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Executives

Bruno Chabas – Chief Executive Officer

Peter van Rossum – Chief Financial Officer

Analysts

Dirk Verbiesen – KBC Securities

Wim Gille – ABN AMRO Bank

Rob Pulleyn – Morgan Stanley

Nick Green – Sanford Bernstein

Mick Pickup – Barclays Capital

Edward Donohue – One Invest

Amy Wong – UBS

SBM Offshore NV (OTCPK:SBFFF) Q2 2014 Earnings Conference Call August 6, 2014 1:30 PM ET

Bruno Chabas

Good evening, all. Thank you for coming and joining us tonight, this wonderful summer day in Amsterdam. All of you are a bit wet, but we appreciate you being here. So, we are going to go through the presentation of the first half 2014 results for SBM Offshore. I'm going to provide a general introduction on the company, what we have done on the market, where we stand, then Peter is going to provide you with information on the financial side, then I will conclude on the guidance for the full year.

So the disclaimer, as always is are we online sorry. Just let me two minutes, are people online on the telephone also? Okay.

So I'm on Slide 3, the first half 2014 in review. And what I would like to give there is, first of all, a good overall performance for the company. On N'Goma, the lifting was completed and basically all the modules are on board of the FPA, so for the final integration. We secure for almost $1.9 billion of financing for the Cidade de Merica project under fairly good terms. And our directional revenues for the year increased year-on-year by 6% to $1.7 billion.

Now, the period we have seen was not without challenging and in particular related to Brazil. So what I intend to do here is really to address the Brazil points and really not come back to that. I’m sure you are going to ask a few questions on the subject; but at least in presentation that's we are going to address now.

So let me recap a bit what has been done. First of all, we published the result of our investigation on April 2nd of this year stating that we didn’t find anything improper in

Brazil. That's our internal investigation. The same was done by Petrobras roughly in the same period after Petrobras had done their own internal investigation.

Now, despite all of this you will decide it that we were not going to tender the two upcoming projects. It was a decision made by Petrobras that we concur with them of all, and it needs to be put in the context of first of all obviously our own investigation.

But, more importantly, the overall political issue which exists in Brazil and the disruption that this can create. Having said all of these what can be said is that, the relationship of SBM Offshore and Petrobras has been a long relationship. We have been working together for more than 50 years.

We have been working together to the benefits of both companies, and there is a lot of vested interest we need back to an even keel and to work together in the future.

Now, next point is really speaking of other financials. When we look at the financial results, they are fairly strong for the year – the half year, I should say. And you need to take into consideration the fact that we have also taking a provision of $240 million, a settlement provision. I will expand on this one a bit later on.

Now, going more into the details of the financials, again, I'm going to focus on the directional figures, which are modeling to the economics of the company rather than the IFRS.

On a directional point of view, our revenue increased from $1.6 billion to $1.7 billion year-on-year or an increase of 6%. If we look at the EBIT figure, we are looking at a loss of $41 million.

This loss, if we take out the exceptional items which is really the provision of $240 million for the ongoing investigation and the reversible provision of $15 million on Deep Panuke, will show an EBIT or the underlying EBIT at $184 million.

Now, if you look on the IFRS numbers, you can see really huge change compared to the economic underlying figures. You can see that the revenue increased from $2.2 billion to basically $2.8 billion, almost a 29% increase.

All of this really trying to demonstrate that the IFRS numbers, which are really the numbers forced upon us by the accounting authorities, have a purpose but they do not reflect the economic reality of the company.

Now let me speak about the compliance case and what's happening there. So as I told you before, we published on April 2nd the finding of our internal investigation. This finding is available on the website and you can go fairly extensive. It’s something which is rather unique in the way we have done it or we have done it in the spirit of transparency like what like what we have done from the beginning on this investigation to make this public.

We have progressed also in our dialogue with the authorities. We have made progress and that progress that today we believe that we are not going to settle this case with zero fine. So we have taken a provision accordingly of $240 million. It’s a provision; it's the best estimate we have at this stage.

It’s really a provision of $240 million. We will be able to provide you more information on the investigation once we are able to so, we are not able to do so today. We don’t have any timeframe on when we are going to be able to do so, but as soon as we are able to do so, we will provide you with extensive communication on the matter.

Now, what I would say also to conclude this slide on compliance is that the company over the past 2.5 years has changed. And it has changed in the culture, in the transparencies, in the ways of working with our clients and with other stakeholders. It’s a journey that we started as a management board 2.5 years ago. It takes a long time, but it’s really something which is noticeable in our ways of dealing with our clients today.

Now, on our HSS results or safety results. The first point is the regret, the deep regret to have to announce that we have had two fatalities on our work site. With a sub-contractor in our yard in Singapore. We have done an in-depth analysis of what were the causes of those fatalities in order to make sure that they will not repeat themselves in the future and that we are really providing to our work force a safe way to work.

Now all of these is even more regrettable when you look at overall performance of a company, whereby you can see that the loss time injury frequency is decreasing the potential severe accident frequency is decreasing also and has decreased from 2011 to now by more than 80%.

So you can see that underlying, there is really a lot of focus which has been made in the company. But all of this is really overshadowed by those two fatalities. From an environment point of view also we are producing or we are better than the industry average by a fairly big margin and we are reporting no spill over the period in the first half of 2014.

Now let’s discuss and I’m on slide 9, for the ones on the phone – let's discuss about the fundamental of our market. Where is the supply of all come in from, the additional supply of all coming from? And really we can see three new buckets who are there ready to replace the depletion of oil on existing reservoir in production today.

The first one is the Shell Oil in the US. The impact has probably been larger than what was expected maybe even two years ago. I think said all of these, because of Shell Oil is not nil, it’s pretty expensive actually and we expect that is going to plateau by 2020 because the depletion of this field is even higher than the normal field.

And therefore, it’s – yes it’s an additional cost supply of oil, but it's not something which is going to be there on a meaningful way for a long period of time or at least that our belief.

In Iraq, where there a lot of plenty of opportunity for production, the outcome is uncertain. It's uncertain due to the political environment mainly and due to the legal environment also. So what remains is really deep water development whereby more than 50% of the large reserves have been discovered over the past decades.

And that's where the new development will be made. There are economic. There are plenty of opportunities. And that's really where the growth of our industry and SBM Offshore is going to come from in the coming future.

Now, if we look at ways to develop the field in the quarter, you can see several players. And on the chart to the right you can see offshore drilling; you can see the offshore engineering; the Subsea; the FPA so the marine transportation.

All of those factors are today under pressure in order to adjust their cost base, to adjust their supplier base to standardize and to provide something which is more – which is cheaper, basically, to the oil companies. And everybody is under pressure at this stage. So what can we say, if we look at the market and what has changed compared to the period of 200 to 2012 to the period starting in 2013.

First of all, one point I would like to make is that last year we made the statement and I believe it was during the half year – stating that the market is going to slow down. The potential for the market is actually good, but the market is going to slow down for the period of 12 months to 36 months, whatever the period is going to be that we don't know.

But the market will slow down.

And why is this happening? If we look at the period of 2000 to 2012 it’s really a period whereby there was a rocket growth of development in deep water. It was development of new technology, it was really getting to know how to do these and it was really inventing the industry for a period of time. Lots of projects went well, some projects didn’t go that well.

But the industry was learning at large. Today what we are seeing is that the projects are becoming more complex. The oil is more complex, it’s often in deeper water, it’s often further away from the shore base, so it’s becoming more complex. As such, the oil companies or clients want to take the learning that they have had over the past few years and to make sure that they incorporate those learnings to the field development that they would be doing. And to make sure, that they are not going to be make any mistakes.

