CGG's (CGG) CEO Jean-Georges Malcor on Q2 2014 Results - Earnings Call Transcript

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CGG SA (NYSE:CGG) Q2 2014 Earnings Conference Call August 1, 2014 3:00 AM ET

Executives

Jean-Georges Malcor – CEO

Stephane-Paul Frydman – Corporate Officer, Senior EVP, Finance and CFO

Analysts

Caroline Hickson – UBS

Bertrand Hodee – Raymond James

Mick Pickup – Barclays

Shola Labinjo – TPH

Jean-Luc Romain – CMCIC Securities

John Olaisen – ABG

James Evans – Exane BNP Paribas

Rob Pulleyn – Morgan Stanley

Christopher Møllerløkken – SB1

Operator

Good evening ladies and gentlemen and welcome to the CGG Second Quarter 2014 Results Conference call. For your information this conference is being recorded. At this time I would turn the call over to the company. Please go ahead.

Unidentified Company Speaker

Good morning, thank you. Welcome to the CGG second quarter financial results conference call. 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 limitations statements about CGG plans, strategies and prospects. These forward looking statements are subject to risks and uncertainties that may change at any time and therefore the actual results may differ materially from those that were expected.

The call today is being hosted from Paris, France where Mr. Jean-Georges Malcor Chief Executive Officer and Mr. Stephane-Paul Frydman, Executive Vice President Finance and Strategy and Group CFO will provide another view of the second quarter as well as provide comments on our outlook. Also on the call Benoît Ribadeau-Dumas Senior Executive President in-charge of Acquisition. 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, Mr. Jean-Georges Malcor.

Jean-Georges Malcor

Thank you Catherine and good morning, good afternoon to all of you. As already disclosed I am on slide three. We have been operating this quarter and since late last year in a weak seismic market in the global context of reduced exploration and development spending. We perhaps, a few exceptions oil and gas companies have revised down their investments and spending forecast since last year especially outside of America.

The overall E&P spending in 2014 is still likely to reach weaker levels but growth is revised down to about 3%. In 2014 more specifically exploration investment is expected to decline by about 7%.

This is the second year in a row that we see declines in exploration spending. There is a shift by major oil company towards development and production due to proved returns from exploration and those measures are focusing upon delivering positive cash flow to maintain high level of dividends. As a consequence for us seismic market is expected to decline this year by 6% for services and even more drastically by about 16% for equipment.

Now going on slide four, as you remember based on the difficult market conditions in acquisition that already prevailed in Q4 last year and based on low exploration spending already anticipated for 2014, we decided to launch as soon as December 2013 the transformation plan for the period ‘14 to ‘16. At that time we were the first of the industry to announce the difficult market condition that we are now facing. Today we have decided to intensify, accelerate and implement the transformation plan in 2014. We have been quite active over the last month and we are now able to be more precise on all the measures that we have decided and the actions we have taken. Some of them as you can see are quite significant.

So following the least of items that we presented during our last capital market day. On the operational side we are accelerating our reformatting and re-balancing for businesses and we are implementing those key measures in 2014. The fleet will be downsized from 18 vessels to 13 vessels by the end of 2014, as soon as the end of 2014. North American land contract business will be disposed to Geokinetics by the end of October. We have announced today that we signed a binding agreement with Geokinetics.

Regarding the commercial efficiency. The new set up with Argas in the Middle-East has been finalized. The New Argas own respectively 51% by Taqa, 49% by CGG as in large this operational footprint across the Gulf countries in an area which is quite active at the moment and for the years to come. We also signed in June an agreement with Sovcomflot to form a marine JV. The JV will formally start trading at the beginning of 2015.

And finally on technology and innovation Sercel delivered the first 508 cross-tech land acquisition systems and as now booked several additional systems. We are seeing a paradigm shift in the Gulf of Mexico with StagSeis fast track high quality images available and strong interest from our customers, I will come back on this later.

But on slide five, our plan is also about cost savings, cost cutting, tight cash management and debt management. Cost control is a key focus and it’s tough to pay out. The reduction of headcounts has been scaling up across the group and all over the world and as per a first 2.5 reduction of employees in January 2014. We have now entered into a very active phase. As already mentioned we went successfully through the mandatory welcome this process in France, Norway and Switzerland. And now I can announce by, that by year end 2014 more than 1000 employees will have left the company a very significant reduction will represent the equivalent of more than 10% of our worldwide headcount.

At the same time and in parallel, we are recruiting in 2014 around 200 new employees in our GGR Division, which is a clear demonstration of our confidence to grow in this segment and in our ability to attract tenants in the company. We are also implementing a strong cost reduction program on operational and overhead expenses and we are also implementing the reinforced cash management plan. As an example we have already reduced the associated support cost structure in every operational marine site in anticipation of the fleet downsizing and with low impact on the fleet performance. Three operational sites were also closed down in Nigeria, in Venezuela and in Bergen in Norway.

Now regarding operational performance, availability and production rates are at 92% in H1 2014, which is a very high level and we want to maintain that high level of operational performance in the future, which is a huge improvement in the marine fleet performance and I would like to acknowledge the professionalism and dedication of our people in these difficult circumstance. We have also very good customer feedback either directly or through the independent willing report, which is the reference in our industry surveys. This is very encouraging as we receive an excellent feedback from our clients not only the Subsurface imaging world, but also in data acquisition and multi-client activities. The unique quality of our data and our multi-client synergies has been highlighted by our clients directly will recognize as well the perfect timing of the data delivery.

