlog and we see growth opportunities in all our markets and while some industry projects have been delayed or postponed, we remain positive about medium and long-term marketing prospects.

Subsea 7 is well-positioned for the future as we have the people, assets, technology and track record to meet the challenges faced by our industry.

And now let’s turn to your questions.

Question-and-Answer session

Operator

(Operator Instructions). Your first question comes from the line Phillip Lindsay at HSBC. Please go ahead.

Phillip Lindsay – HSBC

Yeah, hi afternoon guys, few questions please. In your opinion, is there a common theme or themes from the project delays and postponements that we are seeing the market today that project economic is worsening because our costs of inflation or is it sort of case-by-case and project-specific issues? Then relating to this, I know there has been a few issues on Kaombo in West Africa in relation to the FPSOs is where I think the Subsea guys have been asked to resubmit their bids as well. So perhaps, if you could just give us your best guess as to when we may see this key project awarded. That's the first question.

Jean Cahuzac

Thanks for your questions. I mean regarding the project delays, in fact, is for various reasons. In some cases, it comes from drilling results which force the operator to review there options to develop the field, look at the alternative technical solution and that takes more time. It's been the case, for instance, on Fram in the North Sea. In some other cases, it can be a question of cost. If you take [Bronzi] in Australia, where our understanding is that the present trend of cost onshore in Australia basically forced our clients to review in some cases, the option they are taking.

And for some other project, I mean there is overall pressure on prices which comes from the industry and from the equipment manufacturers which leads to questioning some of the option that the client had initially. So it’s various reason, it's not necessarily unusual, but it's true that we've seen over the last couple of months a number of project being delayed or postponed. Regarding Kaombo, I think it's an example of what I just mentioned and I think it's also an example where there is a very good coordination communication between Total, the client and the service industry.

There are some cost challenges on the projects and the process, which has been initiated, has been to actually work with Total to review what is the optimum design of the field and how together we can lower the cost for the development of the field and Total has been doing with the Subsea industry with us and I suspect with our competitors too, but also doing that with the FPSO company. All that takes time and it's difficult to have an exact idea of when this contract will be awarded. It could be a bit later this year or it could be delayed a bit further, I don't really know.

Phillip Lindsay – HSBC

Okay, that’s fine. And then a couple of project specific questions. Can you just comment on the Ekofisk contract in Norway, where another contractor is experiencing some problems? Are you able to confirm that you in Norway affected by these issues? And then secondly on the CLOV contract, is there any difference between your margin expectations on CLOV right now versus when you bid it? If I remember right, when you originally won the contract, it was bid with another vessel, the Polaris, I think. Has the execution with Borealis has helped your margins in anyway?

Jean Cahuzac

Yeah, I mean, I'm going to answer on CLOV and then I'll let John answer on the other question. I mean regarding CLOV, I mean we are, the project is being executed as per plan. I mean the Borealis is a more efficient vessel than the Polaris that we had plan to put on the vessel initially. My comments regarding the profitability of CLOV was related to the fact that the project was awarded in a more challenging business environment and therefore the profitability of the project is lower than some other project that we've executed in the past like PazFlor or some other project or project that we will execute in the future, but the CLOV project is being executed as per plan. John, you want to comment?

John Evans

Yeah, we have a number of contracts with ConocoPhillips on Ekofisk and we have a big bypass to do with them at the end of this month, early next month, which means there is a shutdown of the platform and we do the bypass there, that is all going as per plan, and as we speak, we're mobilizing the vessels associated with our contract. So we have certainly seen no change in our clients' plans for our work at Ekofisk.

Jean Cahuzac

And we don't see any negative impact on what could happen on this project for us.

John Evans

Yeah

Phillip Lindsay – HSBC

Okay, fully understood, thanks very much.

Operator

The next question comes from the line of Frederik Lunde of Carnegie.

