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

Good morning. This is the conference operator. Welcome, and thank you for joining the GTT Half Year Results 2023 Conference Call and Webcast. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Philippe Berterottiere, CEO. Please go ahead, sir.

Good morning everybody. I am very pleased to be with you today to present to you the first six months' results of GTT for 2023. I have with me Virginie Aubagnac, CFO of the company, and Anouar Kiassi who is the head of our digital activities; Jean-Baptiste Choimet, who is the managing director of Elogen and Jean-Baptiste Boutillier, who is our VP, Innovation. I have also Jean-Baptiste Garnier, who is the Investor Relations Head of the company. Immediately, the key highlights of our presentation. First of all, the new orders, we received 43 new orders in this first 6 months. It's a very large -- It is very important for such a short period after a year 2022 which has been exceptional, it demonstrates that market is still very eager to have new LNG gas. Another figure which is also very impressive, it is the new liquefaction facilities which had been decided. 40 million tonnes per annum, it is a lot. It is a very high figure for just such short period. And we could say that if we look at these two figures, the combination of these two figures, we can see a strong flow of orders and also a strong flow of new projects which are decided, so this market is profoundly sound, it's profoundly looking at the future, it is looking at the new developments in terms of liquefaction facilities, in terms of ships, and we will see in some other aspects. Well, without entering into too many details now, I just would like to say that we have 3 new directors at the Board level. And that is largely a consequence of the fact that the directors of Engie are much less as a consequence of the sale of a large part of their stake. If we look at the order book, just something to say, 287 LNG carriers to deliver. Never ever we had such an order book. So it is very impressive and [indiscernible], it has consequences, very, very significant consequences on the secured turnover for the next years, including it has consequences on not too distant years, but we are going to see that later on. You are used to the ammonite, and we are keeping on working on LNG carriers on our containment technologies for LNG. We continue to improve them. But I would like to spend a minute on transformation, where we are working on the transportation of liquid hydrogen. As you know, we are working on the electrolysis, we are working on carbon capture, we are working on ammonia compatibility for our tanks. We are working on gas management. We are working on equipment for liquefying gas named Recycool. We are working on many things, new things. And we are really working on making the company ready for zero-carbon future, many projects, and we will talk about that in a moment. Now I would like to hand over the mic to Jean-Baptiste Boutillier for looking at our R&D and innovation activities.

Thank you very much Philippe, and good morning to everyone. So the purpose of innovation is to support the GTT strategy by first, maintaining the leader position on core business but also by developing innovative solutions to diversify activities at GTT to enable the energy transition. To maintain leadership on the core business in addition to development of new technology for containment systems, GTT is convinced that we shall improve the global efficiency of the vessel. And to do so, we are working on innovative design of LNG carriers. We developed such an innovative design with 3-tank LNG carriers, while traditionally the vessel have 4 tanks for the same capacity. For this development, we received several Approval in Principle from several classification society, and the last one has been received from Lloyd's Register in May this year. This innovative design brings added value to all the stakeholders, to shipyard, to ship owner and also to ship operator. For [ LFS ] market, so LNG as a fuel market, GTT received several Approval in Principle from various classification societies for applying the GTT membrane technology to new type of vessels, new vessel segment, such as VLCC, Very Large Crude Carrier. For this, we received Approval in Principle from BV, together with a shipyard, chinese shipyard as the valuers, and we also worked on smaller design of tanker, Suezmax tanker, for which we collaborated with Marin and we received Approval in Principle from DNV. Going further into diversification, GTT is engaged and continued development of cargo containment system for liquid hydrogen. The purpose of this development is to allow transportation of liquid hydrogen over long distance in large quantity in a safe condition. For this, GTT is working with several partners. We are engaged in a joint development project together with TotalEnergies with LMG Marin and Bureau Veritas. Purpose of this joint development project is to develop a liquid hydrogen carrier of large quantity -- of large capacity, sorry, of 150,000 cubic meter. Within this joint development project, GTT will design the membrane containment system, while Total Energy will define the vessel specification and will define the operating profile of the vessel. LMG Marin is responsible for the concept design or the basic design of the vessel to take into consideration the specification from Total and to take into consideration the constraints of the tank design or the tank shape. The job of Bureau Veritas within the joint development project is to conduct a risk analysis and to review and assess the design and, at the end, we target to receive an Approval in Principle from Bureau Veritas. Last year regarding Approval in Principle, we already received 1 from DNV. And in July this year, we have received Approval in Principle from a ClassNK, so the Japanese Classification Society, for the design for the containment system of liquid hydrogen -- for the liquid hydrogen. After this brief and short overview of all the innovation within GTT, or the main activities of innovation, I now leave the floor to Philippe, for Strategy and Activity.

