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Compagnie Générale de Géophysique-Veritas SA (NYSE:CGG)

Q2 2013 Earnings Call

August 01, 2013 4:00 am ET

Executives

Christophe Barnini - Senior Vice President of Group Communications

Jean-Georges Malcor - Chief Executive Officer, Senior Executive Vice President of Acquisition Division, Director and Member of Corporate Committee

Stephane-Paul Frydman - Chief Financial Officer, Senior Executive Vice-President of Finance, Corporate Officer, Member of Group Management Committee and Member of Corporate Committee

Benoît Ribadeau-Dumas - Deputy Senior Executive Vice President of Acquisition Division and Marine Business Line and Member of Corporate Committee

Analysts

Alejandro Demichelis - Exane BNP Paribas, Research Division

Julien Laurent - Natixis S.A., Research Division

Robert Pulleyn - Morgan Stanley, Research Division

Geoffroy Stern - Kepler Cheuvreux, Research Division

Ryan W. Kauppila - Citigroup Inc, Research Division

Christopher Møllerløkken

Jean-Luc Romain - CM-CIC Securities, Research Division

Caroline Hickson - UBS Investment Bank, Research Division

Bertrand Hodee - Raymond James Euro Equities

Operator

Good morning and welcome to the CGG Second Quarter 2013 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to CGG. Please go ahead.

Christophe Barnini

Yes. Thank you. Good morning. Welcome to the CGG second quarter 2013 financial results conference call. The quarterly financial information including our press release, the detailed financial results, the 6-K and the presentation are available on our website.

Some of the information contains forward-looking statements, and these forward-looking statements are subject to risks and uncertainties that may change at any time and therefore the actual results may differ materially from those that were expected.

The call today is being hosted from Paris, where Mr. Jean-Georges Malcor, our Chief Executive Officer; and Mr. Stephane-Paul Frydman, our CFO, will provide an overview of the second quarter as well as provide comments on our outlook. Also on the call today is Sophie Zurquiyah, in charge of the GGR division; and Benoît Ribadeau-Dumas, in charge of acquisition.

Following the overview of the quarter, we will be pleased to take your questions. And now I will turn the call over to Jean-Georges Malcor.

Jean-Georges Malcor

Thank you, Christophe, and good morning, all. Starting with a few lines of introduction. Thank you for joining the CGG Second Quarter 2013 Conference Call. Pleasure to be back with you. And this is the second quarter of the new CGG following the acquisition of Fugro Geoscience. And I'm pleased to say, right at the beginning, that this integration is going very smoothly and even ahead of plan.

Now moving on Slide 4, looking at the strong quarter 2013 that we have posted this morning. I'm very pleased indeed to report that this quarter was both a quarter of solid operational and financial performance. If we look at our operational performances, in equipment, Sercel delivered sustained performance with revenue above $250 million and a 28% EBIT margin in line with our plans, confirming that Sercel's business model is solid even during the quarters where we have no deliveries of land equipment from mega crews.

In Acquisition, our Marine division achieved record quarterly utilization rates across the fleet, confirming our improved operations, the full integration in our fleet of the Fugro vessels and the better-than-expected performance. In non-acquisition, the traditional seasonal low activity after the winter season was hampered by severe adverse weather conditions in several areas and challenging security issues in North Africa and Egypt.

In GGR, this was also a quarter of validation for the new CGG and for our new Geoscience profile. The new CGG is starting to shape up nicely and to bear fruits. The GGR division delivered a very high 26% operating margin, thanks to record Q2 multi-client sales and high multi-client cash prefunding rate of 84%, but also due to solid performance and activity across the other GGR businesses. Our backlog as of June 1 was $1.3 billion after strong June sales both at Sercel and multi-client. Very strong leads are not included in the backlog, and they are currently in discussion with a coverage of around 95% in Q3 and about 60% in Q4.

Now if we look at our financial performance. We delivered a very good financial performance with group revenue up 24% year-on-year, above the $1 billion threshold with a mix 18% Equipment, 46% Acquisition and 36% GGR.

Group EBIT increased 21% to $117 million, a margin of 11%. This corresponds to $128 million EBIT before the negative impact of $11 million due to the nonrecurring charges linked to the Fugro integration. Our operating cash flow was $204 million, significantly up from the $63 million of last quarter.

Now I'll hand the floor to Stephane-Paul Frydman for more detailed financial results.

Stephane-Paul Frydman

Thank you, Jean-Georges. I'm on Slide 5.

So as mentioned by Jean-Georges, CGG revenue was $1,032,000,000 this quarter, up 24% year-on-year and in line with our target of 25% growth in revenue from 2012 to 2013. Such revenue growth at group level is a combination of the respective growth of each division contribution, meaning a 19% decrease for Sercel contribution given intra-group sales, meaning the equipment sold to the division acquisition, representing 26% of the division revenue this quarter; a 19% increase for Acquisition contribution given intra-group sales, meaning the acquisition component of the multi-client CapEx, representing 21% of the division -- sorry, 31% of the division revenues this quarter; and an 84% increase for the GGR contribution, meaning all the revenues of the division. On total basis, as said by Jean-Georges, the respective rate of the division in Q2 amounted to 18% for Equipment, 46% for Acquisition and 36% for GGR.

Moving down to EBIT. The G&A stand this quarter at 5.2% of the revenues versus 5.4% in 2012, leading to an EBIT of at $117 million, including the nonrecurring items related to the Fugro acquisition integration and at $128 million before those nonrecurring items, meaning the same high level than the one generated in Q1 and corresponding to 12% margin.

This 12% margin was made whilst taking into account the impact of elimination and unallocated central costs of a 28% in Equipment margin, delivered in line with expectations; a 5% Acquisition margin; and a high 26% GGR margin driven by record multi-client sales for second quarter. The income from the equity investee was negative at minus $5 million this quarter, due mainly to the contribution of our 40% stake in the Seabed Geosolutions joint venture hampered negatively by the delays of some operations and globally ramp up slower than originally targeted.