Frederik Lunde – Carnegie

Hi, good afternoon, just going back to CapEx which has been a bit of a recurring theme. Given the things you're referring to about project delays; I know this is nothing new, but still we've seen oil pricing flat for three years, we see cost inflation creeping up, oil companies being probably a bit more prudent in terms of the CapEx really makes sense for Subsea 7 as well as to take a step back and reconfigure kind of the five-year investment time which will require most of the CapEx in terms of the cash flow as it looks to me. Why this urgency to renew the fleets?

Jean Cahuzac

Well, I will let the client answer themselves on their view on the CapEx and what's being planned in their development program. We haven't seen a material or significant decrease in this tendering and in particular in the North Sea. So I mean we still see ambitious plan from our operators. Timing of projects can be difficult, but the project are still there.

Regarding our own plans, I think, we are taking a very cautious approach on the CapEx side. It’s true that we have announced some CapEx numbers and but what you have to keep in mind is that, when you look at the CapEx that we are foreseeing in the years to come, they come from, I mean, different sources. I mean the first one is success or no success in the PLSV contracts with Petrobras and we expect Petrobras to award to the market a number of PLSV at the end of the year.

If we were to commit to this CapEx, it will be with the backup of long-term contracts and with rates which allow us to exceed our financial objective in terms of cost of capital or recover more than our cost of capital. So I believe it's a pretty good investment if we were to be successful on these contracts and future will tell if we are not. Regarding the additional vessels that we are committed to, we committed to a new-build PLSV last year. We see a very high activity in the North Sea not only in the foreseeable future, but the long-term for this type of vessel and it's part of the renewal of the fleet.

And our newly announced Heavy Construction Vessel, in fact, is to position ourselves at the high-end of the market using technology and trainee’s capability, but also some other technology on which we all has to execute the project the way we see they will be developed by the clients in the future, and in particular with Statoil in Norway. So I think it's a prudent investment plan that we have and no CapEx is committed to without a thorough analysis and without us coming to the conclusion and they are both coming to the conclusion that we will get the necessary financial return.

Frederik Lunde –- Carnegie

Just a follow-up if I may…

Jean Cahuzac

I don't believe that we are taking risk there

Frederik Lunde – Carnegie

And you've clearly being very good at securing a low cost of debt. So I'm wondering what cost of capital they're buying for new projects.

Ricardo Rosa

Fredrick, when we are evaluating our projects on a standalone basis, we and our investments associated with them, we will use a hurdle rate somewhere between 10% and 11%, so we would be looking for returns, value-adding returns in excess of that hurdle rate.

Frederik Lunde – Carnegie

And does that number take into account where you are in the business cycle and kind of where do you think you are in the cycle now?

Ricardo Rosa

If you mean in terms of the hurdle rate, I mean we tend to work with a small range of hurdle rates as I mentioned between 10% and 11% and the decision to go or not go on the particular CapEx project obviously is a function of how we see the marketplace evolving in the coming years, but as you can imagine, I mean we run, locates and base case and do sensitivity analysis, so that management and the Board can feel comfortable that it's very likely that we meet the objective.

Frederik Lunde - Carnegie

Great, thank you.

Operator

Your next question comes from the line of Andrew Dobbing of JPMorgan.

Andrew Dobbing – JPMorgan

Yeah, hi, good afternoon. Couple of questions from me, first of all, the North Sea, you talk about the utilization is deteriorating in 2013. Like as you're still assuming, that's going to recover in 2014, and secondly a quick question on your technology slide, you mentioned composite materials. Can you talk about how you think developments are going on the kind of development of pure composite rises on flow lines, is that something you are involved in and can you comment on how you think progress is going there? Thank you.

Jean Cahuzac

Yeah. First, maybe to clarify your point, I may not have been clear on the deterioration of utilization in North Sea. What I meant by that, that in fact in Q1 and probably in Q4, we will see utilization more in line with the past year of taking into account seasonal effect, so when we are talking about low utilization, it was low utilization than Q1 2012, where we had seen at the time an unusual high utilization, but overall I mean we foresee a good utilization of the vessel in the North Sea,

Andrew Dobbing – JPMorgan

Okay.