And third point, they are trying to standardize what they are doing and as such they are addressing every component of the supply chain and trying to reduce the cost. So all of this means that fully in our view there is real slow down in the activity but the slowdown plus the ability for the industry to speed up once we are going to be on the event here.

Now if we look specifically at the FPSO market for SBM Offshore and here I am discussing about the over market of all type of FPSOs. What we see is the market estimate by an analyst or market analyst in particular are looking to awards of 10 to 14 or what per year.

Now our view for 2014 and 2015 is to have 12 awards in 2014 and 13 in 2015. Out of the 12 awards for 2014, five has been awarded in the first half of 2014. We were the competitors in three of those tenders. We didn’t win them but we were competitors in two of those tenders and in another one we could have been a competitor we would decide it not to submit.

What it means, it means that 20 awards remains through the end of 2015. 14 today are in active tendering mode and out of those 14 SBM is tendering three of those and that there are six projects which are in pre-tendering phase. Five of which are targeted by SBM Offshore, and they include four projects for Petrobras.

Now, you would in this next slide that there is a huge amount of tendering activity which is on the go. Our expectation today is that the award market is going to be in line with what we are seeing. However, we are seeing a lot of delays in project awards, really a lot of delays in projects award. So we could see a shift of the demand going to the right.

Now to illustrate this case, is let’s look at the tendering activity of SBM Offshore announced on Slide 12, let’s look at the tendering activity of SBM Offshore for all type of products, meaning FPSO in particular. What you can see in this slide is two things, first of all the level of tendering activity is increasing year-on-year.

It was seven in 2011, seventh big tender on the go. Today we have more than 13 big tender on the go. We also see that projects are being carried away from one year to the next much more now than in the past. In 2011, when we look at a figure of seven projects being tendered, two projects were carried away from the previous year.

Today, with certain projects being tendered, four projects are being carried from 2013 to 2014. In fact in some cases from 2012 to 2014 and we expect the trend to still accelerate in 2015 to what we expect the carryover of projects to jump up to six projects.

So, based on this, I will leave the floor to Peter, who is going to go in detail through the financial performance of the company.

Peter van Rossum

Yes, let’s start with a recap of the accounting change we’ve seen in the beginning of the year. We shared with you when we issued the quarter trading update, but I think it’s good to put it again in perspective, because it explains why the numbers under IFRS look quite different from what they were looking before.

If I look at the situation ends of 2013, how many units were we working on, so we talk at production units that’s FSOs, FPSOs, the semi-sub – plus the projects that we working on, that would get into a joint venture, with let’s say with partners going to be taken into production in the coming year.

So in 2013, we were talking about 22 units. Under new IFRS, the new joint venture guidelines pretty specifically stated you have a make a test whether or not you control a joint venture when it controls, your account for it on a 100% basis with the recognition of the minority share, if you do not control it, if it’s a joint operation you have to do equity accounting.

So for all intents and purposes, the details of the vessels disappear from the balance sheet, they disappear from the P&L, and they are kind of a statistical after fought included in the P&L as income from associates.

So under these new rules, we would lose of the 22units, we would lose 7 units mainly in Angola, and 2 in other parts of the world. And if you are looking these at slide 14, you can see which ones are taken out its on cost side, it’s N'Kossa, Saxi Mondo, N'Goma, Kikeh, Sanha, and Kuito.

The other site is that the vessels that were proportionally consolidated previously and where we have control all of a sudden become 100% reported, and therefore add significantly to revenue, also to cost, to assets, and to liabilities because we take everything of the venturing into account in our consolidation.

So far the Yetagun, for Llhabela, Paraty, Marica, Saquarema, Espiritu Santo, and FPSO Brazil, all of a sudden the total signs of the business looks much bigger.

And then there are a number of vessels like Deep Panuke Anchieta, where we have a 100% of the share, actually nothing really changes. So what does it do? And you can see there is a table at the bottom of the char. I will start with the assets, where we had $7.1 billion in assets in the beginning – sorry at the end of last year. And they are all IFRS.

The vessels are leaving because they are joint operations and not controls, will lose $300 in asset value. These are older vessels. They are more depreciated. The part that we don’t own of the Brazilian vessels they come into play, that adds $1.9 billion in asset value. So, the – the same fleet effectively stands now for $8.7 billion in our books as compared to $7.1 billion in the old IFRS.

The same with the loans, you see that the loans are significantly higher under the new rules. Revenue, and that’s the one thing that is actually slightly different, revenue comes down slightly, because it’s very much related to the fact that’s under the old IFRS – the finance lease contracts in the turnkey sector had two components. The first one was where we were building the vessel for ourselves. We would take effectively revenue based on the net present value of the shoot of this income. That’s the final fleet value.

The parts that we were selling to the partner basically we had a cost plus whatever it was agreed as the turnkey value of the vessel based on what percentage of completion. So, there was a profit margin in that. That profit margin now disappears. So despite the fact that we invoice that, we are getting the money from the partners that come into IFRS it’s no longer feasible.

It makes it much harder to explain, let’s what is happening from one period to another and we go give you one more example. We are building N'Goma. N'Goma is a project, of course, that we have in the portfolio, it will go into a joint venture with someone go, it is not controlled, therefore it will be equity accounted when it is ready. And therefore it seems a third-party.

Building something for a third-party is like a turnkey sale. So N'Goma, from a project that was a finance-lease type of project, has turned into a turnkey sale because of a change in accounting rule and that’s how we take it through the books now, the official books of the company.

If we contrast that to what we do with directional the 22 units that we had are still the same 22 units that we have today. So in terms of the reporting parameter nothing really changes. We take effectively in terms of vessels nothing out, nothing in, except for two vessels that under all directional were fully consolidated and because we are now saying directional reporting is every leases in operating lease and to every joint venture is taken proportionally to share with SBM alternate.

We have to make adjustments to Capixaba Aseng where there is a 20% minority share in Capixaba and 40% in Aseng. So we did control that. The impact on revenue for 2013 was $18 million so you see that the total revenue at the directional has come down slightly and that’s what we carried into 2014 as well.

From here on, I will concentrate mostly on directional, because that we feel that it’s the better reflection of what a company is managing.

I’m on Slide 16, underlying directional performance. What I’d like to do here is just focus on what are the adjustments we have made to come from the bottom-line number to the corrected and underlying bottom-line number. In 2013, in the first half, if I can refresh your memories, we had to take – or we settled with the client on the Yme project.

The settlement total was $470 million. We had to provide I think in 2012,$200 million, so there was an additional top-up of $270 million. On top of that we had to do an impairment on the Deep Panuke project for $30 million that gave us an exceptional of $300 million in the first half. For this half year, we 15 negative adjustments, so it’s a 15 exceptional income we enjoyed in the first half of the year and again that’s related to Deep Panuke.

We settled with the clients a case that could go into a litigation, good discussions. We closed it out the result was an increased day rate taking that new day rate into account, the net present value looks better and we were capable that the first half of this year to write back $50 million of the impairments which was in the previous years.

And then secondly, as Bruno explained, we are taking two new $14 million provision in the compliance case. So a net amount for changes $225 million. I am going to talk a little bit about the results for each of the segments, but that’s been offset. These are forward results and they are in line with the targets we’ve set ourselves.

In terms of Page 17, the turnkey P&L, when we introduced the half year results in 2013, we mentioned very clearly that we were looking at a set of results that were actually very strong and what happened in the first half last year is that we delivered – we closed out a number of projects. Cidade de Paraty was deliveredOSX-2 was delivered and paid.