Down from EBIT to the net income, the cost of debt was a $47 million charge. The income tax amounted to $36 million based on the $10 million in taxation, coupled with an average 36% GGR, leading eventually to net income amounting to $36 million, including the nonrecurring items related to the Fugro acquisition integration.

Just as a reminder concerning those nonrecurring items, there are many made by acquisition financial cost, meaning the cost of advisor fees, bridge loan and so on; some sunk cost related to the 2 ex-cruise vessel we stopped to operate before year end, the Atlantic and the Geo Barents; and miscellaneous integration and restructuring costs. All those costs are deemed to be $85 million over the year, meaning 62% already booked in H1 and to be globally balanced by the $85 million capital gain related to the reduction of our stake in Seabed joint venture we recognize in Q1.

So moving to Slide 6 and the cash indicator. You can see that the group EBITDA was high this quarter, $324 million, corresponding to a 31% margin. That level of EBITDA, coupled notably with the negative change in working capital related to the multi-client sales mainly booked in June, led to a high cash flow from operation at $204 million, quite twice the comparable 2012 indicator.

On the investing side, the CapEx were monitored tightly this quarter being slightly lower than expected. That -- they amounted to $198 million, including $77 million of industrial CapEx and $107 million of multi-client cash CapEx being mainly offshore and well prefunded at 84%. I will remind you that we are targeting a prefunding rate of 75% over the whole year. All in all, and given $58 million of cash interest paid over the quarter, the free cash flow was negative in Q2 at minus $43 million, a far better performance in Q2 2012 where it was $129 million.

To provide you with a year-to-date view, which was to note that overall H1, the total CapEx amounted to $400 million being globally halfway compared to what is targeted for the whole year, with industrial CapEx at $165 million, representing 45% to 50% of the now targeted 2013 envelope. And multi-client cash CapEx at $235 million, representing 50% to 55% of the now targeted 2013 envelope. We remind also that -- about the free cash flow, the 2 are in H1 at $191 million -- minus $191 million, and we plan to be positive year-over-year, in line with what was done in 2012.

Moving to the balance sheet on Slide 7 and the picture of the capital employed. They were at June end at $6.9 billion, corresponding to a slight increase compared to March and by an increase of 1 point -- $0.1 billion. So on the industrial side, from bottom to top, the working capital is stable in relative terms at 57 days of revenues. The net fixed assets are slightly increasing, meaning that the CapEx were lower than the depreciation this quarter.

The multi-client library is slightly up at $751 million and is comprised of Marine data library for $580 million, Land data library for $131 million and Robertson basin data for $40 million. The depreciation rate was low this quarter at 51% in Q2, but it's still expected to be close to 65% in average over the whole year 2013. Last, the goodwill is unchanged at $3.1 billion, and I remind you that it is including $0.7 billion related to the Fugro acquisition.

On the financial side, the net debt is up to $2,170,000,000 from $2,092,000,000 as of the end of March, corresponding to 47% net debt-to-equity ratio, quite stable compared to end of March. The cash balance at June end was down to $359 million. The decrease compared to March end being after [ph] redemption of a dual [ph] revolver facility and 1/3 to the payment of accrued interest.

Looking at the split of the capital employed between the reporting segments, we can see that the picture is quite unchanged compared to March end, which on the one hand, capital employed for the Equipment division as well at a moderate $0.8 billion, corresponding typically to a pure accounting value as Sercel development was historically driven by organic growth; and on the other hand, capital employed respectively for the Acquisition and GGR division, closer to economic values as the development of those divisions were based mainly on external growth and recent M&A moves.

So GGR is then seen with a minimum $2.8 billion minimum value, contributing at -- for 100% to the group value, and whereas Acquisition is seen with a $3.3 billion minimum value, contributing for 80% to the group value given an average 20% of intra-group sales. Those minimum value, obviously, are challenged in the current manner for the impairment test we perform at each closing of our accounts.

Moving to Slide 8. As usual, as you know, we are trying to manage very productively and opportunistically our indebtedness and on our financial resources to benefit from a solid maturity umbrella and optimize cash cost of the debt. So as announced during our last Q1 communication, our Q2 priorities were: first, to refinance ideally 50% of the Fugro vendor loan, which have to be repaid this year; and second, to renew and enlarge, as the case may be, our U.S. and French revolving lines that were both maturing by January end 2014. So that's what we negotiated those last weeks, both with some Nordic banks syndicated by Nordea and with our U.S. and French bank pools.

And we have to put in place in July the following resource, the one mentioned in the slide, meaning first, a $200 million secured loan with collateral -- as collateral per vessel with a 5-year maturity and weighted by a fixed 4.4% interest rate dedicated 2/3 to the partial reimbursement of the Fugro vendor loan; and $165 million of U.S. revolving line with a 5-year maturity and weighted by a LIBOR plus 2.5% interest rate, and a $325 million French revolving line signed yesterday, with a 3 plus 3 -- 3 plus 1 plus 1 year maturity, which is the usual European practice and that can be drawn in euro and in U.S. dollar at the same price, LIBOR plus 2.5% on the U.S. dollar side.

So we took immediately advantage of this increased liquidity and the attached cash [indiscernible] in our balance sheet to launch the early redemption of a significant part of our most expensive debt instrument. So out of the $350 million of our 2016 high-yield bond tranche weighted by a 9.5% coupon, we repaid $125 million that should trigger over the 3 operators [ph] to come, $20 million net cash savings.

So I'll hand the floor back now to Jean-Georges to make the operational overview of the quarter.

Jean-Georges Malcor

Thank you, Stephane-Paul. So on Slide 10, and let's focus now on the operational overview of the quarter, starting with the equipment, which displayed sustained strong performance.

The Equipment total revenue was $254 million and was slightly up sequentially with a strong EBIT margin at 28%. This revenue and margin level are quite an achievement and clearly showed the resilience of Sercel, as we did not deliver any Land equipment for mega crews since the beginning of the year contrary to last year.

Marine equipment sales represented 48% of total revenue. Sales were strong in Eastern Europe, Asia and Russia. Sales in North and Latin America during the quarter confirmed the commercial success of UNITE, the Sercel's wireless land acquisition system.

