CGG's (CGG) CEO Jean-Georges Malcor on Q2 2016 Results - Earnings Call Transcript

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CGG (NYSE:CGG)

Q2 2016 Earnings Conference Call

July 29, 2016 3:00 AM ET

Executives

Catherine Leveau - SVP, Investor Relations

Jean-Georges Malcor - CEO

Stephane-Paul Frydman - SVP, Finance and Strategy, Group CFO

Analysts

Rahul Bhat - JP Morgan

John Olson - ABG

Christopher Mollerlokken - SB1

Eli Benson - Nomura

Jessica Alderson - Morgan Stanley

Operator

Good day and welcome to CGG Second Quarter 2016 Conference Call. This conference is being recorded.

At this time I would like to hand the conference over to Ms. Catherine Leveau, SVP, Investor Relations. Please go ahead.

Catherine Leveau

Good morning and welcome to this presentation of CGG second quarter 2016 results. My name is Catherine Leveau, SVP, Investor Relation. The quarterly financial information including the press release, the presentation and a streaming audio webcast of this call are available on our website at www.cgg.com.

Some of the information contains forward-looking statements including without limitation statements about CGG plans, strategy, and prospects. These forward-looking statements are subject to risk and uncertainties that may change at any time and therefore the actual results may differ materially from those that they were expected.

The call today is being hosted from Paris where Mr. Jean-Georges Malcor, CEO; and Mr. Stephane-Paul Frydman, SVP, Finance and Strategy, Group CFO who will provide an overview of the second quarter as well as provide comments on our outlook. Following the overview of the quarter, we will be pleased to take your questions.

And now I will turn the call over to our CEO, Jean-Georges Malcor.

Jean-Georges Malcor

Thank you, Catherine, and good morning all. So referring to the presentation, I suppose you want and starting with a group overview. In the second quarter we have been operating in a market which remained challenging and characterized by very low pricing and very weak demand. However, the conditions seem to have somewhat stabilized with the recent oil price increase and more importantly over the last three months some E&P deals have been launched and the nature of the conversation with our customers is certainly changing showing early signs of improvement.

There is a growing sentiment and understanding that current conditions are found sustainable for the sector, not to guarantee the level of expertise needed, not to ensure the ability to address the elevatable recovery. At the same time there was also recognition that the recovery may be very different than the ones that we had in the past and that a more proactive and buccaneering approach will be necessary between the various players. Some customers are more and more open dialogue and interested in new ways of doing business, in addition we’re seeing some our customers considering strategic countercyclical approach to be ready when the market recovers while maintaining the expertise that the sector needs.

H2 will be interesting, as customer will enter into their budgeting cycles and may be keen to give us more visibility that include their contracting terms. So there are very early signs of improved market sentiment and we may have well reached the bottom of the cycle of close to one, but let me say right away that it has not yet translated into better market conditions nor better volumes. We think that it will take a few quarters to stabilize fully and we expect that current conditions will persist in 2016. In the meantime, we keep a strong focus on our priorities, operational excellence, strong delivery on all of our prospects, strict execution of our transformation, strict control of our cost and stringent management of cash.

So looking now at our Q2 performance which was fully sustained this quarter by GGR, our total revenue were 290 million, down 7% quarter-on-quarter and operating income before non-recovering item was at negative minus 22 million. If we exclude the non-operated assets, we achieved all positively close to breakeven this quarter. All in all Q2 results were driven by sustained GGR performance. GGR benefited from a good level of multi-client sales with a high net 84% prefunding rate and SIR.

On the equipment side, sales and margins were strongly impacted by very low volumes with market conditions not challenging than expected, we had lower seasonal sales, which would however have reached the low point this quarter. Contractual data acquisition posted lower revenue due to the program reduction of the fleet which is going as scheduled and due to the fact that 66% of the fleet allocation was done to the multi-client programs.

Looking at the EBITDA, the Q2 EBITDAs were at 104 million. They include this quarter some R&D tax credit we were able to book as a result of our long-term research and development investment policy.