Jean Cahuzac

What is putting a bit of headwinds in the North Sea for us is the fact that the Ocean after going to dry-dock will be on her way to Guará-Lula into Brazil and therefore one be available in the North Sea for operation and that's one less that's in the North Sea, but I didn't meant to say that we're hoping low utilization to North Sea overall. Regarding the technology, I'm going to let Jean comment on that.

John Evans

Yeah, you know Composite Materials is one area that we are tracking in terms of the potential developments. We are involved in specific discussion with one of the provider's offline as well. I think it's going to take quite some time for the composite technology to make its mark on the industry, in theory it offers a lot of opportunity in due course, but we are certainly making sure that we track that capability, but I think it's first deployment will be in very benign environment, in very standard environments that we work in shallow waters and such like initially for it to get it's track record and credibility, but we're looking at five to 10 years before we get to that stage we believe and then it's used in the much deeper, much harsher environments will take longer in again.

Andrew Dobbing – JPMorgan

Okay, thanks very much. Just one more question, a quick question on pricing in Brazil, you talk about higher pricing on the, on the renewal of PLSV contracts. I assume that pricing will be sufficient to offset higher CapEx or higher OpEx costs in operating in that region?

Jean Cahuzac

Absolutely, I think the industry in the past years, if you go back a number of years from now, I mean had underestimated the cost of inflation on the people's side in particular. I think it's today is something that we do understand and monitor pretty well and we have taken into account when we propose a day-rate to Petrobras, not only a better formula, but also the necessary contingencies to cover the inflation of the (inaudible) that we foresee in Brazil. So it's something the way we've taken a cautious approach and we are comfortable with the numbers.

Andrew Dobbing – JPMorgan

That’s clear, thank you very much.

Operator

Thank you. Your next request comes from the Goran Andreassen of RS Platou.

Goran Andreassen – RS Platou Markets

Yeah, hi, good afternoon, just two questions for me. First one is regarding 2013 margins. They seem actually to be holding up pretty nicely considering offer execution on projects booked in the lower price in that environment in 2010 as well, 2010through 2012. You’ll also have higher than usual level of [early phase] work in the mix due to the fact that you've been successful in booking lots of projects that are more complex and you also have Guará-Lula at the no margin contributing at around 7%, 8% of your revenue this year. considering that, that we should expect to see significant margin expansion at one point, but it's probably not a 2014 event but 2015 onwards. Could you comment on what you see potentially where margins could go in this cycle?

Jean Cahuzac

As you know, it's a difficult question. I mean margin are improving and we see things going in the right direction. The tightness of the market depends on the type of project and the type of assets, but I think when you look at the overall margin for the Group, it also depends on the portfolio of project. The fact that we are seeing larger projects, large EPIC projects, means that we foresee in the future more revenue coming from procurements in particular and it can represent a very high level of the value of project and in some cases up to 30% or 40%.

What we are doing when we look at risk mitigation on these projects is actually mitigate the risk and balance the risk with our clients on the procurement side and therefore, there is a lower margin on the procurement than there is on the more added value of the rest of the project, which is project engineering and offshore execution. So while we see this overall trend of margin improving, difficult to give you a value for 2014 or 2015 or 2016. It also obviously depends on project execution, and you mentioned Guará-Lula, which as you know, I mean we've taken losses on Guará-Lula at the end of 2011 and at the end of 2012. So Guará-Lula is a loss-making project. But I'm quite pleased with the execution that we have on the other projects worldwide and providing that we maintain this good execution, we should also see improvement of the overall market. But very difficult to give you numbers and I would not go in that direction.

