FMC Technologies' (FTI) CEO John Gremp on FMC Technologies and Technip Combination Conference Call (Transcript)

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FMC Technologies, Inc. (NYSE:FTI)

FMC Technologies and Technip Combination Conference Call

May 19, 2016 08:00 AM ET

Executives

John Gremp - Chairman and CEO

Doug Pferdehirt - President and Chief Operating Officer

Thierry Pilenko - Chairman and CEO, Technip

Analysts

Bill Herbert - Simmons

James Wicklund - Credit Suisse

Daniel Boyd - BMO Capital Market

Robert MacKenzie - Iberia Capital Partners

Fiona Maclean - Bank of America Merrill Lynch

Byron Pope - Tudor Pickering

Scott Gruber - Citi

Nick Green - Bernstein

Operator

Good morning everyone, there is a long disclaimer in the slide deck and we encourage you to read it fully. More specifically, I would like to remind participants that statements made during the conference call which are not historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers and listeners are strongly encouraged to refer to this disclaimer, which are in integral part of today’s by presentations, which may find on our website along with the press release, an audio replay and a transcript of today call at technip.com and fmctechnologies.com.

And now, I will turn the call over to John, Chairman and CEO of FMC Technology.

John Gremp

Good morning. Thank you all for being on the call after my opening remarks I’ll turn the call over to Thierry Pilenko, Chairman and CEO of Technip and Doug Pferdehirt, President and Chief Operating Officer of FMC technologies.

Today is a very special day for our two companies, our people, our clients, our shareholders and our industry as we’re excited to announce the combination of Technip and FMC Technologies. All today it was a very challenging oil and gas market, we know that supply and demand will eventually be rebalanced. Further we’re convinced that offshore production will be a critical source of future hydrocarbon supply. We also know that even when oil prices and operator cash flows improve, offshore production won't be fully developed unless the industry improves project economics.

To do this, it requires significant and sustainable cost reduction and to achieve this it requires change, it means doing things differently. To be successful, companies like our mean to lead this change and position ourselves for the eventual recovery. The current downturn is the perfect time for establish this position because the operators have never been more open to change and this explains the early success of our alliance in the Forsys Subsea joint venture. A little lower year ago, we brought together a unique combination of two market leaders with the shared vision. A vision to improve corporate economics by lowering cost through early involvement into dying stages and integrate two key elements the Subsea production systems and the Subsea umbilicals risers and flowlines scope of our clients values strength.

Building on the proven success of our alliance and the Forsys Subsea joint venture, we now have an opportunity to accelerate and expand change in the industry and all of us bring us to where we are today, combining our market leading capabilities and further expanding our comprehensive and flexible services and product offering, across all of our markets Subsea, Surface and Onshore/Offshore. Doug will now give us a deeper look into how we create even more value for our clients. Doug?

Doug Pferdehirt

Thank you, John. I joined both you and Thierry and sharing my enthusiasm for this compelling combination. From the beginning both companies have had a shared similar vision to provide a step change in project economics. We first demonstrated the shared vision Thierry spoke of when we came together to form Forsys Subsea. To report Subsea our alliance, we brought together the complementary offering as of Technip's SURF business and FMC Technologies portfolio of proprietary SPS Technologies. We also leverage Technip's industry leading design and engineering capabilities to provide our clients with simpler and less costly integrated solutions.

The implementation of the shared vision across only a portion of our total portfolio has already resulted in a step change and project economics for our customers and acceptance by our clients that has exceeded our expectations, but Forsys Subsea was only a portion of what we saw, we could do together. First, as depicted in the value stream, TechnipFMC will have the most unique and comprehensive set of capabilities in the oil and gas industry. With this portfolio of technologies and engineering and project management capability in one combine company TechnipFMC will further accelerate improvements in project economics and will ensure that we can deliver seamless project execution of our clients.

And not only we will be better able exploit the technology innovations, already identify through Forsys Subsea, we will be able to access our combined portfolio to accelerate innovation across the entire value change. It is clear that this merger will allow us to further accelerate project economic improvement, deliver seamless integrated project execution and will allow us to unlock greater potential for technology innovation and integration as one company. Based on the success, we’ve already had -- we now see the opportunity to take this proven integration and technology development model across the broader portfolio of the new company Subsea, Surface and Onshore/Offshore. We recognize our customers who want optionality in their commercial model therefore we will be uniquely positioned to o continue to offer discrete products and services through fully integrated solutions.

