TechnipFMC plc
Q1 2015 Earnings Call Transcript

Published: 23 Apr 2015

[Operator:]

Welcome to Technip's First Quarter 2015 Results Conference Call. [Operator Instructions]. I would now like to turn the call over to your host for today’s conference call, Mr. Thierry Pilenko, Technip’s Chairman and CEO. Please go ahead, sir.

[Thierry Pilenko:]

Good morning ladies and gentlemen, thank you for participating in Technip's Conference Call. I'm Thierry Pilenko and with me are with me are Julian Waldron, our CFO; Virginie Duperat, our SVP & Group Controller as well as Kimberly Stewart, Aurelia Baudey-Vignaud and Michele Schante of the Investor Relations team. I will turn you over to Kimberly, who will go over the conference call rules now.

[Kimberly Stewart:]

Thank you, Thierry. I would like to remind participants that statements made during the call which are not historical facts are forward-looking statements within meanings of the Private Securities Litigation Reform Act of 1995. Readers and listeners are strongly encouraged to refer to the disclaimers, which are an integral part of today’s slide presentation, which you may find on our website along with the press release and an audio replay and the transcript of today’s call at technip.com. Please note that we will refer to adjusted numbers which were prepared as described in Technip's fourth quarter and full year results press release throughout this conference call to ensure consistency and comparability we will continue to report and provide forward-looking information on an adjusted basis as is used by Technip for management's purposes. And now I will turn you over to Thierry who will go over the first quarter 2015 highlights. Thierry?

[Thierry Pilenko:]

Thank you, Kimberly. For Technip first quarter 2015 was solid despite industry headwinds, the group revenue grew 17% of operating income from recurring activities of OIFRA grew 43% and net income grew 28% year-on-year. As in the previous three quarters performance was contrasted between our two segments. In subsea revenue growth was 28% and it was a substantial improvement in both margin and absolute profit compared to last year. Order intake was robust at €1 billion including a very resilient demand for the Brazil pre-salt developments with Technip significant high-tech flexible award. Onshore/offshore continued to experience difficult operating environment and I must say that I'm not satisfied with this performance. Although revenue grew thanks to the new projects such as Yamal which was won last year. The operating profit of OIFRA fell to 24 million. Order intake was solid in terms of services contract with early stage work and PMC contract but much slower in EPC awards resulting in a low order intake value this quarter. At the end of the quarter Technip's backlog is over €20 billion and we have strong balance sheet with adjusted net cash of €600 million reaching 1.7 billion. We continue to reduce our cost and increase our efficiency, this translated this quarter into SG&A cost down $11 million year-on-year. I will now turn you over to Julian who will go over the first quarter results in more detail.

[Julian Waldron:]

