Acergy S.A. Q3 2009 Earnings Call Transcript

Acergy S.A. (ACGY)

Q3 2009 Earnings Call

October 14, 2009; 10:00 am ET

Executives

Karen Menzel - Investor Relations

Jean Cahuzac - Chief Executive Officer

Mike Jones - Deputy Chief Financial Officer

Jean Cahuzac - Group Financial Controller

Analysts

Iain McPherson - Simmons & Co

Johan Rasting - SEB

Paal Dahl - First Securities

Christyan Malek - Deutsche Bank

Stephen Gengaro - Jefferies

Frederick Lunde - Carnegie

Martijn Rats - Morgan Stanley

Erik Tonne - Arctic Securities

David Thomas - Citigroup

[O’Martin - ABG]

[Eurient Bodayal - Chevrolet]

Presentation

Operator

Thank you for standing by and welcome to the Acergy S.A. Third quarter results, 2009 conference call. At this time all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instruction). I must advice you that the conference is been recorded today, Wednesday, 14 October 2009. I would now like to hand the conference over to your speaker today, Karen Menzel; please go ahead.

Karen Menzel

Thank you and good afternoon. Joining us on the line today are Jean Cahuzac, our Chief Executive Officer; Mike Jones, our Deputy CFO; and Jean Cahuzac, our Group Financial Controller. The earnings release for the third quarter which ended on August 31, 2009 can be found on our website, along with the presentation that we will be using during this call.

Before we start the presentation, may I remind you that certain statements made in the course of this conference call, which express the company’s intentions, beliefs and expectations, are forward-looking statements within the meaning of the US Federal Securities Laws.

Actual future results and trends could differ materially from those which are in such statements due to various factors. Details of these can be obtained from time-to-time on the company’s SEC filings, including the company’s annual report on Form 20-F. Copies of these filings may be obtained either from our website or from the SEC. May I also draw your attention to the more detailed disclosure on the forward-looking statements that appear in today’s announcement.

Our call will run for one hour, and with that, I hand it over to Jean.

Jean Cahuzac

Thank you Karen and good afternoon. I would like to comment briefly on our results, the market and our expectations, after which Mike will run through our financials and regional performance. We will then be happy to take your questions.

I’m pleased with our results. In spite of ongoing challenging business environments, we had a good quarter. These results reflect our continued good operational performance and our ability to deliver good margin on our ongoing projects.

Our strong client relationships has enabled us to achieve positive commercial outcomes, which are also reflected in these results. I would like to mention that the number of the projects which have been executed during the quarter, are projects with still good margins, as they were awarded in previous years when business conditions were more favorable than today.

We have delivered good financial results for the quarter. For continuing operations, our revenue was $558 million. We had an adjusted EBITDA of $110 million, and this correspondence to 19.7 adjusted EBITDA margin, $65 million net income and $0.29 diluted earnings per share. We’re maintaining a strong cash position, driven by good operational cash flow in the quarter.

In an ongoing competitive environment, we have continued to win a number of major contracts worldwide, which clearly support our strategy. In Brazil first, as you will recall, we were very pleased to be awarded the $260 million, four-year service arrangement for the Polar Queen with Petrobras. In the market which is a structural significance for the foreseeable future was to build upon our strong local organization and the clients’ confidence in our ability to help them to achieve their strategic plans.

In Angola, we were awarded $110 million contract by Total and BP, for work on Block 17 and 18 respectively. Again, this is based upon our strong local presence, and enables our clients to further announce their involvement in the Angola ALNG project.

In Australia, first quarter end, SapuraAcergy was awarded $170 million reindeer project under [very quick] developments. This represents an important development for our joint venture and indicates SapuraAcergy [Inaudible] into the promising Australian market. This award as you know will not appear in our backlog, and all these is an addition to a number of smaller awards in Angola, Australia, North Sea and other parts of the world.

I would like now to have a few words on the future markets. You will recall that I have commented for each of the past few quarters, that short-term visibility was poor - a situation we expect to benefit through 2009. This remains the case. The underlying fundamentals remains unchanged, and therefore I remain cautious in the short term for the SURF markets.

We anticipated that the worldwide recession would have a negative impact on the usual seasonal pattern of activity in the North Sea, which it has to some extent. We also expected clients around the world, would continue to postpone some of their projects, which we have also seen during the quarter in the SURF market.

Over the past couple of weeks I have met with most of our major clients. Their comments and concerns were pretty consistent. Short term, the clients remained cautious and continue to focus on cash optimization, until they get more comfortable with the sustainability of the present oil price; and after all instead we have thought that the smooth forward looking curve does not necessary predict the future oil price, nor is it the basis on which major investment decisions are made.

So what does this means for us in short term? The SURF market continues to remain difficult with sporadic order flow and more aggressive competition. Although the oil price continues to operate in a range deemed appropriate by most clients, there has been no recent change in their behavior. We fail to continue to some pressure on cost, in-part contributing to more aggressive competition for recent and new tenders, and I expect this will adversely affect margin in 2010.