On the financial and cash side, after the successful execution of our capital raise in Q1 and thanks to a very solid performance in our operation, we benefited this quarter from a good cash generation giving - assist us with a positive free cash flow at 97 million that was minus 83 in H1 2015. This means that our H1free cash flow is positive at 8 million after taking into account the non-recurring payment related to our transformation plan.

We have therefore leveraged ratio with a good assume at 3.9 times with the net debt level at 2.15 million at the end of June, quite close to the level we had in March. As we said many times, we are focusing on what we can control, i.e., delivering the transformation plan, implementing a very strong cost discipline and monitoring our cash very closely.

Before looking in detail for each division of the financial performance, let me give you little bit of color on the operational highlight for Q2. I’m on Slide 4. Starting with multi-client, this quarter we continue our survey in Brazil and we were very active in Scandinavia, as we were shooting the second part of the Northern Graben programs. We were also active Ireland.

As I said before, we will give you our multi-client fleet activity relation for the two quarters to come to a few modeling our activities. After a low Q1 with 25% on the overall fleet dedicated to multi-client work, this ratio has moved at to 66% in Q2, should reach 75% in Q3 and go down to about 55% in Q4, as we have in Q4 some important contractual surveys which are already booked.

As usual strategic licensing loans are driving the activities and clients can come before or after being awarded the block to have good Q2 particularly on OP on prefunding, there are signs of interest and good discussions for the rest of the year.

Going to subsurface imaging and reservoir, in subsurface imaging we are pursuing our technology and innovation journey in helping our clients providing differentiated products and services. Let me outline some of the key achievements. We did complete the final phase StagSeis deep water for the Gulf of Mexico data library project.

Slide 4, high quality footage image brought down long asset data set was delivered, we have advanced geo imaging technology on time, which is now being marketed to our customer base. We have had this quarter some tough recognition from some of our customers for the outstanding in imaging complex structures.

GeoSoftware launched the series of innovative new releases across its reservoir characterization for the portfolio to pursuit of powerful solutions to overcome the most complex subsurface challenges.

In Equipment, in Middle East and most specifically in Saudi Arabia, crews continued to achieve a good operational performance and the 508XT is regularly breaking new records. We also started this quarter the 508XT crew in Russia, which is a new and very nice environment for this equipment and the Sercel in Russia, went very well.

Contractual data acquisition, as scheduled an average five vessels was operated this quarter. We have a low level digitated contractual marine, 34% in accordance to our current refocusing on more multi-client work. Thanks to the professionalism and the commitment of the crews and despite the difficult time we had very strong marine operation performance with a 90% availability rate and 94% production rate.

Now, moving to the operational results for the quarter and starting with GGR. I’m on Slide 6. GGR pursued solid multi-client revenue and subsurface imaging and reservoir performance. GGR recorded this quarter the 20% revenue increase quarter-on-quarter at 196 million, mainly due to the multi-client activity. Multi-client and subsurface imaging sales were nearly equally split.

Subsurface imaging and reservoir revenue were at $101million, they were down 7% sequentially. And despite clients were earning closures [ph] and despite some delays in project and less audio recorded SIR remains quite resilient in current conditions with a good coverage for the rest of the year. Multi-client revenue reached 96 million at 74% with a very good performance in prefunding and they were the highest in Latin America, Brazil and Mexico and Scandinavia.

Prefunding sales were at 65% at 78 million, when after service we were at 80 million. The cash prefunding rate was good for the quarter at 84%, which gives 77% for the first half, above our 70% target. We reached 80% depreciation rate including accelerated depreciation. Looking at the net book value, we added 990 million recorded at June end, at 3% for the Q1 2016, 12% related to onshore survey and 88% to the offshore. GGR EBITDAs were at 120 million and GGR OpInc reached 29 million, showing a 15% margin.

Moving to the equipment and Sercel on Slide 7, equipment levels are at historical low level. Equipment has been impacted by this very low volume level. It reached 44 million sales this quarter, down 39% quarter-on-quarter. The sales split was 2 for land and 1 for marine, which remained valid compared to the first quarter.

Equipment sales were at the lowest quarterly level in more than 12 years, suffering from delayed projects and very low spare orders. Q2 has been more challenging than expected both under nine [ph], but it should knock the low point for the equipment activity and H2 is expected to be higher than H1. Despite these very difficult conditions, Sercel maintained its market share this quarter.

