Saipem's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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 |  About: Saipem S.p.A. ADR (SAPMY)
by: SA Transcripts

Saipem SpA (OTCPK:SAPMY) Q1 2014 Earnings Conference Call April 24, 2014 11:30 AM ET

Executives

Umberto Vergine - CEO

Alberto Chiarini - CFO and Compliance Officer

Salvatore Colli - Head, IR

Analysts

Phillip Lindsay - HSBC

Fiona Maclean - Merrill Lynch

Haley Silverman - Barclays Capital

Ryan Kauppila - Citigroup

Caroline Hixson - UBS

Rob Pulleyn - Morgan Stanley

Luigi de Bellis from Equita SIM

Henry Tarr - Goldman Sachs

Guillaume Delaby - Societe Generale

Geoffroy Stern - Kepler Cheuvreux

David Farrell - Macquarie Securities

Operator

Good day and welcome to the Saipem First Quarter 2014 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to your host today, Mr. Umberto Vergine, CEO. Please go ahead sir.

Umberto Vergine

Thank you. Good afternoon and welcome to the conference call to discuss the Saipem first quarter 2014 results. I’m here with Alberto Chiarini, Saipem’s Chief Financial & Compliance Officer; and Salvatore Colli, our Investor Relations.

Today we are going to go over the main points relating to our first quarter financial results, give you an update on the current backlog of both new and the legacy projects, as well as update you on operations within the Drilling and E&C business units. I will finish with our comments on the 2014 guidance, and then we will be happy to take your questions.

Before we go into the details, I would like for to give you an overview of the first quarter. As you know, our management objective has been to take actions which will stabilize Saipem in order to put in place the foundations for a sustainable recovery in profitability. During the first quarter, we have continued to make progress on the physical execution and commercial discussion of our legacy contracts as we work with clients to achieve the best outcome on these projects.

In the past few months, we have experienced headwinds on working capital, which has impacted the net debt in the first quarter. Saipem’s management is focused on tackling the issue of payments. We got a strong order intake in the first quarter, boosted by the significant South Stream contract win, and since the quarter end, I am pleased to say that we have won further contracts in excess of €3 billion all of them, in line with our commercial strategy implemented since the beginning of 2013. Of course, the pace of our recovery is contingent on both these higher margin new business awards and on the progressive delivery of the low margin legacy contracts. The details, we will run through now, will provide the ground on which we are maintaining our guidance for 2014.

Before looking at the results in detail of Slide 6, I just wanted to remind you that the figures of Q1 ’13 were representing the E&C business before the issuing of the second profit warning and therefore they’re not entirely comparable.

Moving on, revenues amounted in the first quarter of 2014 to almost €3 billion, with more than 50% of those revenues coming from E&C Offshore, while Onshore only accounted for approximately 30%. These results confirm that our revenue mix is moving towards the E&C Offshore segment, and more profitable segment.

In Drilling, the slight reduction in revenues compared to the first quarter of 2013 was mainly driven by the Scarabeo 7 downtime for scheduled maintenance that required more works than originally expected, work that was not foreseeable until maintenance began.

EBIT stands at €132 million. This includes the ongoing negative contribution of €29 million from E&C Onshore driven by the execution of poor legacy contracts in line with the 2014 guidance. E&C Offshore has started to benefit from the ramp-up of new projects won in 2013, but this positive movement has unfortunately been offset by the negative impact of the extra costs associated with an operational accident in Brazil.

As you may know in the middle of March, the FDS vessel experienced a problem during activity on the P55 project in the Roncador field. The accident was caused by a structural failure of equipment and resulted in damage of a portion of the pipeline being installed. A remedial action plan was immediately implemented and we have reestablished safe operational condition, which led to the installation activity being resumed from 5th of April 2014. As a result of the incident, we have booked additional cost of around €40 million in the Q1 results.

I would like to remind you that P55 was one of the entry ticket contracts won in Brazil few years ago at low margin. The scope to absorb problems arising during the execution phase is limited, and we see their immediate impact on the P&L as a result.

Turning to Drilling’s contribution to EBIT, in the Q1 we record the lower contribution from Scarabeo 7, currently under maintenance as already explained, as well as the start up cost of the new onshore rigs in Saudi Arabia. In conclusion, net profit stands at €61 million after financial expenses of approximately €40 million and taxes of around €30 million.

Turning to net debt, at the end of the quarter business stood at €5.56 billion, €800 million higher than at the end of the fourth quarter 2013, reflecting the impact of deterioration in working capital over the quarter.

There are four major drivers of the increase in working capital over the first quarter. The first two components relate to the timing and to the structure of the payments and milestones within the terms and conditions of the contracts.

The first is the reversal impact of the down payments we received during 2013, from contracts won during the course of the year. Our Q4 cash position benefited from these down payments, and during Q1 of this year we began the ramp-up of those projects, incurring the cash outflows associated with those 2013 down payments.

As you know, there was a lack of contract awards during H2 2013, meaning that these outflows were not off-set by new down payments during Q1. This accounts for about €110 million. It has to be noted that the Q1 did not benefit of down payments of new contracts won in the period, such as South Stream and Jangkrik that are expected to be cashed in Q2 and that amounted to €170 million. Secondly, €430 million deterioration derives from a combination of the fewer high value milestones across a series of large legacy contracts where bad payment terms are penalizing cash flow. The largest single component is the €170 million increase during Q1 in the outstanding position for Wasit in Saudi Arabia. These are the two components related to timing and structure of the payment and divestment of our contracts.