I will now hand over to Thierry.

Thierry Pilenko

Thank you, Doug. And today is special day for three of us, very special day for both our companies, and I think it is something very-very unique that's after 18 years. So I'm going to now get into the details about how we are going to work together and how we are going to create that value for clients for our people and for our shareholders. So the new company is TechnipFMC, The values and goals of TechnipFMC are clear, and I want to emphasize that John and Doug both said about -- what John and Doug had both said about the combination. TechnipFMC is going to set new standards. We are going to make breakthroughs in the way we work with client and in what way we after them.

Many of you know me well at Technip and that we recognize the way in which I've been describing the combination a broader portfolio, early enrollment, the alliance of technology, equipment, consulting project management and the power of integration. Both our companies have been building and broadening what they do over recent years, what truly exciting is the spec change that a combination of our two companies can facilitate to configure our strategy to be the drivers of change in our industry.

So first the walk, TechnipFMC, a new company for buy an old stock merger of FMC Technologies and Technip where TechnipFMC will be headquartered in Paris where our main office and in Houston where Doug will have his main office. The terms of the transaction are very simple and very balance for example the exchange ratio is 2:1. The value is pretty close to 50% for each group of shareholders as the Executive Chairman of TechnipFMC and Doug will be a CEO.

We have agreed on the main management structure and identify the team leaders from both companies that will help us drive change. Both our Board of Directors recognized the potential of TechnipFMC and enormously approved the combination. We will now start the former process of putting our two companies together when submitting the combination first to our values work council for approval and then to our shareholders. And we don’t expect any particularly regulatory issues as the overlap between our companies are minor. So as a result, we expect to be up and running early next year.

On Slide 13, this is how Doug and I will manage FMC Technologies, first the Board. It would be seven from FMC Technologies including Doug and seven from Technip including me. For management, the roles Doug and myself are clear and in terms of management to be organized our activities around five business units. 2017 Subsea Projects and Products and then Surface and Onshore/Offshore. Of this five business units, Surface and Subsea territories will be run out of Houston and Subsea Projects Products and Onshore/Offshore up at Paris.

The Company notes it shows that very well, this made finding the right governance and leadership structure quite easy. It also means that the integration can be made quickly with the new organization plan in place and ready to grow at closing. In fact Doug and I have known this for more than 20 years and we share us and vision. I believe this is the key point. We are talking about two companies with common cultures and goals. The integration process is less risky in my view as a result of that. It also means that we can also drive values through synergies.

Let's focus on the synergies now, we estimate synergies will be at least $400 million per annum on a pretax basis in 2019 and thereafter $200 million in 2018. This is around 3% of our combined cost base and the implementation costs I committed to be at around $250 million. The key areas of cost synergies and divisions are on supply chain improvement, optimization and infrastructure, corporate and other costs. Let me just add that the synergy estimate presented in here are the result of the four analyses jointly carried out by both management teams.

I want to be clear on one point. Both Technip and FMC Technologies are ongoing cost reduction plans and deals will continue. The synergies will come on top of those cost reduction input. Last but most important, the top line synergies will be important perhaps not immediately in today's market conditions, but secondly further out as the market recovers. We can create substantial value for our clients and in the process to accelerate our own growth. The combined offering in Subsea is obvious. We can progressively expand our products and system offering, getting those in more possible project and substantially expand what we do for our customers over the production life of the assets but we're also identifying promising areas of investment in Onshore/Offshore where the addition of FMC’s LNG loading technology will fit well and surely in Surface too.

This is exciting, and I’m now going to hand back to Doug to summarize the financial profile of the new group.

Doug Pferdehirt

Thank you, Thierry. Let’s look at some of the key figures. Today, we have a combined $20 billion backlog and in 2015 we had $20 billion of revenues. 2015 EBITDA was $2.4 billion and the combined balance sheets show strength and strong liquidity. Both companies have an investment grade credit rating. In short, TechnipFMC is going to be a leader in our industry with the resources to invest and grow as well as to continue return policy both through dividends and share buybacks.

Now Thierry, let's sum up together and turn over for questions.

Thierry Pilenko

Doug, thank you. We’re going to highlight five strengths together. First, TechnipFMC for the plant execution skill across the value chain and from concept to project delivery and beyond. Second, we based our market positions on technology and innovation and equipment assistance. Third, our customers can access what TechnipFMC offers on an integrated basis, but also flexibly across Subsea, Surface and Onshore/Offshore, but we can take it from there.