Manufacturing levels being very low, it is obviously pulling down margins, in fact the low level of sales led us to negative approach in margin this quarter at minus 18 million. However, despite this very low level of revenue, cash has been tightly monitored. The transformation plan is on track and we have further reduced our breakeven point in OpEx, while maintaining key R&D spending and manufacturing capacities to address the near term when the demand comes back.

We have also pursued our actions of diversification outside the oil and gas sector with some interesting contact where we show our expertise of our manufacturing capabilities could be well suited. This will have however the mid-term impact on our operations.

Moving to the contractual data acquisition on slide 8, we benefited from the segment from lower marine weight due to higher fleet allocation to multi-client. Total revenue was down 34% quarter-on-quarter, at 59 million. Sequentially the lower revenue can be explained for albeit [ph] by the relation of the fleet and albeit by the fact that only 34% of the fleet was dedicated to contractual data acquisition, less than 75% last quarter on the other hand.

As we already said, contractual marine pricing conditions reached historically low level in Q4. However, they seem to have now stabilized albeit at a very low level, we have no further degradation for the last two quarter. We do not see the pricing improving significantly before a few quarters as there were still and despite some shipping in the market, and other supply which is kind of overhanging over the market condition. So reducing our exposure allows us to reduce the margin negative contribution. Despite these conditions, marine at this quarter contributes strong performance. We have excellent production rate at 94%. Between contract and multi-client, our coverage for the year is strong.

Land and Multi-Physics, total revenue were at 37 million, up 20%. Market activity is however low affecting all contractors, except they were up for the Middle East and North Africa markets. We have initiated the data strength [ph] of Multi-Physics as you know as it is an non-core asset for us. The full completion is expected to be done before year-end and it’s progressing well. EBITDA of the segment were positive this quarter at 9 million, and operating income reached breakeven. At EBIT level, the contractual acquisition segment contribution is minus 5 million negative, and can be mainly explained this quarter by the negative contribution from the Seabed Geosolutions joint venture we have with Fugro.

Moving to the non-operated resources on slide 9, this report as you will remember reflects the non-active stuff of our fleet. We reiterate what we said last quarter, for the whole year 2016, EBITDA should stand within the range of minus 20 million to minus 25 million, including minus 15 million in H1, while the G&A i.e. the non-cash charges should amount to between minus 60 million, minus 65 million, including minus 54 million in H1. Our six owned cold-stacked vessels are in Dunkirk, they provide us with high flexibility to manage our contractual data marine acquisition, will allow us to clear that to market needs.

With that I now hand the floor to Stephane-Paul to comment in more detail the financial figures.

Stephane-Paul Frydman

Thank you, Jean-Georges. I’m on slide 11. So looking at the P&L at the group level for the first half of the year, the Group revenue amounted to $603 million, a year-on-year minus 42% decrease, which was mainly due to change of all perimeter for the reduction of the operated fleet, six in average in H1 2016 versus 11 in H1 2015, with acquisition down minus 57% year-on-year.

B, through the data evaluation of market condition and change of mixed production with CGR down minus 27% year-on-year and waiting for 60% within group revenues that is 48% in 2015, and C, due to very low volumes, equipment contribution down minus 53% year-on-year. The Group EBITDA looking at the whole Group is $151 million, driven down by negative contribution from Sercel and contractual data acquisition.

To show the effective performance of the operated business perimeter, it’s worse to consider the Group EBITDA excluding non-operating resources negative contribution which amounted to $146 million for the first six months.

At the OPINC level, the Group half year performance was minus $55 million for the operated perimeter and minus $104 million when including the NOR segment. The contribution from investment inequity was null in H1, corresponding to minus 5 in Q2, which can be mainly explained by the negative contribution from the Seabed Geosolutions JV.

We have to book this quarter $2 million complementary charge related to our transformation plan, consistent with minus $7 million in H1, and all in all, taking into account notably our accounting cost of debt at minus $85 and income tax at minus $13 million, the Group net income amounted to minus $109 million for the first semester.