Ricardo Rosa

Goran, I'd just like to add one observation to Jean's comments and clarify a potential misunderstanding. We don't distinguish, we don't have differing margins depending on the phase at which we find ourselves in the course of a project. So we don't have a distinction, we recognize a blended margin across the life of the project as we recognize the percentage of completion. But what happens is that on every project we have contingencies and the large amount of contingencies relates to operation. So when we come to operations on the well-executed projects, what happens is that we release contingencies and you see an improvement of the margin at the end of the project. It comes with the accounting method. It's basically to represent the actual milestones which are reached and successfully executed in the life of the project.

Goran Andreassen - RS Platou Markets

Okay, so then regarding contingencies, you had actually quite okay margin West Africa this quarter. Was that helped by contingencies released on the MPN Satellite Project?

Jean Cahuzac

I am not going to comment on individual project, it's again a portfolio of different things, but I think we results show that we are executing very well in Africa.

Goran Andreassen – RS Platou Markets

Yeah. And then just a final question, you did mentioned on Guará-Lula back, it has entered into the offshore phase which is critical of course, but that also means that you are in more control of the remaining policy scope, but you say that it remains a challenging project. Should we take that as some early warning of potential additional offers or is it just, should we, does it look okay?

Jean Cahuzac

When we made this, comment we want to highlight that we are indeed starting the more challenging phase of the project as far as operation are concerned. I mean the Polaris has started the operation in April; the ocean will operate later on. We are going to install the buoys and that's all that in an environment in Brazil, which is more difficult than in some other countries that relates to administration, to importation, to local suppliers. I mean all those things we talked about in the past and then also the time of the year where the weather in Brazil can have an impact on some operation. So when we were talking about challenging project, it was basically referring to the phase where we are in for the project as well as they are still in Brazil, some challenge which maybe don't exist in other countries. That was the comment.

Goran Andreassen – RS Platou Markets

That’s very helpful, thank you.

Operator

Thank you. Your next request comes from the line of Ian Macpherson of Simmons.

Ian Macpherson – Simmons & Company International

Thank you. Jean, there has been some media noise recently about Aasta Hansteen and I guess the government wringing hands over, I guess, the cost of the project and more broadly, I guess, the impact of recent tax, higher taxation in Norway. Is there anything to that based on your perspective and any sort of backlog risk you see with that project? And more broadly, do you see any impact on Norwegian activity as a result of recent tax changes?

Jean Cahuzac

No, any impact in the one direction is not positive, but we haven't seen an immediate effect and we don't foresee an immediate effect. I would like to take, however, the opportunity to comment on the cost and the cost in Norway, which is definitely a concern, and in particular the costs associated with regulation and people in Norway, which means that it's more and more difficult for the Norwegian industry to be competitive outside of Norway. So the general comment about the cost of project going up, the cost of operation going up is true and [one] but in particular in Norway, we are seeing more and more accelerated cost and I personally don't think it's good for the industry. But we haven't seen an impact for Subsea 7 and we don't see in terms of the standard, in terms of the activity, but it's increased the cost of the clients without any doubt. Even if it is a positive pass-through of course from outside, it increases the cost of the developments in all

Ian Macpherson – Simmons & Company International

And you're not seeing anything specific with regards to revised outlook for Aasta Hansteen?

Jean Cahuzac

No, we haven't seen at this stage anything specific.

Ian Macpherson – Simmons & Company International

Just a quick follow-up it hasn't come up, but I just wanted to sort of confirm that of course you don't guide specifically, but I think that we infer that you are effectively still okay with the consensus EBITDA estimates for 2013 based on your comments today?

Ricardo Rosa

I think we repeated what we said at the end of the year, but we will see some progress compared with 2012 and obviously, I mean, if there was some significant change compared with consensus and/or our review, we will notify the market as soon as we would be aware of the changes.

Ian Macpherson – Simmons & Company International

Very good, okay, thank you.

Operator

Your next question comes from the line of Rob Pulleyn of Morgan Stanley.