Our visibility for conventional work in West Africa remains better than the SURF market. Following the award of EPC4A in May, we have continued to see progress in this market, including the award of Block 17/18 contract in Angola that I mentioned earlier. We expect that further West Africa awards will come to the market in the near term.

At the end of the third quarter we had backlog for continuing operation of $2.6 billion. $600 million of this backlog is for execution in the reminder of 2009, and approximately $1.4 billion is for execution in 2010. These figures exclude the backlog awarding to our joint venture, including SapuraAcergy, and any small contract awards for first quarter end.

Based on our core end view, we expect revenue from continuing operations for fiscal 2009 to be inline with previous guidance, and subject to successful outcome of a number of commercial negotiations in the final quarter of 2009, and the continues good execution of work awarded in more favorable business conditions, we expect to achieve an adjusted EBITDA margin for fiscal 2009 above previous guidance, although below the out come for fiscal 2008.

What about 2010? We expect that 2010 will see lower activity levels, so revenue from continuing operation is expected to be lower in fiscal 2010 than 2009. The combination of more aggressive competition for recent and new tenders, the reducing pricing pressures, and the phasing of the current and expected project portfolio will adversely affect margin. Therefore we expect the adjusted EBITDA margin for fiscal 2010 to be lower than our 2009 previous guidance.

Our expectations take into account the impact of recently awarded contracts on 2010. Where are we against the challenging backdrop? We are very well positioned in this market cycle. We continue to focus on delivering outstanding execution for our clients, which as you know is key to our success. We remain vigilant; we are managing our costs, and focused on ensuring that we maintain an acceptable project risk profile, in the face of challenging short term condition.

We will continue to address our approach to the various business scenarios that we have identified, without compromising our long-term strategy, as it is essential that we retain our core engineering and project management expertise, and ensure that our assets support the achievements of our ambitions. With that in mind, we are reorienting resources towards key markets, in line with our clients’ needs, and geographical growth opportunities.

Despite the present challenging condition in the SURF market, our long-term view remains unchanged. Our strategy remains focused on the global SURF markets, in particular, the number of key geographies where we expect to see significant developments in the medium term. We continue to see the conventional market in West Africa as important. Our substantial local presence is a competitive strength in this market, which provides continuity, a factor particularly important in a cyclical business such as ours.

We have a strong cash position, which will enable us to mange through the uncertainty of the present market cycle, and also look at typical opportunities as they emerge. The current market conditions may present some opportunities to invest for the future, which will be with interest and are well positioned to act. These factors together with our continuous strategic focus allow us to strengthen our business today, to ensure that we’ll exploit new growth areas when our markets return to growth, and to capture the expected medium term outcome in our markets.

So, while I remain cautious in the short term, the medium term fundamentals remain strong. Our clients are clear. The intent to go ahead with their strategic projects in deepwater and Deep Panuke when the timing is right. So for us it’s a case of when rather than if.

With that, I will turn it to Mike to run through our financials.

Mike Jones

Thank you, John. So turning to slide number seven in the presentation to look at the financial highlights, I will concentrate on the continuing operations comparing to Q3 of last year 2008. In terms of overall revue levels, we are at $558 million, which is a 13% reduction on the same three months last year. You will see from the segmental analysis, that both Northern Europe and Canada and South America have lower levels of activity.

Net revenues are down by 22% to $217 million, which reflects the decline in North Sea volumes generally, despite good operational progress being made on projects including Ormen Lange, Dong Nini, Deep Panuke, Gjoa and Morvin. Q3 2008 was an exceptionally high quarter driven by higher overall activity levels, including Volund and Tyrihans subsea installation.

South American revenues are down 49% to $39 million due to a smaller contribution from projects, whereas the previous year also included [Frade 1]. The vessels on long-term service contracts with Petrobras achieved full utilization. Although in Asia and Middle East we are down 11% to $43 million, we still had good revenues from Bluewater Al Sheehan and Pyrenees, while the Pluto project remains in the early stages of its activity.

In Africa and Mediterranean, revenues are up 4% to $243 million, with solid progress made on EPC4A in Nigeria, and Block 15 PazFlor, Angola LNG or in Angola, which are supported by continued contribution from Sonamet. North America and Mexico regional revenues are up $12 million to $13 million, due to the completion of the offshore phase of the Perdido project during the quarter.

Turning then to our adjusted EBITDA, which as Jean mentioned was $110 million in the quarter, EBITDA margin is 19.7% compared to the 25.4% achieved in Q3 2008. Gross margin is $116 million, a decline of 38%, hardly reflecting the lower level of activity, but also driven by lower gross margin percentage down by 8.2% to 20.8%, reflecting lower margins generally on new projects and a consistently prudent view of ongoing commercial discussions.