Shell decided to cancel the FRAM project, but in the meantime we had spent a significant amount of money on it. And because we went from, say, below 25 at the moment that the project is closed, you are at you are at a 100% of completion, so we could take the whole profit in the first half.

And there was Scarf, that we closed out Scarf and then there was a one-off recognition with Scarf, what happens when you close our these projects and you've run them well is you can release contingencies. You close out on variation orders with the client and it all helps to the recognition of profits.

This half year, we don’t have those close out issues in the first half. We are working hard on Llhabela, on Marica, on Saquarena, and those two are new effectively to the portfolio in comparison to the first half of last year. But overall, it starts performance in terms of the EBIT contribution.

We’ve looked at not just first half last year, first half this year, but we also looked at where the EBIT numbers, the underlying EBIT numbers for the second half of last year. And if you look at – and it's the bottom line on this particular slide, you can see that in the second half of last year, we made an underlying EBITDA margin of 9.6% which compares to the 8.9% for the first half.

But we would like to see as higher of course, that this half year with regard to any special events. The target range which was defined previously for this sector was between 8% to 10%. We would like to – let’s say move it up further. Let’s say 8% to 12% we’re this year within that range, but there is scope for improvement.

If you go to the next slide, lease and operate. We had a – let's say an unusual number of vessels leaving the fleet in the second half of last year. So in terms of the comparison, it’s not exactly apples-for-apples comparison, because P-57, Sanha, Kuito, and Frade are no longer income generating in the first half while we were full in the first half of last year.

On the other set, we had de Paraty and Deep Panuke contributing to income in this half year which we didn’t have in the first half last year. So overall we see an improvement in revenue because the vessels that came in contribute more to the vessels were taken out. What we see is in terms of the margin, that is generated by these vessels. It’s slightly lower that what we’ve seen in the past.

And what we look at here is a reflection of increased maintenance cost. Something that we’ve announced in February and we do talk about maintenance exercise to ensure that the vessels that had this preventive maintenance secondly and with a longer duration of the lease contracts that we can continue the high up time on the vessels, and that we improve our chances on lease renewals without too many cots.

Those costs are coming through and have an impact, of course on the margin. And also here when we look at the three semesters in a row, first half this year, second half last year, and the first half last year you can see that the performance this first half is very much in line with the second half of last year.

Overall, looking at the Group P&L, slide 19. Just a few things to highlight here. Net financing costs you can see there is a slight increase. The increase basically is the consequence of two reasons, total loan portfolio has grown quite a bit.

And what we see now is for instance Paraty, Deep Panuke, those loans now account in full in the P&L, on the other hand, the company has arranged a number of bridge facilities which are short-term, therefore carry a very low interest rate. And the average interest rate for the Group has come down from something like 5.3% to just over 4% which helps.

I will tell a little bit a about the increase in the overhead costs, SG&A. But for the rest indeed we are ending up this half with a directional result of $98 million loss that we had back at the $225 million. It’s just over a $100 million underlying positive compared to the $44 million loss last year which has a $300 million correction.

On the overheads, what’s included in here is, SG&A costs plus research and development, products and technology development. We announced the full year results in February. We announced three initiatives that were investments in the future in the company.

One of them is the maintenance program that we just talked about which is reflected in higher cost, in the lease and operate segment the other two, obviously 24 which is a business improvement project, looking at various aspects on how we manage the company.

The company has grown. The company is working on much more complex projects, I’ll leave it what Bruno was saying, the industry is taking a time out after a gross – let’s just take a few minutes, few months, maybe a year or so, really study whatever we learnt in the period and how can we form a much more robust platform for future growth.

That’s the kind of thing we are doing as well, looking at the internal procedures, looking at the way we can manage our projects better, looking how we manage our supply chain and we have a clear expectation that the bottom-line benefits of these efforts should be at least 5% cost reduction on the projects that we are managing.

That’s 5% may have all approved to us maybe part of that goes to the client. But the reality is it will make us more competitive and it’s all certainly to a large part improve our bottom-line. That was a long introduction. The point is to say, we see cost of debt coming back.

So if I look at the quite significant growth in SG&A and research and development costs which gone from a $100 million last year to $153 million, a fairly substantial part of that is related to one-offs and the improvement programs. A couple of one-offs like the some of the costs that are related to the complaint case, we had the issue.

I’d say the – very special circumstance that we’ve announced through the sale of some real estate in Monaco. As soon as we’ve announced that you don’t depreciate anymore as soon as you’ve done the deal, you start to pay rent. And that’s part of the thing that’s coming through, but they are smaller amounts.

The majority of this is really the cost related to increased research and development and the improvement program. The underlying variation of $15 million is not a significant and clearly this is a result of the Group growing more professional, getting, let’s say new people in place to manage the various aspects of the company, but it’s the growth rate that in itself is not sustainable. We would expect not to see, let’s say this level of growth into the future.

A few words on the balance sheet. The balance sheet is directly – sorry, is IFRS and we don’t have a directional balance sheet. We don't restate that but I hope you will not have missed the fact that we do publish a kind of a proportional loan portfolio. I think that’s an improvement development to let’s say the analyst models are going.

A couple of things I want to highlight on the Group balance sheet. Clearly, the construction contracts, we saw an increase in the half year with $1.7 billion and clearly is related to the massive investments we are doing in these finance leases. Again, I repeat, this is not just the SBM share, it’s also the partner’s share which we now carry on our balance sheet. The same applies to loans and borrowings. We see a significant increase and that’s an increased related to the SBM share as well as the partner’s share on the project loans that we have put in place.

The impacts of the provision is clearly visible, this provisions have gone up from $143 million to $433 million. Equity that is included in this chart is the combined equity of SBM as well as the non-controlling interests of partners in the assets and liabilities that we have on our balance sheet.

Few words on cash flow. We started the year with $208 million in cash. We have added through cash from operations. We cited new loans, and again, this includes the partner’s share of the loans. We had some equity funding from partners of $30 million.

We will repay something along that we did on behalf of the partners of $118 million and we received $84 million of the divestment of real estate we did in December of 2013. At the same time, significant investments in the finance leases and CapEx $1.4 billion. In total, and again, it includes the partner’s share. We redeemed loans to the tune of $600 million and we paid interest of $72 million leaving us with a cash balance of $154 million.

As I said, we think it’s important that there is a good understanding of which part of the loans accrued to SBM and which part of the loans accrued to partners. So in this slide number 23, we break that down. So for the first half of this year, the 30th of June, there was a 4.4 billion dollar gross loans under IFRS. If we strip out the partner share, there is $3.2 billion left.

We can see at the bottom parts the bridge loans, the bridge loans of corporate facilities that SBM has put in place itself. So there is no difference but on the project finance and the other loans, the shareholder loans, of course there is a significant reduction and the same applies to the last year. So, I hope that is improving the transparency of the numbers.

Directional backlog, $21.5 billion, even the direction of backlog has changed a bit, we’ve taken out the partner share of Capixaba and Aseng to be fully in line with the directional view now. Of course you see that back in the lease and operate revenue, you can see that, hope we added, we signed in the first half of this year the lease and operate contract on Turritella, the FPSO previously known the Stones project for Shell. We had the FPSO contract at the charter signed lease and operate signed in the first half of this year. So it was a good decision.

Overall, if I look at the totality of lease and operate and the turnkey we expect to generate another $1.7 billion, which is contractually committed for the second half of this year.

Few words on funding. Bruno, already referred to it. We had a good year, half year in funding. We signed up a $400 million bridge loan for Deep Panuke. The intention is to place an USPP under the second half of this year or the first half of next year on this facility.