Doug Pferdehirt

So the last two areas is the transaction will create value for our shareholders through our enhanced financial profile, increased reach to clients and cost synergies over and above our ongoing restructuring efforts. Finally, we are bringing together two complementary market leaders and most of all two companies with very talented employees, building on the proven success of our existing alliance. We look forward to bringing together the outstanding employees and cultures of both companies as well as the complementary capabilities of our organizations to position TechnipFMC to drive change by redefining the production and transformation of oil and gas.

Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] We have a question from Mr. Bill Herbert from Simmons. Sir, please go ahead.

Bill Herbert

Thank you. Doug and John, question, I had was with regard to from the merger being consummated. I’m curious, if you could illuminate for us the increase value proportion that the merger provides FMC clients at the Forsys JV didn’t with regard to your Deepwater and Subsea clients?

Doug Pferdehirt

Bill, thank you very much for the question and it’s an important question. Under the joint venture and the alliance that we have created, we were able to take the existing technologies of the two companies and use those to redefine the way the Subsea architecture is deployed and it was really around reducing interfaces and having and putting more efficiency in the overall Subsea production system. But what we have identified as we have been together now for sometime is there are even more dramatic to integrated technologies that we could develop together by having access to the full company's intellectual property to the full company's knowhow to the full company's capabilities to bring even greater transformation into the Subsea domain in terms of completely redesign Subsea production systems and delivery systems.

And it’s really thinking beyond where we are today, which indeed has been substantial and the markets reacted and we certainly are seeing the market acceptance of the integrated model. But we realize there is a much more that we can do together as one company and that’s the benefit of coming together to leverage that and to really drive not only seamless execution by being one company but again being able to take advantage of the entire technology footprint and to be able to exploit that and bringing that to the market much quicker. Bill, you didn’t ask but I also want to talk about beyond Subsea and clearly, clearly Forsys Subsea was positioned in that domain four a reason, it’s where we have the most experience, it’s where we had a relationship, historical relationship as worked side-by-side in the industry for many years. We needed to prove the model in that core activity first.

Now that we've proven up model and the ability to be able to integrate and provide this offering in Subsea, there is no reason, we would not being able to as successfully deploy that in the surface or in the land market be unconventional or convention by being able to put together the full production system on land as we are now doing in the Subsea. So Bill, it's really exciting for us as we start to look at how we could leverage, and if you will go beyond Subsea. We started in subsea. We wanted to prove the value proposition. We’ve done that now we can bring together the capabilities of FMC Surface technologies business segment and the Onshore/Offshore segment of Technip and approach to land market as well.

Bill Herbert

Okay, I’ve got one more from me and that is -- is there any break-up fee associated with the deal?

Doug Pferdehirt

I could not hear the question.

Bill Herbert

Is there a break-up fee associated with this transaction?

Doug Pferdehirt

There is a break-up fee associated with the transaction and its $250 million.

Operator

We have a question from James Wicklund from Credit Suisse. Sir, please go ahead.

James Wicklund

Good morning guys and congratulations to all on the deal. It strikes me and I understand and agree with all the comments that have been made, it also strikes me that one of the reasons or at least the impetus for this now is the fact that Deepwater is expected not to recover John your point on eventual, are we still looking at Deepwater revenues overall declining for the next couple of years before it starts to recover?

John T Grump

Jim, this is John. Yes, we know that and I said it in the last earnings call that major Deepwater projects probably wouldn’t be awarded in 2016, so we do expect and start coming back in 2017. So we see that trough of revenue probably in 2017, but then as cash flows improve, oil prices improve, those projects are going to start to break loose and in down start to show up late 2017 and build from there.

Thierry Pilenko

If I may add and coming from the upstream world as you know and there are very significant reserves in the quarter, very significant reserves, and I can tell you that the owners of this blocks of those licenses in the quarter want to find the solutions to reduce the cost and make those projects happen again. I mean, we have been on both sides, FMC Technology and Technip, we've be talking to a lot of those major players in Deepwater. And I can see that they are driving the cost down, but not just as an opportunity today because some of the costs of services are lower. But they really want to drive the cost down structurally and therefore are challenging their own teams and are challenging us to find those sustainable lower cost productions in the Deepwater. And I think, it’s a great opportunity and it's going to be this type of unique offering, integrated working together with the entire chain to reduce the cost of the system in Subsea, that is going to make those projects be viable again.