Our shifts maintained a high level of utilization throughout Q3, inline with the previous year. Administrative expenses were down to $55 million, a reduction of 12%, and this reflects both the impact of our cost reduction initiative, as well as the strengthening of the dollar compared to last year.

Joint venture contributions have increased by $4 million to $17 million, although NKT flexibles made a smaller positive contribution due to the lower levels of activity and lower margin levels compared to a year ago. So far Acergy contributed positively during the quarter compared to the loss last year, and Seaward heavy lifting also made a positive contribution.

Net operating income is $77 million. Northern Europe and Canada and Africa and Mediterranean regions made the largest contributions. The neck region contributed $34 million, and that made contributions 27, including a strong contribution from Sonamet. Angola LNG and EPC4A, both passed the 5% threshold during the quarter.

Our North America Mexico region showed a significant increase in profitability up to $4 million, including good contributions from the Perdido project, which has completed its offshore phase, and the Frade project which is jointly managed with the South American region. Likewise, operating income from South America was up to $6 million in the quarter. The shift on long-term charter made a good contribution, which was supported by the Frade project, which completed operations in this quarter.

Asia and Middle East saw a reduction in profitability to a breakeven position, with a decline being largely due to costs associated with the unplanned dry dock required to clean the whole of the Toyota deals. These costs were partially offset by good progress and contribution from Pluto and Bluewater Al Sheehan and the positive contribution trends from SapuraAcergy.

In terms of other financing activities, the main movement is in relation to other gains and losses, which have increased to a $25 million gain, due primarily to the effect of foreign exchange translations on short-term inter company and cash balances. We have a $31 million taxation charge in the quarter, with a small reduction in the effective tax rate. The underlying rates for the group during the quarter was 32% for the forecasted full year, underlying effective tax rate of approximately 35%.

Net income from continuing operations is $65 million, down by 36%. Discontinued operations, solely the Mexilhao contract contributed $2 million during the quarter, giving us a total net income of $67 million. Earnings per share from continuing operations were $0.29 per share based on 183.9 million shares on a diluted basis. Earnings per share including discontinued operation were $0.30.

Turning now to slide number eight which is the cash flow; cash generated in the quarter was $119 million. Net income from operations, plus depreciation and other non-cash items produced $88 million, and working capital reduced to deliver a further $86 million, most of which relates to a movement in deferred revenue; and that gives us a total net cash generated from operations of $175 million. We spent $29 million on investing activities, mostly capital expenditure amounting to 34, and we paid dividends of $40 million to shareholders. The only other significant movement was $12 million revaluation of cash balances as a result of FX movements. With $119 million generated, closing cash increased to $807 million.

Finally on to slide nine in the balance sheet, which is compared to the audited position at the end of last year and nine months ago, in line with the second quarter treatment, Sonamet remains as an asset held for sale. The comparative figures in the asset held for sale in the previous year was the Acergy Piper.

Although previously both cash and cash equivalents were $807 million, well over the nine month period cash has been generated to $302 million. Although the net increase after deducting $68 million of cash associated with the assets held for sale of Sonamet, is $234 million. Its worth noting that the sale of Sonamet which is expected after the year end now will not immediately be for cash, but contribution will be in future dividend payments.

Total equity has increased by $201 million since the end of last year of which the major components are net income for the nine months of $169 million, less $14 million of dividend paid, and increases in cumulative translation adjustments affecting hedging reserve and minority interests. Our borrowings over one year were $411 million broadly in line with our position at November.

Our trade and other payables are down $106 million to $546 million. Again, this is mostly related to taken up the elements associated with Sonamet. Finally on the liability side or assets held for sale, these are the liabilities directly associated with Sonamet. So $173 million was the primary change on the phase of the balance sheet.

With that, I’ll pass it back to Jean.

Jean Cahuzac

Thanks Mike. We will now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instruction) Your first question comes from Iain McPherson - Simmons & Co.

Iain McPherson - Simmons & Co

Two questions if I may; first you have, I guess a continuing or increasingly bifurcated view between the award outlook for conventional work and SURF work. Could you quantify what that mix has been over say 2008, 2009 and where you see it heading based on the outlook today. And does that have any bearing on your review of margins comprising next year as well, or is that sort of a separate issue?

Jean Cahuzac

I think it’s a good point. I think you got the right to highlight the difference that we see on the market in the SURF and the conventional. We have more visibility definitely on the conventional, and we expect in shorter term more awards to the markets on the conventional than the SURF.

A number of reasons for that, I mean the cost of production for the operator, some project which have been delayed for quite a while which may materialize now. When you look at the margin for conventional today, they are better for us than they are on the SURF into the environments. You have reasonable margin, although this margin are lower than the margin that SURF would generate in a buoyant market. It’s all good news in the short term.