And then in July, at the end of July, so it’s post period we a actually signed up a project loan for Cidade de Marica for $1.450 billion, a significant amount. Two tranches, 12 years and 14 years, $1 billion for 12 $450 million for 14 years with an overall coupon of around 5.3%. We are quite happy with that.

It’s the biggest loan we’ve ever signed up and in terms of the duration, the maturity, it’s a maturity that two years ago, perhaps even a year ago would not have been possible. But we can see that there is huge appetite for these facilities. Spoke about the average cost of debt which has come down by 110 basis points, pretty much on the back of the short-term bridge loans. So it helps the bottom-line.

And then finally, undrawn cash and credit facilities and cash for a total of about $1.1 billion at the end of the first half year. So, good visibility on the funding and liquidity.

Rounding off, the financial ratios. Clearly, the impact of the provision as meant that there hasn’t been a lot of growth in equity at the same time the impact of investments we are doing. As is the total of the assets value are going up which means that, that’s up by 27% equity flat.

So net debt over equity, a significant increase, very understandably so. Quite important, if we look at the solvency ratio, and we’ve talked about that ratio more than once in this panel. It’s an important criteria for the Group. Because of new IFRS, we have to calculate it on the old IFRS basis because the loan facility specifies that if there is a change in the accounting rules, the facilities or the covenants need to be calculated as if those changes did not take place.

So on the old basis, the solvency ratio was midyear comes out to 27.5% and that reflects that incorporates the $240 million provision for the compliance case. Bruno?

Bruno Chabas

Okay, thank you, Peter. Now let me conclude on the outlook for the year. Two projects would be delivered by – before the end of this year. The N'Goma FPSO which should be delivered actually in the third quarter of this year. And the Cidade de Ilhabela delivered sometime second half of 2013, expected delivery in second half of 2014.

All of this is on track. The project has been done – the N'Goma project has been done partly on the panel yard in Angola, is the final commissioning done there and that’s the picture you are seeing on this chart and Ilhabela it’s predominantly being commissioned on our Brasa Yard in the Brasa Yard in Brazil.

Now if we look at the overall portfolio value of our projects online with the target that we set. Now you can see if you compare this chart the previous chart, you can see some projects which are moving. But the move has been done in relationship with the client because of they all are planning change and therefore you can see some shift here and there for two projects in particular.

By and large, I mean, the main message there is that our portfolios is on track, and our projects are being delivered on time with the commitment we have made to the client. Now before I speak about the overall outlook for the year, it’s worthwhile to remind you about our positioning in the market. And our strategy and it’s fully reminder there. When we started in the journey, we said that we were going to reach – SMB Offshore into what SBM Offshore does well, and what SBM Offshore does well is really FPSO product is more in technology and in the operation of FPSO who will lead and operate.

Those are the core products and capability for the company. We also announced probably a year ago that we are going to build on those competency in order to develop other projects and other capacities for the market. And this is only for the FLNG product.

Again, we are not going to be in competition with the share of this – we are doing a large FLNG project like – what we are looking at is really positioning our product offering in the same manner than what we have done for the FPSO conversion. So the median side, FLNG product which will be there in order to have the developments of field in a remote area.

And also we are looking at other floating means to develop field in Deepwater such as semi-submersible or TLP projects out of which we already have delivered five projects and five TLPs over the past few years.

So now the guidance. The guidance for 2014 remain unchanged, basically we are saying that our revenue will be in line with $3.3 billion for the year out of which $2.3 billion for the turnkey activities and $1 billion for the lease and operate activity.

The second statement we are making here is that the market is evolving. There is some delay in project awards. Things might take longer than what is expected and as such, we are going to have to adapt the structure of the company. Now we are going to do these in a manner, which is going to allow us to grow the company in the future in line with market demand.

And therefore we are going to do this in a manner whereby strengthening our core skill as a company and we are adapting our structure to the reality of the market today. So this concludes the formal presentation for our first half results. I propose we open the floor for questions both here in this room and over the telephone. Thank you for your attention.

Question-and-Answer Session

Dirk Verbiesen – KBC Securities

Dirk Verbiesen, KBC Securities. A number of questions. Firstly, on, I think it's on top of everybody's mind, the – or this the provision and I respect what you say in your press release, but still can you explain a bit more how you come to a number of $240 million? And does that still correspond with the disclosure on the two regions, Angola and Equatorial Guinea that you disclosed before, or has there been any change in that?

Any disclosure there would be welcome, I think, to everybody who is involved in this case?

Second question I have is on the benefits versus costs for the improvement program internally and externally to supply chain management as well? I recognize what you say on slide 22, but was there in the first half for the program already a 2.5% to 3% cost incurred across the board? And a remark from my side is or a question, why would you disclose this 5% benefit that you expect to achieve?

I of course, recognize that you want to say something on benefits versus cost, but you could also have chosen to let the numbers and hit rate in future projects to speak for itself? Other question I have for the tender, the actual tenders that you are involved in for the three FPSOs, is there any of that with some kind of confidence expected to be landed in the second half of 2014 or are they for 2015?

Last question I have, maybe you also saw the comments on the three combinations involved for Tartaruga and for Petrobras, can you give any comment on the competitive landscape? Do you see, let's say, the mid-sized players moving up to the high-end of the market, as you call it yourself? And so far were my questions. Thanks.

Bruno Chabas

So, let me take the two last questions first, I propose that it's comments in the provision, and Peter comment on your second question. So if you look at the tendering activity today and the project that was tendering, what we are saying is that decision-making today is extremely long.

It used to take 12 months to take a decision between the feed and the final decision-making, today it’s not real that we see projects dragging on to 18 months, 24 months and even longer. It’s a but run down at times, at times we believe that things are going to be extremely fast and decisions would be made quickly and in fact, it takes longer than what is expected for a number of reasons.

Some of them are trying to optimize the field development other political reasons. It could be changing on a ship in the field, it could be whatever the reason is. But for the original trend that we are saying. So, we cannot be sitting down confidently today and telling you that any of those tenders would be awarded before the end of the year.

We have some hopes, but we cannot be confident about those hopes. Now, when you are in a market like this, since shifting and changing and this basically when we look at our market segments, things are becoming tougher because of the delay on which the awards are made but this apply to the industry at large.

So you can imagine that when something like this is happening, everybody is trying to get out of their preferred niche of activity and trying to trying to grab projects right, left, and center and ready to extend on the level of activity.

Now the strategy that we have taken at SBM Offshore, basically based on the experience that we have had in the past whereby we expanded our activity into products which were not the core of our core competencies and which we got burnt quite badly. As for as to focus on what we know how to do to make sure that we are going to get the purpose on the condition and the proper economics after this and why is important?

It’s important because we are not delivering a product and we are washing our hand off. We are delivering a product for which we are going be responsible for the coming 20 years and which has a huge impact on the economic value of any old companies. And here I am discussing about both turnkey projects or these enterprise projects; it doesn't make any difference for us.

We are looking at the overall image of the company and the reliability of what we are saying. And to some extent I prefer not getting any project at this stage under a bad condition than getting projects which we know we are have to cut corner in order to deliver them and will impact the future of the company. So that’s probably where we are.

Now I cannot speak about the competition quite obvious but I can speak about process for the company and our strategy there. Also maybe to conclude on this point, if you look at our behavior in the market over the past few years, in 2012 we didn’t get any awards during the 2012 period. And the market was a bit more uncertain than which is now.

Today, we are really looking at the market. We are being careful. We know we need to improve our productivity. It’s part and parcel of what have being a contractor is, but we are not going to do things which means that we don't have a project where we have the terms and conditions that we would like to have or the economic condition to deliver it proper. So, on provisions, Peter?