On the cash management side, thanks to the two refinancing operation launched in April we push back the mandatory installments beyond 2019. We also negotiated at the end of July a one year extension of the French Revolver Credit Facility. Regarding the CapEx reduction, we have already this year lower than more than 10% of 2014 industrial CapEx and we have now a new target, which is between $250 million and $275 million. This is what we continue in the years to come with less assets in operation.

With the end of our multi-client IBALT program in the Gulf of Mexico in Q3, our multi-client CapEx achieved the peak and will then go down to a more normal range of $300 million to $400 million CapEx range in 2015. As you can see we have been quite active over the last months and let me address now in more details the situation of the data acquisition division in marine and land in our Gulf of Mexico multi-client library.

So, moving on page, on slide six. Accelerating the marine transformation plan, as we are downsizing our fleet from 18 vessels to 13. We will drastically reduce the number of streamers by about 30% from 2012 to 2014 as you can see on the chart. We did reduce the fleet choosing different options. The Symphony vessel was decommissioned in Q1 you know that already. One 3D vessels is been taken out from the seismic market and this will be finalized by year end to receive the new announcement.

Two vessel will be de-rigged by year end as well and one vessel is permanently converted into a source vessel, which mean that we will reach our 13 vessels target by the end of the year. The vessel names are confidential as the process is ongoing, but at the yearend as I said we will be operating only 13 vessels and all the cost associated to this right sizing have been accounted for in Q2 numbers. The significant effort will certainly bring some discipline in the market, we are part of a global industrial trend and the recent announcement made by some of our competitors are also encouraging as we may see some discipline regarding the fleet reduction.

Now going on slide seven and looking at the land transformation plan. On the land contract acquisition, we have been also very active to re-configurate the activity and implement a strong shift in the business model. In North America we have announced this morning that we are exiting the land construct business. We told you in Q1 that having to phase one of the most difficult winter season for our land operation this year and in this region and with the level of activity significant to reduce to 2014 – from 2012 sorry, we immediately adopted our regional organization. This was done in Q2, but in parallel we negotiated the transfer of this land construct business.

We successfully signed a binding agreement with Geokinetics to dispose this business by the end of October. In the Middle-East the deconsolidation of our design is not effect at the end of Q2 and the new Argas is up. In the rest of the world we also have restructured the business closing urgencies when necessary to keep our operations focused on some niche countries in high-end and technology markets.

As you can see in the graph in 2012 the land business was roughly $850 million revenue of which 65% were directly operated by us. In 2015, the land activity will generate roughly $1 billion revenue globally, but only 18% will be directly operated. So as you can see we have clearly shifted from a direct operating business in the very commoditized market towards business many managed JVs or partnerships either or geographically or related to a special segment such as the Seabed activity.

Moving on page eight and looking at the GGR multi-client and particularly focusing on stacks-size, stacks-size which would be ready on time for the Gulf of Mexico lease round which is coming up. As you can see the coming licensing rounds will take place in the western and central parks of the Gulf of Mexico and we’ll cover mainly the following areas East Breaks, Alaminos Canyon, Garden Banks, Keathley Canyon, Green Canyon and Walker Ridge. This is the region of ultra deepwater and the block alteration is happening every ten years in this part of the Gulf of Mexico.

When you look at the graph which shows how many blocks are going to overtake in such areas is directly the lease runs peaked in 27 in 207 in 208. With the one coming, you can see there is a very strong much with the location of IBALT our program one two and 12 which have been surveyed using the StagSeis technology. Here we’re talking about more than 20,000 square kilometer of data, which were required with the latest technology StagSeis. We started the IBALT program early in 2012 to prepare and be on time for these very big licensing rounds.

Given the complexity of the geology and sophisticated parameters of marine acquisition here we are talking about not only wide asset but longer set broad bound and I would say full asset we have the combination and the integration of our latest acquisition techniques with our unique processing and imaging capability and this provides our customer with the new paradigm in Subsurface imaging. The Fast Trax data has already attracted strong interest from our customer base with more than six companies already presenting the project.

Now let’s now review the Q2 fields, on slide 10 and starting with the group overview. We posted this quarter a resilient operating income in weak market conditions. As we said previously during the Q1 conference call we were expecting the second quarter of 2014 to be roughly in line with quarter Q1 and this is what we have delivered in the operational income level.

Total revenues were $689 million down 15 quarter-on-quarter both equipment and acquisition were down but GGR was slightly up. Looking at our Q2 profitability, operating income before non-recurring item was up $45 million with a 6% margin. This operating result was in line with our expectations and this quarter the marine acquisition division showed a very good operating performance. On the EBIT side, the result was $51 million including minus $13 million negative contribution from the equity from industries many related to the Seabed Geosolution.

In the context of accelerating and intensifying the transformation plan we booked in Q2 2014 accounts 287 non-recurring charges for four different natures $120 million are directly coming cost the cash component is limited to $96 million which fits within the envelop that we have indicated to the market at the end of December of $400 million. $37 million write-off are related to – 2728 all Brazilian surveys, which were required in Brazil with conventional technology. The two other charges were already known $74 million assets write off related to the Seabed activities which is mainly linked to the investment in the Seabed Geosolution JV in line with the announcement made by Fugro with majority shareholders on July 10th and $57 million one off cost attached to the April refinancing as it was mentioned at that time. As a result the net income was negative in Q2 at minus $325 million.