One of the difference between conventional and the SURF is that on the conventional we don’t have the same use of vessels that we have on the SURF market. So $500 million project for instance in conventional will not mean exactly the same for us. It would still not answer the question of utilization of the vessel and doesn’t solve the problem of visibility on the utilization of the vessel.

In terms of backlog, I mean traditionally SURF has represented 80% of our revenue, and conventional 10% to 15%. If the present trend that we see continues for a while, I expect the conventional proportion to increase slightly compared with SURF.

Iain McPherson - Simmons & Co

Just slightly?

Jean Cahuzac

Well, to increase. The future will tell how it is.

Iain McPherson - Simmons & Co

If I could ask just a quick follow-up on your success this year in doing a little bit better than you’ve anticipated at the beginning of the year margin wise, what you attribute that out performance to on your EBITDA margin? Is it a function of just being prudent with your guidance or have you achieved better execution or better cost savings or a little bit of all the above. Any of them spilling in possibly to hopefully help out next year or the dynamics are going to be primarily contained this year?

Jean Cahuzac

When we looked at the rest of the Q3 there are a number factors. The Q3 results were better than what we had expected for a number of reasons. The first reason is vessel utilization worldwide, which has been higher than initially contemplated.

We’ve been successful in winning filler gap jobs around the world, not only in the North Sea. I find that encouraging from the marketing and client relationship perspective. Although these jobs are with low margins, it’s better to work in this condition than to stack the vessel, and we have made the assumption that more of the vessel would be stacked than what actually happened in Q3, so that’s relatively good news.

On the guidance for 2009, we expect now that we conclude positively several commercial discussions than initially thought. What I mean by that is that, there are some commercial negotiations which are likely or expected to be completed in ‘09 where I thought it would more in ‘10, so it’s a bit of a transfer of vessels from that perspective.

In terms of the visibility, obviously we have a better visibility now than we had earlier in the year as we come closer to the end of the year end we know what’s happening in the North Sea.

Operator

Your next question comes from Johan Rasting - SEB.

Johan Rasting – SEB

A few questions if I may. First of all, I’m of the opinion that the tendering activity in the industry has increased somewhat in the recent months, and that we also see the number of feeds arising. Do you share this view, and if you do, can you give more and more flavor on that issue?

Jean Cahuzac

I am not sure I pretty share the same view; it depends on what you’re talking about. When you look at the large SURF contract, there’s still a lot of activity, a lot of tendering activity, a lot of question on salvation with the customer. That does not necessarily mean that a decision will be taken very, very quickly, we don’t know; I mean, there’s a lack of visibility there.

Second example, I mean the cloves, the famous clove project with Total. We were expecting contract awards in early ‘09 summer. We have submitted technical and financial offer as our competition has done. We are in discussion. It shows that Total still considers that as a strategic project, but I don’t know when a decision will be taken, and it’s likely to be next year, maybe the second part of next year even.

So, yes there is a lot of activity, but on the last project, the uncertainty about the date of contract award still remains. There have been a number of small jobs which have been awarded, and that’s what has aroused to maintain a good vessel utilization, but still a limited number of jobs and a lot of competition on these jobs, which basically drives the margin towards lower values than they were in the past.

Regarding the conventional, the project that we’re talking about has been on the table for quite a long time. I think we’ve come closer to a decision in market awards; not necessarily to Acergy, it’s not what I’m saying, but to market award. So from that sense it’s not changed, but I think the customers are ready to take decisions.

Johan Rasting – SEB

Then you’re saying that you’re renting resources towards key markets. Then you’re referring to West Africa which has been your key markets, or also Brazil and the North Sea?

Jean Cahuzac

It’s more than Africa. Obviously are focus in Africa will remain strong. It has been in the past. It’s a key area for us, where we are able to differentiate from our competitors in a lot of areas, but we’re focusing in particular on Brazil, we’re focusing in the North Sea, in Norway in particular, but also in UK.

Australia is definitely an area which is very attractive for the industry and for Acergy in particular, even if it’s not probably at the beginning of 2010, a bit later that we are going to see some move. So it’s more a worldwide approach, but mainly in the area that I mentioned.

Johan Rasting – SEB

Then lastly, the use of cash, are you considering proceeding the buy back of shares?

Jean Cahuzac

When we look at our balance sheet which is strong, I’m pretty pleased with the situation we are in. It will allow us to manage very well through the uncertainty

of the present market cycle, but also we are very well positioned to look at that set of opportunities as they emerge, and I think the current market condition may present such opportunity, and of course it’s something that we will look at.

It has to be done in the right price, and it has to make long term sense for the shareholders with the right level of return. But today’s market may present some opportunities, and the Board will look at it on an individual basis. If these investment opportunities will not materialize, the intention is not to continue to build our balance sheet, the Board will consider returning cash to investors.

Operator

The next question comes from Paal Dahl - First Securities.