Doug Pferdehirt

Thierry, I think that’s an excellent point that you make on sustainable cost reduction, because this isn’t just about deflationary, and Jim it's important that as we go forward when the recovery occurs we will be uniquely positioned. We will be integrated and we will have structural offering that is different than our competition which will offer a sustainable advantage and a sustainable cost reduction for our customers.

James Wicklund

Okay. I understand and I agree with all those comments, no problem with that. I think from that perspective it's clearly positive. The one issue is that FMC has always traded at a significant valuation premium the Technip and now you’re doing a 50/50 deal and of course this picks up, Thierry, this picks up your valuation and kind of loose FMC’s valuation, but can you talk about how you guys look at the relative valuations in putting these two companies together?

Thierry Pilenko

So, Jim, good question. Clearly as we are able to bring this type of innovation into the industry into our customers, we are redefining a new space in the industry. That new space will warrant a multiple and we fully anticipate that, that new space is going to warrant a multiple that is going to be very attractive as we continue to deliver value to our shareholders.

Operator

We have a question from Daniel Boyd from BMO Capital Market. Sir, please go ahead.

Daniel Boyd

I want to follow up a little bit on Bill’s first question. Can you help put some numbers around the benefits of the JV from the customers' perspective maybe or from the merger? Can you help us to find in that with the JV you think you were able to improve Deepwater economics by X and now as a fully integrated company the target is to prove Deepwater economics by Y?

Doug Pferdehirt

Dan, this is Doug. Thank you for the questions. Let’s just talk about what we’ve been delivering thus far. So what we’ve been delivering thus far as you referenced through Forsys Subsea joint venture is the ability to be able to get about a 25% to 30% cost reduction our of the Subsea system and that correlates to about a $5 to $7 reduction in the breakeven price. So it’s so significant and then also as you well know there is other parts to the Subsea or Deepwater developments that is are also seen benefits either just simply due to deflationary pressure overcapacity or others that are also innovating in that space. So the 5 to 7 as we are able to influence together, together we represent about 30% of the cost of the Subsea development.

Clearly by coming together as one company, being able to not on leverage what we have created but being able to drive further technology innovation. We believe there is substantially more, Dan, I don’t have a target to put out there and I don’t want to say too much about the direction that we’re doing because we’ll have an opportunity and have and we’ll continue to have an opportunity to file intellectual property. But we believe if you look at it holistically instead of compartmentalized from equipment to installation to life-of-field services, and you begin to look at that holistically, it will impact all the way back to the equipment design. And it’s indeed and when we’re delivering that to the market that will offer further reduction than we've been able to today, which would just simply bringing together the existing technologies and the existing portfolios of the two companies.

Thierry Pilenko

Absolutely, Doug, and if I may add to all these elements whether it’s architecture whether cost of equipment or cost of individual unit whether it is the -- you know the right solution, the right installation, there is an elements here which goes beyond the cost which is the schedule. And it’s a very important element that we’ll be able seeing more integrated with more common processes that we will be able to be -- to deliver projects that they are going to be delivered in a shorter timeframe. And this is a massive cost improvement that is nicely benefited to our client.

Doug Pferdehirt

It’s really drives the economy.

Thierry Pilenko

Absolutely.

Daniel Boyd

That’s a very good point on a last one. Just one follow-up is one the synergies, on a sort of perfect as they were conservative as a percentage of revenue or the combined company, but just a question on, how long it’s going to take to realize those synergies, it just looks like a little longer time frame than I would have expected, can you maybe help me understand why it's going to take so long to realize those?

Doug Pferdehirt

So we’ll have the full run rate in 2019, Dan. The synergies that we presented you were cost synergies. On top of that as we said, we have revenue synergies on top of that, but we were only talking about the cost synergies that we identified in the 400 million. And again I do want to emphasize that we are redefining the industry. We are bringing together two complementary companies. This isn't if you will -- this isn't if you will a consolidation and in a consolidation clearly you're going to be looking at significant redundancies. What we’re doing is bringing together complementary companies that are they complement each other both from geographical footprint customer relationships, technologies and again how our products interact. So, again, as the market recovers, sure, you should expect additional upside in those synergies, but we’ll see the throughout the delivery of the integration.