Thank you, Thierry. So on slide 5, I will start with subsea, the quarter was a little better than we had expected. Vessel utilization was a solid 68% as is usually in the first quarter we have relatively little work in the beginning of the year in the North Sea but this year also in Asia-Pacific where we had no significant offshore campaign schedule. The Deep Orient was in West Africa and the G1201 went into and came out as a scheduled class dry dock. By contrast we have full utilization of our vessels for example in Brazil including our two new 550 ton pipelays four vessels [ph] one of which came on stream four months earlier than planned and is being well used by the clients. In the Gulf of Mexico we were working well for example on Julia with the Deep Blue and the Deep Blue is now transited to Europe. The G1201 is now back in Asia and as I said our upgrade has been satisfactorily done in Singapore and the 1200 is actually now just entered a first class certification dry dock. In Africa we were busy offshore with both GirRI 2 and Block 15/06 and the ramp up for the major campaigns in the second half of the year in West Africa have also being proceeding satisfactorily. I would note that our manufacturing plants were all busy, that includes Acu where productivity and progress as continued during the quarter. As you can see in the first quarter the segment grew both it's margins and it's absolute profit and this good momentum has set us up well for the rest of the year. So to conclude we have in subsea a segment that is currently outperforming our early expectations. Now by contrast moving to the next slide as Thierry said, we’re less satisfied with onshore, offshore. I will start with a couple of things which are working well. So the amount in particular is progressing very much according to expectations. Progress payments from our client are in-line and the module fabrication campaign in Asia and engineering overall are progressing well. The Yamal's revenue is starting to be material to this segment. Again as Thierry said the operating environment is tough. Some of them so the supply chain are under pressure and some clients continue to be slow and I would say even adversarial in managing changes and variations on projects. Well this is not knew we were commenting back in July last year about these trends and we had indicated that we expected a slow start to the year in mid-February but the attitudes were probably worsened since the start of the year. And the consequence is that we’re for example across some projects committing extra costs for example to manage additional engineering or project management without at this point the expectation of getting additional payments or reimbursements to cover them. So what's our response? Here are some elements in terms of how we’re reacting, firstly we’re intensely focused on cutting our cost. I will come back to that in a later slide. Secondly, through the next few quarters the focus that we have put on growing our services contracts and our project management consultancy for example and our reinvestible work should start to contribute an increasing share of our bottom-line. As we have said consistently overtime the amount will add to our profits. And last of course we’re intensifying the work with our customers to move matters on faster and we will during the year continue to finalize and physically deliver projects to customers that not all of which as you can imagine are contributing profit today. So having covered the two segments on slide 7, I will turn to the Group, make a few comments here. Revenue was up 17%, operating profit up 43% year-on-year and as we have noted the contrasting between the two segments with subsea being particularly strong. Foreign exchange notably the dollar boasted revenue, the total impact was 204 million spread evenly between the two segments but at this time of the year the mix between the different geographic regions meant that there was actually minimal impact on OIFRA. As you can see from the P&L we maintain the momentum in cost reduction. SG&A expenses were down 11 million year-on-year and 14 million compared to last quarter. Although I would expect currency effects to have several influence on the headline numbers I'm confident that we’re finding additional ways to reduce our SG&A and that we’re also starting to see momentum and response in cutting costs above gross margin as well and this has been as you know one of our key focus areas this year. Corporate costs came in at 17 million which is quite clearly below last year's run-rate. The below OE [ph] front were 22 million of non-recurring items, six million of restructuring and a further depreciation of INHB [ph] stake. The projected tax, the effective tax rate was 30% and I have got nothing particular to note on that. Turning to cash flow on slide 8, working capital was better than we had expected at the beginning of the year and was positive at 318 million. This reflects good milestone payments and down payments across a range of projects both onshore and offshore and subsea. Now we said in February that we saw working capital requirements would rise modestly this year. Although it's not being the case so far I see no reason to change that initial expectation and I do expect us to need working capital between now and year-end. Nothing new in that, it's perfectly in-line with the way we would expect our cash on our projects to move. We will pay our dividend in quarter two, so our cash I suspect because of that will go down this coming quarter. Last mid-CapEx was 58 million in the quarter and that’s fully consistent with our full year objective to reduce CapEx to 300 million. There were no divestments in quarter one, but we have found additional divestment opportunities on which we’re actively working and I would expect to close a couple of these in quarter two, in quarter three. So before handing back to Thierry, I will cover the objectives on slide 9, as you’ve read this morning we have confirmed our expectations for the group overall remain unchanged. But recognizing that at this point subsea is outperforming and onshore and offshore is underperforming. We raise our expectation for adjusted operating profit for subsea to the top of announced range so at around 840 million and we lower onshore, offshore to around a bottom of the announced range so around 250 million. I would note that forex is currently pushing revenue higher. It's had a positive impact on Q1 and a positive impact on backlog. And the good progress on subsea projects so far this year is probably pulling some revenue into this year as well. The consequences -- so I would note two further things firstly in onshore/offshore should ramp up over the remainder of this year, at this point I think caution is the right word and we do see the second quarter margin still quite low. I would note by contrast that subsea will have normal seasonality this year. And with that I will turn you back to Thierry to talk through the current market environment.

[Thierry Pilenko:]