The remaining two factors reflect the intensive commercial dialogue with some of our clients as we reach peak execution and complete the late stages of the largest legacy contracts.

Following the improvements in payments achieved in the run up to year-end. In Q1, there has been an increase in trade receivables of some €220 million due to delays in payments, mainly in Nigeria, Saudi Arabia, China, and Venezuela and Egypt. Finally, as a fourth factor, coherently with the progress of the legacy contracts, there has been an increase in costs related to Change Orders still under negotiations of around €90 million. These explain the increase in the working capital over the first quarter.

There are a number of factors that give us confidence that working capital will unwind steadily over the course of this year, with the Company strictly focused on tackling the issue of payments. In particular these factors are the ongoing discussions that we’re having with our clients to obtain Change Orders approval. The schedule of our legacy projects with several coming to an end during the course of 2014. The turnaround of the penalizing cash flow profile of the Wasit expected in Q3 2014, the ramp-up of activities from new projects with favorable payment conditions, and finally, as we will discuss in the upcoming slides, there are a number of sizeable commercial opportunities that could materialize in the coming weeks and months, down payments from which will positively impact on our working capital. Just as an example Kaombo will generate the impaired down payment in excess of €100 million.

For these reasons, we are confident that the net debt guidance of €4.2 billion at year-end is achievable, notwithstanding the headwinds seen in the first quarter.

Moving to the backlog and the new order intake on Slide 8, we have had a good start to the year. During the first quarter, we have reported a good order intake across all three E&C business units, amounting to approximately €4 billion. These results include some extremely important contract wins that we’ve already announced in particular South Stream and Jangkrik. On South Stream activity is progressing as per the plan agreed with clients.

At the end of March, the overall backlog stood at €18.5 billion, with more than 50% represented by E&C Offshore, some €600 million is related to amendments and Change Orders on existing legacy contracts. As I’ve already mentioned, since the end of the quarter, we have seen further contract wins in excess of €3 billion with associated down payments expected in the coming months. We will go into some more details on these new contract wins later on in the presentation.

Looking now at Slide 9 of the backlog by year of execution, you can see from this chart that out of the total backlog of €18.5 billion 44% will be booked in 2014, 35% in 2015 and 21% in 2016 and onwards.

In terms of the projects to be executed in 2014, we have already reached a comfortable cover ratio ranging from 80% to 88%, and that gives us the confidence to maintain our revenue guidance for the full year. Furthermore, the good level of order intake year-to-date, including the contracts won since the end of March help to enhance the visibility that we have on the performance of the business beyond 2014.

I’d now like to give you some of the operational details underlying the forward-looking factors that will drive 2014 performance and beyond. Starting with the Drilling business on Slide 11, in Offshore in relation to our two mid water rigs in the first quarter we signed an agreement to extend the Scarabeo 4 until the third quarter of 2015 at a flat day rate. As per the Scarabeo 3, at the moment we are completing the activity on the current well, waiting for the final approval from the client for a one year extension until the first quarter of 2015, at existing day rates.

Looking at the other segments of the fleet, we have a full utilization schedule for 2014. Beyond 2014 the top-end deepwater units have contracts expiring not earlier than 2017, with the exception of Scarabeo 7 and Scarabeo 6 at the end of 2015, for which we are already in commercial discussions. In terms of jack-ups, we have already started marketing activities for the four units whose contracts will expire at the end of this year and we are confident in the possibility to agree new contracts with improved terms.

In Onshore Drilling, the utilization rate in the quarter has remained very high standing at 96%. As in the Offshore division, we have already started marketing those rigs whose contracts are expiring during the year and we have received indications of similar or slightly better rates.

I’d now like to update you on some significant use on the E&C business. During the first quarter, we were awarded the long awaited contract for the construction of the first line of the South Stream for a total value of approximately €2 billion. It’s a particularly challenging job that only very few companies could carry out. South Stream involves a system of pipelines from Russia to Bulgaria across the Black Sea, each 930 kilometers long and to be laid reaching a water depth in excess of 2,200 meters. Saipem will carry out the installation design and the construction for the entire first line, as well as the parts in shallow water, the shore crossing, the landfall and the associated facilities for the four pipelines that are ultimately part of the full project.

The pipeline construction will be carried out by the Saipem 7000, our state of the art J-Lay vessel suitable for ultra-deep water which already constructed the Blue Stream pipeline in the Black Sea, and by Castoro Sei, the S-lay vessel suitable for both shallow and deepwater which previously laid several trunklines, including the North Stream Pipeline. The Offshore deepwater activities for South Stream will commence towards the end of 2014.

Among the other major E&C awards in the quarter, please refer to Slide 13, it is worth mentioning the EPC for the Jangkrik growth in production units for Eni, offshore Indonesia, for a total value of approximately $500 million. The topside fabrication activities will be carried out in Saipem’s Karimun Island Yard, located in Indonesia. This contract fits well with our strategy of growth in the area of Floaters construction, in regions such as Asia Pacific and Africa where we can exploit our well established local presence and our unique availability of fabrication yards.