Paal Dahl – First Securities

Did you say that 2010 margins will be lower than all those guided for 2009 initially? Could you say something more about that?

Jean Cahuzac

It is difficult to be more precise or more detailed at this stage. What we see today is on the SURF side for the reasons I was mentioning before. We see less projects; there would be basically no large projects awarded in 2009 besides the joint venture project with Gumusut that we won as a recent announcement of Saipem on air.

I mean basically, there have been at Bonga Northwest with Saipem, but basically there have been no large project awarded in addition to these two projects in ‘09. And therefore the additional activity related to last project in 2010 would be more limited than in the past.

So we see less projects, we see more competition on the short term project on the SURF; that will have an impact on margin. Conventionally it would be different as I was mentioning before, but it has a different impact on the bottom line as it uses less vessels. So we do expect lower margin in 2010 than 2009.

Another factor is that, in 2009 we had a number of project which have been executed and completed; project which have been discussed in a more favorable market over the last past years. We still have some of these projects, but there are less of them in 2010, which will come to operation.

Paal Dahl – First Securities

Yes, that’s actually my second question, because out of your backlog you have significant coverage in your backlog of awards and then are one in eight and seven when the market was really strong. Is there any reason to believe that these contracts should have a lower average margin than what the markets were at that time?

Jean Cahuzac

When we look at the projects which were signed in ‘07 and ‘08 at good margins, the customers are not challenging what has been signed in the contract that we have with them. So we should be able to deliver good margin on these projects.

What changes that we’ve seen some delays of additional scope of work on these contracts. I mean in the past we are seeing the operator asking us to do more work, that still happened, but it’s a bit less than we had seen in the past and the lowest margin will be on the new contract, especially the short-term self contract that we are seeing.

Operator

The next question comes from Christyan Malek from Deutsche Bank.

Christyan Malek - Deutsche Bank

Two questions from me; firstly, in Q2 you said you have $1 billion book able for next year, two months later you’ve got $1.4 billion, so that balance of 300 where did that emerge from in terms of given the fact you’ve won $300 millions worth contract in the last three months. And I guess the question to that is what’s the risk if those projects get delayed, that you won’t be able to actually execute what you hoped to as per this quarter.

The second question is relation to the negotiations around some of your contracts. Can you elaborate, and I guess more specifically is there risk in Q4 that if these negotiations break down there could be a charge in anticipation?

Jean Cahuzac

No, regarding the commercial negotiation on the contracts, what we see is good relationship with the customer and negotiation happening in a positive way. It’s more a question of timing than the question of knowing this contract, if it’s commercial discussion will be completed or not.

My previous comment in 2009, in fact it went to be trusted that I was expecting and that’s explained to a part of the result of 2009. So I’m not particularly concerned by the ongoing discussion, they are done in good spirits.

Regarding the risk on the existing contract, our operation deferments is good, and I expect it to remain very good in the future. While we see the operator challenging us like they challenge our competitors on new projects and on additional scope of work, we have not seen them challenging us on what have agreed previously and trying to question the type of right that we had signed in the past.

I think one other thing in this recession is, while we see pressure on margin, pressure on pricing with the operator, it’s still done in a fair way with Acergy. I’m not particularly concerned by existing contract.

Christyan Malek - Deutsche Bank

Well, I think what I’m trying to get at here is in the next three to six months you’re budgeting a certain rate of contract wins or scope changes of variation orders, which presumably gives you that confidence to say you’ve got $1billion book-to-bill and I guess my question is it obviously gives you the confidence to say when you’ll be slated off next year.

What is the outlook on those types of contracts, given we’re seeing a slight deterioration on the conventional market and also if Nigeria is slightly more than we expected, but if all that dries up, how would that change your outlook?

Jean Cahuzac

First, to the contrary we are not seeing a deterioration of the conventional in West Africa.

Christyan Malek - Deutsche Bank

I mean North Sea, sorry not West Africa.

Jean Cahuzac

And that’s an area where we are particularly strong, so that’s positive for the industry and for us. Regarding the [Inaudible], that we would be able to sign the contracts or basically continue to maintain the backlog where it is, what we are giving you is our best estimate and it’s a way I see the market. There is always some uncertainty, but in this business there are always uncertainties.

Operator

Your next question comes from Stephen Gengaro - Jefferies.

Stephen Gengaro – Jefferies

I was curious, and I know you mentioned this briefly both on the call and the release; when you look at 2010 and you kind of gave some preliminary margin expectations, can you give us a sense for what’s driving? I mean is that price, and to the extent it is I certainly see it existing more, but how much of that is also your utilization expectations?

Jean Cahuzac

Well the guidance that we’re giving for ‘09 and the indication that we’re giving for 2010 are based on the assumption of utilization of the vessel, and as I mentioned before, the visibility on the SURF side is not great. I mean it’s still poor, and therefore there is a degree of uncertainty on utilization of vessels. So that’s where we are there, and there is nothing that we can actually define more precisely in this area.