Strategy and Activity. Well, first of all, the LNG prices, they are softening. We can see on this graph that they've been very volatile as a consequence of some weather events and also as a consequence, of course, as of the war in Ukraine. And now they are back to normal, while the war in Ukraine is continuing. It demonstrates that there was volatility due to some kind of emotion, but also some kind of unpreparation from the buyers for facing such a situation. They were rushing for buying cargoes, and prices were very high. They were very high also before the war due to some weather events in Europe, Northern Europe or in Texas at some point of time, showing that the more you rely on renewables, the more you need gas. Back to normal. It's a very good time for the LNG industry in the current conditions because it facilitates the decisions for new facilities, and it's what we see since the beginning of the year. The importing capacity in Europe have increased. There's thanks to FSRUs. There is a need in Europe for additional importing capacities. And we can see that with the rate of utilization of the existing terminals, which is very high. That will open new gates for LNG to come into Europe in the coming years. China has resumed its increase of imports. You know that, in the past decade, China was growing very much in terms of energy import. The COVID, the lockouts have slowed down this trend. But now we are back to something normal, and we expect that in the years to come, this increase will continue and China will take back its position as the first LNG importer in the world. Other South Asian countries are going to continue their imports, in the case of Korea, in the case of Japan, in the case of Taiwan, in the case of India. If we look at the long-term contracting, we can say that it remains dynamic. We can see that in the first half of this year, it was about the same as the first half of 2022 or the second half of 2022. So we are on this dynamic, which is demonstrating that the LNG market is profoundly sound. It's generated by a true need of additional quantities of LNG and buyers are there. So if we look at who are the buyers, we can see that Europe is an important buyer, it's not a surprise, but it's not the largest buyer. The largest buyer, that's the portfolio players, it means the big LNG companies, the Total, the Shell, the Chevron and so on and other traders. And these players are savvy enough, have enough acumen, are analyzing that, in fact, the long-term contracting from some countries, from some buyers are not large enough to satisfy the demand in the years to come. So they are investing heavily in long-term contracts, and they will resell these quantities to this buyer. So there, also, it's a sign of confidence from these players in the long-term development of the industry, in the long-term need for LNG from buyer countries. If we look at the projects, which have been decided, we have 40 million tonne per annum of projects, which have been decided since the beginning of this year. We could say that Qatar is in an in-between situation with long -- significant long-term contracts, which have been passed already, but no announcement has been made. So we are on a very positive trend. Behind that, or beyond that, we can see that there are many American projects, which are ready to be decided and which may be decided in a not too distant future. Talking about the new environmental regulation for the shipping industry, we can say that they are there. And in fact, the trend is to further constrain these regulations. And in any case, there are at least 228 ships, which are Steam Turbine with too high CO2 emissions, which are on the block, which are concerned, directly concerned in the short term by these regulations. So that is also shooting the LNG carrier demand in the short term. Now let's look at LNG as a fuel. We continue to consider that LNG as a fuel is the only available solution to reduce the emissions. So we had a very strong year 2022. Year 2023, up to now, has been a little bit disappointing as a consequence of the high LNG prices last year. Some owners had been deterred to choose LNG as the economics were not fitting well. So they preferred to look at some of other solutions. Now LNG is back to normal, and they -- some owners are reconsidering their choices. And we announced recently that LNG and our membrane tanks have been selected for 10 very large container ships. So it's a good sign. We still think once more that we are the appropriate solution. And even though during 1 year, some owners have considered methanol as the solution, we -- methanol is generating more CO2 than LNG. And so why do they choose -- and even more CO2 than [indiscernible] diesel oil, the current fuel used by vessels? So why are they choosing methanol? They are choosing methanol because they believe or they bet on the fact that there are going to be bio methanol or e-methanol at a certain point of time, and they are going to be able to mix, to blend their fossil methanol with these new fuels. There are about 70 ships in the world, which have selected that, very large ships. And we don't see how there can be enough bio methanol to fuel these ships. So for us, there is already a capacity problem, which will prevent these vessels to use this fuel. And if you begin to look at biofuels, you can have biogas. It exists today. It exists. It's already on board. There are some owners who are blending their LNG with BioLNG. So we are already in this situation where we can further reduce the CO2 footprint from the LNG, thanks to BioLNG. Now I would like to pass the mic to Anouar Kiassi who is going to present to you our digital solutions.