Thank you, Julian we’re now going to talk about market environment and for those of you who are looking at slide 11 and I would say compared to two months ago publication of our full year results in mid-February down this slight changes in our news [ph]. First projects for which final investment decisions have been made continue to progress. There has been no change here in the current projects that have been FIDed. However negotiations as we said are increasingly difficult on the contract changes and valuation of this particularly for onshore/offshore projects. We have started to see deflation movement in the supply chain in particular for procurement for new projects and I believe that this lower input cost should benefit new projects or that should have getting some traction on new projects. And we continue unfortunately to see new projects being delayed as clients are reassessing their investment priorities and this is true to both for international live companies as well as national live companies [ph]. However as we said in February we start to see some maybe that some strategic projects could be prioritized that includes the projects in subsea and also projects in downstream petrochemicals falling up. A word on Brazil, the demand for the Brazil pre-salt developments continues to be very strong as is strengthened by the high tech flexible type award that we have this quarter. We go over this in more detail in few minutes but I can already tell you that we had a very positive reaction from our clients on the FMC Technology and Technip, our greater than alliance and greater proceed. So we’re discussing project with we have previously thought to be uneconomic as likely candidates for studies using for subsea abilities. We expect that the first four subsea conventional studies will occur in 2015 and that’s a resulting EPC award could happen as early as next year. Moving to slide 12, we had 1.5 billion of new orders in the quarter. The billion in subsea mainly compose of flexible supply orders was that positive news and compared with an average of about 1.3 billion the quarter for the last three years. So onshore/offshore as we said before is that around 500 million and is more in-line with the current market that we seek. Backlog is nearly stable at €20.6 billion and of course positive contribution from currency valuation was there on the backlog about a 1 billion contribution on forex. The coverage of 2015 has improved and with an estimated 8.2 billion of business to execute for the rest of the year our revenue objectives are fully supported. 2016 has also improved and we have for example of the 3.5 billion of subsea work booked for 2016 and I remind you that this does not include the PLSV long term charters that in joint venture nor reimbursable and service work for example in the onshore/offshore for PMC work. Moving to slide 13, this slide was first presented in our full year results and we felt necessary to comeback to it. We have had a strategy to enlarge our portfolio of solutions for some time and we must and will continue to diversify our revenue streams demonstrating and we’re able to work in different ways with our clients. So today close to a third of our activity comes from these new services in which we have being investing heavily going from manufacturing and equipment to reimbursable project and for example in March we took a step forward with the alliance with FMC Technology and I would like to comeback to this on slide 14 where we show the scope of our exclusive alliances FMC Technology and the purpose of the Forsys Subsea joint venture that we’re creating within the context of this alliance. I just want to highlight a few points, first, this alliance is between the two undisputed leaders in the subsea business. The products that we manufacture and the skillsets that we offer are completely and absolutely complimentary, we have no overlap. Second we’re both convinced that being involved together in the design phase of the projects can bring significant savings to our clients today. And third, not only we had the capacity to execute from design to installation but FMC Technology and Technip had the size and the capabilities to invest together in additional research and development to develop new products that can further increase efficiency all the way from the well-head to the platform completely seamlessly. So customer's initial reactions to the alliance as John grant told the market yesterday absolutely extraordinary. This alliance is major step to broaden our portfolio solutions with adjacent and complimentary products as I say. Many of the technologies are proprietary to FMC Technology or to Technip. This is why Forsys is offering what we call vendor based solutions but of course and you can see that on slide 15, in parallel Technip and it's affiliate vendors will continue to design generic or agnostic solution as we say for clients we prefer this kind of approach giving choices to our customers should increase our differentiation, the tool should increase our accessible markets. Moving to slide 16, we have an example of the pay-off of our recent investment in manufacturing in the latest award of the Lula Alto flexible supply contract in Brazil, 200 kilometers of pipes for the development of ultra-deepwater pre-salt field. These are unique exclusive products that are qualified for port which are the result steady focus and increasing investment in R&D, coupled with the right manufacturing capabilities in our Acu plant and the right PL is the vessels to install these pipes. And with around 17 FPSOs to be installed by 2019 more supply contracts of these type should come. Now moving to slide 17 and to onshore/offshore business. We’re also steadily growing backlog of new revenue streams based on our investment such as the recently signed [Technical Difficulty] project management consulting contract. Early stage projects like the FLNG for Brazil and Australia or the Coral FLNG for Mozambique all downstream operator technologies like what we did this quarter for the STAR hydrogen plant in Turkey or ethylbenzene plant in China. So good momentum in this new streams of this business for onshore/offshore. So as a conclusion the environment is undoubtedly challenging but I believe we’re uniquely positioned with the strengths of Technip. First we’re the newer backlog of projects which we will renew very selectively. We have a very diversified revenue stream. Early stage work, PMC contracts we have the ability to continue to invest in key talents and key technologies and strong balance sheet to support our strategy. Now our priorities in terms of operations are very clear and they haven't changed. First we need to make sure we maintain the good momentum that we have in our subsea projects. Second, we need a very strong focus particularly on client negotiations in onshore/offshore. We need to continue our cost and improve efficiencies and last but not least for the future we need to ensure, right now we engage early with clients to optimize our projects through early stage involvement developing Technip's know-how and technology. With that I will turn it over for questions. Thank you.

[Operator:]

[Operator Instructions]. We have the first question it's coming from Guillaume Delaby, Societe Generale. Sir, please go ahead.

[Guillaume Delaby:]

I would like to come back to your view on subsea, I'm not talking about your backlog I'm talking about 2015, 2016 about the market. Two days ago at the FMC Technology' conference FMC has been relatively optimistic to say the least regarding it's order intake by the end of 2015 with further acceleration in 2016 and if I try to compare that with your slide 11, where you show some let's say confidence as well I would like to ask if according to you something has changed, there are some regions which are changing. Is it only the fact that the supply chain cost are going down if you could even more elaborate than what you did previously.