Regarding the margins, the more small jobs there are, the more the large project itself are delayed, the more pressure on margin we’re going to see; and that’s one of the assumptions that we are making for 2010.

Stephen Gengaro – Jefferies

When I look at the number of 53% of your backlog, which is executed or expected to be executed in 2010, is that chunk of work to lower margins than the chunk of work executed in ’09, or is that an incorrect statement?

Jean Cahuzac

It’s a mixed bag of different contracts. Some contracts which are good margins signed some time ago and some signed at lower margin more recently. So the conventional is very similar with what we’ve seen. SURF is somewhat lower, so its difficult to know what it will be, but it’s not the significant drop overall, but what we have to look at is special utilization which could have a negative impact and to begin on the North Sea.

Stephen Gengaro – Jefferies

I assume your comments are fairly consistent across the geographies.

Jean Cahuzac

The comments are consistent across geographies. The biggest known are in the North Sea, because the market can react very quickly in either direction, and that’s why we are cautious on what we say, and we are saying that it is difficult to give details.

Operator

Your next question comes from Frederick Lunde - Carnegie.

Frederick Lunde - Carnegie

I’m just a bit surprised, because just like your surprised from the very aggressive guidance for 2009, a year ago, I think you’re surprisingly cautious now given that we have seen an increase in activity in the North Sea, compared to this part of the summer season, all the parts come up, and book-to-bill already exceeded 100% in the third quarter. It sounds to me like they’re more focused on managing expectations than planning for the potential on the upside for 2010?

Jean Cahuzac

No, that’s not at all the idea. When you look at the increased activity in the North Sea, there is the traditional upside in the North Sea in the summer. Activity nevertheless is still significantly lower than in 2008, and the message that we receive from the operators and some of the largest operators I know in particular, is that they are still unknown about what they are going to do in 2010.

So I don’t think I’ll share your view on the upside of the North Sea. I mean yes, from the timing perspective, summer time, but besides that I think it’s not. Regarding the major self award, I mentioned before there is good message for us which was a joint venture and also any other last project which we awarded would have an impact post 2010, and that’s also a point that has to be kept in mind.

Frederick Lunde - Carnegie

And also just on the guidance or the indications you made on 2010 revenue, you’re around $2 billion of revenue and you have $1.4 billion in the backlog, and given that you have your key potential conventional contract in Nigeria that would probably amount to nearly $500 million or a bit less, maybe say $400, it still seems like you could easily come in ahead of $2 billion in revenue next year, given that these contracts actually materialize in time?

Jean Cahuzac

Well two points; I think in terms of a broad figure, I mean your comments are probably valued in terms of broad figure of the revenue, although I cannot be more precise than that.

Regarding the conventional work, one of the point not to forgot is that any conventional project which could be awarded, even of a large value represent work of two, three or four years sometimes. So it has an impact in 2010, but it’s roughly 25% to 30% of the total value of the project.

Then there is the unknown about the North Sea about what’s going to happen on the SURF side. And Australia, I was mentioning before that I’m personally quite optimistic about the medium term future in Australia, but again when you talk about the project like Gorgon or Ixis, you’re talking definitely post 2010 also.

Frederick Lunde - Carnegie

And also on PazFlor, that should be quite important in 2010, 2011 for you, and that was $700 million when awarded. What’s sort of an indicative value on that contract today?

Jean Cahuzac

Well, we can’t comment on the value. The only thing I can say on PazFlor is that the operations are going on very well, and that we will have operation in late 2010, 2011.

Frederick Lunde - Carnegie

If I recall correctly on [Greater Butonio], that project ended up generating revenue of twice the original contracts. Could you achieve something even close to that on PazFlor or are you looking at $700 million to $800 million, just any indications?

Jean Cahuzac

I cannot really comment on that. It depends a lot on the project; it depends on what is going to happen with the customer. As I mentioned before, what we see today is that the customers are very cautious not to add additional scope of work, when they can delay work. I mean they are optimizing their cash; it’s a general trend.

They are not questioning what has been agreed and signed, but they are limiting the additional work on existing projects. Well what will it be later in 2010, the future will tell, but it’s difficult to say.

Frederick Lunde - Carnegie

And last question on the cash position. I mean you have $800 million of cash now, that’s nearly two years of EBITDA, and now some of its repayments, but still, if you compare it to for example ’07, that’ll have a totally different capital structure, and at some point you just have to address this and I would assume prices are not falling anymore.

Given that banks are opening up, we are seeing the oil price coming up, etc, and at some point you’ll loose the best opportunity ever to take advantage of this balance sheet and what time this your view on this change; what does it take for a dividend buyback, just employing to cash?

Jean Cahuzac

Well, the look of the balance sheet is definitely on the top of the agenda of the board. I was mentioning before that in today’s market there maybe opportunities of gross and an investment on assets.