Operator

We’ve a question from Robert MacKenzie from Iberia Capital Partners. Sir, you can go ahead.

Robert MacKenzie

Thank you for taking the call. Doug, I guess my question turns to the topic of technology, you see that printed out that somewhat in press release vis-a-vis your R&D, what do you see as the opportunity to not just lower the cost here to what you have now, but fundamentally change how fields are developed through developing and continuing to develop new technologies and approved the way things are done?

Doug Pferdehirt

Yes, Rob, thank you for the question. Again without being too explicit for obvious reasons, the ability to look at this from one company without making decisions that often there things that can be done that only benefit one company or another company in a value stream. That creates a natural conflict and normally that conflict results in the issue not being addressed and even were sometimes it results an additional cost being put into the total value steam. If we look at it again now as one company as we’ll be able to do when the transaction closes, it’s gives us an opportunity to just simply redefine because we are looking at a unique set of parameters.

We’re still looking at from an equipment point of view. We’re still looking at things like reliability. We’re still looking at things at product integrity. But now we’ll be looking at things like install ability. We’ll be looking at things like operability. We’ll be looking at things like serviceability. We used out the factor in those other parameters into the early engineering of the equipment as well as in the early engineering of the field architecture, it changes the outcome, and it can change the outcome significantly. The way you accomplish that is by looking at it as one company or you gain the benefit and your client gains to benefit.

Robert MacKenzie

That sounds quite encouraging. In terms of the vision, it's obviously not a short shortly time vision, how long you think it will take to realize as much of that?

Doug Pferdehirt

So the benefit of being in the alliance and the joint venture that we've had in place and with that as given us additional encouragement because of that success to be able to move forward as we are discussing today is we have a lot of very-very innovative people in our company. And they have identified many opportunities while that along the line of with I am describing or if you -- to be trying not to describe to you, but when I am trying to just give you a gist at general overview of what we are trying to accomplish without providing the details for competitive reasons. But we have a lot of very talented people who have a lot of ideas and because of that we certainly will be able to reduce the cycle time of delivering those technologies. Now when you are talking about significant changes in technology, that does take some time to put an exact time stamp on it would be difficult Rob, but I certainly would see we have an 18 month advantage.

Operator

We have a question from Fiona Maclean from Bank of America Merrill Lynch. Madam, please go ahead.

Fiona Maclean

I have a few questions. Firstly in terms of the timetable of this transaction, have you got a closer date, and secondly, could you walk us through the various processes you are going to have to go through to make sure that this transaction can be completed successfully? Secondly, I know you highlighted that the 400 of savings is in 2019, are you able to give us an annual break line of the cost and the savings to watch that number? And then lastly, have you decided on what accounting currency you are going to use for the combined entity going forward? Thank you.

Thierry Pilenko

Okay, Fiona, good afternoon. This is Thierry answering the question here. So as far as the expected closing date in concern, we are talking about the first quarter of early 2017 sometime in the first quarter of 2017. So the process itself is a pretty straightforward process, I would say there is one element on which we think, we are going to be very diligent and relatively quick which is the antitrust. So a very good reason first of all our business is up being complimentary, we don’t think we're going to have any material antitrust issues in any of our jurisdictions, in any of the countries where antitrust is applicable. The second thing is we went through with Forsys Subsea before, and actually, and we looked at the footprint of other two companies in the Subsea space and we got cleared very quickly. So something that can be a major although when you're doing mergers that look like small of the same with significant overlaps here, should be a just a process that we pullover to be shouldn't have a major issue. That's why we are pretty confident that we can close in early 2017.

Doug Pferdehirt

Absolutely and it's a complimentary integration versus a consolidation. On the synergy question, on the run rate of the synergies, we said that we would have 400 million in 2019. We would expect to have achieved 50% of that in 2018 beyond.

Fiona Maclean

And then in terms of what accounting currency you are going to be using going forward?

Thierry Pilenko

Everything is dollars.

Fiona Maclean

Dollars okay. And just my last question, given look at the businesses that are complimentary, do you see every single business line remaining in place let's say two years down the line or are there any businesses or assets or other things that you see as disposal potentials over the next couple of years?

Doug Pferdehirt

What is clear I think we have a unique set of very strong competencies across the various business segments of the companies and if that comes from manufacturing or from installation or from project management, proprietary technologies, all of those are important capabilities that we will want to retain within the Company as we go forward.