Sercel also successfully launched the new multi-sensor solid streamer during the AEG, the Sentinel MS streamer. The Sentinel MS offer directional measurement for both cross-line and vertical wave fronts and delivers multi-sensor data sets for enhanced broadband imaging. Globally, the Equipment division EBIT margin was in line with our forecast at a solid 28%.

Now on Slide 11, if we move to Acquisition. Total revenue of the Acquisition division increased to $605 million, up 2% sequentially and up 30% year-on-year, with an excellent operational performance by Marine acquisition and the traditionally low seasonal activity in Land acquisition.

Marine acquisition revenue increased sharply to $511 million, up 14% sequentially and up 53% year-on-year. Marine production was high this quarter for the entire fleet, with record availability and production rates at 93% and 92%. All operations went very smoothly with excellent continuity and low level of transit in yard, even though we are operating the most complex surveys in the industry.

A good example of a strong Marine performance is IBALT, the multi-client project we are shooting with our StagSeis configuration in the Gulf of Mexico. This project is probably the most complex acquisition settled for the industry, with 6 vessels working together, 2 large seismic vessels recording and shooting and 4 shooting vessels.

On this project, we have been shooting with very limited downtime for more than one year. And we will have, by the way, after such a lengthy operation, to stop in Q3 for our planned and mandatory dry dock. Both sides continue to have a lot of traction with wide acceptance, excellent results and fast turnaround time. A large part of the fleet was located in the North Sea where 6 vessels were in operation, 4 in the Gulf of Mexico and 6 in Asia.

On the Land side. Land acquisition revenue totaled $94 million and was down 35% sequentially and 28% year-on-year. During this typical weak quarterly performance due to the demobilization of the winter crews in North America, land crews operated in challenging security and safety conditions in North Africa and in Egypt and in severe unfavorable climate conditions, particularly in Oman and in southwest of France.

The global Acquisition division EBIT margin was 5%. While the Acquisition EBIT contribution in Q1 was equally split between Marine and Land, this is a totally different picture this quarter, with a big contrast between an excellent profitability in Marine and losses in Land. When compared to last year, the EBIT improvement from 1% to 5% is entirely coming from the Marine acquisition.

Just one on Airborne -- word on Airborne activities, they should join CGG on September 1.

Now if we focus on the GGR division. I'm on Slide 12. The GGR division revenue was $367 million, up 41% sequentially, related to a group performance across all businesses in a strong market and with excellent contribution of our newly acquired business lines. Multi-client and basin data displayed a strong increase in revenue to $215 million, up 75% sequentially and 149% year-on-year. Prefunding revenue was $87 million. Multi-client cash CapEx was at $107 million and was mainly focused in the Gulf of Mexico with a continuation of our IBALT program and on onshore in the Marcellus region.

After sales were at a high level across the regions and particularly in Brazil following the Equatorial Margin lease sales and ahead of the October Santos pre-salt bid round. The multi-client cash prefunding rate was 84% this quarter, with an increasing interest for IBALT, the multi-client StagSeis program. And thanks to a very fast and efficient processing, we are now the first to start [ph] synergies of this program and results are absolutely spectacular, showing significant synergy elimination improvement of complex subsoil geologies.

Imaging and reservoir revenue was $152 million, up 35% year-on-year and 12% sequentially. The imaging and reservoir characterization markets remain bouyant due to the increasing volume of data and a high number of projects in more complex geologies. Globally, the GGR division EBIT was $96 million, a margin of 26%.

Now moving to the outlook and Slide 14. Looking forward to the end of 2014 -- 2013 and 2014, we remain confident about the level of spending of our clients. They are facing difficult exploration and production challenges, for which geoscience should play a key role. And our reinforcement in the geoscience should position uniquely our company along this chain of this E&P.

In this context, CGG, with a balance portfolio of clients and a strong focus on better resolution images, better illumination of complex subsalt of subbasal geologies, better 4D for existing reservoir and better broadband for deep targets should be ideally positioned. We strongly believe that the national oil companies, such as Saudi Aramco, PEMEX, ONGC, Petrobras and others, but also Rosneft or Chinese oil and gas company, have long-term programs and will maintain or increase their investment, while IOCs independents should also maintain a high level of their budget dedicated to exploration particularly in emerging areas or in regions or provinces with new technologies.

We're anticipating increasing demand for worldwide geophysical activities in ultra deep waters and new frontiers. Geology and geophysics role is becoming critical and more generally, we expect an increasing impact of geoscience on production strategies shifting to tank reservoir and unconventional.

So now as a conclusion, and let's turn to our financial objectives on Slide 15. Overall, the ongoing process of integration of Fugro Geosciences is progressing well and is already a great success, thanks to every employee of the new CGG. We are very pleased with our Q2 financials and operational performance and therefore, we can confirm our financial objective for 2013.

Our growth in revenue should be around 25%. To address a sustained demand in multi-client, especially in Brazil, multi-client cash CapEx where revised upwards to $400 million to $450 million range, but with a prefunding rate confirmed above 75%. Industrial CapEx are maintained around $300 million to $350 million. We are anticipating a positive free cash flow generation and better return in capital employed which, as we already communicated, is also one of our main objective for 2013.

So overall, CGG is well positioned to start a new journey of growth and also a new journey of strengthened performance. Thank you, and I would now be pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Alejandro Demichelis of Exane BNP Paribas.

Alejandro Demichelis - Exane BNP Paribas, Research Division

A couple of questions. I think Jean-Georges, you told us what's your coverage into the end of this year. Maybe you can give us some kind of indication of what you're seeing into the first part of 2014, both in terms of coverage and maybe some kind of early pricing indications. And then the second question is, you have said there are no mega crews deliveries from Sercel first half of the year. When do you expect those mega crews deliveries to start please?