Moving then to the cash indicator on slide 12, you see that there are $131 million of Group EBITDA, combined with low tax paid and significant positive change in working capital at $234 million led this semester to very solid operational cash flow standing at plus $372 million, up 105% year-on-year.

Total CapEx at $203 million were down 10% year-on-year with multi-client cash CapEx at 8% at $163 million, and industrial CapEx down at 58% at $22 million; and R&D CapEx at low $18 million. The combination of the cash flow from operation, the global CapEx and $44 million paid this quarter led to a positive $97 million of free cash flow over H1, versus minus $83 million last year. Including the cash non-recurring charges related to our transformation plan that weighted for minus $47 million in Q2, the free cash flow was globally positive for the first half, standing at plus $8 million.

Moving to slide 13, we can see that flowing February [ph] capital increase, which generated $370 million in the proceeds, and our solid H1 cash performance by June and good liquidity plus falling to the cash available and added on credit facility, reached good level at $745 million. On such basis, the net debt amounted to $2,150 million by June end, corresponding to a 3.9 times leverage ratio, nearly unchanged compared to March end at 3.8 times, and below the 5.4 times bank covenant cap. The headroom is also remaining satisfactory, when looking at the coverage ratio, meaning the EBITDA over the cash interest on the long-term - last 12 months basis that amounted to 3.57 times by June end versus a bank covenant floor at 3 times.

Continuing our debt maturity profile, and you would see that in slide 18 appendix. There was no significant change this quarter, the average maturity of the senior debt out of the RCF standing at four years by end of June. All in all, we can see that the strategy we implemented over the last quarters managing the company by the cash, safeguarding the Company’s liquidity, so that in critical times we are navigating in.

I’ll hand the floor back now to Jean Georges for the conclusion.

Jean-Georges Malcor

Thank you, Stephane Paul. Going to slide 15, and looking our capabilities in Geosciences, as you know we want to refocus the Group on less capital intensive businesses, and we want to continue to offer a large range of solutions to help our customers to save the current condition, in taking full advantage of our integrated model. Our multi-disciplinary expertise stands at all scales. Beyond the seismic and the well scale from truly global modeling of earth systems to the nanometer scale in litigation of rock samples. This would reach into Geoscience and the breadth of our offer give us unique advantages and differentiators to navigate through the difficult market environment we are in.

The ability to provide integrated solution is one of the answers to the new paradigm in a customer relationship, which will emerge from current crisis. Multi-clients are the best example, the first market segment where we can combine our strategic basin and business knowledge in order to help exploration teams to notify the best opportunities and move rapidly to close the widening gap between supply and demand.

The success of our Northern Graben survey is a first and good example of this approach. We want to use the combination of CGG leading technologies and equipment, and possessing our geological knowledge, our modeling methods and non-tightening methods to help our clients at each step of their decision making. In exploration, we have to drill, in development, each number of wells, and production EOR and the whole events of recovery wells, and these are at the worst case and for all geologies.

The integration of the Geoscience Company has been accelerated by the timely execution of our transformation plan. It will have to be supported in parallel with a new and a revisited customer relationship, based on mutual trust and mutual dependence.

Now moving to the slide of conclusion on slide 16, in summary, we have been operating this quarter in market conditions which remain challenging and characterized by low volumes and pricing. The transparency and weak conditions will probably prevail for the rest of the year.

However the current levels are unsustainable and now leading to massive industry adaptation, loss of capability, loss of expertise in sector, which will be very difficult to rebuild quickly to serve any market upturn, which may now come quicker than later.

As we said, the turn of the conversation we have with our customers is changing and improving. The increasing dividends of supply and demand mid-term tightening is raising, as we saw for the first time in many months some smaller post revision in the oil process assumption from some commodity strategies. We need to stay cautious, but we may have the early signs that we have passed the weakest quarter in the year, and may have reached or closed to the reach, the trough of the crisis.

With that and a typical seasonality of our business including equipment and multi-client phase, we expect a better H2, even if uncertainty on activity will persist throughout the rest of the year.