Thank you, Philippe. Good morning, everyone. So digital activities is a combination of software and hardware that we use to optimize the operations of ships to reduce the cost, mainly the energy, improve the safety of the assets and also reduce the emissions to comply with the regulation. And the digital strategy is deeply associated with the other innovations that we work on today and also with the rest of the strategy of the group. Key highlights for the first half year, it's a combination of innovation to build the long-term competitive advantage, and also commercial -- our key commercial achievements. If we look at the first one, which is the approval by DNV of the, what we call the Shaft Power Limitation which is a solution to monitor the power limitation, which will be part of the future solutions to reduce the emissions in the industry by lowering the speed or the power. And this solution will help the ship owners comply with these new rules or limitations if their ships are old. The second item we would like to highlight is this commercial achievements and this large ship owner that is adopting our solution for the fleet. We're talking about 30 vessels here, but actually, there are options that will be activated probably late this year or early next year, and it is a recognition of the quality of our solution and the value that we provide to this key players. By the way, and this ship owners use our solution to develop their ESG strategy and they communicate about that. And we have seen lately a communication from Navigator Gas, which is the largest gas carrier in the world using our solution to comply or to execute their ESG strategy. The third item is predictive maintenance, and this is very much linked into the core business strategy because it increases -- reduces the total cost of ownership of the membrane. And our aim is to make this solution industry standards, associated, hopefully, with all the membrane tanks because it helps extend the survey or the inspection period of the membrane tank, which is every 5 year by regulation. But with our solution, we can extend that beyond 5 years, and that increases the value of the assets also in terms of -- by reducing the cost of maintenance, but also increasing the value a charter can get from the ship by increasing the running time or the uptime. One of the also major innovation we are working on is the weather routing or the route optimization. The objective here is to incorporate all our optimization feature or advice into the what we call the route planning. It's a key feature because it allows to align the stakeholders like the navigation, let's say, crew. And of course, the people on the shore responsible of the operation of the sea and by -- of the ship. And by answering the concerns of the crew regarding safety, by working with them on the planning and incorporating the optimization features, we are sure to make our customers getting the best out of these tools because we are aligning key stakeholders on the shore and on board in order for them to implement the advice. So how does it work? So we have ship modeling, and this is one of the key, let's say, competencies of GTT, also that we enhanced by the acquisition we have made. We help the crew plan and execute the voyage, and also we integrate there a lot of, let's say, deep knowledge we have for the ships from GTT, but also artificial intelligence mainly brought by our subsidiaries. Now I leave the floor to Jean-Baptiste talk about Elogen.

Thank you, Anouar. Good morning, everybody. I will now share with you the latest developments at Elogen. First, let me give you a set of key figures for this first semester. We achieved a revenue of EUR 2.2 million, which represents an increase of 26.2% in comparison with the first semester of 2022. We expect an acceleration of our revenue growth in the second half of this year. EBITDA losses are controlled at minus EUR 7.7 million compared to minus EUR 4.8 million last year in the first half. And we expect to reach EBITDA breakeven from mid-decade. Our commercial initiatives are paying off with new flagship contracts, which I will present in a moment. And thanks to those, our order book increased by more than 3 in comparison to the end of the first semester of 2022, reaching a value of EUR 20.3 million at the end of June. Our strategy relies on 3 priorities: one, be efficient because electrolyzers' efficiency is key to make green hydrogen competitive in the long run; two, be reliable because this is what hydrogen producers need from us; and three, be ready because we do what is necessary to structure Elogen to deliver our product in mass when the market truly accelerates. So to deliver this strategy, our team is focused on pursuing the structuration of the company. We continue the development of our R&D activities with a particular focus on inventing new materials and developing large-scale electrolyzers. We prepare the scale-up of our production, in particular with our Gigafactory project, which benefits from the support of the hydrogen IPCEI. We continue the development of our network of local partners to support our commercial expansion in the world. We limit our cash consumption by managing our costs, but also by selecting the contracts that are of interest for the company, either in terms of reference or in terms of acquisition of experience. Now I would like to share with you more details on the contracts that we won since the beginning of this year. So first of all, in January, we were awarded an order from CrossWind, which is a joint venture between Shell and Eneco. Under this order, we will deliver a 2.5 megawatt electrolyzer, suitable for offshore operations as it will be installed on a platform and coupled with a wind farm located 20 kilometers off the coast of the Netherlands. The purpose of this demonstration project is for CrossWind to perform peak shaving, storing hydrogen when the wind is strong and using it to produce power when the wind is weak. This contract started in January with an engineering phase in order to adapt our design to this offshore environment. We performed this phase to CrossWinds' satisfaction since they gave us the notice to proceed with the implementation of the electrolyzer at the end of June. In the last few weeks, we were awarded an order for a 2.5-megawatt electrolyzers from our Korean partner, ValMax. This system will equip 1 of the first 2 sites selected in South Korea, aiming at developing the country's hydrogen production, in this case, for mobility purposes. This success proves the case of our strategy, which, in countries far away from our base, is to first secure a partnership with a local industrial company before nurturing commercial prospects. I thank you for your attention. And now Virginie Aubagnac will present the financials for this first semester.