Robert Pulleyn – Morgan Stanley

Hi, good afternoon, gentlemen. A couple of questions from me if I may. First of all, regarding oil company behavior, in your view, in your experience, are delays between the start of, I suppose, leading indicator engineering activity and progression to final investment decision and contract award. Are those delays getting longer on average or are they similar to in the past if you can maybe put a little bit of color around that that would be great? Secondly, obviously you highlighted the working capital improvement in the first quarter. Could you give us a little bit of guidance as to how we should think about that for the full year? Is it going to be sort of steady state from now or is that going to reverse over the course of 2013? Thank you very much.

Jean Cahuzac

I will let Ricardo answer on the working capital, but first one on the delays, I mean, which would come from engineering the project management. The challenge of the industry have been there for a while, I mean there are constraints on the people availability as an industry. There are constraints from the supply chain. There is the operator working with a company like Subsea 7 and others to review the optimum technical solution to lower the cost on the project. So that means that in some cases, it takes more time to launch a project.

I wouldn't say it's true for every project. I don't think, I think it would be a bit of [integration], but we are seeing the constraints of supply chain, the constraints of lack of human resources with the right qualification in some cases, delaying a bit the project. Nothing new in this quarter compared with what we've seen for the last 12 months. It's one of the theme which had identified in the past. Whether it's been for Subsea 7, I think it means two things, it means that we need to have a very detail and total review of the resources available and making sure that we don't compromise the quality of what we are doing in our approach by trying to do too many things or whatever so I think we have a good control on that. I think it's also bring opportunities because there are not many companies in the industry which can provide the clients with the flexibility on the vessels, but also the resources and the expertise that we have to answer to their needs. So I would say, overall, it's a differentiator for Subsea 7 to be able to face these challenges with the client. Regarding the working capital, Ricardo?

Ricardo Rosa

Yes, Rob, I guess, I mean working capital management in our industry is, as you are aware, a pretty complex task. I mean, our target is to minimize any increase in working capital. So for 2013, we would like to keep working capital at or below what we had for 2012, preferably below. So, I mean that is the broad target that we are looking at, but I do want to add a couple of comments that may help you model it going forward. First of all we as a Company are very conservative in the way we recognize potential changes to scope in the form of variation orders that we can agree with clients. We have to have a very high level of confidence that we will reach agreement with the clients before we record a receivable, and clearly that has an impact on working capital. Our activities are a mixture of lump sum contracts, where we aim to be cash neutral throughout the life of the contract, absent any very significant variation orders that may arise.

On the other hand, we are also a Company that runs on a day-rate basis, particularly with regard to the vessels and for instance the PLSVs in Brazil. There we would tend to have positive working capital, because we will build at the end of each months and we will have perhaps 30 to 60 days receivable outstanding. And the last comment, I'd make is that client mix does have an impact and in particular there is Pemex in Mexico that as part of its standard contractual conditions will insist that all materials procured on its behalf for a contract, be received and certified before any payment is made to the contractor.

So if there is a very significant growth in our activity in Mexico, you would expect some upward movement in working capital, but recall I mean that something that we price in the project, I mean that's why we price it, but it clearly has a working capital impact as well we do have a lot of work in that part of the world, but we take that into account when we evaluate our cost and the cost of capital is obviously important.

Jean Cahuzac

Exactly.

Robert Pulleyn – Morgan Stanley

Okay, very helpful gentlemen. And then one follow-up question if I may, in terms of return of cash to shareholders, last year obviously you returned a large volume and you haven't committed to a, shall we say a constant dividend stream going forward? Is it correct to assume that you are awaiting the outcome of the PLSV tendering process in Brazil and on the subsequent announcement of who has won those units you'd be in a better place to decide whether you could return more cash to shareholders?

Jean Cahuzac

I wouldn't, I mean, I'll let you answer Recardo.

Ricardo Rosa

Okay, Jean, I think the, I would not, the Board has already indicated that it will recommend a dividend be paid of $200 million in 2013, obviously that dividend is subject to shareholder approval. So it is not if there is any absence of cash returns we've seen this year. The fact is that we clearly take into account when we are evaluating any additional returns of cash to shareholders are, clearly our capital expenditure commitments and I wouldn't like to say that it's the PLSVs to drive that, but we have provided guidance on the level of CapEx, which we are seeing this year and in the next few years.