In this context, we remain determined and focused on what we can control. And first, we continue to be excellent in what we do and deliver a strong operational performance. Second, we continue to successfully implement our transformation plan. It has the right size, it is on track and we should reap the full benefit of it in the second part of the year. Third, we continue to adapt, and with a strict cost discipline continue to cut massively in our cost base. A lot has already been achieved internally, more is coming to lower even more our breakeven points for all our businesses, and we achieved some cost centers particularly on our external cost base, and for our non-operating assets which needs to be sold at a point.

Fourth, we continue to control our investments. We decided to cut our 2016 full year CapEx by the south of 50 million. With the visibility we have now for H2, the size of our fleet and the allocation of the fleet to multi-client service, we can be confident to get the industrial CapEx to be in the range of 75 million to 100 million, and the multi-client cash CapEx to be in the range of 300 million to 350 million, of course with the prefunding rates of above 70%.

And finally, we continue to maintain our stronger focus on cash management and as Stephane-Paul said, manage the business of cash in the current environment. We therefore confirm that we are aiming to reach a net debt of less than $2.4 billion by the end of 2016.

Thank you very much and we are now ready to answer your questions.

Catherine Leveau

Operator, we are ready to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll now take our first question from Rahul Bhat from JPMorgan.

Rahul Bhat

Hi, good morning, Jean-Georges.

Jean-Georges Malcor

Good morning, Rahul.

Rahul Bhat

Can I ask a couple of questions and start off with Sercel. On the second half performance, you expected to be stronger and I think in previous calls you had said that’s going to be from China and Russia. Can you confirm if that is still your expectations and there are no MegaCrew evolved, expected in the second half of the year?

Jean-Georges Malcor

That’s correct. Yeah. We don’t expect any MegaCrews this year. There is no cut short in the other timing on that in the Middle East. So, on the Sercel side we have both seasonality and market reopening in Russia and in China.

Rahul Bhat

Okay.

Jean-Georges Malcor

So and there was another one as well, which is important, and Algeria, which is reopening.

Rahul Bhat

Algeria.

Jean-Georges Malcor

Yes.

Rahul Bhat

And early you were alluding to some non-oil and gas manufacturing facilities. Could you elaborate a bit on that, as in is it something you think will come in ‘17 or ‘18, and what kind of the opportunity that you’re talking about?

Jean-Georges Malcor

Yes. It’s not a short-term. Clearly, I mean it will be great if it could lead some short-term revenue. But it would be very minor. Yeah, it’s more a vision that would take one year or two years in order to apply the technology and the knowhow in other domain in oil and gas. But it’s not going to translate into massive revenue on the short-term.

Rahul Bhat

Okay, I understood. And on GGR and particularly on the late sales, so if I look at first half of the late sales, it was 8 million in last quarter and 18 million this quarter, which is quite weak in compared to historical levels. Can you explain a bit on that and I was expecting you to benefit of bit from the sale of BG Group merger in terms of some transfer fees. So did that come through or is that something that you did not benefit from?

Jean-Georges Malcor

No, we did have some benefits from these transfer fee, but obviously less than some of our competitors because we were less exposed to the areas and particularly at the North Sea. Yeah.

Rahul Bhat

Understood and anything on late sales in particular and why it’s been so weak in the first half and how do you expect it to trend in the second half?

Jean-Georges Malcor

Yeah. We expected after sales to be stronger in the second half. Okay, we have the low level of after sales particularly in Q1, Q2 was recovering a bit. But obviously we are expecting Q3, Q4 to be much stronger with the traditional seasonality, but also leaned to the various lease rounds and the areas of the lease rounds, okay. Typically, the lease round in Gulf of Mexico for August was marginally interesting for us because the data was - not a lot of data on lease round first, and second data on [indiscernible] have been sold already last year.

Rahul Bhat

Understood, so is there any other lease round that you’re looking at the anticipation, is it the Mexico one in December?

Jean-Georges Malcor

Yes, of course. The Mexican one, and also the Gulf of Mexico in March, 2017, where there is some sort of good, where we have good data.

Rahul Bhat

Understood and last question if I may on the strong prefunding performance this quarter. Is this due to converted contracts in say, Brazil in some areas, or because otherwise the impression - my impression was that it’s very tough to time prefunding from companies.