Peter van Rossum

Yes, although I echo very much your comments it’s in line with the – that we really observe the risk-reward balance around our projects rather carefully, and you can also apply that to what our competition are doing. Yes, the big elephant in the room or it’s at least a visible elephant to the tune to $240 million.

As Bruno said, we basically have progressed into discussions that we have across the board to close this issue to such an extent that our best estimate of what it is that the final closure will cost the company is $240 million.

There are lots of questions that you all want to ask, what authorities, which countries, et cetera. I don’t want to prevent you from asking the questions. And you should take pride but at this particular stage we can’t give that detail. And it would not be the company’s interest to give the particulars at this stage when we have not concluded our discussions.

And I caution you again this is a company’s estimate of what final closure will be, but it is not the final settlement. That we’ve done it and that we communicate about it is in line with how we have dealt with this issue from the beginning which is to go out and to tell the market about the progress.

Very often in this case is the opposite is true a company will only disclose to the market, we want the settlement is reached and in a way preempt all these steps that we are now talking to you about. So, you have to bear with us. All that you can rightly conclude from what we say is that we have advanced compared to what we previously reported to you.

Your questions on the improvement program, we very deliberately announced this program in February of this year because when you – it was going to be substantial in terms of investment. And mostly these investments will be in the operating cost arena it was only for the small part of it but it can be capitalized a lot of this also hours – engineering hours for instance and those were engineering hours we don’t spend on projects.

Let’s say on the construction projects, but on this improvement projects. The – obviously 24 projects started late last year has been working very diligently to blueprint the opportunities to set out the work program. It consists of very different parts that goes from working on supply chain management through, let’s say and supplies architecture to HR elements and several others.

But we are now actually at a stage to say, that we can put and maybe an ambitious goal in there. But if the combination of doing our work better standardizing, taking surprise elements out, doing better supply chain management. If we can’t improve the project performance by at least 5% that will be a disappointment and given the amount of money that we are investing in this, 2.5% to 3% of directional revenue.

So you talk about somewhere order of magnitude of $75 million potentially $100 million on per annum basis for two years and that includes the maintenance by the way on the fleet. That’s completely visible. What we are showing you is that, we are actually serious about it and we are working hard on it.

So, in terms of the run rate, I think we are ramping up you see considerable cost and we are going to see this every piece of that cost in the second half of this year and into 2015.

Dirk Verbiesen – KBC Securities

So overall, it was already 2.5%, 3% in the first half, or more than that because you are ramping up?

Peter van Rossum

No, that was still let’s say accelerating.

Dirk Verbiesen – KBC Securities

Great, thanks.

Wim Gille – ABN AMRO Bank

Wim Gille from ABN. Maybe just to clarify on the last point. Did you just stated the – let’s say increased maintenance spending on the fleet that it is included in the Odyssey 24 cost? And you also give a bit of feeling on the Odyssey 24 cost?

To what extent is that reported in the underlying EBIT for both the turnkey division and the lease and operate division and to what extent is that disclosed as a separate line in the R&D and SG&A costs? That will be my first question.

The second question is, on the settlement provision obviously, to what extend did you kind of discuss this $240 million with the accountants and with the regulators? And is this just something that you are provisioning for a potential settlement with regulators or would this also include a settlement with Petrobras if there is going to be any?

And then a last question, you indicated that you are currently targeting 8 projects actively in your slide, can you confirm that all of these 8 projects are either projects are either turrets or FPSOs and that you are not yet targeting actively semi-submersibles and FLNG projects?

Bruno Chabas

I am going to take the last question because it’s serious and fastest to answer and the answer to that is yes. We are – the eight projects either FPSO or direct project.

Peter van Rossum

The question before is little less easy to answer and to what extent did we discussed the settlement with authorities and regulators and with our accountant, I mean, on regulators and others, we are discussing closing this matter with a number of authorities we have told you in the past who they are, the DOM the DOJ, we co-operate with other authorities and – but it is our decision.

It is our estimate and we take responsibility for it. Now clearly when you can do that in the context of the review by the auditors of our half year figures, we discuss that with them and they review it and clearly where we are aligned and otherwise we would have taken that provision.

And whoever this pertains to closing out everything, I think it’s good to remind yourself that we initially reported that we are doing investigation and that we have reported that to the DOM in Holland and the DOJ in the US. We do not have an issue with Petrobras in a sense that they claim something from us or we from them for which we would have to make a reservation or anything. The relationship is at a stage where both parties are treading carefully while the political storms abate and then we will resume.

Bruno Chabas

And then on the improvement programs we have three distinct programs. Those are the fleet maintenance which we will find back in the lease and operate cost and therefore in lease and operate gross margin. There is products and technology developments, research and developments and the Odyssey-24 program.

So, Odyssey-24 does not include the other two. The PNTD and Odyssey-24 by and large, you will see find back in the overall SG&A and research and developments costs.

Unidentified Analyst

(Inaudible) I have one question about the investments you are currently making in your lease fleet. Can you give any indication on the cash out you expect in the second half of the year for this contract under construction and preferably with the split between the fully consolidated impact and the proportional impact?

Also can you indicate to what extent do you expect an offsetting effect from cost savings from the improvement programs in 2015? So that the net effect of the restructuring cost will be lower?

And my third question is on – you mentioned that of the tenders in the pre-year four out of five related to Petrobras projects. Can you give any indication on the timing there and if you are confident that the ban will be lifted and those projects become more active?

Bruno Chabas

Okay, so the two last questions for me, first of all, the improvement program what we stated is four one – tell you that’s two years. So the 2.5% to 3% cost impact of those program will impact not only 2014 results but also 2015.

We are going to see some interest, some cost reduction or some improvement over the years but it’s not going to be meaningful as before 2015. So the first real improvement you are going to see will be not before 2016.

The relationship with Petrobras is a valid question and it’s one of the question of what’s the timing for things to go back to normal. I would say to a large extent things are back to normal today. We are working, we are producing more than 15% of the oil of Petrobras in the quarter today and we have an excellent relationship at operating level and we have an open communication with them.

We have 50 years of experience in working together and it’s for related to the mutual benefits of both parties. And all of us recognize that. Now there is some political components at this stage in the environment in Brazil which might impact our relationship a bit longer than that. But we are extremely confident that we are going to go back traditionally. Now the timing is not in our hands, it is really a timing more – it’s in the hands of Petrobras.

So, this question would be better addressed to them. But, I am taking the confidence that we have that we are going to be able to come back to a normal working relationship over months to come.

Peter van Rossum

Okay, looking to your first question, what about for the second half year? The outlook that we give, because actually through the backlog, so you can see what we expect to realize for the backlog in the second half of the year both in lease and operate and on turnkey.

We don’t want to give more detail. We haven’t done that in the past. We are not doing that, that now. Just to second on what Bruno was saying on the improvements coming out of the improvement program. I’d say a lot of value in the projects that created at the very beginning of the project. When you set the rules, when you do the design, when you do the contracts et cetera.

So from either run rate of the income is really going to be realized on projects become let’s say contract in the future. So, 2015 probably not much 2016 with hopefully the new projects we should see some tangible benefits.

Bruno Chabas

Now you should take some questions from the telephone line.

Operator

Thank you, (Operator Instructions)

And our first question does come from the line of Rob Pulleyn with Morgan Stanley.

Rob Pulleyn – Morgan Stanley

Hi, good evening gents. A few questions from myself, if I can. First of all, you mentioned obviously the relationship with Petrobras, which seems in good shape, but with the elections on the horizon – it feels like this is in the Brazilian government's hands. So when do you expect to be back on some of these tender/bid list for Brazil? Can you give us an estimate of that? That's the first question.