[Thierry Pilenko:]

I don’t think something has changed very significantly compared to two months ago. However it is clear that our client particularly the AUCs a pretty large portfolio of opportunities in shallow and deep water and that the first action when there is a change in the market is to try to see which cost you can cut immediately but it's also to try anticipate what should be the cost environment and the solutions that you design to exploit those deep water resources. And I think what we have seen over the past few months is the first thing was very short term reaction what can be done to optimize cost of trading, change such as some conditions, get advantage sometimes of the capacity on the leading site but in parallel to that we see that some customers particularly the AUCs are looking at what are the ways we could reduce the overall cost of these developments by standardizing, by reducing the requirements, reducing the specification and by going to more fit for purpose solutions. I think some of the optimism that you may have heard is coming from the fact that we have seen some traction with standardization in particular. Now is there a region in particular. I wouldn’t say so, I would simply add that clients have started to really be very active on the elements of cost reductions that I was talking about, standardization, simplification, fit for purpose solutions and that’s why we have seen the absolutely formidable reception of initiative with FMC Technology. So you could see that for example in Brazil I believe the plan to develop [indiscernible] is still going full speed in the sense, it's still at the very conceptual stage but it's massive reserves. You can see that clients will have some strategic extreme projects are moving forward I think this is quite important to realize that after a period of maybe the reassessing the portfolio our clients are showing some key strategic projects into moving forward. For example, BP deciding an investment in gas in Egypt, we could be seeing in places like Mozambique and if we listen to our clients in Mozambique we could see decision to move forward again gas developments in the next 12 to 18 months. So I would not say there have been a major change in the environment but we start to see the reaction of our clients and I would say it is going in the right direction in the sense that they want to make this resources exploitable.

[Operator:]

Thank you. Mr. Mick Pickup of Barclays. Please go ahead with your question.

[Mick Pickup:]

Sorry to focus on the negatives, I just wanted to enquire about the onshore/offshore and obviously that margin which is disappointing. So couple of questions and probably actually tied into each other. So can I just check that your booking all the associated costs on VOs there is not a working capital somewhere else for payments you expect to get later in the year and this is probably the same question, if you expect this year to do somewhere towards bottom of the range such as you’re doing 4% now, now obviously one off in Q1 a weak Q2 says even of an exit rate of 66, 67 that type of number. Just wondering what it is that makes that step up, is it just the VOs or is there any recognitions coming through at that point in time?

[Julian Waldron:]

On the first point, we booked across we think we first of all that we have and we think we will incur to cope with the issues that we have now. None of us would ever sit here and say that it's going to exactly pan out like that when we get to the end of the project but I can confirm where we have and where we can estimate and where we have estimate those costs are fully in the books. Secondly in terms of looking at the rest of the year or the next several quarters. I would go back to the points that we made earlier in the presentation I think there are three or four years which are critical for us to intensify first. Regarding our cost and across the group that including onshore and offshore being proactive and maintain momentum both above gross margin and below gross margin is important to us. Secondly, we have put on a significant portfolio of services work, reimbursable work, project management consultancy, large projects like Sasol for example in the United States and the wait of that in our onshore/offshore segment is growth. Thirdly, without setting for you exactly a timeframe the amount of profit in the group that we will take from the amount will increase and lastly and you made this your last point and I will come to a last the management action from Thierry and comments downwards to help our clients reach decisions on execution plans to move projects forward and they are after to come to an agreement on how those cost should be shared that momentum will -- or that effort will increase and will be sustained across the segment. So I think those are the elements that we have in-mind for both the coming quarter but also the next several quarters.

[Mick Pickup:]

So the follow-up from that is so it sort of seems the back off of this year exit rate feels like a rate which doesn’t have anything special in it. Yet I look at consensus and consensus is still willing in the big percent into next year. So does that make more sense to you at the moment?

[Julian Waldron:]

We’re not commenting on 2016 at this point but I think I would probably suggest that we look back at what onshore/offshore in terms of absolute amounts of money has produced and what I would call more normal quarters over the last 2 to 3 years and I don’t have the numbers to hand but my guess is that it's somewhere between 70 million 80 million maybe on average a little higher than that but it's somewhere in those ranges in terms of absolute profit over the last 2 - 3 years. So I don’t think we consider this quarter to be either satisfactory or reflecting the underlying strength of the overall portfolio of the business that we have and the results of the actions that we can take on the segment over the next few quarters.

[Operator:]

Thank you. Mr. Phillip Lindsay of HSBC. Please go ahead with your question.

[Phillip Lindsay:]

Two questions please, first one slightly related to the previous question. So given how low the margin currently is within onshore/offshore. Have you actually sort of gone back and reevaluated the bid process for these projects? So could the current situation imply that these projects were maybe not bid appropriately at the start, perhaps you can make a comment to that. And then second one unrelated, just sort of came to explore strategically what you’re thinking of taking the business in the coming years. Obviously we’re all aware of the subsurfacing [ph] capability that you’re keen to add. You got it tied with FMC, it doesn’t sound like you want to make the business more capsule intensive in the current year, but you came to do something and maybe capitalize on some of the opportunities at the downturn might present and you have clearly got a balance sheet to do that so. Should we think along the lines of sort of extensions to current business lines or perhaps a move into a different direction? Thank you.