Finally our backlog as of July 1st reached 1.1 billion but as you can see our fleet coverage has been increasing we are now covered at 97% in Q3 and 40% in Q4. So let’s have a look at our second quarter operations division-by-division. On slide 11, and starting with the equipment division. The equipment division showed stable profitability sequentially in weak market condition. As we said earlier we expect the equipment market to go down roughly by 15% in 2014 due to the weakening demand from seismic contractors across the world.

In that context Sercel total equipment sale declined only 5% in Q2 compared to Q1 to reach $196 million in that declining market it is remarkable that Sercel is nevertheless increasing its market share. External equipment sales were at $148 million down 9% sequentially. Land equipment sale accounted for 62 and marine for 38% quite in line with the usual pattern of two third land and one third marine.

In land we were awarded through our guests the 60,000 channel count crew in Saudi Arabia validating the set up we are now in the Middle-East. The sale deliveries of the new land equipment 508 prospect have been completed and new orders have now been received allowing the system to be implemented particularly in North America.

Internal sales represented 24% of total revenue versus 26% last year, as we are downsizing the fleet and not ordering new equipment. In low volume environment the equipment division managed to keep a sustained margin at 20% as in Q1 despite pressure on pricing due to competitive environment lower market condition high level of euro dollar parity but thanks to efficient cost control manufacturing efficiency in the equipment division.

So moving to slide 12, in acquisition we are showing a solid operational performance in the weak market. Acquisition total revenue was down 14% at $481 million sequentially and acquisition external revenue was down 32% at $241 million sequentially. Internal revenue was $240 million representing 49% of total revenue versus 37% in Q1 2014. This increase in internal revenue is totally correlated to highly our multi-client CapEx and 52% of the fleet was dedicated to multi-client program this quarter. If we look in more detail land and airborne revenue was down 30% at $74 million. Land activities low in Q2 as usual as I told you we started a restructuring at that time and in airborne we were awarded some oil and gas contract but the mining market is very low.

Marine revenue was down 10% sequentially at $4.7 million. Acquisition operating income was $19 million this quarter showing some improvement from Q1 2013 in weak market conditions. The marine contribution was positive during this we operated 17 3D vessels including source vessels in operation and we have the solid operational performance with nearly the same high availability rate at 94% and the production rate at 92% as in Q1 2014. Land acquisition operating contribution was at the low level but no deteriorating despite the low activity.

Overall the acquisition EBIT contribution was positive at $6 million with a negative contribution from the equity from industries as I said many coming from the Seabed Geosolution.

Now if we go to slide 13 and looking at GGR, GGR showed globally a sustained profitability and we despite the low multi-client after sales. Q2 total 2014 GGR revenue were $300 million at 3% sequentially. Revenue for multi-client data was underlying $28 million stable and many driven by pre-funding revenue. Pre-funding sales were at $92 million corresponding to 53% pre-funding rate versus 51% in Q1. After sales were $35 million down 26% sequentially due to overall lower exploration spending and delays in operations and also permitting issue in Brazil. Amortization rate was 62% as anticipated.

The subsurface imaging and reservoir activities stood very well at $172 million and were up 6% due to a strong performance across the business lines. Demand is strong for imaging Geosciences and the reservoir services and software activity. GGR division profitability was quite stable sequentially GGR EBIT reached $62 million showing a 21% EBIT margin. So the GGR margin is in line with the bracket that we’ve indicated between 20% and 25%.

So now I hand the floor off to Stephane-Paul Frydman, who is going to comment in more details the financial figures.

Stephane-Paul Frydman

Thank you Jean-Georges. I’m on slide 15, so looking first to the cash indicator. Our cash performance in Q2 was in line with our expectations quite similar to Q1. Group EBITDA amounted to $194 million, a 28% margin and higher sequentially, equipment EBITDA margin was 25%, it was 20% in acquisition and 64% for GGR. This EBITDA combined with paid tax and significantly positive chance in [indiscernible] led to a $263 million cash flow from operations after non-recurring charges twice higher sequentially. The strong improvement comes from a better management of working capital notably.

The global CapEx was $256 million on this quarter quite stable compared to last quarter with two different elements. And industrial CapEx declined by 23% versus Q1 and with $63 million excluding $9 million related to Sercel’s lease pool. As said previously by Jean-Georges were put in place the strict militaring of our CapEx and we are reducing our target for the full of 2014 by 10% to be done to range to $50 million to $75 million.

R&D CapEx were stable at $60 million our multi-client cash CapEx were up as anticipated to $135 million remind that more than half of our fleet was dedicated to multi-client collusion this quarter. Those CapEx were 53% pre-funding like Q1. We are expecting the pre-funding rate to follow the usual hop up at terms throughout H2 and with account share market at 17% target for the whole year.

The combination of the cash flow from operation the global CapEx and $60 million of interest paid led this quarter to negative minus $53 million of free cash flow excluding cash from recurring items. Equity and cash non-recurring items free cash flow was $58 million and all in all over the H1 the free cash flow amounted to minus $210 million only comparable to H1 2013 where it was minus $190 million.

Moving to the balance sheet structure as of end of June 2014, I am on slide 15 you see that days on the 1.37 euro/dollar closing rates, good capital employed plus depreciation and write off amounted to $6.1 billion at the end of June then from $6.3 billion as of March end.