Bruno Chabas

As I stated just previously, was really that we have a long-term relationship with Petrobras is a relationship to the mutual benefits of both parties. We don’t have a timeframe when things are going to go back to normal. But we are confident that there is a mutual interest on both parties to sign an agreement and to go back to a normal working relationship.

Rob Pulleyn – Morgan Stanley

Even though that list of eight contracts potentially includes some from Petrobras by the end of next year, which sort of implies that by the end of next year we should be back to normal?

Bruno Chabas

It’s our expectation, yes and we’ll see where we are going to be but that’s our expectation based on the working relationship we have based on the interest for both companies actually and let’s not forget that Petrobras has a huge development program and today we have been delivering their FPSO and producing their oil to their full satisfaction. And we are a key supplier to their development program.

Rob Pulleyn – Morgan Stanley

Okay, thank you. And the second question, I think a hallmark of the management team at the moment since you came in, was to try and address the risks you take through the contracts with your clients; which obviously previous management teams signed contracts which obviously came back to haunt them. And thus far, the terms on Stones, as you renamed it now – you look to be bearing that out.

But, can I ask with the slowdown in project sanctions and certainly the longer time to get them, is the negotiating power swinging back towards the integrated and how does that bode for the risks you guys will take in terms of contracts going forward? Thank you.

Bruno Chabas

That, when you go through a cycle in this industry and I have had the privilege to go through few cycles in this industry, things are changing and today is more the buyer market and the seller market. Now one thing we need to consider and which is specific to the FPSO industry is that what we are doing is really products which are going to be producing for the old company for a period of 20 years.

And if we don’t – they want to have a product which is to their satisfaction which allow them to produce oil when the time is good and they produce the most cash flow and to do this on a reliable manner, they need to have contractors whose terms and conditions which are acceptable. And we are making normal economic profit out of this.

Now, it means also that on the contractor side, we need to find ways to improve our productivity, we need to find ways to improve our quality. We need to find ways to become more competitive and that’s possible duty in everything that we do. But I would say a relationship of a client basically imposing his terms and conditions which are unacceptable will not be a relationship under that which we will enter.

Others might want to do that, and that all in good for that. But at the end of the day, it’s not really good for the clients and it’s really not good for they intend to produce over a long period of time. But today, you are correct to say that the environment is difficult and it’s in a place whereby we need to fight for every terms and conditions. But, okay, we need to learn from that.

We need to see all while the clients who have the courage to stick to the part of terms and conditions, to have a long-term view other than the short-term view. And to remember this, when we are going to be in the up cycle.

Rob Pulleyn – Morgan Stanley

Okay. Thanks very much, Bruno. I am – and sorry, one last one, which hopefully is very quick for Peter, a clarification. You mentioned earlier some add-backs from the impairments last year.

In addition, obviously, – or offsetting the $240 million provision for the compliance issue. Could you just refresh us on that? I didn't quite hear on the telephone line at the time. Thank you.

Peter van Rossum

Yes, Rob, this is a pleasure. Well we know the Deep Panike project the has incurred to delays and cost overruns in the past and there was an let’s say a discussion with the client on some of those cost overruns.

Certainly, it came on stream in the second half of last year it wasn’t so higher in December and that was also the starting point for let’s say the final discussion negotiation with the client to basically resolve all the open items.

We resolved that positively, I think both parties were happy with the outcome. It resulted in an increased day-rates for the facility which had a positive impact on the valuation and that allowed us to write-back $15 million of previous impairments.

Rob Pulleyn – Morgan Stanley

Brilliant, thank you very much.

Operator

And our next question does come from the line of Nick Green with Sanford Bernstein.

Nick Green – Sanford Bernstein

Hey good evening. Nick Green here from Bernstein. Three questions, please, and I’ll try and be brief. I know you guys are staying up pretty late over there. Firstly on free cash flow related to the Turritella and the Saquarema vessels. For Turritella, can you give an update on the status of any potential JV partner and then project finance discussions?

And, actually, the same question for Saquarema on the status of project finance. And I suppose the general point I'm making there is, these are taking a little bit longer to arrange than has historically been the case. So can you help us understand how important the timing of securing this finance or potential JV partner will be to your free cash flow? That's my first question, please.

Peter van Rossum

Let me address that one immediately. We did arrange the funding for Marica as we have announced. Saquarema is planned for the beginning of next year and so we will start on that and we hope to finalize that somewhere in the first half of 2015. Available liquidity is sufficient to see through that period. The same applies for Stones.

We don’t expect funding to put in place on Stones in the quarter of 2014 that will be again the 2015 issue. Your question on partnership on terms is open and I’ll let you know when we get to this a further view on that.

Nick Green – Sanford Bernstein

Okay, thank you. And just quickly on the Marica debt, you mentioned that it was post-period, does that mean that it's not in the net debt number that was reported today?

Peter van Rossum

Yes, that is correct. We signed this in the final days of July. So it is post period. We have drawn some of the money in the meantime. So the numbers are not included in the loan balance. The numbers are not included in the – let’s say the available liquidity.

Nick Green – Sanford Bernstein

Lovely, okay. My second question was on strategy. So clearly we see a number of mid-tier players competing with you in MODEC – Bumi Armada, Teekay, BW, they are the obvious names and we are forecasting a fairly significant slowdown in the market, generally.

So my questions here are, firstly, can you give us your thoughts as to whether SBM can afford not to play in the mid-tier FPSO play – space? And secondly, what steps you have in place to maintain your strength and position in the large turret market? Thanks. That's my second question.

Bruno Chabas

SBM Offshore over the years has been competing on the technology that it bring to the market. And even during the more difficult period, in 2012 and 2013 we kept investing into technology and in order further our leads.

If I take specifically the turret activity it has been one of core investments we have made over the years, it has been a co-investment we have made actually over the past two years in order to further the lead that we have to become more productive, to become more efficient in what we are doing.

This will help us to remain competitive. It doesn’t mean to say that we are not going to face competition, but it means that we are trying to improve our productivity in everything that we do in order to become more competitive and keep on positioning the high end of the market.

The same comment would apply to the FPSO strategy under which we already are developing some new efforts to it. It’s a bit too early to figure out this but it’s really one of the pull and that we are putting today in order to see how we can further audit in this project.

Now, if I look at the short-term, one of the things that we need to be actually careful about in the short-term is not to get overly excited by the fact that we might be losing few projects and not getting any activity.

Yes, it’s painful and I can tell you we are fighting hard in a number of projects, but if we were to lose then at terms which are not acceptable to us, with the largest track record in the FPSO industry and terms which are either contractual terms of economic terms. I don’t mind, I am not going to take a project under which I know I am going to lose money under which I know we are going to be in a difficult position to deliver our product which be to the satisfaction of a client,

Now if your was to take a risk with someone who doesn’t have the same level of experience, well it’s good to them and I wish them a look get a lot of luck. But our position is clearly stated is we know what we are doing, we have a lot of track record experience.

We are building on this experience. We are trying to improve our productivity. We are trying to connect with our clients more thoroughly than what we have done. We are trying to be better to our clients also better than we have done in the past. And we are going to be successful with this strategy.

Nick Green – Sanford Bernstein

Thanks, Bruno. That's very helpful. Just a final question. Could you please walk us through your order intake number of just over $1 billion? Now as a rough guide, I wasn't expecting the Turritella O&M contract to be much above $150,000 today. So, on a 10-year contract, that's about $600 million intake, equally Merlin. So six month extension, maybe you are talking another $60 million there.

So we're still talking about a $350 million in variation orders also. If this rough math is right, I was just surprised to see a number such as $350 million in variation. Or is it seems quite a sizable number? Perhaps you would just talk through that real quickly.