Jean-Georges Malcor

Okay. All right. Thank you, Alejandro. On the coverage side, frankly, beginning of the year, it's far too early. Number of bids are coming up now in basins, which are traditionally active in the beginning of the year, typically the Gulf of Bengal with India and Myanmar. Just to give you the bidding side. On India side, we have received the first call for tender. We're expecting 2 more to come in the next few weeks. So it's really too early to give you an indication for beginning of 2013. Okay. On the second point on the mega crews, it's -- I'm going to give you a little bit of same answer. The mega crews are coming up now. We have, particularly in the Middle East, indications or discussions -- or early discussion, I should say, with the customers, where we are really strong, if you want, by the level of the mega crews that we're talking about. It's a matter of 50,000, 100,000 plus, and one could go up to 500,000 channels. So it's also a story of the end of the year, beginning of next year. But it's becoming to be quite active, and we expect after the Ramadan in the Middle East to have the level of activity being confirmed with large bids coming up and that will be an important part of the strategy of Sercel for the remaining part of the year.

Alejandro Demichelis - Exane BNP Paribas, Research Division

So just to clarify, the disruptions because of social tension and also the weather disruptions have not affected the timing of deliveries.

Jean-Georges Malcor

No, not in those countries so far. I hope it will be the case, of course. But no, no. So far, not in those countries because here we're talking about Saudi, we're talking about Oman, we're talking about UAE and Kuwait. And so far, we have not been affected by security issues in those areas. The issue we had in Oman is last quarter, on the beginning of this one, was flooding and bad weather, but no security issues.

Operator

The next question comes from Julien Laurent with Natixis.

Julien Laurent - Natixis S.A., Research Division

The start of the year, if I remember well, you've said that 1/3 of your full year EBIT should be generated over the first half...

Jean-Georges Malcor

H1.

Julien Laurent - Natixis S.A., Research Division

H1. If I do some math, it would imply if you do 2/3 of the seasonal [ph] EBIT on the second half, that you will generate more than $800 million EBIT. So is there something wrong?

Jean-Georges Malcor

No, no, no. There's nothing wrong. It means that we have been doing a little bit better than schedule in H1. But we confirm very clearly the bracket we gave at the beginning of the year for the EBIT between $580 million and $600 million, okay. So I confirm that very, very clearly so that there is no ambiguity. And of course, on the basis of H1, we are reasonably confident that we will be within this bracket. But let me say that it's also subject to, as usual, a very strong Q4 quarter for multi-client. It is also subject to a strong Q4 quarter for Sercel because as you know, Q4 is never a very good quarter for Sercel. It's a quarter where we prepare for the winter season. So Q4 has to be strong. And of course, we need to -- that will be predicated as well to no further deterioration in security issues or in bad weather condition like we have had in H1. In H1, we had good performance, and we managed to, if you want, offset the bad weather and security conditions. But obviously, there is so much we can do when we have adverse effects like that. So it's true that when you look at the current performance of EBIT, we could expect more for the global year. But our plan -- we're really in line with our plan. We're a little bit ahead, which is a good thing to be. But again, I reiterate very clearly the $500 million (sic) [$580 million] to $600 million bracket for the year.

Stephane-Paul Frydman

Maybe just as a complement, Julien. Looking at the sequence, Q2, Q3, Q4, there are many events that are not that easy to place timely. Well, we have very good multi-client sales in Q2. Part of it were, in our mind, targeted more in Q3. So meaning we have a strong Q2. So we'll be on that -- we'll see what will be the level of the sale. But part of the sale expected in Q3 are already in Q2. That's one thing. Second thing, we have a very high availability rate on our vessel, meaning planned dock, and some planned dock were delayed to Q3 and Q4. So again, for the same amount, same target for the year, but different sequence between H1 and H2.

Julien Laurent - Natixis S.A., Research Division

Okay, clear. Just what is your thoughts then regarding Sercel in Q4? Are you fully loaded in terms of backlog?

Jean-Georges Malcor

On Sercel, the backlog, particularly in Land, is irrelevant. We are producing the equipment and selling the equipment. They rarely transfer for the backlog. The backlog in Sercel is mainly related to Marine. So it's not a good indicator for Sercel on the backlog side. We have strong leads. We are, as I said, discussing a number of very big contract for Sercel. But we expect and we've -- that's why we say we are confident that we'll be meeting the end of the year. But we will need a strong quarter in Q4, and that's why we are reasonably prudent and realistic about the guidance we give. Just to give a bit more color on the sequence and for the second half of the year, we say that we're expecting a strong Q4 for multi-client and Sercel, as Stephane-Paul just said. The Q3, I like to point out one thing which is important, is the dry dock program that we have for the fleet. We have been displaying for the last 2 quarters very high level of availability rate and production rate. Okay. Production rate should keep going at the high level because the operations are going fine. But the availability rate on Q3 will be lower. You remember I told you -- I told the Street that globally, we'll be at 90% for the availability rate and the production rate. If you look at the availability rate to date, we actually above this 90%. It's because we have been operating extremely well, and we have had no major incident on the fleet, which is good. But what I want to say is that this excellent performance to date, I don't want to make any compromise on our repair and maintenance doctrine that we put in place 2 years ago and we're starting to bear fruit, which means that in Q3, we will have to do -- in fact in Q3, a little bit in Q4, we will have to do programmed compulsory mandatory dry dock program, particularly for our world fleet. So there will be a little bit of soreness in the availability rate, which is fully programmed and we maintain the global 90% for the year.

Operator

The next question comes from Rob Pulleyn with Morgan Stanley.

Robert Pulleyn - Morgan Stanley, Research Division

A good set of results. It seems like Bloomberg consensus was right after all. A few questions for me, if I could, a few housekeeping ones. First of all, could you give us some color as to why the tax rate was so high for the quarter? And secondly, could you give us an idea of the size of the Sercel backlog of the total of -- as a proportion of the whole? And also, in terms of that guidance, unfortunately, I can't quite hear you. But did you say $500 million to $600 million EBIT for the full year or $580 million to $600 million? I mean, if you could just clarify that because I can't see it on the slide anywhere.

Jean-Georges Malcor

Sure. Let me clarify. It's 5-8-0, $580 million to $600 million, $580 million to $600 million. Did you hear it properly? It's okay?

Robert Pulleyn - Morgan Stanley, Research Division

Yes, I did.

Jean-Georges Malcor

Okay. Great. Okay. So tax rate, perhaps you can take it, Stephane-Paul?