[Thierry Pilenko:]

Starting with process on onshore/offshore. I don’t think we have changed or seen an massive change in the way we're bidding over the past few years. I mean we always say that we wanted to diversify portfolio of projects in terms of size, in terms of clients, in terms of nature and between onshore and offshore. So I would certainly not say that those projects were not bid appropriate but of course we’re today in a different environment and I would say something which is probably different between onshore/offshore and subsea which is in onshore/offshore projects particularly some onshore/offshore projects. We did start from fees that were sometimes incomplete or fees that fees that we have not done ourselves and where there was an understanding with client that we would actually complete the incomplete part of the feeds and move as we move along with the project. This is not unusual actually to have an approach like that particularly with onshore/offshore where you can add resources or change the design as you go along. Now as you do that of course you expect that they will be variation orders to compensate for these elements. Those variation orders are the ones that are today more difficult to negotiate and we started to like align that in the middle of last year and it's obviously more acute today in $50 to $60 oil environment. Whereas for subsea because of the involvement sometimes very large fleet during the installation time, everything needs to be extremely well-defined from the beginning because you don’t have a lot of flexibility to change things as the project goes along. But now moving forward as we said we’re going to be continue to be selective but more importantly is what has happened over the past couple of years, 2-3 years is that first we have moved much more into services, a project management consulting, EP and construction management projects so where there is no construction or fabrication risk and of course the development of our technologies with the acquisition of Stone & Webster that we did 2.5 years ago and which has been a great success. So that is transition actually to your next question which is obviously we have invested quite a lot in hardware and expanding plants, modernizing and expanding our fleet and so forth so that for the past 4 to 5 years and we believe that we have the industrial tool that we need today and in fact of course we’re going to continue deliver the vessels that we have committed to deliver but we’re not planning for major additional capital expenditures over the next few years and in fact if you look at what we did with the alliance with Heerema this was a way to get access to very capable vessels without having to go through the capital expenditure. Now when you look at what we’re doing with the new businesses that we have developed whether it is PMC, technologies in onshore, whether it is the alliance with FMC Technology. It is a way to actually broaden the market, to get broader solutions, create new revenue stream without having to invest massively into new hardware and I think this is a strategy that we started to apply many years ago and I think this is a strategy that helps us be more resilient in the more difficult period like we have today and the strategy that will help us to grow faster when you’ve growth periods.

[Operator:]

Thank you. Mr. Asad Farid of Berenberg. Please go ahead with your question.

[Asad Farid:]

Most of my questions have been answered, but I just want to ask like three very quick questions. First as you highlighted that because of the change in the market conditions especially on with regards to the variation works you’re taking more EPCM work versus EPC work on the onshore side. How do you expect that will impact your long term margins for the onshore/offshore business over the next three years? Secondly Petronas reported their full year results yesterday, they are talking about cutting their 2016 CapEx by 37% versus the previous plan, even in absolute terms they are talking about cutting their 2016 CapEx versus 2015. Can you explain why despite these cost should mean so constant on achieving good utilization and returns on the capacity which you’ve added in that region and lastly four of your PLSVs in Brazil will be up for renewal over the next 14 months. Are you confident that these contracts can be renewed and can be renewed at the same terms which you had in the previous contracts? Thank you very much.

[Julian Waldron:]

On the first question I think in terms of EPC work we’re still across onshore/offshore very keen and interested in taking EPC work and we will continue to do so. What you’ve seen us do progressively over the last few years is to endeavor to take most of our EPC work on the back of early stage involvement and whether you look and if you look at our largest onshore/offshore projects, if you look at Yamal, if you look at [indiscernible] if you look at Jubilee, if you look at Braskem, those projects are advancing in a satisfactory matter. In the case of Jubilee that project was taken on the feet in 2009 delivered to the client last year with really nothing happening in between other than a good safety record, a good schedule record, a good cost and a good quality record. When we take EPC projects having done the feed, the client gets an excellent results and we get the results that we seek as well. So I think our strategy in EPC will continue to be to increase the amount of front end work we do, increase the amount of early involvement. To the extent of the wait of other types of activities, whether it's process technology as a result of the acquisition of Stone & Webster, whether it's pure services work whether it's reimbursable work. Some of that comes with higher margins than traditionally in the industry, the EPC business. I think from our point of view it also comes with a different risk profile and I think that mix of margins in risk profile is positive but if we can continue to work at the early stage of projects and taking risk continues to be something, we’re very interested and keen to do and on which we make money.