Thierry Pilenko

Yes. You probably are recognizing now the description of the business unit, but you will find the main pillars that you have at FMC Technologies and at Technip. And you will find those are main pillars or main five pillars in the TechnipFMC and organization.

Operator

We have a question from Byron Pope from Tudor Pickering. Sir, please go ahead.

Byron Pope

Doug or John, FTI has made some strides on the Subsea services side as a standalone company FTO comes to mind, and so just in the context of the combined company and given that it will be as a separate I guess business unit, how you think about the enhanced opportunity set for on the Subsea service side for the combined company?

John Gremp

Sure. I appreciate the question. Subsea services remains a growth platform for FMC Technologies as you correctly point out and one that we’re very proud of and it differentiates our company in the SPS space. The key here is we’re going to be able to unlock potential in Subsea services that we could not address as a single entity often when we talk to our customers about offering life-of-field services. They were very favorable to our offering, but our offerings do not address their actual need. Their actual need was for somebody to address the entire Subsea ecosystem or holistically address the subsea, which means it’s not only about the trees and the jumpers and the controls and the automation systems and the manifolds, but it’s also about the flowlines and the risers and the umbilicals. Somebody who could put together a holistic data driven solution that could allow them to optimize the production and to improve the uptime of the entire Subsea ecosystem, together we will be able to do that as one company. So Subsea services if you will, we’ll be addressing a larger market segment and we believe have greater growth potential.

Byron Pope

Okay. And then just one additional question for me, you touched on the benefits being for beyond just Subsea and so at a high level wouldn’t expect you'd be given a detail, but at a high level, could you give an example of how Technip enhances, let’s say FTI integrated service installation in the North America conventional?

John Gremp

The question was related to the North America land market, if I understood correctly.

Byron Pope

Right.

John Gremp

So, today, you have a highly integrated Subsurface offering by some of the large oilfield services players. There is not a holistic integrating offering on this surface, if you will the production system, gathering system, distribution hydrocarbon transformation system on the Surface. You’re not putting together two companies that have unique competencies that will be able to put together that holistic offering. So where the FMC Technology, Surface integrated solutions offering is indeed an integrated system, it ended at a certain point of the value chain if you will. With Technip provides is the next two elements to that value chain and allows us to have a contiguous value chain now that goes, if you will from the last frac all the way through to the hydrocarbon transformation.

Operator

We have a question from Scott Gruber from Citi. Sir, please go ahead.

Scott Gruber

Hello, congrats on the deal. A key question I have is, is ability to retain the benefit of the cost synergies, if the order rate remains little offshore? Doug, it sounds like you believe that the competitive advantage you’re creating with the combination will be sufficiently large to realize the synergies without simply passing them on to customers even if the order rate remains low. Is that fair characterization here?

Doug Pferdehirt

Scott, the way I would look at it is, we are trying to help our customers unlock the potential of their Subsea reserves. As Thierry pointed out and as John alluded to as well, there are significant Subsea reserves that have been proven but not yet developed. We want to give our customers the best solution with the best economics, with the best and most reliable Subsea systems to be able to accelerate and bring those projects, if you will to sectioning to FID earlier than they would be, if they were only driven by the price of hydrocarbon recovery alone.

Clearly, it takes a combination of factors, but what we’re doing is we are addressing the cost side in a more structure and sustainable way, which is important to our customers as they think about Subsea developments because these are large multiyear projects. Looking at deflationary cost alone, do not provide the confident that they will need to move those projects forward. They need to see deflation, but on top of that, they need to see sustainable and structural cost changes and that’s what we are providing.

Scott Gruber

Got it. So is it fair to then as soon as we model out the combined entity that you retained most of that savings, the 400 million?

Doug Pferdehirt

Yes. That is certainly our intent.

Scott Gruber

Got it. And then how should we think about the new normal ETR as you read domicile to London?

Doug Pferdehirt

The challenge with the ETR as you know its most -- the largest impact on the ETR is the geographical distribution of our revenue. So as that is changed quite dramatically over the past year and will continue to evolve over the next couple of years, it's very difficult to put if you roll our figure on an ETR because again that geographical distribution will be the primary driver.

Scott Gruber

Got it. Congrats again, I'll turn it back.

John Gremp

I hope certainly exactly the same thing with the portfolio that Technip is going to bring in the backlog, highly depends on the mix of projects and the location of projects.

Operator

We have a question from Nick Green from Bernstein. Sir, please go ahead.