Furthermore, in Canada, leveraging on our new Yard in Edmonton, we have won three E&C Onshore contracts amounting to approximately CAD500 million. Canadian Natural Resources awarded these contracts to Saipem for the development of the Hydrotreater Phase 3 of the Horizon Oil Sands Project, in the Athabasca region. In addition, as we’ve mentioned, since the end of March, we have won contracts worth more than €3 billion, out of which, I would particularly like to highlight the contracts for the construction, operation and maintenance of the two FPSO units for the Kaombo field, offshore Angola worth in total more than $4 billion. These new contracts confirm the strong commercial momentum we are seeing in the business.

In terms of full year we maintained the guidance we issues at the beginning of the year which as shown on Slide 15 is as follows. Revenue between €12.5 million and €13.6 million, EBIT between €600 million and €750 million, net profit between €280 and €380 million, CapEx of €750 million, net debt target of €4.2 billion. With respect to the EBIT and net profit targets, notwithstanding the incident in Brazil earlier this year on P55 which as I said cost us an additional €40 million, we maintain the original guidance due to the positive impact of our new contracts won which will take effect during the course of 2014.

In terms of net debt, there are several factors underlying our ongoing confidence in the target of €4.2 billion at the end of the year that I would like to remind you. First, some of the legacy contracts are due to be completed during the year, and we expect the pending and final payments for some of these to be made before the end of the year. It is therefore reasonable to expect a significant easing of our working capital position as a result of the development of our portfolio characterized more and more by contracts with more favorable cash flow profiles.

Second, we have attractive commercial prospects which we are confident of converting into backlog over the course of the year. These will bring in additional down payments, further helping our working capital position. Finally, on the basis of the €600 million EBIT target, we anticipate generating around €250 million of operating cash flow, which will be deployed towards a reduction of debt.

As we’ve said, we are maintaining our guidance for 2014, but achieving the guidance will depend on a number of moving parts as set out on this Slide 16, and now I will take you through them one-by-one.

First one is the efficient execution of the legacy contracts. This chart 17 shows the breakdown of the E&C backlog of Q1 between lower margin contracts and new contracts awarded since 2013, to be executed in both 2014 and 2015.

Looking solely at the existing lower margin contracts, the amount stands at €4.3 billion, compared to year-end of 2013 there has been a reduction of some €600 million as a result of the normal progress of the projects. As you can see on the slide, the majority of legacy contracts will be executed from the backlog by the end of this year, with a small portion amounting to €1.5 billion to be executed in 2015.

The other two moving factors are the new order inflow and the time of execution of the new contracts. You will remember this Slide 18 from our full year results in February, illustrating the principal E&C projects up for tender whose award is expected by the year-end. We want now to provide an update on those that Saipem has been awarded during the year-to-date.

As I’ve said in Offshore we won the first line of South Stream and not foreseen in the slides we are now negotiating the second line job. In the Asia Pacific region, Jangkrik FPU has been secured. The floating LNG Feed of Masela is not significant in terms of value but still important for potential future developments. In West Africa, Kaombo FPSOs have been awarded solely to us, whereas the SURF that we bid in joint-venture went to another contractor.

In Onshore, in April, we were awarded the 200 million contract for the expansion of the Versalis plant in Italy. The evolution of the new awards during the first four months of 2014 confirms Saipem’s competitiveness in the key business areas of trunklines, FPSO construction and complex onshore projects. We are still competing and negotiating for a number of opportunities listed here and we are cautiously optimistic that we can achieve further awards, particularly in the Americas and in the Middle East, where the projects still up for award play to Saipem’s core strengths, both from geographical and technological perspectives. Timing of award and execution of future contracts will be another important factor towards achieving the high-end of our guidance.

As far as new contract wins year-to-date they will provide a limited contribution to 2014 figures. Just looking at the biggest one, to give you an example, in South Stream the laying activities with Saipem 7000 will start at the end of 2014. Out of the $4 billion of the Kaombo award, 3 billion pertains to a four year project where the first phase under execution this year is mainly engineering. The remaining 1 billion is related to operations and maintenance activities starting in 2017. It should also be noted that a portion of order intake year-to-date is represented by change orders of legacy contracts, hence with no contribution to EBIT.

Now moving to Slide 19, to sum up, we have made solid progress in the first quarter of 2014 towards stabilizing the business and delivering the recovery. On the legacy contracts, we confirm our constructive ongoing relationships with clients and the continuous progress on execution that will result in the completion of the majority of these low margin contracts by the end of this year.

The strong order intake we’ve seen in the first quarter has continued into the second quarter, and we are pleased that all of these new contracts have terms in line with the clearly stated commercial strategy of this management team. All of this activity allows us to maintain guidance for 2014 and we remain confident that the foundations are being laid for the return to profitable growth in the medium term.

On that note, I conclude the presentation, and Alberto and I will be happy to take your questions.

Question-and-Answer Session

Operator

Certainly, thank you sir. (Operator Instructions) I will now move to our first question today from Phillip Lindsay for HSBC. Please go ahead.

Phillip Lindsay - HSBC

Yes. Good evening gents. Two main questions, please, first of all, it seems like you’re much more competitive for lower margin FPU work right now versus say higher margin SURF work. I just want to try and get a sense, if that’s a real trend so as we look into the future should we expect much a greater proportion of FPU in your offshore mix that we’ve seen historically or do you think, you still think, you’ll grab your fair share of SURF and more traditional offshore work? That’s the first question. And then the second question is, I really just want to get a sense of your thoughts on strategy around the Onshore business. It feels like the competitive environment as it got a little easier in the last six to 12 months, but I’m interested to hear your thoughts on how you view the competitiveness of your business in the medium-term given your more commercially disciplined approach? Thank you.