[Thierry Pilenko:]

All right, now let me take the question on PLSVs in Brazil. You’re right, focus on this will come up for renewal over the next 18 months for Technip. Now in these four PLSVs I would like to describe a little bit what we have there, we have two PLSVs which are actually at the end of the life and client may decide to keep them for a few more months depending on their operational priorities but the plan was for us always to replace those two PLSVs. It was the sunrise and the different factor which should get up not only with our fleet but the market. And this is why we had this plan to renew our PLSVs in Brazil. And then you had two PLSVs in Brazil then you have two PLSVs that were built in Brazil and which have been operating for two years but for more than two years, four years sorry and which are coming for renewal. Those PLSVs are Brazilian PLSVs, they have been incredibly efficient and the clients like them so there will be a negotiation of course around the renewal like they do all the time when the time comes but I do believe that we will be able to get this another long term contract. We should also remember what happened at the end of last year with the new PLSVs coming into the market as Julian was before Petrobras asked us to accelerate one of the two PLSVs that we deliver to them because there was a growing need for installing flexible pipes and which is completely confirmed by and supported by the fact that they have placed very significant additional orders for flexible pipes. So I don’t foresee any issue around the renewal of the PLSVs.

[Julian Waldron:]

Your second question I think was on client spending, I don’t think there is much more for us to comment on that, we expect the slowdown in activity to be prolonged and harsh we have said that consistently over the last few months. We remain cautious and I don’t think our view has changed and I think there are few areas where nonetheless we do see movement, one of those that where our clients can they are focused very much on sustaining the production that they have planned and introduction growth that they have planned. So when you look at the Petrobras spending priorities for example that’s definitely towards the pre-salt which is an area of interest or us. And as Thierry mentioned earlier we’re seeing the early signs of prioritization between what's strategic, what's financially giving a short term return and those things are perhaps marginally more evident that they were three months ago. But I don’t think we see anything in our customers' recent announcements but changes our overall view what the next couple of years is going to look like.

[Thierry Pilenko:]

If I may add a couple of things to that. When our client talk about spending, they talk about the global spending in general not necessarily making a difference between the ongoing CapEx, there is new CapEx. So it is hard to say what's coming from the ongoing activities particularly when you see the reduction in cost in rating seismic and other services. Now what's important for Technip is that we focus on the right projects moving forward. So you know the overall spending is a nice number to have but I think for me what's more important is to make sure we're engaged with the client on the projects that have the best chance to move forward and generally that requires the right technology and the right early stage engagement. If you’ve that you can much better gauge whether a project will move forward or not, whether it is upstream or downstream.

[Operator:]

Thank you. Mr. Christyan Malek of Nomura. Please go ahead with your question.

[Christyan Malek:]

Just two questions, my first two questions if I may firstly when I see asking to revise cost down, is that discussion also imply a lowest subsea margin for you instead of implied 15% you’re currently making, could that move structurally low overtime to 10 to 12 say. Secondly with some of your competitors realizing subsea margins and offshore if you see high single digits, do you see there will be a price for subsea contracts as they materialize and as you say the market stays prolonged and harsh.

[Thierry Pilenko:]

I think obviously when you’re getting into a period which is more difficult like it is today, we have seen that before and I will go back to what I said which is we need to be selective. In the previous period if you remember the year 2010 we have been able to be quite selective even if there were fewer projects and in particular we moved away from certain projects which was very, very intense competition and where prices didn’t seem to make sense. So we will continue to be disciplined here, but it's not just at the bidding stage. Again what we need to do is to be proactive at the early stage and not just look at you know reducing margins but reducing overall cost of projects and this is why we do what we’re doing with FMC Technology in the subsea work. Now this being said do we expect to see globally for our industry, margin decline? Probably overall. Now, we're not going to get into the guidance for the next years or so for Technip. But, in terms of backlog coverage, I think we're in a pretty strong shape compared to other players in the market and that should help us be more selective and be more resilient.

[Julian Waldron:]

And Christyan, I would just add one last thing, there is nothing in the subsea order intake in quarter one that would change anything that Thierry has just said.

[Christyan Malek:]

Right. And just as a follow-up, if I may? On the onshore, so variation orders you talk about that are getting more difficult to negotiate, which is more a macro thing, arguably that tends to be leading indicator, a charge maybe incurred if discussions are not successful. So can we be clear that this is not the case and there are no execution issues in the onshore portfolio?

[Julian Waldron:]

I think, Christyan, I'll go back to the question that Mick asked earlier, because I think that's the right way to view it. Have we taken in our P&L all of the costs that we concede are complete at this point? The answer is yes. Can we always, on every project, guarantee to you that that's the last word? Never; not this year, not last year, not next year and not five years ago. So I think both you and Mick have asked the right question, but I think the answer is the clear one that I've just given.

[Operator:]

Thank you. We have a next question from Robert Pulleyn, Morgan Stanley. Please go ahead with your question, sir.

[Robert Pulleyn:]

Changing tack a bit, two relevantly different questions. The first one in terms of housekeeping, if you wouldn't mind. In terms of Yamal ramp-up, what is the revenue contribution we should be expecting for this year, just so we can get a grasp of how much that's contributing in that division? And secondly, regarding your contract negotiations. Much of the focus is around price and cost, but could you maybe add a little bit of color to what extent your clients, particularly offshore, would like you to take further risk? I know you have got a very good backlog and you said you're going to be very selective, but I think that would be quite interesting in terms of how the market dynamics are working? And then thirdly, if I can revert back to the variation orders. May I just ask, is this many projects and clients or really just one which is making this impact? Thank you very much.

[Thierry Pilenko:]

Do you want to talk about Yamal, Julian?

[Julian Waldron:]

Yes, so on Yamal, I think, three or four months ago we were probably thinking that Yamal would be €700 million - €800 million of revenue this year. It'll be north of that. I would expect actually today, given a little bit of currency impact plus, actually, the good progress on the project that we'll be over €1 billion this year.

[Thierry Pilenko:]

Now going to your question about the risk offshore. When we talk about the offshore world let's talk about the platform world. There are not very many large platform being discussed at the moment. Many of them are in the relatively early stage, like fruiting LNG for example. I would not say that we see something very different in terms of terms and conditions. I think for the execution of the offshore projects the key is going to be the workload and the capacity of, in particular, the Korean yards over the next two to three years; and how they're going to go from a very intense and, I would say, almost an overload situation with many projects in parallel, which they are currently delivering to a much slower environment. I would expect that if we see a lower pace of awards in offshore for Korean yards that they will start to re-internalize their delivery; therefore have less subcontractors. So I would say that in that case they would probably have a better control of their costs and a reduction of their costs and better control of their delivery, which is going to contribute to the overall decrease or deflation of cost of projects. But this transition in the -- particularly the main yards, is going to take probably 18 to 24 months. Now about the deals, it's not to one project. There are a few projects on which we're discussing deals with clients and this is not different from what we have been doing for a very long time. It's just much more difficult, because our clients are much less flexible in terms of cash.

[Julian Waldron:]

Rob, I think it's just going back to when we first started talking about this in July last year. I would say that the projects on which these discussions are taking place has not really changed over that time. It's pretty much the same projects, so not one; it's not everywhere either.

[Robert Pulleyn:]

Okay, that's very helpful on those issues. Just maybe sorry, one follow-up if I may over to Thierry, in talking about -- that was a very interesting comment about the Koreans. But also regarding subsea, I know we had a question earlier in terms of the pricing war in subsea, but in terms of the risks that you would take in terms of installation there; whether it be around weather or whatever it might be. Are you seeing any pressure to take more risks in that market as well as -- on top of the answer you gave for the other markets? Thank you.

[Thierry Pilenko:]

Well, as usual when you go from a period of high activity to lower activity the pendulum is swinging back. I haven't seen -- we don't enough data points at this stage. People think three months or four months of lower prices is a long time, but it's not that long. So we don't have a lot of data points, but I would expect that clients, for example in the North Sea, would start to push for us taking weather risks or us taking contingencies for weather. So after that that means you have to judge what contingencies you can take and then the commercial exercise starts. But yes, we will probably see the pendulum swinging back a little bit, particularly on the weather side.

[Operator:]

Thank you. Mr. Nicholas Green of Bernstein. Sir, please go ahead with your question.

[Nicholas Green:]

Can we talk a bit about the flex pipe award in Brazil for a moment? On slide 16 you talked about the significant opportunity there and there is a big opportunity. Given that you are fairly near full capacity at the moment how should we be thinking about your ability to capitalize on that opportunity? I suppose the same question in reverse is, are you concerned that that opportunity may go to other players, because you don't have capacity to service it? That's my first question, thanks.

[Julian Waldron:]

Two comments I think to make. First, Acu is running at its full available capacity today. Its full available capacity today is not what it will be in 12 months' time and not what it will be in 24 months' time. This is a high-technology, high-specification plant; it takes time to ramp it up. So our capacity will increase in Brazil over the next two years as Acu moves from startup phase into fully normal run phase, if you will. And that's a couple of years' worth of process. The good news is and it's one of the reasons why I think we're seeing momentum across our subsea business at the moment, is the last nine months in terms of ramp up have been according to what we expected and what we wanted. In other words, the teething issues that we expected to see we have seen those and we're working through those. The ramp up in productivity that we expected to see we're seeing that as well, so far so good. But the capacity will be bigger in two years' time. In addition, we have an ability in Brazil and our client has worked with us in that way before to supply Brazil not only domestically but also from Le Trait in France. We've done that on a few awards over the last five years and that plant is qualified and does that. We're as you know, putting €68 million, a modest amount of money to upgrade the capacity in Le Trait over the next two years. So there's modest CapEx and a lot of productivity improvement are going to come to increase our flex capacity worldwide.

[Thierry Pilenko:]

Yes and I think in terms of organization that's a detail, but it's quite important. We have created about a year and a half ago now the concept of one manufacturing for Technip, so that we have a much more seamless organization across our plants which helps in case a company like Petrobras, for example, wants to get access to other plants of Technip. We have a lot of synergies between the two plants in Brazil where, for example, we can start fabricating in one plant and finish in another plant depending on the work load. The same thing with Le Trait and in the future with Asiaflex. That's quite important that we keep this flexibility, because that helps us increase revenue and capacity without having to actually reinvest in new plants or new production lines.

[Nicholas Green:]

Yes okay, so just to confirm then, you are open for business for more project awards, more flex pipe awards in Brazil? You would have capacity to take on and win another couple of awards?

[Thierry Pilenko:]

We have. And as I said in the script earlier, we believe there will be more projects coming our way, because so far we're still the only ones to be fully qualified for the port flexible pipes.

[Nicholas Green:]

And then just my second question, just a quicker one. In your prepared comments you mentioned that the alliance with FMC had been discussed since over a year ago; it had been in progress over that year. So just a question then, would that alliance still have gone ahead if your proposed deal with CGG had gone ahead? And should we be inferring that that was case, the strategic logic that underpinned that CGG deal that in some sense still remains unsatisfied, you still wish to plug that gap, it hasn't been plugged by the FMC collaboration? Thanks.

[Thierry Pilenko:]

It's a very good question and thank you for asking this question. Well, first of all we have been working for about a year, so that means you can imagine that we have worked in parallel on these two initiatives. I will explain in a minute why I think some of these initiatives are actually complementary. The thing we did with FMC Technology is, why did it take a year? It's because we wanted to make sure that before embarking into, for example, the joint venture or the alliance, we would have certainty about our capability, as combined companies, to significantly reduce the cost when we work together, by reducing the interfaces by standardizing, by bringing the people who work on SPS and SURF, which are the two main components of subsea together and we started to work on actual projects; and projects where both FMC and Technip were involved, but separately in the past. We said; what could we do today to improve the design and improve the operability and improve the installation, improve the cost? And we found out that on these projects we could, with what is available today, reduce the overall cost by working together, reducing the interfaces; increasing the standardization, reduce the cost by about 30%. Once we were convinced about that we said, then, how do we move forward? And we said, well, we're going to move forward by creating an exclusive alliance and then by having a joint venture, which is going to be working on these early-stage concepts and then, of course, the two companies will execute the projects when the clients are ready. So that was the principal. Now in parallel to that we felt and we have been feeling now for quite a number of years, coming from the input we're getting from our clients, that it was becoming more and more important to be successful with a full design of an offshore development project, including the platform, the subsea systems and so forth. It was becoming more and more important to have subsurface competencies and skills. When we looked at CGG we were not looking at becoming a seismic data acquisition company; that was never our intention. We were looking at acquiring the skills around data processing; data interpretation and reservoir and well performance, so that we could have a complementary solution, which includes both the subsurface and, i.e., the reservoir itself, the well and the subsea systems. So our strategy hasn't changed. In fact, the fact that we built with the -- with FMC a very comprehensive way of developing subsea makes the competencies on subsurface even more attractive today. But as far as CGG is concerned, we have turned the page. We have turned the page. We will be looking for opportunities to develop those subsurface skills through either organic growth; bolt-on acquisitions, smaller size acquisitions. But we still take this direction, but certainly not at the scale of what we discussed at the end of last year. Is that clear?

[Operator:]

Thank you, sir. We have time for one more question, Madam Amy Wong of UBS. Please go ahead with your question.

[Amy Wong:]

Just one question from me. In terms of your tendering pipeline in your subsea EPC business, could you give us a sense of in terms of the projects that you're currently negotiating and working with clients? What is the timeframe for the offshore campaign, generally for the bulk of those projects? Thanks.

[Thierry Pilenko:]

I would say the projects that we're discussing now are for offshore campaigns, 2016/2017. Most of and some of them could be a little bit even beyond that, but as you can see most of the work for 2016 is not fully booked, give or take. Okay, well, ladies and gentlemen, thank you very much for attending our call and have a good day.

[Kimberly Stewart:]

Thank you, Thierry. Ladies and gentlemen, this concludes today's conference call and we would like to thank all of you for your participation. As a reminder, a reply of the call will be available on our website in about two hours. You're invited to contact Michele, Aurelia or myself in the Investor Relations team. Once again, thank you for your participation and enjoy the rest of your day.

[Operator:]

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