Jean-Georges Malcor

No, there is no converted so called converted contract and I’m glad you are asking the question. They are genuine prefunding, the fact is that we have been very selective, which is easier to do when you have small fleet of cost. And out of the various pipelines and opportunities that we have to contact multi-client, we are trying to select the one, which attract the highest level of prefunded. So far we’re travelling quite well, since for H1, we are at 77%, 84% in Q2 and we don’t expect this rates to be affected in H2. So, we confirm our target for the year of being above 70%.

Rahul Bhat

Understood, perfect, and thank you.

Jean-Georges Malcor

Thank you, Rahul.

Operator

We’ll now take the next question from John Olson from ABG.

Jean-Georges Malcor

Hi, John.

Operator

Please go ahead your line is now open. Please ensure the mute button is switched off. John Olson your line is now open.

John Olson

Yeah, good morning, this is John Olson from ABG. Question is on slide number nine, you having all of this - the owned vessel stack. I just wonder, what will it take for those supposed to comeback, because you say - you are right that if you could quickly adapt to market needs. How much will the day rates have to improve for those sections to come back? And two, are those vessels fully equipped with streamers and setters. Are they ready to route rather short notice?

Jean-Georges Malcor

Well, first of all, before thinking above this all coming back we need to see fully and sustained recovery on the market. Today, we have still very broader line in terms of supply demand. The market is probably still over clouded, because we don’t see the rates going up. Even though we see the rates stabilizing, now if we leave aside some from time to time some work behavior on certain contracts, we believe the rates are stabilizing for the - they have been stabilizing for the last two quarters. Now coming back to your question, the rates were hiking massively up. First of all I reinstate our position to say that our priorities are multi-client business, but if we have to bring back result, it’s not very expensive, because the results have been - they are maintaining in good shape, well we need - they have been doing, so we need to equip them with new equipments or equipments from the rotating spend, and of course, in terms of crew, the way we are managing our crewing, we would be able to very rapidly mobilize crew for both maritime and seismic crew for the research.

John Olson

So the vessels do not have the streamers on them, they have been, all the streamers have been taking off -

Stephane-Paul Frydman

We have a pool of streamers, for the first two vessel to be back, we have noted some specific CapEx needs, looking at the equipment, thinking about the fees equipment, and refurbishment of the fees equipment on the Board, for the equipment and see where the ability to equipment to result.

John Olson

At least two vessels, yeah, and is it possible to be a more specific, how much the rates have to increase before considering taking those to boost speck [ph]?

Jean-Georges Malcor

Now we have not looked at it that way as I said for the time being we are really concentrating on our multi-client. I remind you that the profile of the company is to keep a mix of activity dominated by the Geo for more than 60%, the equipment 25% and we don’t want to the data acquisition to be more than 15%.

John Olson

And then is it possible to give some indication to where you are planning to do multi-client investments in the second half please?

Jean-Georges Malcor

I don’t want to give you all my secret, John.

John Olson

Okay.

Jean-Georges Malcor

Now this is quite confidential, but we have our policy as multi-clients quite clear. We are clearly playing in more matured basins, rather than let’s say very, very risky exploration ones. So from that you can probably guess where we are going to shoot multi-clients.

John Olson

Yeah I know you should be thinking the U.S. and Gulf of Mexico for a while and it is one of your four areas…

Jean-Georges Malcor

In Gulf of Mexico, we invested a lot in the past and now it’s time to reap the benefit before we reinvesting in Gulf of Mexico.

John Olson

The final question is given the version of prefunding you had and would it be possible to - it will be likely that when you bring back more vessels, if that would then happen, it’s more likely that you’re going to increase multi-client investments rather than to do contract?

Jean-Georges Malcor

Yeah. This is an interesting question. For us, I mean if the market comes back strong, clearly, we will be looking at doing more multi-client, because we see the base of our model. But again we aren’t working on and compromise because clearly we are hunting for hyper annual rate and the market - the business as we speak to for additional vessel on that market segment.