Nick Green

Good morning, good afternoon. Thanks for taking my questions. Nick Green here from Bernstein. I have three questions please, if I just do two first and then will come to the third one. Firstly, on that returning to the 400 million cost synergies, are you able to give us a bit of a more granular breakdown please and you did indicate in the footnote that there was a 3% of 2015 cost base and clearly in 2019 when your volumes are higher that cost base will also be higher. So I am trying to get a better handle of how volume changes over the next few years with influence of 400? Secondly, there was comment when you talked about the dividend and the distribution to shareholders, you described it as a market based dividend and then it's turning to be slightly cryptic on haven’t quite decided yet or nothing of that sort, so this is a talk through a little bit, how you see the distribution policy? And I’ll come to the third question in a second.

Doug Pferdehirt

Okay. Maybe I’ll start with the synergy question. On the synergy side, as we’ve talked about we’ve given the 400 million and we’ve said we’d achieve 50% of that or about 200 million in 2018. This specific question is around how did we model that relative to, if you will volume or relative to activity. Clearly, that’s against the plan is how we came up with the number. Now, the sensitivity of that number in regards of an accelerated top line is going to be additional savings in terms of synergies. Some of the synergies if you will are scalable to activity, certainly things like supply chain synergies. Others are more structural changes that would not be scalable to volume. But clearly as volume recovers if it's beyond that, that we had modeled then there would be additional synergy savings. On top of that just I do want to reemphasize again with there are no revenue synergies in that number.

Nick Green

Thank you. Sorry Thierry. Just I follow-up from the synergy question, just we’re even making a more detailed breakdown and indeed potentially some of the calculations behind that number available to investors?

Doug Pferdehirt

As we move forward, you should expect to have that additional granularity. Yes, sir.

Nick Green

Thank you.

Thierry Pilenko

Now, moving to the question about dividend and equity, both companies obviously had as a policy to have regular return way of returning cash to the shareholders and either through dividends or share buybacks and our intent is to continue to have these both mechanism in place, but I think it’s too soon to tell what’s going to be the proportion of either mechanism. But we are committed to return cash for our shareholders with those types of mechanism on a very regular basis.

Nick Green

Okay, thank you. That’s very helpful. My final question I want to probe a bit some of the comments you’re making throughout the as far as the Forsys JV, but in general integrated model is a proven alliance is being an early success you commented on market acceptance of the concept. I think from our perspective we haven’t seen much direct evidence that oil companies are buying and going ahead with such an integrated model even if they may agree with the concept as being a very good thing. So are you able to give concrete evidence where you have actually seen this is being a proven alliance of viable success of market acceptance et cetera?

Doug Pferdehirt

Sure. Thank you for the question. So just to be very clear, there has been acceptance both in the frontend engineering side, if you will where we do these studies and identify the potential cost savings. And now the activity is actually been quite robust and we continue to actually prioritize the projects that we work on at this time. And one of the benefits of coming together as one company is we will be able to actually expand our capacity in that area and take on even additional work. But what's more important is what is happening in the marketplace right now, customers have come to recognize and accept the value that can be achieved from this integrated offering.

We are working with several clients right now at going directly into the execution phase. So typically they would start at the frontend engineering phase to a 9 to 12 months study, 3 to 6 months process evaluation and sanctioning of the project. So you’re looking at anywhere from 12 to 18 months before you will be into the execution phase. We have customers coming to us now wanting to go directly into the execution phase because other frontend engineering had been done previously on these projects. They recognize and believe in the value that can be delivered and they are coming straight to the execution phase.

Now, when will the projects get sanctioned, that goes back to the comments that John made earlier on the call there is other things that impact the sanctioning of the project beyond simply that of the project economics although that’s a major driver. It’s also the availability of cash, the preference for dividends and overtime as the cash flows continue to improve we would expect to see the awards accelerate. And what we're seeing right now and this is would has us so excited, as we’re seeing customers sit down with us right now and want to talk about, how can we go directly into the execution phase using this integrated approach.