Stephane-Paul Frydman

Yes, Rob, on that matter, again, well, this quarter was a quite usual one, given part of our revenues are exposed to deemed taxation. So if you try to moderate, it's quite simple. You take, say, between 25% or 30%, 33% of our acquisition revenue. You apply 5% withholding taxation, meaning a deemed taxation. So this quarter, the weight is $10 million. And on the rest of the revenues and the corresponding profit, you apply a 30%, 35%, 36% ETR and you're exactly on the number we had on active [ph], meaning the 35%, 36% obviously related to the fact that we have 1/3 France, 1/3 U.S. and 1/3 for the rest of the world. But we are exposed to those 2 [indiscernible]. So again, we are -- and we'll try to, obviously, to work on those matter. The best way to work on the deemed taxation matter is obviously to be more profitable because eventually, you have to pay 5% of your revenue somewhere. To have a decent ETR you need to be at least at a 15% profitability level. So -- and that's the target looking forward. But again, if you want to understand the model -- the tax looking forward, apply the simple rule of the thumb, which is 1 -- deemed taxation 1/3 of the acquisition revenue and then 35%, 3-5 percent, of ETR on the rest of the profit.

Robert Pulleyn - Morgan Stanley, Research Division

Okay. And on the Sercel backlog?

Jean-Georges Malcor

Yes, for the Sercel backlog, again, the Sercel backlog is not very relevant on Land sales, okay. The Sercel backlog should be around $200 million, from memory as we speak, okay. But in this $200 million, what is mainly in the backlog is the Marine part. The Land part, it's a type of sales we do in a quarter. We sell it from the inventory. So we manufacture and we sell in the same movement. So it's -- we have very little Land sales transiting into the backlog.

Robert Pulleyn - Morgan Stanley, Research Division

Okay. And I have just one follow-up on your acquisition business, if I may. Sorry to ask so many questions. But on your acquisition business, I see the EBIT margins are still fairly low. Given the large amount of capital employed in that division, could you give us some idea of what sort of margins do you think are required to hit your group cost of capital for that business? Or would you look at hidden cost of capital sort of on a group level, so to say?

Jean-Georges Malcor

Okay. I will let Stephane-Paul answering the last part of the question, but I'd like to make one comment before. When you look at the Acquisition EBIT margin for the quarter, it's about 5%, okay. And it may appear low, you're right, as a global margin. But as I said in the call, it is made of 2 things: very high performance in Marine and low performance in Land, where you know that land in Q2 is traditionally negative territory, okay. On top of that, we have had specific issues this quarter with the security and bad weather. So if you look -- if you want, if you add to the traditional negative territory of Land, the negative impact of this quarter and you calculate back what is the performance in Marine, you will see that we have had a pretty good quarter globally on the Marine side. So it's a contrasted quarter, traditionally low for Land, compounded by specific issues. But globally, you can answer, Stephane-Paul, on that.

Stephane-Paul Frydman

I mean, the picture is obviously to be -- to reach and to be back to, as I said, double-digit profitability for the whole division, which we hope to -- this is the level we hope to reach in 2014. And I remind you, as said by Jean-Georges previously, that on the Marine side, we are still on the recovery mode, meaning we align the things on an industrial matter and now the fleet is working well, the price are increasing, the profitability is globally increasing because -- due to work and to around the generation of productivity gains. And clearly, we are targeting, looking forward in 2014 and following to which double-digit profitability at the Marine level obviously and at the acquisition level globally. That's the level required for -- that's a point to justify for the NPV calculation and for the income interest to justify this -- that level for capital employed.

Operator

The next question comes from Geoffroy Stern with Kepler Cheuvreux.

Geoffroy Stern - Kepler Cheuvreux, Research Division

I have several questions actually. The first one relates to the Equipment division. Earlier on this year, you mentioned that you are expecting the top line to be flat in 2013. Anything that's changed? Or I mean, do you see any change this year? And also, related to that, what level of intra-group sales do you expect for Equipment as a percentage of total sales in 2013? And then I have a question on the fleet. Could you be a bit more precise for -- with regard to Geo Barents and Geo Atlantic vessels? When do you expect those vessels to exit the fleet? Because I suppose that they were contributing to the revenue in Q2. And also, a question on the net sales. You have not -- you have mentioned weak -- high level of net sales in Q2, but you have not provided any precise figure. So I think it will be really helpful to have that. And finally, on the affiliate in 2013, you were previously expecting, if I remember correctly, something around $25 million to $30 million this year. Obviously, Q2 is a bit disappointing. Could you update us on that for the full year?

Jean-Georges Malcor

Okay. I'll take some question and I'll pass some other to Benoît for the Marine and -- okay. I'll start with the Equipment. No, we -- no change in Equipment. We are still looking at a flattish situation for the year. The intra-group, about as usual between 15% to 16%. It went high in H1. H1 was high. Yes, but normally, for the year, we should be back to the traditional 16% -- 15%, 17% range, okay. I answer on the affiliate because on the affiliate, we said that in a comment -- in a call, we have -- the main reason for the Q2 lower level in affiliate is linked to the 40% that we have in Seabed Geosolutions, where we have a slower start of the year. However, I would like to point out that this is not something to be -- an alarm or whatever. It's just a matter of ramping up a new JV. In fact, the commercial success are coming in, are already quite good. We've a business, one in North [ph] and in SWOBS. But there are also some very big contracts which are taking a bit longer than scheduled in negotiation. And I have no doubt that the Seabed JV will recover quarter after quarter to be probably in full swing sometime next year. So that was one of the big hit on the affiliate. The other part of the affiliate are doing reasonably okay, as scheduled. So no particular other elements to mention. But perhaps, Benoît, you can comment on the fleet and the Geo Barents and the Geo Atlantic?