As Jean-Georges told you in the context of the acceleration and the identification of the transformation plan and in addition to the directly corresponding restructuring cost – this quarter from non cash and non recurring charges being accelerated depreciation of intangible assets.

First $75 million of write off related to the Seabed activities impacting mainly the value of our 40% stake in the Seabed Geosolutions joint venture in line with the announcement for the major stake holder last July by the 10th. It has to be noted that this amount is a special reverse of the $84 million of capital gain we booked last year consistently with the terms of the [indiscernible] transaction bringing back the value of opposition closer to its historical value.

On the multi-client side, we decided to impair $47 million related to the survey acquired in the year to 7218 Brazil. You remind that we decide a year ago to withstand the country level survey up to seven years from five year hoping we would not encountered additional delays in their sales process.

Looking at it now it appears that the Brazilian contract didn’t involve [indiscernible]. We are still in the general slowdown mode with October election filling to a certain uncertainty question mark on these run in 2015 and administrative process to get environmental getting longer and longer.

On such basis and given the very [indiscernible] the three years to come we decided to be back to original accounting pattern by generating the opposition of the [indiscernible] state. By doing so all in all the multi-client net book value amounted eventually to $1012 million as of June end based on multi-client CapEx closed at 63% and 62% depreciation rate in Q2.

Out of this value 10% is related to our North American on shore position and 90% to our off shore library as corresponding to our Gulf of Mexico position. Once again as illustrated previously by Jean-Georges, our stacks-size library has to be seen as an investment, which is the main course of our net debt increase over the last quarter an investment that will pay off in the two to three years to fulfill the high end debt that is for the future 2016, 2018 credit for our licensing rounds.

On the liability side the net debt amounted to $2.6 billion at the end of June corresponding to net debt to equity ratio at 75% and more important to leverage ratio the net debt to the last 12 months EBITDA at 2.7 times when it was 2.5 times by March and on the 1st April refinement [indiscernible]. This is obviously leverage that looks high in relative terms, but what is most important in that factor is it is essentially the repayment schedule which is showed on slide 17.

From that you point as usual that we manage directly opposition and our exposure to benefit from an extended time we do headroom, as you can see from the rough as we speak, there is no major debt instrument before 2019. And that’s mainly thanks to the financing operations, we successfully completed last April at a good market conditions.

I remind you that particularly we issued primarily a €400 million amount in Europe due 2020 at 5.875% and a week after in U.S. $500 million senior notes due 2022 at 6.875%. We used the proceeds of those issue to fully April says the first $60 million you will convertible bond due 2016 to fully hand those 2025 senior notes due 2016 and two third of the senior notes due 2017.

So thanks to financial operations, we extended the majority of our debt as and of June from an average four year to approximately six years and obviously we kept optimized cash cost of debt which generates 5.3 cash interest rate under senior debt financing.

The weather of course attached to these refinancing moves amounted to $57 million but being $21 million of product cash flow share. Concerning our short-term exposure, you remind that we renewed and raised up a year ago [indiscernible], we issued at that time in July 2013 five year maturity, U.S. that incurred facility amounting to $155 million and the Sercel three plus three plus three year maturity French amounting to $425 million.

A year after it was that the time to discuss with our French banks the extension by the one year of the maturity of our French, what we did in the past weeks, so it’s one year maturity extends well then successfully committed by July the 31st showing the confidence [indiscernible] exposure.

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

Jean-Georges Malcor

Thank you, Stephane-Paul and going on slide page 19 and to conclude. We are operating as I say in weak seismic market conditions due to cost cutting measures from our customer base and less predictable exploration spending. So CGG management as decided to intensify and accelerate its 2014, 2016 transformation plan. Looking at 2014, and as presented we are implementing a full range of actions. We saw reductions, set up of partnership, the land North America contract sales, site closures, OpEx and other less reductions.

The 2014 is real CapEx guidance is reduced by 10% to $250 million to $275 million versus the $275 million to $300 million. All this elements will have a positive impact from our business and on our resilience. For the rest of the year, we are anticipating the second part of the year H2 to be stronger than H1, we have a typical seasonality Q3, Q4 characterized by the strong Q4 in equipment and multi-client.

We have an intensified and accelerated plan, the group confirm it’s subjective of 400 basis point of EBIT margin improvement in 2016. But in conclusion, I also would like to take the opportunity to reinforce our conviction of the strength, the merit of our integrated business model with a strong focus on innovation. It is not the first time, this industry is facing the downturn.

We are ready to manage it, we are flexible, we know how to adapt and we have measuring place we’re really strongly when we come out of that difficult period. The strength of this integration is important; let me illustrate it with some examples.

In equipment, Sercel is to see new products in the field along with the Subsurface imaging and using and investing back to improve the product. This is becoming more and more critical as we are moving up in technology and complexity. The new 508 cross tech system is clearly opening up new opportunity and the change in business model.

As the equipment, more and more sophisticated customers will buy more and more acquisition and processing together. The quality of the data provided by our Subsurface imaging is becoming a very strong differentiator. We are also using our latest acquisition configuration with stacks-size in the offshore multiplying business side-by-side, we have high level processing and imaging techniques. And now our ability to deliver very quickly high quality image fast-track is a strong business driver for the multi-client.

In GGR, we know-how an offering an multi-client North American shale and conventional on the onshore market that which is able to deliver high value proposition. The shale optimization workflow integrate some multi-client long acquisition using our Sercel equipment, Sercel Subsurface imaging and seismic characterization. And we are now marketing several shale plays.