If that can be done at the right price, taking advantage of present markets, where there may be some companies which maybe willing to give discounts or were force to give discounts on some assets, it’s something that we look at and that the board will look at. It has to be with superior return for shareholder obviously. Is this opportunity one to materialize? Then I think the board will share your view, which is that there is no point continuing to increase the balance sheet.

Frederick Lunde - Carnegie

But we have seen some being able to raise very attractive financing just a couple of weeks ago, and others assume to seem the end of opportunities open to you guys if you lost a good opportunity. I’ll tell you, we’ve been looking at acquiring assets for anything close to $800 million. I mean a little bit of the Broad are very keen on buying back equity at twice the current share prices in 2007 and 2008, and its been like third in the region and nothing has happened. It just looks very strange from the outside.

Jean Cahuzac

I think the way the board will look at all that, it’s a combination of first, immediate availability of cash. When you want to capture opportunities of investments, I think it’s a plus.

The second thing is, while is the financial market has improved somewhat, I don’t really want to comment on subsequent approach, but I mean the market is okay maybe, but not extraordinary advantages to people who borrow the money. Regarding the cash on the balance sheet and the proven comfort of keeping cash on balance sheet can ensure you that it’s a topic that the board is looking at very carefully.

Frederick Lunde - Carnegie

If you exit 2009 with the same cash position, that’s going to be a horrible decision in terms of capital allocation.

Operator

The next question comes from Martijn Rats - Morgan Stanley.

Martijn Rats - Morgan Stanley

My questions have all been asked, but I’ve got one last. Over the last four quarters, you’ve been very careful or cautious in terms of the outlook, yet the margins have been structurally very, very strong. I guess partly because you’ve been finishing projects and released provisions towards the end, execution has been very good.

My question is mainly about what will happen to margins if the up turn happens, not so much like the embedded margin in new contracts going forward, but about the accounting structure in the sense that, if the backlog starts to rise again from early next year onwards and revenue starts to respond, can we see the flip side of what we saw this year, that margins are actually depressed at least from an accounting perspective for a while, because you’re doing engineering and procurement and start up and you’re not really seeing provisions, and you’re not doing a lot of installation yet.

While it’s actually the embedded margins in these projects can be quite a bit better, can we see the flip side of that. Can margins be temporarily depressed when revenue start to rise aggressively again?

Jean Cahuzac

I think your view is quite right. I think in the industry on the last SURF project there is slack time, which means that when the market accept and we start to increasing backlog with good margins, there is a transition period before you actually see all that coming to the bottom line.

Operator

Your next question comes from Erik Tonne - Arctic Securities.

Erik Tonne - Arctic Securities

I just wanted to go a little bit further into the margin discussion for next year. What I’m struggling a bit to see what you’re saying is that, when you’re looking at the current consensus estimates for EBITDA margins for next year, are you saying that you see further down side from that sort of level or are you saying that there is no reason for us yet to try to upgrade our margin estimates for next year?

Jean Cahuzac

Well, we are not commenting on 2010 and not giving guidance for 2010 at this time. If there were things which were drastically different from the market, the fiction will have the duty to communicate our feelings and our views, but we are not making guidance for 2010, qualitatively guidance for 2010 at this level.

Erik Tonne - Arctic Securities

But you are saying that it’s going to be below what you said at the beginning or at late November last year for this year. So the question is, it’s definitely below that, but is there some kind of lower level that you see and can you comment on how much prices are down on these smaller SURF contracts that you are saying that there is heavy completion for now?

Jean Cahuzac

What we’ve said is that we expect the EBITDA for fiscal 2010 to be lower than our 2009 guidance. That taking into account the portfolio of project that we have and our best estimate, based on the fact that we have the last project with good margin like PazFlor and the combination of a smaller project, which will have lower margin and will affect the results somewhat. So it’s a best view that we have at this stage.

Operator

Your next question comes from David Thomas - Citigroup.

David Thomas - Citigroup

A few wrap up questions please. I’m sorry to discuss a bit more detail on the EBITDA margin for next year. I just really needed you to confirm the quantitative number for it, because I’m just trying to struggle with what actually would be the number for 2009. I’ve got in mind 16.5% of the adjusted EBITDA margin outlook for 2009 when you were speaking about it late last year.

Then on your commentary around the quantum of targets next year, can you just say whether you will be in a position with the pre-close trading updates in late November, to actually give some hard targets or are you still perhaps going to be a bit more guided even then, because we’re running nearly a month for Seaway.

Finally just a philosophical question really. One things discussed, he said he’s been talking with clients recently, are they’re actually putting direct pressure on you to lower prices or is it just competitive within tendering. So you’re actually hearing from them, commentary about “You’re going to have to reduce your prices” and are there any specific type of clients like national companies that are more aggressive perhaps than others.