Stephane-Paul Frydman

The way we size our operation, John was you may remember when we announced the plan and how we came to the five vessels. That was our ability to provide let’s say reasonable level of prefunding rates 70% plus on the fleet. And we thought that in order to maintain our level of multi-client and attract the 70% prefunding rate, the previous year’s value average was a good number, so if the market tomorrow - because if recovery can sustain for vessels in multi-client with the same level prefunding rate, it will be an opportunity for us.

John Olson

Great, thank you very much for answering my questions. Have a nice summer. Bye, bye.

Operator

We’ll now take the next question from Christopher Mollerlokken from SB1.

Christopher Mollerlokken

Yes, good morning, gentlemen.

Jean-Georges Malcor

Hi, Christopher.

Christopher Mollerlokken

Good morning Jean-Georges. Regarding the transformation plan, could you elaborate how much do you have paid out now in the first half and how much you expect to payout in the second half?

Stephane-Paul Frydman

Yeah, sure. Typically, on the first half we paid in terms of manufacturing item around 88 million for the plan for H1, and we plan today roughly 110 in the second half of the year, for the second half.

Christopher Mollerlokken

You also mentioned at the start of the call that EBITDA in the second quarter was positively impacted by some tax credit. Could you say how much that contributed?

Stephane-Paul Frydman

Yes, I think you can find it in the - it’s around 20 million.

Christopher Mollerlokken

Okay.

Jean-Georges Malcor

That credit depreciated to R&D -

Stephane-Paul Frydman

It’s R&D.

Jean-Georges Malcor

It’s R&D tax credit. yeah.

Christopher Mollerlokken

And should we assume further tax credits being booked in the second half, or was this one-off?

Stephane-Paul Frydman

No, no for the year, that will be probably be it, okay. In the years to come, there may be more to come because it’s a result, the tax credit is a result of continuous policy that we have in R&D investment around the world particularly in the U.S., and it’s the effort which are booked every quarter in terms of R&D spending and every once or twice a year, you have to come back with the administration, discuss with the administration and recognize the tax credit. And this is becoming more interesting of course when the activity is low and when you are in negative territory.

Jean-Georges Malcor

It’s a long term line, Christopher, and that’s a matter of documentation and discussing about the cost basis like that with the tax registration.

Christopher Mollerlokken

And final question, you also mentioned that you have further reduced the breakeven point for the equipments business. And could you say roughly where you expect that business to breakeven now?

Jean-Georges Malcor

Yes. I can give you an indication. We were, you remember, we at the beginning of the year below 400. Now we are south of 375.

Christopher Mollerlokken

Okay, thank you.

Operator

[Operator Instructions] We’ll now move to our next question from Eli Benson from Nomura.

Eli Benson

Yeah, hi, just a quick question. Just so the total amount that you’re going to be spending on this restructuring, is it still 300 million? I know a question was asked on how much you spent in the first half and then how much you are going to spend in the second half, but the total amount is still 300 million over your restructuring plan?

Stephane-Paul Frydman

This is correct. And I remind you this fleet 200 this year roughly, so 88 this quarter, 110 next quarter, sorry first half, 110 next half roughly, and then we have the 50 million roughly in 2017, and another 50 million after.

Eli Benson

Got it and when you spend this 300 million to restructure your company, what type of savings are you looking for or how does an analyst or an investor look at the savings that CGG will reap when you actually spend this money?

Stephane-Paul Frydman

Yeah we don’t give lot of guidance on that because it’s quite sensitive on our cost base, you know on the market. But the way you can look at it is if you look at the cash spending for example H1 last year, and you can compare it to the cash spending H1 this year, you see that there is a huge swing okay in terms of cash and that will give you a rather good indication of the type of saving we are targeting for our submission plan.

Eli Benson

Got it, so that entire amount that tells us what you are kind of spending on an annualized base, like the annual savings, is that - that’s kind of what you are targeting. Okay that’s clear. And then another question, which I understand it’s hard to answer, but I’d like to ask it. What oil price do you view as sustainable for the type of business that you do, I mean I’ve heard numbers all over the place, I’ve heard number of $45, I’ve heard $50, I’ve heard $60 but what level do you think, I mean a stable oil price, I don’t mean like oil flips-up to $55 approx. a barrel and then goes back down to $40 but what is the level where you feel comfortable?