Benoît Ribadeau-Dumas

Yes, I mean, the situation for this 2 vessels is quite clear. I mean, we have not changed the plan since 2 quarter. The Geo Atlantic chart is coming to an end in October this year, October 2013. So we will give it back to the owner at that time. She will be delivered to the owner and in the meantime, she's shooting, for the time being, in China and hopefully until the end of her chart. For the Geo Barents, it's a little bit more complicated because her chart is coming to an end next year in September 2014, but we plan to stop operating her at least at the streamer vessel at the end of her current backlog in the North Sea this year. So she won't be a streamer vessel anymore, let's say, start -- as of Q4. We might use her as a source vessel if we have this opportunity.

Geoffroy Stern - Kepler Cheuvreux, Research Division

And just to follow up on this -- I'm sorry. Just to follow up on this. When I look at the -- when I try to look at the contract revenue you generated in Q2 versus Q2 last year, taking into account the productivity, availability rate and so on and so forth, I end up with actually a kind of, let's say, revenue per streamer, which is not that different compared to Q2 last year. Could you -- which is a bit surprising to me. And clearly, the revenue per streamers comes down compared to Q1 this year. So could you elaborate a bit on this, please?

Jean-Georges Malcor

I think we'll have to take it offline, Geoffroy, because I don't recognize your point there.

Stephane-Paul Frydman

Yes. In addition, Geoffroy, I mean, this approach by revenue per streamers, it's a -- meaning we are -- we're handling far more complex business and notably weighted the things [ph] by the project costs. And so the project costs, meaning which are usually impactful to the customer, that's, for example, the case for our PEMEX surveys and [indiscernible]. So they are clear Australian survey. So they are clear. I'm blurring [ph] the picture because you, obviously, just had a gush up of cost. So when you apply, trying to compare a so very good [ph] quarter to another one when fundamentally, the mix of contract is different, you can't get it. Again, and you remind that those matter of project cost could be 25% -- 20% to 25% of total contract revenue level. So it's not something which is not significant. But we will address your question. [indiscernible]

Jean-Georges Malcor

It's a non-issue, so we'll guide you for the -- we'll explain how it works offline.

Operator

The next question comes from Ryan Kauppila with Citigroup.

Ryan W. Kauppila - Citigroup Inc, Research Division

Just 2 quick ones on Brazil. For the LIBOR-related sales in 2Q, could you give some indication about the number of and level of client interest? Was it comparable to say what you're seeing in the Gulf of Mexico, or were there considerable larger number of clients interested in that survey? And then finally, on your raising of multi-client CapEx guidance for the year, can I just confirm that, that is increased acreage being shot in Brazil that's driving that?

Jean-Georges Malcor

Yes, it's a plan. The increase CapEx for the year is that we see additional opportunities, if you want, this year to increase the acreage, which is going to be short in Brazil, particularly on the back of the first lease sales, where we have some very large prospect being discussed at the time being with a number of customers, particularly the customer which have been active in the blocks which have been offered and which have been auctioned 2, 3 months ago. So absolutely, absolutely.

Stephane-Paul Frydman

But on that matter, we're sticking to our guns, looking at prefunding ratio that we are looking for.

Jean-Georges Malcor

Absolutely, absolutely.

Stephane-Paul Frydman

I mean, we were under the 75% minimum threshold for those multi-client cash CapEx and we stick to, again, on that matter.

Jean-Georges Malcor

Absolutely. You need to read this increase with 3 parameters: the increase itself, the prefunding and the cash. We think that despite all these increase, we'll still have a 75% prefunding, and we maintain our guidance in the positive cash for the year.

Ryan W. Kauppila - Citigroup Inc, Research Division

Yes, absolutely. And I think this is -- you commented on this in your prepared remarks, but just to confirm, the uptick in prefunding from Q1 to Q2, that was broad-based across your portfolio, by and large?

Jean-Georges Malcor

Yes, it was broad based across the portfolio, but with one specific forecast on IBALT in the Gulf of Mexico, which is a very complex, multi-client survey that we are shooting. And since it's what we call a technology multi-client survey, so it's a brand-new technology that we are bringing in, bringing some huge breakthroughs in terms of imaging. Some of the clients are now joining because they can see the result of the first test track, and they are quite interesting and bringing in and coming in as original participant towards the end of the survey rather than the beginning of the survey.

Operator

The next question comes from Christopher Møllerløkken with SB1 Markets.

Christopher Møllerløkken

On the guidance for 2013, could you just repeat? It includes the assumed equity income and also the impact from the Fugro transaction. Is that correct?

Jean-Georges Malcor

Yes. It's a net value of everything.

Christopher Møllerløkken

Okay. And the Airborne activity that you will include from September, could you just help us regarding what that has typically generated in annual revenues EBIT margin for Fugro?

Jean-Georges Malcor

Sorry, can you say that again, Christopher?

Christopher Møllerløkken

Of the Airborne activity that you're about to conclude now, how large was that business, again, in terms of rough annual numbers in revenues and EBIT margin?

Stephane-Paul Frydman

[indiscernible] $100 million revenue or...

Jean-Georges Malcor

Yes, roughly -- roughly $100 million revenue, yes. Of course, for the -- it will be half a year for us. I mean, not half a year...

Stephane-Paul Frydman

One quarter.

Jean-Georges Malcor

One quarter.

Stephane-Paul Frydman

Four months.

Jean-Georges Malcor

Four months, four months, exactly.

Stephane-Paul Frydman

Because it will be completed by early September, September 2 because there was some administrative orders on that matter. In terms of profitability, while we are at the trough of the cycle, on this business, it's severely related to mining business, and so it's at a low level. But we are targeting looking forward, not this year, but looking forward, more of a, say, high single-digit margin looking forward.

Christopher Møllerløkken

Okay. In second quarter...

Jean-Georges Malcor

This year, the contribution will be really minimal in terms of EBIT.

Christopher Møllerløkken

The loss in the Land acquisition basis, is it possible to quantify that for second quarter?

Jean-Georges Malcor

No, we don't give a bit detail. But I mean, it's quite easy to calculate it. The indication I can give you is that the impact of the security issues and the weather was probably in the $10 million range for the quarter, negative.

Christopher Møllerløkken

Okay. And is it possible to provide any guidance on the equity income going forward as we had this loss due to the Seabed joint venture in the second quarter?