Bruno Chabas

I mean. It’s not surprising and the size of variation order and I am not comment on the exact number, because we don’t want to go into this level of detail. Having said all of this, what is not surprising is that the level of variation order can – to get into some project whereby you have some provisional sum, which I am not included in your order intake those provisional sum would be included in your order intake once they are firm.

So, they will add a significant amount of value to your order intake not that this was not forecasted at the beginning but you couldn’t take those because they were not signed. So, whichever number you spoke about could be a valid number.

Nick Green – Sanford Bernstein

Is it fair to assume it's on the turrets as opposed to the FPSOs under construction?

Bruno Chabas

Nick, he has come out from the subject. Your assumption is your assumption.

Nick Green – Sanford Bernstein

Okay. Many thanks, all right. Bye.

Operator

And our next question does come from the line of Mick Pickup with Barclays.

.

Mick Pickup – Barclays Capital

Good evening gents. It’s Mick not Nick here. A couple of questions, if I may. Lots of commentary about the clients and negative behavior from clients. Some of your competitors have been talking about the clients coming to the service industry and asking you to help them solve their problems. Wondering if you are seeing that that they are coming to you as a solution, not an issue?

And secondly, there's been a fire on Deep Panuke recently, according to some press articles. Any impact on you with that? Thank you.

Bruno Chabas

So, regarding clients’ behavior, we are seeing two types of clients. Some who are really looking for the long-term features of the industry recognizing that we are in a phase whereby there is a slowdown. While there is opportunity to it differently and really trying to more closer with contractors like us and others in order to find solution for the long haul.

That’s one type of client and we see another type of clients who are basically are saying, in order for the project to fly, you need to cut your price by 50% and otherwise it’s not going to fly and I am going to take the ship. So, for us, it’s really a matter of finding the clients with whom we can have a long-term relationship whereby we can bring benefits to each other whereby we can save cost to each other whereby we can accelerate the speed of their development and whereby we can have a view for the long-term and not only for one project.

Regarding the Encana project there has been an operating issue which is a minor operating issue. I don’t want to comment on this here because it is; more for Encana to comment on it. But it’s a minor operating issue.

Mick Pickup – Barclays Capital

And can ask one further question? I think your presentation for the first time – well, maybe it's not the first time, but you seem to have more emphasis on TLPs and semi-subs. Clearly, you've done semi-subs over the years, over recent years. I can't remember the last time you did a TLP, and I'm thinking it's probably 10 years ago – and it is from memory, I think, you had issues on that one, back then.

So, can you just correct me if I am wrong and just tell me when the last time you did a TLP was and why you're confident that that’s a business you can make money in?

Bruno Chabas

So, on the TLP side, it’s I am not saying that we are going to four TLPs what I am saying is that we have some technology which also taking TLP either in terms of the hook up in terms of the – in terms of the portability of the equipment and that we can joint venture with companies who bee doing the new deals and for us to bring some additional added value there which could make a difference in the project.

Now it could be under the form of a consortium or in the form of a joint venture or whatever its going to be the opportunity, but we have some technology. We check this in a company which has been using in the past that we can leverage. And that’s what you are speaking about when I speak about other type of products is to leverage the technology we have in a company in order to expand basically our footprint.

Mick Pickup – Barclays Capital

And I have to do lump sum SeaStars?

Bruno Chabas

At this stage that’s not in the comp but there is few others come in that we will keep you posted.

Mick Pickup – Barclays Capital

Yes.

Operator

And our next question does come from the line of Edward Donohue with One Invest

Edward Donohue – One Invest

Good evening gentlemen. A few, if I may. Just a starting one, on the provision. I am assuming this is for a global settlement, which was something you've talked about in the past, that that's the only way you would go forward, that it would be a global settlement with all respective parties. That would be one.

And then just going back to the slide – well on page 7 of the press release, looking at the backlog, can you talk about the situation in 2015? Because if you look at your turnkey backlog deliverable in 2015 it's not very much relative to 2014, if you look at your footprint in Brazil, how do you actually square up the capacity you've got versus the potential lateness of maybe awards, or not winning awards with what you've actually got that's business in hand at the moment?

And if you don't get X awards, what is plan B, and does that actually go back to your statement about adapting to market conditions, the structure of the company to a certain extent, because it seems to be a new phrase there? If you can just talk through those business start with, thanks.

Bruno Chabas

Yes, as you can see on page 7 of the press release, the turnkey backlog at this stage stands at less than $1 billion for next year which is rather low and only speaking about the turnkey activity.

So, definitely, first of all this excludes some projects which is a project whereby we don’t have any joint venture partner. So, in the direction of backlog, this number is excluded and why this number is the Stones project or the Turritella project requires a lot of man hours and activity.

What you don’t see there also is all the tendering activities associated with the business that we are submitting at this stage and most of this tendering activities actually paid fees and requires a lot of talent and lot of man hours.

Then the third part is that we need to be a realistic is that there is going to be – we need to adjust the switch of the company but we need to adjust the switch of the company in a manner which is going to allow us for us to capitalize on the strength of the company in a manner that we are going to be able to grow the company in the future in line with the market demand.

And all of this is in a – stage and we are working actively on all of those points and we are going to be able to come back with more information probably in – when we do the full year results for next because by then we are know exactly where we are, what’s happening in the market, how quickly the projects are being awarded on that. You had a first question which I didn’t – oh, it was on the provision.

Peter van Rossum

Yes, the answer is brief, yes, we aimed a settlement to be as global as possible in terms of the authorities included but for further detail, you’ll have to wait for the outcome of the matter.

Edward Donohue – One Invest

And just on that, I am assuming that you arrived at this figure on the basis of fairest calculations discussions with the respective parties. Is there any reason to think that if you’ve actually come up with a hard number after today’s discussions that wouldn't actually finally see the closure of this issue, this year?

Peter van Rossum

And on timing also, it’s not in our control, I mean, I would be happy to give you a timing if we could control it, but we don’t and so I can’t.

Edward Donohue – One Invest

Well, I can remember in the past, we actually had sort of rough dates. And I'm just trying to think that now actually you've come up with a hard sum, which is based on discussions. Therefore, you must be coming to a closing period with regard to those discussions at the thought otherwise it's a finger in the air.

Peter van Rossum

I’ll try, we burnt our fingers once in the past. You have a good memory and we will not do that again,

Edward Donohue – One Invest

Okay, great. That wasn't my criticism against that point. Then just coming back on the 5% saving on project costs, is this required to get to the IRR that you as a management team feel is necessary on projects, because conditions are changing or is this above what you would be getting on a standalone basis? I'm just trying to get a better understanding of why you feel you need to go through this particular exercise now?

Bruno Chabas

There are several reasons and I would let Peter expand on this. But, the main reason for that, if we need to recognize that we are in a business we are seeing the rival being all the time, a business which is becoming more mature and as such, we are need to improve our productivity in everything that we do.

The company like the industry has really grown usually over the past few years. So experience will formulize or that was not formulized and we need to work more as a one unit as a group in order to be able to deliver products in a consistent manner and at an economic level which should give us access to the market and give us satisfaction in terms of results.

So that’s what I would – Peter wanted to say and I am sure Peter wants to add something.

Peter van Rossum

Oh, I don’t have anything to say on that. Here in the room, any further questions?

Wim Gille – ABN AMRO Bank

Yes, Wim Gille. If I look at your CapEx number for the first half, it’s staying at 1.3 something kind of billion, whereas your directional net debt number is going up by some 550 million. So there is kind of a big gap there. Obviously, you have a direct cash flow statements which makes it a bit difficult for me to kind of makes one on one.