The GGR cross selling start to bear fruits, for example in APAC we have a dedicated Subsurface imaging center where the client have asked us to reinforce a team with work characterization people and we should at least generate 30% more activity with the new set up in the years to come.

To conclude let’s not forget that, even if we are and rightly so, focusing today on the right facing and on cost based reduction. The second leg of our plan is to rebalance the company portfolio in also growing the equipment and the GGR business in segments with image it long-term growth potential.

Thank you very much and we are now ready to take your question.

Question-and-Answer Session

Operator

Thank you very much sir. [Operator Instructions] Our first question is coming is from Caroline Hickson of UBS. Please go ahead, your line is open.

Caroline Hickson – UBS

Hi there, just my first is about your balance sheet, you’ve talked about it being your net debt-to-EBITDA being 2.7 times at the end of 2Q which is in line with your covenants. But, I mean are you confident that you can that you can sort of stay within your covenants going forward or could we see needing to access the equity markets?

Jean-Georges Malcor

You take the question Stephane.

Stephane-Paul Frydman

We’re pretty confident that meanwhile, we are seeing currently with our balance sheet, we are discussing it for no later than early July to extend the little bit of our lines, the matter which is for little bit of our lines so we are clearly at least with the present privilege and obviously we don’t need any capital increase. And we remind you that we have pushed back our main debt instrument to 2019 so there is absolutely no short-term needs and we…

Caroline Hickson – UBS

Okay thanks. And just secondly, in terms I see you’ve reiterated your EBIT, there some margin guidance target for 2016, but it doesn’t seem to be a mention of the full be in revenues and equally, can you confirm what you are guiding to for multi-client CapEx for 2014?

Jean-Georges Malcor

So yes, I take this one Caroline. So on the reason why we are confident on the guidance that with the cost reduction we put in place on the EBIT margin. We are quite comfortable to achieve this – this particular target and that’s why we are reiterating our vision. Now obviously on the volume and the size, the market condition now the one that we know today and we will have to tell very clearly how the things will deliver. But I would say almost regardless of the of evolution, we will be confident with our EBIT margin improvement level.

Caroline Hickson – UBS

Okay my question was actually about the revenue target that you previously indicated of over 4 billion that’s how you reiterated your margin guidance, but you – it doesn’t seem to be that I can see any reference to the revenue target?

Jean-Georges Malcor

Yes, well, at the timing Caroline you know very well that the market condition has been degrading, compared to where we gave the guidance. So we are clearly at the deep and the revenue will get up as we go from, 2015, 2016 is far too early to say that what I have seen in the – in the valuation analysis we are pretty comfortable with the delivery of revenue that we can see in the various notes.

Caroline Hickson – UBS

Thank you. And just on the CapEx, your CapEx now for 2014 in place significantly lower in the second half of the year and also I would start there as well can you confirm what your multi-client CapEx will be for this year?

Stephane-Paul Frydman

Yes, yes, Caroline on that matter we are still looking at the runs of 550, around 550 plus, so with exactly what we have remained on the multi-client cash CapEx side we see reduced by 10% in your store cash CapEx and answering also your question on 2015 horizon, I remind you that we will remain on the pattern where multi-client cash CapEx should decrease very significantly the 2015 to 2016 horizon. As we said together with Jean-Georges in 2015, 2014 we build up a significant position which was the stacks-size library in the Gulf of Mexico that explain mostly the debt increase.

And this investment will, somehow went up, so we will reduce to show multi-client cash CapEx with a reduced of you down to $400 million plus and the investment we are making in the Gulf of Mexico should generate cash significantly starting 2015, 2016.

Caroline Hickson – UBS

Okay thanks. That’s from me.

Operator

Thank you ma’am. We’ll now go to Mr. Bertrand Hodee of Raymond James. Please go ahead.

Bertrand Hodee – Raymond James

Yes hello everyone. Two question if I may, and the first one Sercel and the second on the multi-client library. I saw in your presentation this year that you expect the Sercel or the market equipment in seismic to be down 15%, in that context where do you see Sercel in 2014 in terms of revenues? And do you see a risk in your seasonally strong Q4, because of the Russia sanction and at the stage do you see or have you been able to see if Sercel equipment could be a subject to sanctioned for technology transfer? And my second question is on your multi-client library. So obviously which an all time at $1 billion, I think that 50% of that is linked to the Gulf of Mexico, can you give us the size of Brazil, a multi-client in that $1 billion. And also with this North America land, can I take this, will you keep your library or will you transfer that to get it?

Jean-Georges Malcor

Okay. So a lot of question, I’ll try to cover them all. I will start with the Russian sanction and to answer more globally the question, as you know CGG as always very strictly followed, full compliance with any sanctions decided and applied either by the European commission, the EU Supranational Bodies and we will continue to do so.

The time being as of today, we are not impacted, our export control teams good professional are closing monitoring the matters, we’ve the various government bodies to understand the scope and relevance for us in – if any of the sanction. But for the time being, we what we know, we don’t anticipate any issue. So that’s for Russia.

Second part on Sercel, when we look at the market, the seismic equipment market, as I said is expected to decrease by roughly 15% in 2014 and as you know Sercel is addressing two markets, the loan market which is really decreasing strong this year including our own internal markets since we are retiring vessels we are buying less from Sercel and the loan market which is more sporty and you know in loan which are sometimes not even going for the backlog.