Umberto Vergine

Okay. Thank you, Phillip. First of all I would like say that when we decided to formalize our Floater business as an independent business unit. The intention was actually to get growing in the business. We identified this business from our offshore and to take the all advantage of the availability of our Yards. I’m very pleased that actually in very short time we’ve been able to win three big vessels to be built, one in Indonesia and the two in West Africa, that are prefect to fill up our capacities both in terms of engineering management and fabrication.

And we’re aiming to this business as much as we’re aiming to the mix of the -- what I consider the mix of the offshore without the Floaters that you know is a really a brand of SURF, of trunkline, of installation of medium-sized pipeline that we’re continuing to pursue with the same interest and same the determination as before. And we are very engaged as our slides shows on trying to win some contracts also on other than Floaters offshore business. But I think that this is a very good result considering the capabilities that we have in terms of Yard.

On the Onshore business, I confirm what I have indicated in the beginning of the year in the previous conference call. We are pleased to see that there are a number of big projects available in the market that have somehow reduced the tension in the competition in between the companies that are normally working on onshore including our friend from Korea. We’ve been able actually to partner with them in a number of offers which in common pricing criteria and that is something really new compared to a few years ago. We are also very close in the -- we opened awarding of some bigger contracts in offshore and we hope to be the selected winners.

Phillip Lindsay - HSBC

Okay. And just a separate on Algeria just where are we now in terms of the investigation and can you say whether the DOJ has contacted you at this point and then maybe where you are in your own arbitration against summer trial?

Umberto Vergine

Well we don’t have any other development in terms of investigation that we can report. The only new thing is an evolution with the relationship with the DOJ and I will ask Alberto to give you some details about.

Alberto Chiarini

Yes. As you know with the DOJ we have signed a solving agreement granting them the right to enter into investigation if they want to do so without the time expiration from that side. Recently they sent a request of some documentation on Algeria which shows an interest from the DOJ on the investigation, the request is normal, a request of documentation we are ready to cooperate with the DOJ on this argument.

Phillip Lindsay - HSBC

And again very interesting thank you.

Umberto Vergine

Thank you.

Operator

Thank you. We’ll now move on to our next question from Fiona Maclean of Merrill Lynch. Please go ahead.

Fiona Maclean - Merrill Lynch

Thank you. Yes it’s Fiona, Merrill Lynch I have two questions first of all for the 2015 backlog that you have due for execution could you give us a breakdown of the amounts for the four segments please? And then secondly there is another discussion in the market about Kashagan at the moment could you just clarify your position at least your -- as of your warranty period and it’s definitely the pipes that’s the issue rather than the more that you carried out. What is your interpretation of the kind of ongoing analysis there and what is the opportunity for you if they were to have to relay the pipe and would you have the capacity to do that? Thank you.

Umberto Vergine

I would start from Kashagan we don’t make much interpretation of course about the issue as you will recall the scope of work that Saipem executed in respect of this part of the project was the bright welding underlying using material and applying working specification either given by the client or approved by the client. We completed this activity in 2008 and we delivered the project in the hands of the client. We are following but we are not part of the work that the operator is making in assessing the problems that they have to face. We are 100% available to carry out any activity that would be required and of course as we were able to foot lay the first lines we still retain in the area all the necessary capabilities to do any job similar or repairing of the one originally made.

For what relates to the breakdown of our backlog by year of execution I think that we have of 2015 as you see in the slide number nine we provide a breakdown by business unit where you see that we are progressively, I mean we are confirming a general increase in the percentage of offshore compared to onshore in the E&C while we have I would say of stable business activity in the drilling.

Fiona Maclean - Merrill Lynch

Okay, thank you.

Operator

Thank you. And we’ll now move to our next question from Haley Silverman of Barclays. Please go ahead.

Haley Silverman - Barclays Capital

Hi. Thanks for that just a couple of questions if I may first I was hoping that you could confirm the timing of the future in drilling outages in 2014?

Umberto Vergine

Sorry can you repeat the timing of drilling...

Haley Silverman - Barclays Capital

Outages, just this downtime in the drilling the timing of those the remaining ones in 2014?

Umberto Vergine

Okay, let me get the slide I will have to refer to the slide which we have seen. Okay so basically if I go more in details compared -- I will try to read that what was indicated in the slide on the offshore we have the number of days either on Scarabeo 7 due to the maintenance work that as of schedule we’re carrying out. I dedicated that there is some extra time associated with this work because we identified some maintenance that are required of the portion of the rig that normally is under water, so that was not foreseeable while the rig was on operation as we took to the drydocking of course that was visible and this will require basically more than one month more of activity in the yard. We have 32 days on Scarabeo 9 and 94 days on the Perro Negro 7. These are the more significant idle days then we have minor situation like one week on the Scarabeo 5 and half a week on Perro Negro 2. But I don’t know if this is exactly what you were asking for.

Haley Silverman - Barclays Capital

Yes I guess I was trying to understand if that was all going to be happening in the first half or if -- the timing around them of the major ones the Perro Negro 7, Perro Negro 8 or 7.