Can you give us a bit more feeling on where should we pinpoint your net debt number at the end of the year? Where should we pinpoint the CapEx number because with these kind of (Inaudible) I’m not quite sure how you said it in English, but you kind of – the amplitude to you’re the model goes up quite a bit?

And a second question is, with the ratios, you have obviously also a net debt to adjusted EBITDA ratio in your covenants as saw on the annual report the adjustments are quite sizable to the tune $300 million, $400 million on an annual basis. Can you walk us through a bit on where do we stand with this net debt adjusted EBITDA and also for our modeling purposes, to what extent should we adjust our EBITDA numbers going forward in order to see if you are still within covenants?

Bruno Chabas

Thanks, Wim. Yes, this $1.3 billion in a big CapEx number, but as I said, it includes effectively the share of the partners which is not funded by ourselves. Let’s say this whole development around IFRS 10, 11 is making things not easier to interpret.

I think what we will see is the discussions with, let’s say with the analyst community with our investor relations is to see what else is needed to be able for you guys to feed the models, that’s going into, let’s say project-by-project specifics. It’s clearly the provision of the proportional net debt number I think is a good move in the right direction.

It’s something that’s we are happy to provide to continue to provide – let’s see maybe there are few other elements without that’s going as far as providing a complete directional balance sheet cash flow is then I’ll need to double my finance department and that doesn't fit into the growth of my SG&A.

So you can imagine. And so bear with us. I think we are dealing with the implementation of IFRS 10, 11. There has been a huge effort to get this done also together with new auditors having to restate to have 2013 having to restate the closing balance of 2012, it’s all massive types of effort.

But we are willing to see what we can do, to not just to make your life easy because that’s not my role in life. But to get you guys to get to these outcomes. Adjusted EBITDA, adjustments are necessary and of course this is again driven by finance lease accounting.

We can imagine that if you take EBITDA for granted, coming out of IFRS even under the old IFRS You come up with a number that is completely nimbus. So, some adjustments had to be made and this effectively restates finance lease components. So, the amortization of the loans that are implied in the income we get from the clients, et cetera.

It’s quite a complicated lease-by-lease adjustment that we have to do there. The intention is that we are renewed the RCF in the second half of this year. Revolving credit facility. That’s the one that’s; driving these particular governments and we don’t want to go through the pain and agonies to do another consolidation, that’s old IFRS and then making adjustments on old finance lease accounting rather the new ones under IFRS 10, 11 et cetera.

We want to get something that’s practical, easy to explain, but reflects the reality quite well. So, expectations are that the new government will be much more related to directional reporting IFRS numbers. Bear with us it’s that would be something we can talk about towards the end of the year.

So, to conclude this – well, okay. You have the microphones so, you are the lucky one.

Unidentified Analyst

Thank you. Yes, it’s Muller [ph] from ING. Two questions from my side. With regards to the difficult market conditions, how bad it is that you didn’t join the he Korean turtle on MSA Tartaruga Verde at all. Let me say in other words, what’s the Tartaruga Verde tendering also in exponent of this difficult condition this year?

And second question is maybe that has been answered already, but what’s the reason to take a provision if you are so uncertain about the outcome and it is maybe a couple of maximum something like couple of months when the outcome is there? Are you not, let me say, taking a lot of risk with regard also to the authorities to say, okay, that’s already inappropriate so now the rest?

Peter van Rossum

It – we do it, but we don’t want to discuss in public the stage of the discussions on which we base it, it’s that simple. We wouldn’t have done it if we thought it was a wild guess. If we thought we were very close to settling, we would wait, but, we are sort of in the middle range and we think it’s appropriate to let our stakeholders know where we are without prejudicing the further development of these discussions. So, it’s a fair question, but I think we stand by our judgment.

Bruno Chabas

And it’s also driven in part by the accounting rules, I mean, once we are – something that which we can put an estimate for whichever reason, the best estimate need to be fair putting new accounts.

So, it’s obviously – give us to where we are. Now your question regarding the relationship with Petrobras, you know, those two tenders under which we didn’t participate was a decision with Petrobras and concur with this. Again, we have a lot of respect for Petrobras.

Things which are happening in Brazil are extremely difficult. We have a long-term partnership with them and we are trying to help each other. And the fact that they are scared to not participate in a tender further to the fact that we have published the result of our internal investigation under which we didn’t find anything important in Brazil and that they’ve done the same.

It’s part and parcel of trying to help them in this case. And it impacts our activity over the short range, that’s what it is. This was why to do some effort at times in order to be on for the long-term. So, yes, it’s impacting our business plan, but that’s what it is.

The telephone?

Operator

Yes, and our next question does come from the line of Amy Wong with UBS.

Amy Wong – UBS

Hi, thanks for taking my question at this hour. Just a question on your discussion here about the incremental annual cost in 2014 and 2015 does that mean that the cost will – we expect that to come down?

How do we expect basically your EBIT margins to evolve like after 2015? Do we expect basically your structural margins will improve in your divisionals, but how do we think about your central cost as well? And that's it for me. Thanks.

Bruno Chabas

Amy, thanks for that question, it’s not that late, we are in Amsterdam and the night is young.

Peter van Rossum

And the sun is shining, lying.

Bruno Chabas

And it’s raining. This incremental cost and the question how is that’s going to come through. As I said, the benefits that we are actually pursuing is on a number of areas. We said, we would like to – we put an ambitious target in there of a 5% decrease in project cost that compared to what we do today.

Well, that all accrue to ourselves, where we use that to gain business. It’s become more competitive. I have to say, because we don’t know exactly how that market will develop over the coming years, but we are in a situation like we are today where it’s a buyers’ market or where, let’s say if that dilutes the markets observe as the same is actually going to come through, are we going to be in a position where we can up the margins.

So, that’s a matter of a little bit crystal ball gazing. The only thing I can say is that, if we achieve the 5% improvement in our project cost through lower procurement costs better execution, let’s say, less use of contingencies and what have you were all going to be better off. So, it’s a price worth going for.

Amy Wong – UBS

All right. Thank you.

Operator

And our next question does come from the line it’s actually a follow up from the line of Edward Donohue with One Invest.

Edward Donohue – One Invest

Just going back now on to your slide 18, I might think a bit stupid here, but you've got the margin in L&O for H2 2013 at 23.8%, the same for H1 2014. But you've taken additional costs in H1 2014. Is that correct on the maintenance side? So does that mean the underlying business is actually doing better?

Bruno Chabas

Would you mind to give us the title of the slide, I think that there is some number difference in the different slides.

Edward Donohue – One Invest

That is Slide 18, on the L&O, P&L.

Bruno Chabas

It’s underlying directional performance.

Edward Donohue – One Invest

Yes, but it's the L&O slide, and it's the one that says you've got a margin of 23.8% for second-half 2013, and the same margin for first-half 2014. But I thought you said in the presentation today that there were additional costs in first-half 2014 as part of this 2.5% to 3% of revenues. Part of the maintenance is falling in there. So does that actually imply that the underlying business is actually doing better in 2014?

Peter van Rossum

Correct, because in these additional costs, these investments we are making, we are not making an adjustments get to underlying numbers. So, they are what they are. They are part of our normal way of doing business and therefore included in the underlying margins. So, yes, you are right.

Edward Donohue – One Invest

Okay, all right. That's great. Thank you very much.

Bruno Chabas

Okay, on this, thank you very much for you present with us in Amsterdam and for the people over the phone for this unusual hours to do our presentation. And thank you for being here. Have a good evening all.

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Source: SBM Offshore's (SBFFF) CEO Bruno Chabas on Q2 2014 Results - Earnings Call Transcript
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