Okay, in loan market you have to keep in mind or so the product mix which comes quite a lot from one quarter to the other, okay. And particularly, you know that when we sell electronic is more favorable than when we sell vibrators for example. And in this context Sercel has to manage both, the reduction in volume less internal sales and also the product mix and to come back to your point we are confident in this that Sercel will have a strong Q4. And I can also indicate right now that Q3 we’ll have a strong vibrator content probably the larger vibrator content even on Q3, because we have the quite nice sell there on the vibrator side. But the mix effect won’t be very favorable, but we’re confident on Q4 and we reiterate the fact that H2 will be bigger than H1.

On the multi-client, I will let Stephane-Paul to answer on the Brazil, but I will answer the North American with Geokinetics. We are very clearly in the press release we are not selling non-exiting our multi-client land business in North America. We are still interested in acquiring and marketing multi-client data in land North America, what we are disposing is our land acquisition contract, which means that if we want to acquire land North American data in North America, we will subcontract it to land operators.

Stephane-Paul Frydman

And looking at the short question on the weight of Brazil, I look at this whether I said, when you look at the billion dollar 10% is onshore, 45% very short for our offshore position is little bit to Gulf of Mexico so there is some impact and Brazil is around 20%.

Bertrand Hodee – Raymond James

Okay perfect. And one follow-up if I may on Sercel, you’ve been awarded in June if I remember well 50,000 60,000 channels as contract with Saudi Arabia, we’ve heard that the AG that there were two more data to be submitted to Saudi Aramco for 50,000 channel each. Have you submitted those bids and when do you expect the answer?

Jean-Georges Malcor

Yes, you’re quite right Bertrand. We indeed won the first one with 60,000 channel in far two-way technology because of the timing and we have answered, we have answered the two other ones already. So that the bids are in, they had been unsold in 508 cross technology and we are a expecting decision by the end of the year.

Bertrand Hodee – Raymond James

Thank you, Jean-Georges. Have a good day.

Jean-Georges Malcor

Thank you.

Operator

Thank you, sir. [Operator Instructions] Our next question is coming Shola Labinjo of TPH. Please go ahead. I’m very sorry, just one second we are going to take the question, this one is going to be coming from Mick Pickup of Barclays. Thank you.

Mick Pickup – Barclays

Good morning guys, thanks for today. And I just have a real quick question, one question, large part of what you are saying is Q4 you expect higher multi-client sales if I’m correct, you’re probably going to have more contract capacity into the markets at that stage as well. So how confident are you about this back-end of Q4 of this year, space that both you and PGS have taken a lot of multi-client capacity into the contract market and you’re relying on retails?

Jean-Georges Malcor

Yes, good point clearly Mick. First of all on the – the multi-client side, we have in the marine side, we are showing 40% coverage for Q4 at the time being, and we see largely contract coverage, because as you rightly said the multi-client will come to an end at least for us by largely to an end at least for us by the end of – by the end of Q3 at the end of IBALT and other service.

So the coverage, it’s a good indicator, the coverage of 40% we give is largely contract which is not a bad number at the time of the year. Second point, you are also right to say that the multi-client, we are expecting that to be strong in Q4, it’s a normal seasonality that we have in business, but it’s a little bit more than this year, because see I would put it differently, the multi-client, acquiring multi-client data provided that the quality of the data is good is a cheap way for company for oil and gas company to keep the contact and to keep the activity going at the time where they squeezed the traditional acquisition CapEx.

At the time being, we have a reasonable traction on the multi-client side, we have been you know from the beginning of the year delivering reasonable number not very high number, but reasonable numbers. We believe this will keep going in Q3 with usual pattern Q4 much stronger than Q3.

Mick Pickup – Barclays

Okay, I’m just following up on that with the ordinary restructuring what proportion of contract multi-client should we be expecting going forward on the 13 vessels?

Jean-Georges Malcor

Going forward we have indicated that it’s probably around 30%.

Mick Pickup – Barclays

30% multi-clients. Okay.

Jean-Georges Malcor

Roughly.

Mick Pickup – Barclays

Roughly not in fact.

Operator

Thank you, sir. Now we’ll go to Shola Labinjo of TPH. Please go ahead.

Shola Labinjo – TPH

All right, so I have three questions, the first was on the multi-client library, you mentioned that, I guess six sales a week in the quarter and I was just curious to know if that, if based on what you’re seeing currently even though you do anticipate strong sales in the fourth quarter, just based on what you are seeing and there is any chance that you might have to write-down parts of the library just like you did for Brazil? That was the first question. And then the second quarter is on 2015, it feels like you’re now comfortable with the transformation plan and I was just wondering at some point this year, you would be able to give the market, I would say more definitive guidance on 2015?

Jean-Georges Malcor

Okay, on the write-down on the library, we don’t anticipate any write-down at all, the – for the coming quarters and be, for the acquisition at the end of the year. We are comfortable with the library we have, it’s reasonably young library, okay all over the place with good technology the latest technology. So we are comfortable and that as Stephane-Paul say the write-off we done on the Brazilian one is a very specific one that we decided to extend a year ago. And the market not being there, we decided to clean it up and it was on the all technology as well, okay. But going forward we are comfortable with the library we have.

Now regarding 2015, obviously we this year 2014 is a big transition year for us in deploying the plan and accelerating and transforming the plan. If we have – if we have a more predictable and more stable environment and we’ll be happy to provide a little bit more guidance to the market. But I appreciate that in current situation globally it’s difficult to do it. So let’s talk a little bit about that later.