Stephane-Paul Frydman

Yes, on that matter, it was just to have a look on what we delivered last year on 2012. It was -- of other year, I'm talking of other year. It was $37 million, but $37 million including notably all 100% of the swaps activity of -- in the Kingdom. And obviously this part will be shift for 60% to the Seabed joint venture. So all in all, when we compare to 2012, the figure on a pro forma basis was, in 2012, something like $20 million. Now looking at 2013, we think that we should be slightly lower than this number. Globally, we're at $5 million in H1, but we think that we should be lower this $20 million [indiscernible] -- I mean, $50 million -- $15 million to $20 million. Having in mind that, as said by Jean-Georges, the contribution from the joint venture of Seabed should be a very low negative in Q2, but globally, a low balance -- just balanced over the year. So it's worth to compare egg to egg with the $20 million we did in 2012 and having in mind that we should be in the range $15 million to $20 million is not silly.

Christopher Møllerløkken

Okay. And 2 final questions, if I may. The multi-client amortization guidance, that's 55% to 60% for the full year, correct?

Stephane-Paul Frydman

No.

Jean-Georges Malcor

No, no.

Stephane-Paul Frydman

We said to the depreciation, we are targeting 65% over the year. So we said 50% -- or 60%, sorry.

Jean-Georges Malcor

You said 55 to 65%.

Stephane-Paul Frydman

No, no. So no, no. That's 65%. What we said was clearly that we are targeting 65% average ratio. I remind you that it was 72% in 2012, even if it was impaired by many things. But 65% is clearly the guidance. So we have the low level in Q2, but globally, we should be in the range close to this 65% average.

Christopher Møllerløkken

And final question, the strong Q4 in Sercel, is that depended upon sales from upcoming mega crews in the Middle East?

Jean-Georges Malcor

There is a range of prospect that we are pursuing at the time being, some being the beginning of the mega crews, some being regional sales.

Operator

The next question comes from Jean-Luc Romain with CM-CIC Securities.

Jean-Luc Romain - CM-CIC Securities, Research Division

One question on Brazil, the tranche [ph] and exchange rate [ph] in the pre-salt area. Given the area which is up for sale in October is much smaller than could have been expected, what about the sales in the other pre-salt areas that you have? Do you have to depreciate that, or will it work? My first question. Second question about the pricing, you have increased your coverage for the third and fourth quarter. Could you tell us a little bit about the price increases you get? Do you maintain the 6%, 7% indication you gave previously.

Jean-Georges Malcor

Okay. So on the Brazil side, no, there is absolutely no depreciation on our book schedule for the year. In fact, the second, we say, is the one coming out in October. Even if it's smaller in acreage, it's right on our data. So it's probably pretty good for us. And we have already in Q2 shown some interest, which have been shown by some players. So no, absolutely no issue on the Brazilian library on our side. The second point on the Marine side, I take the opportunity to say that we don't talk in terms of price because the price depends on basin, vessel, geometry. So I'm not going to go for that again. And it's very uneven by basins, as you know. So let's talk about EBIT impact only. And on that, we are in line with our global views. We are roughly 10% impact in H1. Q3 flat, as we said before. And in Q4 -- Q4, it's far too early, as we have a lot of large and complex bid ongoing. They are being evaluated as we speak. In fact, when you look at the publication of some of our competitors, they are seeing exactly the same thing. We're talking about tailor-made offer differentiation, which is more and more based on acquisition design and in our ability to address complex geology and also complex processing. So it's really ongoing and for the time being, we maintain our global view for the year.

Operator

The next question comes from Caroline Hickson with UBS.

Caroline Hickson - UBS Investment Bank, Research Division

Just to come back to the guidance you've given. I know you said it's net of sort of any costs from the Fugro acquisitions. And I think previously, you'd said the gains and the losses from Fugro will net up to 0.

Jean-Georges Malcor

Yes.

Caroline Hickson - UBS Investment Bank, Research Division

Is that including the $20 million gain from Spectrum, though? So effectively, it should be less?

Jean-Georges Malcor

Yes. Yes. It's...

Stephane-Paul Frydman

No, no, no.

Jean-Georges Malcor

No. Spectrum has nothing to do with the Fugro transaction. The Fugro transaction, we recognized a $95 million capital gain in Q1, which would be offset -- which has been partially offset in Q1, partially offset in Q2 and will be further offset in Q3 and Q4 to have a net 0 washout at the end of the year. So it's -- the $500 million to $600 million are including that.

Stephane-Paul Frydman

And again, so -- and to be more clear...

Jean-Georges Malcor

I'm sorry. The $580 million to $600 million are including that.

Stephane-Paul Frydman

So that means that for H2, we had this plus of $85 million. Globally, we have minus $50 million and -- minus $51 million. Minus $11 million in Q2, minus $51 million in Q1. So globally, we are minus $62 million. That means that looking forward, we have still a $22 million to $23 million [ph] of nonrecurring charges to be spread over Q2 and q...

Jean-Georges Malcor

Q3 and Q4.

Stephane-Paul Frydman

Q3 and Q4. Probably mostly in Q4.

Caroline Hickson - UBS Investment Bank, Research Division

Okay. That's $580 million to $600 million. Does that include the $20 million gain from Spectrum that you recorded in Q1?

Stephane-Paul Frydman

Yes, yes.

Jean-Georges Malcor

Yes. Yes, of course. We said it in Q1.

Caroline Hickson - UBS Investment Bank, Research Division

Okay. And just on the prefunding. I mean, your guidance does -- even though prefunding was better than expected in 2Q, you guidance implies a uptick in 3Q and 4Q. Can you just give us some idea of the timing? Is it going to be higher in 4Q than 3Q? Or just any...

Jean-Georges Malcor

On the multi-client, 4Q will be, of course, much higher than Q3. The only thing where we have a question mark on the thing on multi-client is the fact in Q3 that exception in this year, there is -- these are lease sales in October in Brazil, which may disturb a little bit the traditional pattern. But if we are in the traditional pattern, on multi-client, we should have a low Q3 and a very strong Q4, as usual.

Caroline Hickson - UBS Investment Bank, Research Division

Okay. And just on Brazil, are you seeing -- I think you've sort of did allude to it in the last question. Are you seeing good contract leads there for the 11th licensing round?