Thank you, Jean. Hello, everyone. I will now comment the financial results for the first half 2023. At the end of June '23, GTT's core business order book reached an all-time high level with a total value of nearly EUR 1.8 billion for a total of 302 units, including the 43 orders received in H1 '23. This record order book offers visibility up to 2027 and beyond. It will contribute EUR 343 million in 2023, EUR 529 million with 70 units delivery in 2024, EUR 600 million in 2025 with 87 units delivered that shows the increase of shipyard capacity, and EUR 372 million with 78 units delivered in 2026. So already above 2023, and almost as EUR 100 million in 2027. So this offers GTT an unprecedented visibility. Now a few comments on GTT's first half consolidated revenues. In H1, our consolidated revenue stood at EUR 177.8 million, up 23.3% compared to the first half of 2022. Our newbuild revenue amounted to EUR 163.5 million, up 25.2% versus H1 '22. The increase in royalties from LNG carriers and Ethane carriers reflect the acceleration in orders from H2 2021. They amount to EUR 147.2 million, up 30.6%. Royalty for FSU amounted to EUR 2.4 million, down 76.3%. The second and last FSU in the order book having been delivered during the second quarter, and royalties on onshore tanks and GBS amounted to EUR 2.5 million. Royalties generated by LNG fueled activity were up sharply, plus 922%, benefiting from the numerous orders received in 2021 and H1 2022. As mentioned by Jean-Baptiste Choimet, Elogen booked a revenue of EUR 2.2 million in H1, up 26.2% versus the same period last year. An acceleration in revenue growth is expected in the second half of the year. Services revenues amounted to EUR 12.1 million in H1 '23, an increase of 2.1% with assistance for vessel in operation and activity in Ascenz Marorka having more than offset the decrease of design studies. Two main comments on the evolution of our cost base over the first half of the semester. Total external costs were up EUR 8.7 million over H1 '22, mainly due to the increase in activity with a greater use of subcontracting and high travel expenses for our on-site representative. Staff costs were up EUR 7.2 million versus H1 '22, with an increase in headcount mainly in our subsidiaries, and the impact of the overhaul of GTT SA compensation scheme. In H1 '23, GTT booked an EBITDA of EUR 104.2 million, up 30.7% compared to H1 '22, benefiting from an increase in revenue from core business as well as nonrecurring items, the most significant one being the reimbursement of the KFTC fine. This translated to an EBITDA margin of 58.6% compared to 55.3% in H1 '22. Net income amounted to EUR 84 million, translating into a net margin of 47.3%. Change in working capital increased sharply by EUR 43.5 million, thanks to an increase in deferred revenue linked to new orders. And H1 '23 cash position reached EUR 253.2 million at the end of June. Regarding the interim dividend, GTT's Board of Directors decided to distribute an interim dividend of EUR 1.85 per share, up 19.4% on the 2022 interim dividend, and representing approximately 80% of H1 net income. As I mentioned earlier, GTT further increased its visibility on the royalties coming from its core business over the first half of the year with a total amount of EUR 1.8 billion of revenue to be booked over the period of H2 '23 to 2027. In this context, and in the absence of delays of significant cancellation of orders, we confirm our objectives for 2023 financial year. That means revenues within a range of EUR 385 million to EUR 413 million, EBITDA in the range of EUR 190 million to EUR 235 million, and the distribution of a dividend for 2023 financial year corresponding to a minimum payout ratio of 80% of net income. I will now let Philippe Berterottiere conclude the presentation.

Thank you. Now we are going to answer to your questions.