Shola Labinjo – TPH

Thank you.

Operator

Thank you very much sir. One I’ll go to Mr. Jean-Luc Romain of CMCIC Securities. Please go ahead.

Jean-Luc Romain – CMCIC Securities

I have two questions please, my first question relates to Russia again and the ability for Sercel to export there and having new sanctions that can maybe U.S. and European authorities? And my second question is about the joint venture you have with Baker Hughes. Could you give us more in terms of potential of that joint venture which seems to be quite important?

Jean-Georges Malcor

Yes, on the Russia I reiterate what I said. We are following very clearly the evolution of any of the sanction for the time being and what we know there is no impact in the sanctions modified in the coming months intensified or lifted we’ll see. But at the time being we have no impact for us.

Jean-Luc Romain – CMCIC Securities

So then it was for acquisition not…

Jean-Georges Malcor

No, no including Sercel it’s for the group.

Jean-Luc Romain – CMCIC Securities

Thank you.

Jean-Georges Malcor

Okay. On the JV we Baker use, your right to say that it’s an important JV, because it’s one of the first of its kind where we are trimming between let’s no effects involve at the field level in a seismic company and this is a interesting combination where we see that combining the strength of both Baker and our self we’re able to provide a complete solution to our customers. And at the time being this is shaping up quite nicely. We have a number of contracts which are being bid and evaluated including projects in of course North America that was a stop, but also including project in the Middle East, we are at the time being working – we have been involved and we are working on the project in one of the big country in the Middle East, but also in China.

Jean-Luc Romain – CMCIC Securities

Is that content for the equity matter?

Stephane-Paul Frydman

Yes, yes but the numbers they do.

Jean-Georges Malcor

For the time being, we are just sizing.

Stephane-Paul Frydman

Now the size again with this question, because the size is reduced and where we will show commercial corporation I’m not going through this Jean itself.

Jean-Georges Malcor

Just to be – to be clear on that, there are two ways to look at the benefit of the Baker alliance for us. There is what we do directly in the JV which is a small JV, but what is more important is the flow of activity that we JV generate in both companies. And then particularly for us on the reservoir characterization and for example on the one particular part of equipment and services that we have, which is called RoqSCAN.

Jean-Luc Romain – CMCIC Securities

Okay thank you very much.

Operator

Thank you Jean-Luc Romain. Our next question is coming from Mr. John Olaisen of ABG. Please go ahead your line is open.

John Olaisen – ABG

Hey good morning gentlemen, question on 2015 you have slide show and that you expect your exploration spending to be down 2% in 2015. I wonder what you based that on is segments from the oil companies and also that’s our exploration spending, how about seismic spending, seems that seismic spending is down a little bit more than exploration spending this year. So when they are expecting 2% decline in exploration spending next year will to expect for seismic spending please.

Jean-Georges Malcor

For the time being John for the 2015 we are expecting flattish condition to where we are today, the graph that we put is an external graph from an excellent company not our graph. It’s covering only the exploration part, don’t forget that seismic is also taking more and more importance in the production side, particularly in the Middle East.

John Olaisen – ABG

Do you have any, if you’re expecting flattish seismic spending somewhat using?

Jean-Georges Malcor

Roughly the time being, but the ability for 2015 will know little bit better by the end of the year.

John Olaisen – ABG

Okay and then on in the second half you are saying expecting pretty multi-client sales just technically will that be built as pre-funding or late sales, is it are you going to go without building it?

Jean-Georges Malcor

Both including pre-funding.

Stephane-Paul Frydman

Including pre-funding. John as we said meaning we initially roughly we had 50%, 52%, 53% pre-funding rate and we are targeting 70% throughout the year. So that’s we’re targeting significant pre-funding in H2.

John Olaisen – ABG

And is it the same as it is for PGS that it’s hanging on the big sales in the Gulf of Mexico over the…

Jean-Georges Malcor

I’ll leave PGS to his comment, we have a full plan on our side with the pipeline of customer that we are pursuing.

John Olaisen – ABG

But the improved multi-client phase in the second half does that depend on big sales from the do in 12 in the Gulf of Mexico?

Jean-Georges Malcor

John we don’t – we don’t comment on very sensitive information. The only indication I gave you is that we have already six companies very important company at Gulf of Mexico we have joined us on the pre-funding on stacks-size and watery space.

John Olaisen – ABG

Okay, thank you very much.

Operator

Thank you, sir. We’ll now take question from Mr. James Evans of Exane BNP Paribas. Please go ahead.

James Evans – Exane BNP Paribas

Hi thanks for taking my question. So one for Stephane and for Jean-Georges that’s okay. Firstly Stephane, you said you’re comfortable obviously with the – with your debt position, could you just clarify with your covenants on adjusted EBITDA are actually reported, still looks like you’re ready for the three times on the last 12 months on the reported side. And have there been any changes to the covenants with the refinancing of the French authority? And secondly Jean-Georges some very strong action I guess besides in employees that you’ve taken out. Anymore detail you can give on where that’s coming from, how much is just direct transfer to Geokinetics, how much is from the both and from the different division with the very well…

Jean-Georges Malcor

Okay, well I will probably start with the one – the one on people, if you don’t mind okay. And so as you’ve seen the plan is quite extensive in 1,000 people its – if you calculate it it’s a little bit actually close to its 11% been more than 10%. We are launching, we have launches plan and we have already decreased the headcount, but the plan is about North America, North of Europe, Asia, Latin America they are the main regions impacted by the measures.