The other factor too is the maturity of the convertible bonds. In October this year we have $500 million of converts that mature. At this stage, our share price is quite close to the strike price of the bonds, so there is a question mark as to whether or not this bond will convert or whether it will have to be redeemed for cash and clearly that plays into our evaluation of our cash needs, but this is, but the evaluation of our cash needs is a topic that's reviewed very regularly with the Board, and to the extent that it makes sense and the Company can afford it while prioritizing growth opportunities, it will consider returns of cash, both in the form of dividends and in the form of share buybacks.

Robert Pulleyn – Morgan Stanley

Thanks very much.

Operator

Thank you. Your next question comes from the line of Erik Tonne of SB1 Markets.

Erik Tonne – SB1 Markets

Yes, hi, thank you for taking my question. Two questions, if I may. The first is quite short. Could you potentially comment roughly on the size of the settlement on Fram with regard to how that's impacting the North Sea operating margin for the quarter? The second element is, we're seeing more projects postponed, as you were saying, but could you just shed some light on how you see prices developing going forward in the different regions in the current environment? Thanks.

Jean Cahuzac

I think on Fram, I mean it's commercially sensitive and we are not in a position to comment on the value. Regarding the project, the pricing on the project, et cetera, you know although we are seeing projects being postponed, as we said, we are also seeing a very high tendering activity, in particular in some part of the world, and we mentioned the North Sea, but we also see increase of tendering in the Gulf of Mexico. Although the timing of the project award to the market in Africa is always difficult to define, we have seen and we probably will continue to see project being awarded to the market in the future. So the comment that I made before regarding the profitability going in the right direction of this new project it stands. We are in a good market in spite of projects being postponed and we need to remain cautious, but the market is still going in the right direction. So, profitability should improve.

Erik Tonne – SB1 Markets

Okay, thanks.

Ricardo Rosa

Shall we move to the next question please?

Operator

Thank you. Your next question comes from the line of James Evans, Canaccord. Your line is open.

James Evans – Canaccord Genuity Limited

Hi, sorry for going about cost, I've got a couple of questions, if I may. Firstly, first of all, the inflation ratio seeing in subcontracts works along with different equipments and subcontracting lines and also in salaries at the moment. And secondly, obviously, there are a lot of bidding activity going on in West Africa at the moment. I just wonder if you could talk how local content in Angola and Nigeria relative to maybe, say, Ghana and (inaudible). Thanks very much.

Jean Cahuzac

Yeah, I mean regarding cost, for instance, when we talk about cost of the project, they are costs that the service industry pass to the clients. So, when we talk about cost inflation on the overall project, the challenge are more on the total budget of the operator. Regarding inflation on compensation, because there are shortage of resources, I mean, there is some inflation on cost. We've seen some moderation overall around the world on this inflation cost; depends on the countries; still very high in Brazil, but relatively low in some other countries. But, I think we've seen some moderation there although the cost inflation is still significant, but probably less than 2012.

Regarding the local content, the local content has the cost and increases the cost of our organization. When you have to do the work in some of the country, I mean, if you take country Nigeria, Angola, I mean, you increase your cost there. It increases the cost for the operator, because it sometimes takes more money, more budget to actually fabricate in some countries and some others. So, again, that's something I think we are defending well and something that we are putting in our costs when we present the bid to the operator. But the local content remains very important in our other countries. Important in Brazil, important in Nigeria, important in Angola; maybe a bit less cost impact in Congo and Ghana just to give you a kind of the flavor.

James Evans – Canaccord Genuity Limited

Okay. Thanks very much.

Operator

Thank you. Your next request comes from the line of Frederik Lunde of Carnegie.