Jean-Georges Malcor

Yes, in Brazil, there are 3 effects which are interesting. Of course, the first lease round on the Equatorial Margin, which occurred beginning of the year, and this bid round has created some multi-client sales, which was good for us. But it is also a second effect, creating a big potential in terms of surveys -- Marine surveys for the, probably, the rest of the year and more importantly, for next year. Because the blocks which have been awarded are very large blocks. The seismic on those blocks is rather old. So it was good enough to make a decision to buy a block and certainly not good enough to make a decision to drill. So -- and not only that, but in addition, for the people who have been buying the blocks, there is an obligation to shoot some seismic within a certain period of time, okay. So globally, there is this dynamic which is created by the first lease round. The second lease round, for the time being, it's more related to production and not exploration. And on this production side, the seismic that we have is rather new. It's hi-tech, because the seismic we have on this Libra area has been shot 2 years ago, has been processed very recently and it is a broadband data, BroadSeis data, that we have in here. So it will be more a matter of multi-client and later on, probably focused 3D or WAZ surveys in order to go more into the detail.

Operator

[Operator Instructions] We do have another question from Bertrand Hodee with Raymond James.

Bertrand Hodee - Raymond James Euro Equities

Just one clarification around Sercel and the mega crews award. What do you need -- what would you need in terms of mega crew award in 2014 to grow at, let's say, 10% growth rate for Sercel? So returning to growth after a flattish year. And can you confirm also that you still expect margin to come back to around 30% at Sercel in 2014? And also on multi-client, can you split your multi-client investment between Land and Marine this year in 2013? And going forward, how do you think the activity in Brazil will be split between multi-client and contract?

Jean-Georges Malcor

Okay. I'm not sure I will answer all your questions because otherwise, my competition will be right on my back. So just allow me to keep some of the thing close to the chest. But nevertheless, a few points. The split between Land multi-client and -- it's traditionally, in multi-client, Land is below $100 million, the rest is Marine, just as a rough order of magnitude, okay, year-on-year. The first question on the mega crews, we have about, potentially within the next few years, 7 mega crews in the Middle East, which could be tender for. Obviously, nobody will win them all. There will be probably a split of the market. And if we are talking about the number of channels that we are seeing at the time being, being discussed, in the prebidding, Sercel doesn't need to win them all to go back into the growth form -- onto the growth path. So if we have the natural partition of both mega crews into the 3 main actors, that will be enough for Sercel to come back into positive territory in terms of growth. The rest of your question, the split in Brazil. Frankly, we don't know because we are not quite sure about what would be the regime under which some of the surveys will be shot on the Equatorial Margin. Is it going to be multi-client? Is it going to be group shoot? Is it going to be contract? Far too early to say. And so these will, of course, totally change the mix between multi-client and contract. What we're seeing today is that we are preparing on our side, and that's why we have this increase in multi-client. We are preparing on our side, too, to go for a little bit more multi-client this year. But I cannot give you the split today.

Bertrand Hodee - Raymond James Euro Equities

Okay. And one follow-up, if I may. So can you still confirm the margin outlook for Sercel 2014 at around 30%?

Jean-Georges Malcor

Well, again, if Sercel wins mega crews, we'll be back on high volume. We are, as you know, launching the -- and I confirm that we are launching the new land product in September. So if we have a good takeup of the land -- the new land product and if it's well received by the market and the mega crews are coming in, we'll be back with a level of activities in Sercel and the margin in Sercel which will be very similar to the one we have before.

Bertrand Hodee - Raymond James Euro Equities

Okay, very clear. And one last follow-up, if I may. Can you confirm that on your IBALT multi-client survey in the Gulf of Mexico DTI [ph] has joined?

Jean-Georges Malcor

No. I don't comment who is joining and not -- who is not joining. No. Sorry, this is really confidential.

Operator

Our last question comes from [indiscernible] with Societe Generale.

Unknown Analyst

It's regarding technology and supply and demand. I clearly have the impression that over the last, let's say, 9 or 12 months, there has been some frustration among seismic actors about pricing, the speed at which pricing is increasing. Just would like to know, I also have the impression that this increase in pricing mainly comes from supply and demand and that new technologies, either your technologies or competition technology, is to a certain extent given and that clients are not really ready to pay for that. So just would like -- if in this given price increase, what would be, let's say, the part of technology and what would be the part qualitatively of traditional supply and demand?

Jean-Georges Malcor

Okay. I will give a -- I may give a long answer to your question, which is a very interesting one. First of all, technology attracts the premium, okay. We are clearly now seeing, after 2 years of operating BroadSeis, that we are able, most of the time, to get the premium out of BroadSeis. Sometime it's a big one, sometimes it's a modest one. But the customer, they do recognize the -- but they have to pay a bit more when they are getting better data and more sophisticated data. First question -- first answer. Second, where we see the impact of technology is not too much in terms of, if you want, plain vanilla survey pricing because here we don't see it, okay. We are seeing the impact on technology in the fact that we are more and more very large and complex bids that we are answering, very sophisticated and where the technology plays at 3 levels, equipment, acquisition techniques and processing, okay. I have in mind the 2 very large bids, very -- when I say very large, it's very, very large, in excess of $200 million, $250 million, $300 million, okay. Where it's a comprehensive -- we're talking of comprehensive approach and where we are answering the challenges which are put to us by providing holistic answers, if you want, where we are harnessing the various technology we have in the company. And frankly, both type of bids can really be answered by probably only the 3 -- top 3. I'm talking PGS, WesternGeco and now us [ph]. So you're right on the plain vanilla surveys. But you're wrong on the highly sophisticated bids that we see coming more and more because our customers are facing very complex problem.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to CGG for any closing remarks.

Jean-Georges Malcor

Okay. Thank you very much. We had a good session in question and answers. I hope that these good results will motivate you to get some interest in CGG. And in the meantime, I wish you a very good summer break for those of you who are taking summer vacation and see you back in September. Bye-bye.

Stephane-Paul Frydman

Bye-bye.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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