Alberto Chiarini\

Yes, both maintenance will expire within the first quarter, so the downtime expected in the drilling rigs would be in line with last year. There won’t be any major impact.

Haley Silverman - Barclays Capital

Great, thanks. And just to follow-up from Phil around the FPSO contracts that you have been winning, typically those are more single-digit margins. And I was just wondering how it is using your local contact at Karimun enhanced this at all?

Umberto Vergine

Well of course there are rules to the components of risk mitigation in all the activities that we carried out. The fact that we’re able to perform the majority of the work required for the construction of the modules that then will be installed into the house by our self under our control is certainly a component that generates a lot of responsibility and lot of direct management of the activity, but on the other side guarantees us from the risk of sub-contracting particularly at the time when you start adding more than one projects to follow. The fact that we can organize our yards to work is casual in parallel executing this business is certainly a guarantee for us.

Haley Silverman - Barclays Capital

Okay. Thank you.

Operator

Thank you. We’ll now move to our next question from Ryan Kauppila from Citi. Please go ahead.

Ryan Kauppila - Citigroup

Yes, good evening. Just two questions from me. Firstly on Brazil there is some industry press that would suggest you guys are pretty well placed on some current tenders there. How would you say Brazil and your new commercial threshold compares to West Africa for similar types of work? And then secondly a competitor announced an award on Block 15/06 today. Was that a project that you guys bid on?

Umberto Vergine

Well we’re not making any way there of our commercial strategy on geographical basis. In the sense that particularly when we talk about offshore activity being pipe laying or SURF certainly we tend to compete applying a strategy that commercially doesn’t -- is not very different for example as you suggested between one side and the other one of the Atlantic. And we’re extremely cautious about the potential risk associated with these activities. And our competitiveness is granted by the fact that we don’t believe that there is a tendency to underbid Ryan from our competitor for the same, exactly the same reason. I think that the associated cost and risk will be always well represented by Saipem and I believe that that will not put us out of the mark.

Brazil remains for us -- is and continues to be a target area and is part of our strategy to grow in the offshore, is part of our strategy by which we are completing the building of our yard. And therefore we’re still quite determined and hoping to achieve some new awards within 2014. The one that as we indicated on the Slide 18, the projects that we’re looking at for the area are those indicated here. So I don’t know which one you’re referring to, that you said that today was awarded.

Ryan Kauppila - Citigroup

Okay, so if it’s not on the slide it’s when you probably weren’t active on it, that’s a safe assumption.

Umberto Vergine

Okay. Exactly, it was not part of our target key target for the year.

Ryan Kauppila - Citigroup

Okay, that’s great. thank you very much.

Operator

Thank you. We’ll now move to our next question from Carolyn Hixson of UBS. Please go ahead.

Caroline Hixson - UBS

Hi there. My first question is just on the execution of the zero margin backlog, so you said it’s 4.3 billion for the remainder of the year which implies it was quite low and your run rate is going to have to increase on that through the years could you just give some implication of the timing and obviously the impact that’s going to have on margins?

Umberto Vergine

Yes. Alberto?

Alberto Chiarini

Yes, the group settlement in the first quarter was actually more than 600 million on the legacy contracts because we had also in the revenues and in the order intakes 600 million of variation orders and amendment to the existing legacy contracts so we actually executed 1.2 billion on those contracts. Of course we have examined the base of executing those contracts in the remaining part of the year and we believe that we will be able to complete the remaining 4.3 billion. You have also to take into consideration that these first three months of the year in some areas is winter season so it’s not easy to progress whereas with the spring and summer of course we will increase the pace of execution on those contracts.

Caroline Hixson - UBS

Okay, thanks. So the fact that you’ve had a lot of change orders does that indication that the equally that 4.3 billion could grow through the year or do you not expect any more change orders to come?

Alberto Chiarini

That’s correct. You’re correct and because we are as we said we are in negotiation with our best clients to make sure that some extra cost would be recognized whenever we have bidding carved in making good all the execution and the operation on those contracts. So I would say that probably in the first quarter we had a big chunk of that but I would expect some more during the year.

Caroline Hixson - UBS

Okay. And can you give the split of that 4.3, what’s offshore and what’s onshore remaining?

Alberto Chiarini

Yes I think two-third offshore and one-third onshore.

Umberto Vergine

Exactly.

Alberto Chiarini

Partly.

Caroline Hixson - UBS

Okay and just on the final piece on the offshore margin so my understanding is your EBIT number includes 40 million hit from the Roncador project which apply back that imply something about a 7% operating margin which seems to me quite high considering you have still got some legacy contracts. Does that imply that the underlying is even higher than that?

Alberto Chiarini

Well we have benefited you’re right on the 40 million actually the 40 million are included so if you exclude you reach the numbers we have correctly mentioned. We had a ramp-up on some more profitable contracts in 2013 like gneiss the main one that I would mention and of course this is improving our profit our margin on those contracts. So in the offshore in a way we are anticipating a bit the cleaning of our backlog.

Caroline Hixson - UBS

Okay, thanks. That’s all from me.

Operator

Thank you. We’ll now move to our next question from [Andreas Kerri] of [Mobilebank]. Please go ahead.