Frederik Lunde – Carnegie

Hi again, sorry to keep pushing on this, but looking at Brazil, for example, where you are now chasing this PLSV contracts. On average since 2005 or so the EBIT margin in Brazil has been about 2.5% on my numbers and this all has been promises of better returns going in the future since, if I recall, in 2007, 2006 and it hasn't materialized. So I mean why are you so keen on chasing more business there as long as Petrobras sticks to sort of day-rates contract format and inflation remains quite challenging?

Jean Cahuzac

I think when I look at Brazil, I mean, there are basically three type business segments. There is a business segment of the PLSVs and day-rate contract. The Seven Seas, by the way, I mean the new contract of the Seven Seas is more than $300 million is a bit of lump sum, but mainly a day-rate contracts, so it's low-risk project where I think we do expect margins to improve when we renew the contract or get other contract for the reason that I mentioned before, it's a risk profile that is acceptable, it's a risk profile that we know to manage. So that's a positive side.

Then you have a second business segment, which are the EPIC project with the IOCs. It’s a limited market somewhat, but to give you an example, the next project to be awarded to market is probably BC-10 for Shell and I think there are project which are running a similar way as the project which are run outside of Brazil when they are run by IOCs and you also have some EPIC projects, small size, middle-size run by Petrobras with free placement of equipment where the risk is manageable. Where, when you look at our Brazilian results, I mean they have been impacted by Guará-Lula as you know, that’s what we told and I think we've been very clear to say that post Guará-Lula it’s not our intention to embark in additional project with Petrobras with the same risk profile that we will pass on a number of projects if we cannot align ourselves with the plans to have a risk profile which is acceptable and we should take into account that the renewal of the PLSV and, we’ll have a positive impact in 2014. I do expect improvement of results in Brazil in the years to come post 2013.

Frederik Lunde – Carnegie

All right.

Unidentified Company Representative

Thank you.

Operator

Thank you. And your last question comes from the line of Henry Tarr at Goldman Sachs.

Henry Tarr – Goldman Sachs

Hi there. Just a couple of quick ones. Firstly on order intake, clearly Q1 was very strong. The delays in Brazil and AFGOM, should we expect lower order intake through the balance of the year?

Jean Cahuzac

It’s very difficult to look at order intake on a quarterly basis, so Q1, Q4 last year was relatively weak, Q1 was very strong. I think we see good order intake in the quarters to come. I’m not saying it’s going to increase every quarter, but I think the trend is still going in the right direction.

Henry Tarr – Goldman Sachs

Okay, and then in Brazil, in the quarter, could you just give us some indication as to the split between the dry-docking in UOTE project in terms of the loss?

Ricardo Rosa

I am not prepared to provide that level of granularity. I mean would emphasize that the UOTE adjustment was effectively the reversal of the cumulative margin on the project as a result of this very significant scope reduction. So, you have the impact of basically cumulative profits of prior periods. So it's not an insignificant element, but that's as far as I’m able to provide guidance for you.

Henry Tarr – Goldman Sachs

Okay. There was no negative impact of Guará-Lula in the quarter?

Ricardo Rosa

Guará-Lula continues to operate with no margin as indicated in previous quarters.

Henry Tarr – Goldman Sachs

Okay. And then just lastly on the PLSVs, the existing ones, what is left to be renegotiated and what's the timing on that as far as you can see today?

Jean Cahuzac

We are in negotiation on the day-rate for the renewal of PLSVs and so, basically the next two which should be on the table are the Normand Seven and the …

Ricardo Rosa

We have the condo…

Jean Cahuzac

No, that's all we have. The Normand Seven and the Phoenix, and then the condo will be later in the year. So, the next two should be the Normand Seven and the Phoenix difficult to know when we will land with Petrobras, but I think we are making some progress.

Henry Tarr – Goldman Sachs

Okay. All right, that’s great. Thank you.

Jean Cahuzac

Thank you. And with that, I think I would like to thank everybody for participating to this earning call and thanks for the question and looking forward to talk to you again at the next quarter. Thank you.

Operator

That does conclude this conference for today. Thank you very much for participating. You may all disconnect.

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