Jean Cahuzac

Different questions. The first point was our guidance for 2009 was mid16.5% to 17% margin for 2009. So that figures were indicated at that time. In terms of the 2010, we are not in a position to give numbers for 2010 margin for all the reason that I mentioned before. In November, I believe that the uncertainty and the market, the lack of visibility on the SURF market will feel the same. If it was still the same, it would be difficult again to go to precise numbers for 2010.

Regarding the operators and the pressure on price, on the smaller SURF job and projects which are executed within a very short schedule, it’s a purely on a competitive basis. There are tenders and very quick turnover from the customer, and it’s a combination of technical capability of the operator, of the contractors, and that’s quite important, because there are a number of competitors who are basically not short listed, because the operator wants to play it safe and then play it with contractors who they believe can deliver. And then it’s a question of price, and price again our main competitor that you have identified.

Regarding the larger project, what we still hear from the IOCs is that they will go ahead if the price is right and there is a pressure on pricing there. I honestly don’t believe it’s our main driver. I think the main driver of the IOC today is that they are not at this stage necessarily convinced about the system and we see of the price of oil. And therefore they are very cautious in the way they spend their cash and the timing of their commitments.

I think it’s probably more important than anything else. Then it’s on a competitive basis and on technical capability of the operators as a contractor. So it is the same way as it is on the small project.

Operator

Your next question comes from [O’Martin – ABG].

O’Martin – ABG

Can you give the split on the $11.4 billion of backlog between conventional and SURF for 2010?

Jean Cahuzac

I think SURF is around 80% and conventional around 15% to 20%. Conventional going up in terms of percentage of backlog and SURF going down in total percentage because of the reasons that I mentioned before.

O’Martin – ABG

In terms of the vessel utilization so far this year, what has that been and what was it in Q3 and what are your expectations for Q4 and 2010?

Jean Cahuzac

Utilization has been pretty good in 2009, with around 83% in Q3 and that’s based on the fact that we’ve been able to win short term contracts at being aggressive on the short term contracts. 2010, very difficult to say; lack of visibility on the market on the SURF side. As every year, winter will be more difficult than summer in the North Sea; difficult to quantify and put numbers on that.

O’Martin – ABG

But in terms of Q4, you had 83% in Q3, what you think will be the utilization in Q4?

Jean Cahuzac

Our assumption when we give guidance for 2009 is that utilization would be lower in Q4 than Q3. Percentage would probably start with a seven. It’s on this basis that we’ve based our numbers and the guidance that we give.

O’Martin – ABG

And I just need to check one thing; did you really say that the margins on new SURF contracts was actually lower than conventional work?

Jean Cahuzac

In today’s market yes, when the market is good for SURF and when the buoyant market margin on self contract are better than conventional, especially on the EPIC contract that we are probably [Inaudible]

O’Martin – ABG

And on the conventional work that is out there today, what’s the margin there, 15%?

Jean Cahuzac

We are not giving values on margin on projects for reason that you fully understand on commercial from a competitive basis. By-the-way, my comment on the profitability on the SURF project being lower than conventional, is on the SURF project that we see today, which are mainly small short-term projects.

When we look at projects which are big project, last project, long-term project, what we will take into account is that this operation will be in late 2010, ‘11 maybe even ’12. Obviously we are quite optimistic about the mid-term business and it’s something we have to take into account when be bid this long-term project.

Operator

Your last question comes from [Eurient Bodayal – Chevrolet].

Eurient Bodayal – Chevrolet

The last week, the Total as a franchise company mentioned that cost could fold by nearly 10% maximum in the subsea market in 2009. When you mentioned pricing pressure, do you share Total’s view, in which real pricing pressure is most significant?

Jean Cahuzac

I think in terms of pressure drop, I think the operator have seen pressure drops on equipment supplies and steel supplies and manufacturing. I think in terms of what else to come, on the cost decrease and in 2010 I personally believe that we are not necessarily far from the bottom regarding the future projects or where we are today in terms of steel price and other supply.

Eurient Bodayal – Chevrolet

Another question about your consolidation; you know that there are 67 odd shares and bonds in Acergy. How are your relationship with the 67, and how would you see consolidation in the sub sea market or maybe a flexible manufacturing market.

Jean Cahuzac

Well I mean, we always said that we would consider that consolidation in this business would be good for the industry, the customer and the shareholders. When it will happen, I wouldn’t speculate. The reason why 57 own some shares of Acergy, I think I would let them answer the question.

Well, I would like to thank you for your questions. A couple of points before we close; firstly, we are looking forward to seeing Simon Crowe, our new Chief Financial Officer joining us later this month. He would be present at the next conference call.

Secondly, as we mentioned in today’s announcements, we intent to publish our pre-closed trading of dates for fiscal year 2009 on the 25 of November, and thanks a lot for your participation and the questions.

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.

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