Stephane-Paul Frydman

Yeah it’s a difficult question, but I will try to answer it with our belief, our strong belief inside the company. And my answer would be in two folds. The first one, stability is probably the first criteria which would be important for customer to regain confidence and start spending again. So of course not stability at $25, but let’s say that first, if we take $50 mark and if it was - if this mark was going to be stable for few quarters, you know we are confident that there won’t be any huge swing but we already emancipate a lot from the change in mentality, the change in discussion, the change in mind. Second, coming to your question, the absolute value, we are seeing that above $60 will unlock quite a lot of let’s say capacity to our customers to reconsider again the offshore because the cost base has been going down a lot globally. And so 60 is an important mark. So if I summarize your question, we would be comfortable within our price stable to about $60.

Eli Benson

Yeah okay. Great, thank you.

Operator

We will now take the next question from Jessica Alderson from Morgan Stanley.

Jessica Alderson

Hi yeah, it’s Jessica Alderson from Morgan Stanley. I just had a couple of questions there. The first one was about your guidance for end 2016 net debt, will be below 2.4 billion Euros. Is that organic, or is that assuming I mean it’s more of asset disposal. And the second question was could you please talk a little bit about the performance of your Seabed Geosolutions JV and what kind of EBIT margins you saw in the first half. Thank you.

Jean-Georges Malcor

Okay I will let Stephane-Paul answer the second point. And the first one for the debt 2.4 and this is including of all of our actions we are taking. It’s sort of global in the area of cash performance and business performance.

Stephane-Paul Frydman

And just on the H2 keep in mind that we are in the process of sale of the Multi-Physics business, and it’s supposed to be completed by the end of Q3 or early Q4, and that’s already computed in. On the SBGS we just mentioned that we have just to give a flavor on, and we will let if you would a majority of them come in the business reserves of SBGS. What we said is we booked as an income from this negative contribution in Q2. It was mostly due to the reduced backlog of SBGS for the overseas business and their ocean bottom cable service. So that led them to intense some tangible assets, and that’s a sequence where we took a lot here. But for the business comments please refer to what will be said by 4 in a week, they are communicating on August 4.

Jessica Alderson

Okay we will wait till next week then. Thank you.

Operator

We will now take a follow-up question from Rahul Bhat from JP Morgan.

Rahul Bhat

Hi Jean-Georges, sorry for the follow-up insisted on that many questions I thought I might just say my luck. This is actually for Stephane-Paul probably on the covenants I think even if you assume an active fall, so you achieved your guidance of below 2.4 billion and say you get 2.3 billion to reach a five times net debt to EBITDA and the EBITDA would have to be around 450 million, and your first half EBITDA was near 130, so is there any scope to renegotiate that covenant number, or do you expect a bump at Q4 as usually?

Stephane-Paul Frydman

Yeah Rahul, on that matter, just a few comments on the story of the covenant and what you said about EBITDA. First, we remind that EBITDA is completely related to the level of net gain we achieved but Q4 is always important and like we see over the last two years. And we won’t comment anymore but what could be our year-end ending point, as we aren’t providing any guidance in terms of EBITDA. About the covenant itself, the covenant matter, I won’t - predicting too much our own future discussion we could have with our lending banks. I just want to remind you that we are in a permanent get out with our lending banks, meeting them each quarter along the information undertakings. We have and we are benefiting from very supportive lending pools, and miscellaneous agreement amendments, and we went for those last year loans and we think it’s likely that again further the discussion with these banks, we will keep on being benefiting from support of the lending banks also going forward. Last, we prove that for the first year we were able to manage the company for cash and also we will continue to do so.

Rahul Bhat

Alright, perfect Stephane-Paul, thank you.

Operator

[Operator Instructions]

Jean-Georges Malcor

Okay, no more questions?

Operator

There’s no further questions.

Jean-Georges Malcor

Okay, very good, so I will conclude the call. Thank you very much for attending the call this morning. Some of you are taking a bit of a break. Wish you a very good break, and let’s stay in touch back in September. Bye-bye for now.

Stephane-Paul Frydman

Bye-bye.

Operator

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

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