In the countries we have been following the social process with consulting our unions and yes in their representative which is behind us now. So, we can move faster there and this 1,000 people are across the group, across the geography including some site closure as I mentioned, but again also in Bergen, Norway. But also Nigeria, Venezuela of course which is also impacting the North American business, we people leaving to North American operations.

And I like also to point out, because it goes on and on, but at the same time we’re reducing our cost base and we are letting 1,000 go. We are also recruiting 200 people by 2014 in our GGR business. So, it’s a double movement, it’s working on cost and reducing the cost base and then which is extreme important to adapt and to be flexible on the market. But at the same time is also to grow in areas where the market is sustained and where we see a potential including as soon as 2014.

Stephane-Paul Frydman

On the point you raise James, so first to net debt to EBITDA, so when talking about EBITDA, [indiscernible] EBITDA first we are talking about EBITDA before any non-recurring charges under the cash position under the non-recurring charges, so it’s the current EBITDA. And second you’re right that is an adjustment you can’t [indiscernible] which is as a dividend received from the equity and industries, which is somewhere the cash portion corresponding to the minority stakes we have in some companies like Seabed these kind of companies, that’s the first point.

Second point is looking at the equivalent base share; you have to know that it’s only applied to little bit of your alliance, so we are obviously seeing these kind of things which is club deal which banks that are very close to us and we are permanently discussing with our bank who have the institution and extend of the financial, you see that they are not at all, I’m sure it’s about [indiscernible]. So we have varieties with the situation and not to be the discussion we had with our deal.

James Evans – Exane BNP Paribas

Okay, Jean-Georges could I ask just a bit more clarity that 1,000 people is that entirely acquisition and is it?

Jean-Georges Malcor

No, no it’s across the board, it’s mainly acquisition by a big part, but we are wavering our cost base everywhere, including over rates including, the support functions in order to adapt the group to the size of the group to the global size of the group.

James Evans – Exane BNP Paribas

Okay, thank you.

Operator

Thank you, Mr. Evans. We’ll now go to Mr. Rob Pulleyn of Morgan Stanley. Please go ahead.

Rob Pulleyn – Morgan Stanley

Yes, good morning gentlemen, lots of questions but I’ll try and keep it short. The first one is, given the fleet reduction program in acquisition which has been accelerated is there any risk of further goodwill impairment given that I understand the lot of our goodwill rest on the fleet? That’s the first question. And the second question on your land charge, you highlight that 18% of your wider land business is operated, does that confirm with what you’ll be consolidating and the remainder obviously coming for your JV launch? Thank you.

Jean-Georges Malcor

Yes, the simple question, the simple answer to your second point is yes, the 18% are the one which are fully consolidated, the other one will come either for equity on investments or even not taken into account. So that’s very clear. On the goodwill impairment at the time being with the size of fleet, which is totally accounting for in our original impairment left here.

Rob Pulleyn – Morgan Stanley

Okay very clear. And maybe just one follow-up on your financings, if I can and could you give us an idea of the quantum maybe I didn’t hear it correctly, but the quantum of revenue that will be just into Geokinetics out of the land business?

Jean-Georges Malcor

Now in agreement with Geokinetics we have decided not to disclose the – this particular data, it’s really a private transaction, Geokinetics is not listed and they don’t used to comment on that at the moment.

Rob Pulleyn – Morgan Stanley

Okay, can you give us an idea of what the Land and Airborne line of acquisition will be for the full year?

Stephane-Paul Frydman

You have the idea of I mean, you have the idea Rob of 18% where we mentioned and, the airborne its business of…

Jean-Georges Malcor

Now your EBITDA you say 18% or we say on the base of $1 billion, so it’s 180.

Stephane-Paul Frydman

And exactly on the land side.

Rob Pulleyn – Morgan Stanley

Okay, no problem I’ll figure it out. Thank you very much.

Jean-Georges Malcor

Okay. In the interest of time perhaps we can take the last question.

Operator

Yes sir, our next and last question is coming from Christopher Møllerløkken of SB1. Please go ahead.

Christopher Møllerløkken – SB1

Thank you. Thank you for taking my question, I have just two short questions, first of all would you say anything regarding the sell outlook for 2015 would it be fair to assume that it follow the trend with declining exploration spending, so a declining seismic equipments market also for next year? And the second question, regarding six pre-funders you see for the stacks-size program in Gulf of Mexico, is it fair to assume that that relates to the three multi-client service you have been doing in the area, or does it only relate to the final through our survey, your currently shooting? Thank you.

Jean-Georges Malcor

No I can’t fill that, the six pre-funders are across the board on the free service. And on the question on sub-sell. It’s not too early to be view any indication for 2015 at the time being as I said before.

Christopher Møllerløkken – SB1

Thank you.

Jean-Georges Malcor

Okay. So, I think we should close the meeting now. Thank you for the questions, obviously we are fully available to answer any of your additional questions. For those of you who are taking a bit of a break, I wish you a happy festive break, they summarized and we’ll be on the bridge for, tackle with difficult market condition going forward.

Stephane-Paul Frydman

Bye.

Jean-Georges Malcor

Bye, bye.

Stephane-Paul Frydman

Bye, bye.

Operator

Ladies and gentlemen that will conclude today’s conference. We thank you so much for your participation. You may now disconnect.

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