Thierry Pilenko

Now, if I can have something here, there is an evolution in the market so we see that some of the probably the larger projects or more complex projects continue to follow the process that Doug was taking about with obviously a concept feed then FID and delivery with find to maximize the cost reduction. And this is where we felt the beginning that Forsys Subsea would be the most active. But as the market has been changing over the past twelve months, we see for example the importance of tiebacks, and I think for may be the next couple of years, we are going to see a lot of companies challenging the models and other then building new platforms and new structure, thinking about longer paybacks, fastest implement and so far. And these are typically the projects that Doug is talking about where companies are saying okay. I understand now what can you do with Forsys, what can you do now it's a combined company to execute quickly and with the shortest schedule this buyback. So this is the market that we think that we're going to be able a capture faster in near term.

Nick Green

Okay thank you very much. Just a very short follow-up which is to say and Thierry you're talking on further that. I was wondering if the appeal of the model is to a certain type of customer and not to every customer, so for example to small oil companies perhaps probably that's sophisticated procurement teams, let’s put the question in another way, to what extent do you think the integrated model requires a fundamental change in procurement philosophy at a large oil companies and as hence therefore a relatively slow revenue opportunity? Thank you.

Thierry Pilenko

That make all customers are slightly different and we can offer individual solutions for the piece of hardware to services to the fully integrated package. And I think this is the beauty of being under one roof, it's the idea that we have now all the flexibility of commercial model. So we can stick to the position on the way customers are procuring. All we can do something different sometimes more integrated, and some customers may like the models, there integrated models, others may not. But I think we need to continue to keep that flexibility.

Doug Pferdehirt

I think it’s the flexibility and also the fact that, if you look at the combined company when we talk about balance and you look at the revenues of the combined company, it is almost equally split between IoCs, LoCs and integrated operators.

Operator

The next question is from Michael LaMotte from Guggenheim Partners. Sir, please go ahead.

Unidentified Analyst

Hey guys, this is [Indiscernible] for Michael. Just on a quick question when I think about the Subsea offering, what do you think this combination is most beneficial geographically, first from a cost prospective then also on a conventional revenues synergy ability to win, win awards?

John Gremp

I don’t think it matters geographically. There is the one area where it makes a difference with national oil companies, they are going to have procurements rules, production ensuring contract rules, might win that some of their direct awards. But the area that I think in the near term is going to be the most interesting as the Gulf of Mexico because the capital commitment for Deepwater increased productions is a lot less because they have existing infrastructure and the returns are higher. And so, Thierry alluded that earlier, that in today’s environment, we're likely to see smaller commitments probably in a formal tiebacks probably in the Gulf of Mexico, big-big megaprojects offshore Africa, they are going to come later once cash flow is improved. So I think geographically as we go from today’s environment to a full recovery, we will see the geographical shipment, but when you think about the what we've been talking about all morning and the power of this merger, it applies ultimately, it applies to all geographies and all types of customers.

Thierry Pilenko

Yes and it’s not only Deepwater, I think it’s also relatively Shallowwater we see that in the North Sea. And there is a market where infrastructure is now sufficiently present, which is going to develop over the next decades, which is the tieback in Australia for example, offshore Australia where we are currently analyzing how we could tieback which are more than 50 miles long. And that’s why serious stuff and I think this is one of thing that we could be developing even better together.

Doug Pferdehirt

And Michael just to add John's comment, the Gulf of Mexico as you well know from following other company is an area where we have a rich history of partnering. And I just wanted to take the opportunity as we've talked about flexible commercial models first and foremost is our legend and our commitment to all of our partners from both companies in the new combined TechnipFMC.

So with that ladies and gentleman, I would like to conclude the call. Thank you very much for you interest and for your questions. I'd like to conclude by stressing how excited I am about the formation of TechnipFMC. Technip and FMC Technologies both have long track records of innovation and commitments to helping their clients, meet the challenges of the oil and gas industry. A year ago, we were at the forefront of recognizing the importance of our broader view of our clients' challenges and seize the opportunity that working together in our alliance could bring.

Together we want to take this strategy further and across the full footprint of the two companies. We have complementary skills, technologies and capabilities which our customers can access on an integrated basis or separately as they prefer. Together TechnipFMC can add more value across Surface, Subsea and Onshore/Offshore enabling us to accelerate our growth. I am confident that we can quickly demonstrate the power of TechnipFMC to our clients, our people and our shareholders.

With that I thank you for your participation and wish you a good day.

Operator

Ladies and gentlemen, this concludes today's conference call. And we would like to thank you all for your participation. As a reminder, a replay of this call will be available on both our websites in about two hours. You are invited to contact Investor Relations, if you have any question or require additional information. Once again, thank you for your participation, and please enjoy the rest of your day.

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