Guillaume Delaby, Societe Generale. My question relates to Slide 17. If we try to project ourselves regarding long-term order intake for LNG carriers, i.e., your core business, if we try to project ourselves maybe post the next 18 months where you are going to have still a lot of orders. Basically, there are 2 approaches. First, if I look at, I don't know, LNG demand in 2030 of 600 Mtpa. This would suggest that the LNG carrier market is now starting to be relatively well balanced. So this would be, I would say, the bottle half empty. If I look at your Slide 17, especially about regulation, you are mentioning that between 2030 and 2040, there might or they could be 400 additional units, which could turn to [indiscernible] i.e., to be replaced. So my question is how confident are you in your analysis that effectively, I know this is very long time ago, long time, right. How confident are you that those 400 additional units will need to be replaced at some stage...

Well, more fundamentally, we can see that now when we talk about exporting, transporting internationally gas, we talk about LNG. That is a consequence of 2022. We can see also, and we've seen that on the graph about the volatility of prices that the more you rely on renewables, the more you need LNG. You can see also that industrialized countries, let's say, Western countries, it goes from Western Europe to Korea going west. They have the intention to rely more and more on renewables. So we have -- and this is the sense of the decisions which are taken. 40 million ton are over 6 months period. I did not look at that in the past, but I think that we never ever had such a high level on such a short period of time. So there is a very strong confidence in LNG development. We used to rely on external analysis on that. But from what we see -- because we don't devote huge resources. But what we can say, the feeling we have from the industry, talking with utilities, talking with energy companies, big LNG companies, talking with shipowners, we can see that there is a very strong confidence in this energy. The energy of the transition, which will allow to reduce very significantly our reliance on coal. The world -- in the world energy mix, coal, it's 30%. If you stop coal tomorrow, if you switch to LNG, you reduce the CO2 emissions by -- the worldwide CO2 emissions by more than 15%. It's huge, nothing else can do that, and it's feasible. And the more it goes, the more we are going to become serious about LNG, the more about global warming, about energy transition, the more we are going to discover that we have a solution ready on the table, which is LNG. So the regulations as far they are concerned, they are going to be implemented. In fact, the discussions, as we can see them in the international maritime organization, are leading towards a reinforcement of these regulations. So we do think that these ships will have to be replaced, not only because they are not compliant in the short term, but because there is a long-term perspective that a lot of people we choose to see, as they believe that renewables are a solution, which is feasible. In fact, we see that we are in a certain way in renewables due to with -- thanks to Elogen, we saw the contract with CrossWind, which is a landmark combining an electrolyzer with windmill farm, which is a great idea. With the confidence, the vision of Shell, about that the way of using this electricity is to combine that with electrolyzers. But all that is going to take time. And meanwhile, the world will have to continue and will have to rely on energy. Another question?

The first one will be related to Elogen. And by the way, thanks a lot for the granularity that you provide in terms of performance for this division. The question is more related on the strategy that you will implement on this entity. And I'm struggling to understand based on the recent communication that you have on order, if you want to be a stack producer or an electrolyzer producer with the balance of plant. So if you can give us some color on your strategy that will be implemented if you want to focus on the stack or if you want also to provide the balance of plants? That will be the first question. If I may. The second one is on the liquified hydrogen. You just announced that you received an Agreement in Principle for the technology. What's the journey here? Is it a technology ready for 2025? What are the next steps now that you have the first agreement in principle? And the last one, you confirmed the guidance and it's still assuming that there are no significant delay [at here], et cetera. Any update on your side looking at the production of the yard, are you fearing something, or you now are much more confident today than 6 months ago because you see the yard progressing very well?

Thank you, Kevin. Thank you, Kevin, for these questions. So the first one is stack or BoP. Well, we are clear about that. We want to concentrate on the stack. We want to develop a very efficient, in fact, the most efficient electrolyzers in the world. We are already at the best level, but we are not alone. We would like to be alone. You know that the cost of the green hydrogen is mainly driven by the cost of electricity. And so less you use electricity, the better you are. So that -- we work on that. We concentrate on that. And finally, we found that it's fitting quite well. The internationalization of the perspectives as we can get partners locally, who're going to produce the balance of plant. It's what we do as Jean-Baptiste [Choimet] said in Korea the very recent contract we obtained. And it's what we intend to do for some other contracts. We are getting ready for that through a network of partnership that we announced from time to time. And we look at these in stations. It's something which is made in some other industries. