Gaztransport & Technigaz SA (GTT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you all for standing by, and welcome to today's GTT 2020 half year results. [Operator Instructions] I must advise you all that this conference is being recorded today, Thursday, the 30th of July 2020. And now I would like to hand the conference over to your speakers for today. Please go ahead.

Good morning, everybody. My name is Philippe Berterottière. I'm the Chairman and CEO of GTT. I would like to introduce to you the GTT team with Eric Dehouck, the [ Chief Operating Officer ] of GTT, who joined the company in last April; and Marc Haestier, the Chief Finance Officer of GTT, who is going to accompany me in this presentation. Well, first, I would like to add some quick words to define what GTT is. We are a French technology and engineering company. We've begun our operations more than 50 years ago in designing LNG technologies, membrane systems, and we continue to do so. Our turnover in the first 6 months of this year has been EUR 204 million, and the net income has been EUR 116 million. So we design, we develop technologies. We provide the detailed designs of these technologies for applications on ships, and we assist our licensees in the construction of our systems. The key highlights of GTT in the first 6 months are in the core business we obtained 18 orders, 12 orders for LNG carriers, 2 orders for FSRUs -- for FSUs, 1 order for FSRUs and 3 onshore storage tanks. What is remarkable in this figure is that 1/3 of these orders are not for LNG carriers but for storage solutions that we developed over the years. New service contracts, we obtained several contracts this year with CMA CGM Group, with Excelerate Energy in the U.S., with Knutsen and with Fleet Management in Hong Kong. So this activity is generating new businesses. We obtained a new license agreement with a shipyard based in Russia, Zvezda, and which has passed almost immediately a contract for 5 LNG carriers. We -- in the first part of this year, we acquired 2 companies: Marorka, a company based in Iceland, a company providing smart shipping solutions; and also a French company, a small French company, named OSE Engineering, which is providing expert smart algorithms that we found very appropriate for complementing our digital offering. We have 2 new directors with Mr. Guiollot from the ENGIE group, who is replacing Judith Hartmann; and [ Ms. ] Isabelle Boccon-Gibod, an independent director replacing [ Ms. ] Leroy. We propose an interim dividend of EUR 2.50 per share. It would represent an increase of 66% compared to what we paid last year, and that should be paid on the 3rd of November 2020. So we -- when we look at what we achieved in terms of contracts, we can see that we are covering the entire LNG value chain. We are in the -- very close to the production with the ice-class LNG carriers. We are in the storage solution with very large FSUs. The 2 FSUs we signed for 360,000 cubic meters are the largest, by far, the largest LNG floating structure ever built, if ordered at least, but we are going to build then. Conventional orders, of course. Mid-scale, it's a segment which is new and the segment which is new for 80,000-cubic-meter LNG carriers. It shows that there is a demand for [ regional ] distribution of LNG retail in a certain sort, in a certain manner, retail LNG. Very large FSRU with 270,000 cubic meter, we built one in the past, but it's a very, very big FSRU. And as you know, it's a domain we are dominating, so it's quite good to see that back in our order book. And onshore tanks, with 3 tanks. So we have a strong level of order book in our core business. We have 135 units in the movement. In fact, we obtained 18 orders in the first 6 months and we delivered 16 ships. On the new businesses, we obtained -- we have 18 units. And in fact, in the first 6 months, we did not obtained any orders, but we delivered 1 bunker ship to MOL and Total for the CMA CGM operations. But just to look at the COVID-19 situation. Well, first of all, I would like to say that the health of our employees and their families is absolutely fundamental to us. And you know that basically we are a company of engineers. We don't have production facilities, so it's absolutely key. No severe case has been reported. We apply very strictly recommendations to employees at head office and abroad in line with those of the French and local authorities. And whenever it's meaningful to enforce, then we are doing so. At the operational level, employees are back at the office, except those who are at risk. Subsidiaries, same policies than head office, depending on local regulations. You know that we have several subsidiaries all around the world. Main risks, the -- it's delays in the timetable for the construction of vessels, which may lead to a shift in the recognition of revenue from a year to another. Well, to be candid: We experienced some delays but nothing significant and nothing -- no significant impact anticipated on our 2020 revenues. Of course, the risks related to the impact of the epidemic on the global economy remain today difficult to assess. LNG market is based on long-term prospects and financing, so that may be not so seriously affected. We can see that the situation has improved in the Asian countries, which represent more than 80% of -- or more than 60% of the worldwide imports of LNG. So our business is operating normally despite the particularly difficult circumstances. And of course, we monitor. We closely monitor any changes affecting the market in which the group operates. If we want to look at our core business with the market and activity update, here you can see on this chart the forecast from Wood Mackenzie. And we can see in red that's the forecast, [ I'll call ], they provided in the second quarter of 2020. You can see it's a bit below what they provided in the last quarter of 2019, but it's still above what they said at the end of 2018 and at the end of 2017 and '16. So we are still on a fairly optimistic view of how the market should increase. We expect that in 2020 the market is going to increase by 3% instead of 6%, but well, it's a business which should significantly increase despite the current situation. We think that the long-term demand trend remains sustained with an average growth of about 3.9% between 2019 and 2035. For example, if we look at China, we can see that the demand remains dynamic. We are expecting that imports will grow by 4% in 2020 despite the COVID situation that has strongly impacted the country, as we know. The long-term growth should remain strong, and we could expect an average rate of growth of about 5%. The -- a factor which has been quite interesting this first part of the year has been the cancellation of cargoes in the U.S. You know that many cargoes has been canceled and what has been the impact on the LNG industry. The American LNG prices were below the Asian LNG prices, something which was not expected at all, of course, and very significantly lower than spot prices. Well, in fact, due to the particular structure of these contracts where the take-or-pay clause is concerning only the tolling fee, the liquefaction cost, we consider that these cancellation don't have a major impact on the LNG companies in the U.S. Well, less shale gas exported, so -- and probably lower demand for shale gas companies, but for the LNG players, whether they are the American LNG companies, the LNG owners who have long-term contracts, the impact has been none or minimal. The current situation, in fact, in our opinion, could even reinforce the LNG for future contracts, as the flexibility which has been demonstrated by this crisis has been, in my opinion, very highly appreciated. In fact, the offtakers are paying the tolling fee, the liquefaction costs and that's it, while in other contracts they are paying the entire cost of the LNG. So it's a much more costly exercise to -- not to take a cargo in other operations. So once -- and that's already the case, by the way. Once American LNG is back in the money, the -- this flexibility provided by the current American pricing structure may be very appreciated by offtakers. Well, a view still from Wood Mackenzie on the -- and very recent, dating from the second quarter of 2020, on the long-term evolution of the demand for LNG. And we still see that, by 2035, there is a need for 240 million tonne per annum. So there is a need for new facilities. It will come back even though we do understand that in the current situation people are postponing their decisions. They would like to see what is the -- what is going to be the situation of the economies post COVID, but we -- or Wood Mackenzie do consider there is a very important need of LNG in the future. When we look at the liquefaction decisions which have been taken, we told you in February that it's leading to 85 -- a need for 85 LNG carriers. If we take into account the ships delivered -- or ordered in the first part of this year, we come now to a figure of 77 ships needed. You can see on this chart the expected delays in the availability of the facilities, which may lead you to think or to consider that these ships may be needed a bit later than originally, as some of these facilities are delayed by the COVID-19 situation. These assumptions are coming once more from Wood Mackenzie. We don't have a particular view on these delays, so it's really figures from WoodMac. And the computations on the number of ships, that's coming from us, and thanks to that, we arrive to this figure for expected orders for the next years. Well, a fact which has been very important in these first 6 months, that has been the orders for onshore storage. We did not signed for -- any for 40 years, but we produced a small one -- small ones meanwhile. We entirely -- we revisited the technology in order to have a state-of-the-art [Audio Gap] I will say that, in fact, this new -- this revisited technology is beginning to convince, with 2 orders for very large storage tanks and one for small-size tank. We are going to continue to work on that, as it's a way of diversifying our activities. And we continue to believe it's exactly in line with what we believe: Technology can transform markets. So coming with the revisited technology with something which is more cost effective or something which is cleaner, you can open demand which was unseen before. If we look at the carbon footprint of our technology. It's 24% less carbon intensive than competing technologies. So while it's something which can convince people, bear in mind that our technology has other advantages, one of those being a smaller cost. The -- well, as far as our long-term estimates are concerned, we are still on the -- for LNG carriers, between 285 and 315 units for the next 10 years; for VLEC, between 25 and 40 units; for FSRU, between 10 and 20 units; for FLNG up to 5 units; and for onshore and GBS tanks, between 15 and 20 units. Let's look now at "LNG as a fuel" developments. You know that LNG is the only mature solution allowing comprehensive environmental compliance. So if you look at SOx, with LNG you have no SOx. If you look at NOx, with LNG you have almost no NOx, or you have NOx with a particular engine. With the other engines, you have no NOx. With CO2, you reduce the CO2 footprint by 25%. And particulates, you have no particulates. So in fact, LNG is in advance of existing and anticipated environmental regulations, and LNG is part of the solution for clean maritime transportation. In fact, LNG fuel keeps expanding in a very challenging shipbuilding market. The demand is very low in the current situation. We may expect a rebound at a certain point of time. We don't know, but for the timing, it's very low. So difficult to bring, to come in front of you with orders while there are very few orders. [ And these ] orders, they are LNG carriers. [ Well, that ] -- but in the rest of the market, it's very [ quiet ] [Audio Gap] recovery at a certain point of time. We are not going to say when, but there will be a recovery. And we do hope that our LNG storage solutions are going to be successful at that time. I will not undermine the fact that, whenever an industry is starting, well, everybody is trying to propose his solution. At the case in the tank solutions, and we are competing with what we call type C, it's bottles, big bottles, big cylinders storing LNG. And type B, it's independent bank -- tank with square shape, prismatic shape. We are competing with that. We do think we have advantages. And so it's up to us to promote our technologies and to make sure that the market is fully conscious of our advantages. Well, as far as services are concerned, what has been quite remarkable, that in these 6 months, we signed for 4 new service contracts with CMA CGM, with Fleet Management, with Knutsen. So I will say that the platform of services we are offering is really attracting shipowners. We do intend to continue to develop it. We are going to say that, but it attracts LNG carrier owners, and it attracts also owners of container ships such as CMA CGM whenever they are turning to LNG. We do intend to continue. And the sense of the acquisition of OSE Engineering, it's a tech company specialized in smart algorithms applied to complex industrial and technical problems. So as you see that, you can see that, well, through the various acquisitions we are making we have an idea of what is going to be the digital offering we are going to put in place in the years to come. Now I would like to give the floor to Eric, who is going to present to you the strategic road map.

[ Okay ], Philippe. Ladies and gentlemen, good morning. So as I said, this is actually what have been explained by Philippe. We would like to present to you the strategic road map -- so this is actually of the presentation done by Philippe. This slide is clearly to take the opportunity to take a step back and look at our strategic road map. As you can see, actually GTT has built a step-wise, step-by-step approach built with determination and rigor. So if we go through this evolution, we can see that at the beginning there is the core product, I will say, which is the tank for the LNG carrier. And step by step, we went from an LNG carrier to being capable of doing some offshore and multi-gas application. This is the enhancement phase. Of course, every day, the team is trying and is actually improving the products and improving the technology, either the Mark technology or the NO technology. And then from this technology improvement, we go for more advice and more services towards our customers. And then being more in the services business, also we clearly see that we want to also enlarge our customer base and using that technology in order to address the LNG as a fuel market and as well the tank, the onshore tank, market as described just by Philippe. And last but not least, into this strategic road map there is this strategy to continue to transform the company and acquire some companies which are in the digital and intelligent artificial market. So this is the process we are going through. And as you can see, we invest in technology, including digital and artificial intelligent technologies. We invest in services for our customer. And we do that on a market which we believe will play a very important role in the energy transition, which mean that really our goal is to improve the energy efficiency, the performance for our customer. And that's why actually we have now a new baseline, which is the technology for a sustainable world. Marc?

Good morning. I will now take you through our customary tour of the financials. Starting with the order book at 30th of June, which stands at EUR 638 million, and on the right you see how that pans out in terms of revenues in the coming year. First, for 2020, you see that, if you include the revenues -- this is only core business. If you include the revenues for the first half, the expected revenues already, I would say, in the bank are at EUR 374 million, which is perfectly spot on with what we expected at the end of last year; and then EUR 266 million for 2021; and EUR 150 million for 2022. And these, of course, numbers will increase as new orders come through. Now financial highlights for the semester: total revenues, as Philippe indicated already, up 66.2%. The largest increase, of course, relates to royalties to the core business with an increase of 71% from LNG carriers. This is, of course, on the back of the very strong level of orders we had in 2018 and 2019. Service revenue, on the other hand, suffered, of course, from the conjunctural impact linked to the epidemic and notably the difficulty for people to travel to perform services on ship or at yards. So the service revenue overall decreased compared to last year by 13%. EBITDA up 92.7%, basically for the same reason. Of course, the company is growing, so that also translates into higher charges, both external charges and staff costs which are increasing, respectively, by 28% and 33%. CapEx slightly on the increase, part of this increase being linked to the acquisition of Marorka at the beginning of this year. And then the interim dividend of EUR 2.5 mentioned by Philippe, which will be paid on the 5th of November. The 3rd of November is the ex-dividend date. Focus on the cost base. As I mentioned already, the external costs are up by 28%. This is mainly due to the increase in activity and requirement for more subcontracted engineers. And that's why you see this increase of 54.7% under the subcontracted test and studies portion. On the other hand, the impact I mentioned of the difficulties to travel had an impact or a positive impact, in a way, on our travel expenditure which reduced by 20% in the first half compared to last year. Staff costs on the increase are, as I was saying, the company is growing, so that is also reflected in our head count. And the fact that also the company is making good results also has an impact on profit-sharing schemes, which are on the increase. That's it for me. I will hand back to Philippe.

Thank you, Marc. So what is our outlook for the years to come? In fact, we confirm our guidance. For 2020, we consider that the consolidated revenue is going to be in a range of EUR 375 million to EUR 405 million. The EBITDA of the company for 2020 is going to be in a range of EUR 235 million and EUR 255 million. And the dividend for 2020 and 2021 will be at least corresponding to a payout of at least 20 -- 80%. So we confirm what we told you in -- last February, and we are quite glad to see that after the period we came across. Well, that is the end of our presentation, so now we are going to be very pleased to answer to your questions. Yes?

Two candid questions, if I may. First, could you give us some qualitative colors about how do you see H2 in terms of order intake? And basically you spoke a little bit about the U.S. market. My question is also how is -- your view has changed regarding Qatar. So this is my first question. And my second question is regarding the strategic road map. You have been speaking for quite a while about gas-handling technologies, but in fact you haven't been very vocal. Could we have some colors on this subject as well?

So qualitative feeling about orders in the second part of this year. I think, for the reasons we explained in the chart where we are highlighting the liquefaction projects and the need for ships and for transporting the LNG quantities produced by these facilities, there should be some orders in the second part of this year. Of course, we are going to see, but normally the flow of orders should continue in the years to come. The second point, about Qatar: Qatar, it's, first of all, the -- Qatar has invested in an American project which is named Golden Pass. I think they are a shareholder at the level of 75%. So it's a Qatari project. It's a true Qatari project. And there, there is a need for about 35 ships. So these ships will have to be ordered as this project is in construction and there is a need for transporting the 16.5 million tonnes of this project. The second point about Qatar is that, as you've seen it, they booked more than 100 slots for building ships in Korea and China. That's a reservation agreement. That's not contracts. So we are going to see whether they are going to transform these reservations into firm contracts, but right from now we know that at least for Golden Pass there is a need for about 35 ships. The last point I can tell you is that they are planning to expand the -- what we call the North Field they have in an -- offshore of Qatar. We know that some contracts have been passed, but the main contracts have not been passed and have been delayed up to end of this year or beginning of next year. So we are going to see whether it's passed. We don't have particularly clues on that. I'm meeting with the -- from time to time with the top-official Qataris, who are very determined. And of course, Qatar has the capability to do that on a equity manner without long-term contracts, so -- but we are going to see whether it's happening or whether, as it has been more or less the case recently, it's a bit delayed. Your point is about gas-handling technologies. So we don't announce major things but -- there, but in fact you have to see that on LNG carriers we are providing all the gas-handling technologies and deliverables. We are very active in that field. We consider that on LNG as a fuel there is a market there. And as this activity will develop, we could provide something there. So this company has clear competencies in that field. And as the application of LNG will increase or the -- and in particular for LNG as a fuel, we think that these competencies will be used, [ found out ] by customers.

Jean-Luc Romain, CIC Market Solutions. I have 2 questions, if it's possible. The first one is about the 4 service contracts you announced. How much does these -- do these contracts represent over their life in terms of turnover? If you can give an -- maybe an idea already. I'm not asking for, here, per contract obviously. Second question is about your contract for onshore tanks. You had 2 very large orders in China in what seems a project which implies up to 10 or 12 very large tanks. And you still forecast 15 to 20 units over next 10 years. How should we reconcile these very large strategic storage projects in China with your 10-year view about tanks?

Well, for the 4 service contract. Generally, we don't give the amount of contracts. So we are going to do so for these service contracts. What I would like to highlight, that of course it's a matter of business. Whenever we can deploy adjacent activities, we are pleased because we diversify the activity portfolio of the company. It's not something which is going to change the balance of activities of GTT. So it's not big amounts, but still it's -- normally it should be a continuous flow of business. I would say, and we said it before, that for us it's not only a matter of business. It's a matter of strategy and, in a certain way, of commitment to the industry, strategy because we develop new services which are helpful for the industry. And it renders the GTT a company very worthwhile, very useful, very appreciated by users of LNG carriers or users of our solutions for LNG as a fuel. It's also a matter of vision because in having a large platform of services we consider that we can help people to switch to LNG much more easily. In a certain way, our service platform obey to the motto, "Make LNG easy." So whatever we can do to facilitate the switch of shipowners from highly polluting fuels to LNG, we are doing so. And that is very much -- in a certain way, it's not so much the turnover we are making in service, which is important. It's the fact that our turnover overall is increasing. Onshore tanks and long-term guidance. Well, you know that we are not particularly exaggerating -- or we are not exaggerating at all in our long-term guidance, so if we can surprise people with order intakes in onshore tanks higher than our long-term guidance, I would be very happy. What is remarkable is that in the last 12 months we introduced 3 innovative storage solutions. Last year, it was the GBS. And this year, it has been the FSUs, very, very -- or ultra-large FSUs 360,000 cubic meters; and onshore tanks. So well, if you wanted a confirmation that the company is looking at new applications of its technologies, you can see that through that. And whenever on the LNG value chain we can bring something to improve the efficiency of the LNG value chain, we are doing so. Well, let's confirm, I will say. Let's confirm that in the months to come, and then I would -- we would be very pleased to revise this long-term guidance on onshore and GBS.

Nicolas Royot, Portzamparc. Could you give us some explanation about the success of type C in LNG fuel tanks and in higher size in -- recently?

In higher size...

Higher size.

Higher size, okay.

And maybe some estimation in euro of your backlog about the 18 units.

The -- so Type C, it's a solution which is not highly technical. The -- there are facilities providing this solution. Once more, it's a bottle, a cylinder of LNG. You have important facilities in China providing that, which in the current situation of low demand are very aggressive. So we see this solution having a certain part of the success, but we always say that, the market for GTT, it's very large ships with very big tanks. That's where we see that the highly sophisticated, the -- with a lot of engineering solution that GTT is providing can make sense. I mean, on a small tank, you provide a lot of technology, a lot of engineering, but finally it's amortized on a small structure; and then mass figures business plan has to make sense. So we see [ as ] making sense on very large tanks, but in fact we see also the type C competing with the lower part of our market. And in fact, it's something that we do appreciate, first of all, because in a new market there is competition. And competition is great because, the more you compete, the more bright ideas you have. So we are in this situation. I will say that we could see that probably in a while when the market is really going to start and our -- we are going to see how finally numerous owners are going to decide on the various solutions. For turnover, I don't have particularly figures. I don't have particular figures. Over the phone?

Yes.

Yes.

[Operator Instructions] Our first question comes from the line of Kevin Roger.

The first one, sorry for that, but it's coming back relating to the, let's say, contracts that you have recently signed in terms of services. So coming back on that subject just to understand because over the past years the, let's say, trajectory of the revenue for -- from services have probably been a bit disappointing for you. What -- let's say, what could be the impacts in terms of earnings just on this business unit? Will you say that it's a few million euro; or that it could double, thanks to those services? The second question is related to the few delays that you mentioned in terms of deliveries of the cargoes. At Q1 earnings, basically you said that there was no impact, especially at yards. So can you explain us the reason of those delays? Is it because of the yards, or the COVID-19? Is it at the will of the shipowner? So what's the reason for this shift in terms of delivery? And the third question is so I appreciate you confirm the 10-year, let's say, view in terms of LNG cargo needs. I was just wondering. If, let's say, the gap between the supply and demand has been pushed back to 2027, does it mean that over the short term your view for the commercial dynamic is a bit less optimistic than before because the shift has -- let's say the gap has shift from 2025 to 2027 in terms of need for new supply?