Unidentified Analyst

Yes, hi. Good afternoon everyone and I have a couple of questions first one is on orders intake and the target that you have for the Korea in the E&C business. Basically you have 6 billion intake year-to-date, I was wondering if you expected to exceed the 10 billion order intake target that you have for the full year if I am not wrong in the E&C business? This is the first question second quarter is on the operating margin in the E&C offshore that if adjusted by the P55 project is 7% in margin. I was wondering if once the legacy contracts related to the offshore E&C business are clean what is the level the sustainable level of operating margin that you have in your mind in the long-term in 2015 for order? And very last question on South Stream could you quantify the size of down payment that you expect in second quarter? Thank you.

Umberto Vergine

Thank you Andreas first of all on the issue of what we expect to be our order intake this year, well we hope to exceed and to exceed with good contracts our target of course our Slide 18 really represent the all the range of targets that we have we are very pleased of the results of this first fourth months. And we are moving toward the direction that could guarantee reaching our objective and certainly if the quality of our offers will be well received from our client we can even exceed that I think that this would be the best indication of how quickly and how solid will be our recovery. At this moment of course as you can imagine I can’t make any speculation about this, but I think that we all take account of the good result achieved so far, and…

Unidentified Analyst

So basically 10 billion is a reasonable target, it remains a reasonable target that could be exceeded if I understand well.

Umberto Vergine

It could be exceeded but again you know this is a matter that remains really open until it gets closed, because until the last minute it’s no guarantee that even what you believe to be your best position it eventually materialize. So really this is a matter that is speculatively you can be very positive, slightly positive or neutral, I still remain neutral.

Unidentified Analyst

Okay, okay. Thank you.

Alberto Chiarini

I will answer on the operating margin of offshore, of course there are so far good signals in this respect. So we’re improving our margins and this is thanks to the -- so I would say that acceleration of the cleaning of the backlog which is good and as we always say that in the offshore we consider assessable margins double-digit more than 10%, these arise a lot depending if its heavily, if its thorough, if it’s front line or P&I. But overall it’s of course is double-digit margin. So I would say that the signals that we’re receiving from the strong commercial momentums are very good, if you look them in terms of -- medium terms perspective. From 2015 onwards we will certainly benefit of that margin. The South Stream down payment is 140 million and will be received in the second quarter of this year.

Unidentified Analyst

Okay, many thanks.

Operator

Thank you. We’ll now move to our next question from Rob Pulleyn of Morgan Stanley. Please go ahead.

Rob Pulleyn - Morgan Stanley

Yes. Good afternoon gentlemen, just two questions from me. Firstly, so obviously you have spent an enormous amount over the last 10 years investing in what seems like a best-in-class asset base and a lot of local content. Are you still confident that in the what seems to be the new market outlook that there is going to be enough volume of contracts coming through to sort of maintain a good level of utilization across that large best-in-class asset base. And all perhaps are some of your assets and yards and local content going to be underutilized? And the second question is much shorter and more simpler as it relates to drilling rates. Did I hear you correctly saying you are expected to get more favorable rates on the rigs which are coming up for contract roll over? Thank you very much.

Umberto Vergine

Thank you. Well certainly the fear that I received from the market at the beginning of last year of Saipem being as a result were found during investigation and surprising low performance being able to secure sufficient work give enough job to do to our fleet and to our yard seems to ease out quite rapidly, particularly with the current wins but only because of their value but their nature, I mean the type of business that we’re winning is excepted, the type of business that Saipem has to win in order to extract the best possible of its strategy. And this strategy you right said goes through it is of their fleet and huge yards, all is going in that direction. If you look at the installation, if you look at the FPSO I hope that we will be able to secure more activity of this nature, not necessary just on FPSOs but even on some activities related to L&G in order to supplement this, certainly I start to see a much easier situation for the next two three years.

Certainly just to wrap-up really what is my thinking at the moment, if we will be able to secure in the short time some more onshore projects to execute. We will secure our activity for the next two, three years also on the E&C Onshore. And then I think that we will be back on a level of engagement with the market, very similar to the successful one of 2010-2009 et cetera. And your second question was relating to…

Rob Pulleyn - Morgan Stanley

Drilling rates.

Umberto Vergine

Out to the drilling rates. Yes I said that we are expecting some slightly better rates on some of the onshore rigs and on some of the jack-ups. There is a certain trend of decreasing rates for the top-end of the semi sub for the ultra deep activities also because there is expectation of the new build coming in. The mid-range and the lower or medium half lower range is still quite -- the market is still quite tensed because of at the end of the day there is not much more number of rigs coming in and the market is still busy in using lower deepwater semi-sub and jack-ups. So, on that one, we don’t expect to see any reduction in rates possibly a slight increase.

Rob Pulleyn - Morgan Stanley

Okay. Thank you very much for the color.

Operator

Thank you. And now we’ll move to our next question from Luigi de Bellis from Equita SIM.

Luigi de Bellis - Equita SIM

Yes. Good afternoon. Two questions for me, if I may. The first one is on the net debt guidance. How much we expected cashed in from the unwinding on working capital expected in 2014 excluding the down payment? The second question is on the full year guidance. During the presentation and looking into your guidance for operating cash flow you mentioned the 600,000 of EBIT, do you think that the high-end of the guidance is now still achievable or is out of the scope? Thank you.

Umberto Vergine

I’ll comment on the guidance and then I’ll let Alberto to give you more details of other working capital. I think that if you remember when we presented our guidance, we indicated the base and high and we said that the richened base was already conditional to a certain level of order intake of contract of a required quality and this is what we have achieved to-date. So I think that in many respect we can say that even despite the issue of the P55, we have somehow secured the low-end of the guidance. Since in terms of new order intake and the number of months during which the new contract could be won and therefore there are possibility to impact on the revenues and on the performance of 2014. I believe that we have not finished here. So if we will be able to win more contracts between now and the year-end that could help our result to move towards the high-end. And again that is depending of how much, how many, and how soon.

Alberto Chiarini

Yes about the working capital unwinding, if we want to reach 4.2 billion which is our month-end objective from that net debt at year-end we have to find to improve our cash flow of 1.4 billion of which 1.1 approximately is unwinding of the working capital. Of course, there are the elements of unwinding of the working capital have already been stated by Umberto I would like just to ask that on the down payment issue we do not see any criticality based on the order intake to recover the €110 million that we have lost in this quarter. And as well as in the milestone it’s a technical element, so we believe that the approval of the maximum should be much more favorable in the second half of the year. The remaining two issues that are very much linked with our ability to negotiate with the client and this the target of the Company and this is the area where the project managers and project directors and the top management is fully engaged at the moment.

Luigi de Bellis - Equita SIM

Is it possible to give an idea of how much is the percentage related to the negotiation on the 1.1 billion?

Alberto Chiarini

Yes it’s what we have stated 90 million we have to recover 90 million in terms of operational loss and then we have another 220 million-250 million that we want to improve in terms of trade receivables.

Luigi de Bellis - Equita SIM

Thank you very much.

Operator

Thank you. We’ll now move to our next question from Henry Tarr of Goldman Sachs. Please go ahead.

Henry Tarr - Goldman Sachs

Hi there and thanks for taking my questions. I had a couple firstly just to come back onto the Kaombo project award. Did you specifically prioritize the FPSOs over the SURF package on that one I think industry articles had you as the low bidder on the SURF package as well? And did you see the client pushing back on price on this particular contract I know so it’s all been vocal about lowering costs on that contracts? And I have a couple after that but I’ll leave that for now.

Umberto Vergine

We’ve submitted the offer for the all job offer the FPSO and for the SURF where the SURF we were in partnership here we’re on our own 100% Saipem. And certainly we have not prioritized our offer. Our SURF is always a target important and on the other side we have not made, we have not to apply discounts in order to win the FPSOs as you recall the awarding of this contract has been pending since a number of months. This has been purely the decision of the operator of the client that after having received the initial offer decided to review the scope and the specification of the project in order to reduce the cost. And on that basis all the companies resubmitted the offers so the reduction in cost that total because we know that is total decline so we have been able to achieve this base not a commercial discount but on a term and extremely a smart approach that they had in order to minimize the cost that initially they discovered that would have had to face based on all the structure of the tender initially.

Henry Tarr - Goldman Sachs

Okay.

Umberto Vergine

Have I answered them or left something out?

Henry Tarr - Goldman Sachs

No, that’s very helpful. And then just a couple of other questions firstly on the timing for South Stream in the second line do you have any visibility on when and if that might move ahead and then could it be of a similar size to the first or do I guess there may be efficiencies from doing a second line? And then just lastly on what’s it on the working capital milestone issues just to confirm there is no at problem with the client here or the ongoing scope of work it simply that you haven’t hit milestones in this quarter and you fully expected to hit them in 3Q and requite that money?

Umberto Vergine

Okay on South Stream the client is excluding the term in to continue and growing either the identifying the best way to execute the remaining three lines. So we are now discussing with them for the second or this all four lines in order to first identify verified availability of vessels and particularly schedule in spite I mean in consideration that they are targeting the completion of the second line quite soon I mean they hope to be able to get the first second line finished around the end of 2016 so you understand that they’re moving there quiet quickly now. We are in discussion with them in order to understand how much we can be part of that if our costs are acceptable to them questioning of course the role that we are already having on the first line. And…

Alberto Chiarini

And with [indiscernible] the issue with us is an issuing with the terms and condition of the contract. So basically we are incurring at the moment a lot of cost especially specifically to chase of material that will be utilized in the project and unfortunately I know that it’s not a nice thing to say but unfortunately we assess that very realizing terms in this discount and so to your answer is strictly respecting those terms and condition of the contract so not doing anything more than applying the terms and conditions of the contract. We believe that there would be an unwinding because this chase of materials and other copper to adding time would be recognized in milestone during the year and this unwinding would be especially strong after the mid year, after mid year so in the second half.

Henry Tarr - Goldman Sachs

Okay, very helpful. Thank you.

Operator

Thank you. We’ll now move to our next question from Guillaume Delaby of Societe Generale. Please go ahead.

Guillaume Delaby - Societe Generale

Yes, good evening and thank you for taking my question. Just when I look at your accounts 2013 and Q1 it’s very difficult for analysts to have some comfort with your guidance with what you’re seeing and I am just looking at I’m sorry it’s a little bit of an obsession with me, but if I look at your staff cost in 2013 I can see that they’re increased by roughly 15% this increase continues in Q1 2014. Do you have plan may be to try to reduce those staff costs as one of your competitor has been successful doing that in 2013? Thank you.

Alberto Chiarini

Staff cost...

Umberto Vergine

Sorry we could not fully understand you’re referring to which cost?

Guillaume Delaby - Societe Generale

Staff cost, so payroll and related cost increased by 15% in 2013...

Alberto Chiarini

Okay, yes, there is an explanation you are right and it looks a bit older but there is a clear explanation for that because we had to convert a lot of contracts namely the one in Mexico and Canada where we had bad performances of subcontractors into direct hiring of the people. So we got rid of the subcontractor and we maintain the people of the sub-contractor and direct hiring of the company. So this is the main explanation of the difference.

Umberto Vergine

I would like to add that that of course so this personnel is normally hired on the project. So the cost that we see on this personnel should not be mixed with the cost of the permanent staff.

Alberto Chiarini

Yes.

Guillaume Delaby - Societe Generale

Okay. Does it mean that the staff cost is going to be stable or maybe slightly go down in 2014 or can we have some color about that?

Umberto Vergine

Well I can tell you this, out of -- let’s refer to the Italia staff for example. In terms of Italia staff we have about 7,500 people. Last year we had a net increase in the range of 70 people I believe and for this year we’re planning more or less the same. If I look at our engineering centers, we have in general variances that are of this percentage of this size where we have big variations are in the international staff. The international staff goes with the projects, more backlog more people of course less backlog less work to do less people. So that are two phenomena, one is impacting in somehow your staff cost, your G&A. The other one is the cost that is built in, in the price that the contract. Certainly there is always a mix between the cost that are not seen as a sub-contractor and cost that are visible because we do direct hirings, mainly we employee supervisors. But sometimes like the cases that Alberto mentioned we employed the full growth, because we had to improve the quality of their work.

Guillaume Delaby - Societe Generale

Okay. Thank you.

Operator

Thank you. We’ll now move to our next question from Geoffroy Stern of Kepler Cheuvreux. Please go ahead.

Geoffroy Stern - Kepler Cheuvreux

Yes. Good evening. Actually I have a couple of question, the first one just to come back on the Offshore E&C business. So as has been said before the underlying amount in Q1 was close to 7%. If I remember correctly a couple of months ago you guided for the margin Offshore E&C to be at 4% this year. So is there any reason to expect the underlying margin in the coming quarters to be at such a low level? And just want to clarify also some of your comments about the trends in terms for the Offshore E&C margin going forward. I think you said that the margin should be at a solid double-digit let’s say in the medium-term. But did you say as well that you expect the margins to be at 10% next year? Just wanted to clarify that. And then I have another question but I will stop here.

Umberto Vergine

Okay. Well. On the Offshore yes you are right that while we presented the budget the Offshore margins showed a 4% around and we had an improvement. You have to take into consideration that we have some of the legacy contracts and then the impact of the new contract was much better and was much better because they say that has been a good run platform, so more profitable contracts as I mentioned [indiscernible]. So in a way as I said that there is an acceleration of the cleaning, in terms of -- I probably didn’t catch exactly your question on the margins on the Offshore. We said double-digit and we said that in 2015 I would expect that we will stay only with couple of big legacy contacts like [indiscernible] for [indiscernible] which is an offshore contact with bigger margin. But I would expect the offshore business segment to pick up also in terms of margins.

Geoffroy Stern - Kepler Cheuvreux

Alright, thanks. And I have a question with regards to offshore drilling, so you commented about essentially the maintenance of Scarabeo 7 impacting the performance of offshore drilling business. So the EBITDA margin was up 60% in Q1 which is quite low compared to the previous years, I would say. Is it fair to assume a pick up to the 43, 44 -- sorry 54% you have achieved over the past two years as of Q2?

Umberto Vergine

Yes we expect a slight improvement and the fact that we have this situation with Scarabeo 7 of course is the reason of this slight increase compared both the budget the previous -- both to budget and to 2013.

Geoffroy Stern - Kepler Cheuvreux

Alright, thanks for this.

Operator

Thank you. We’ll now move to our next question from David Farrell of Macquarie. Please go ahead.

David Farrell - Macquarie Securities

Hi. Two questions from me please. Firstly in terms of the insurance claim on the Perro Negro 6. Could you tell me what the size of that is and when you expect that to come through in terms of the cash flow and its contribution to the reduction in net debt? And then secondly in terms of the Onshore E&C business, I was wondering if you could give a little bit more color when you will expect a positive operating profit contribution from that division? Thanks.

Umberto Vergine

Okay. In terms of the insurance, it has been already cashed in. so we’ve fully recovered the value of that remainder of fix and it has been cashed in last year, so we’ll benefit of any cash flow inflows this year from this for the insurance. What the insurance is now dealing with is the wreckage removal. This will be based on a contract that is affected by the insurance will be fully managed by the insurer. So the insurer will manage the wreckage removal and we’re pretty confident that we’ll not incur any excess cost based on the first assessment that we made. Any other questions?

David Farrell - Macquarie Securities

Yes so the other question was when the Onshore E&C business is likely to deliver a positive contribution?

Umberto Vergine

Well I mean we have indicated which is our view for this year, and we hope that with the revenue target that we have indicated, if that would increase this could accelerate of course the recovery in margin or it will be next year.

David Farrell - Macquarie Securities

Okay, thanks.

Operator

Thank you. And it appears we have no further questions at this time, sir.

Umberto Vergine

Okay. Thank you very much.

Alberto Chiarini

Thank you.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

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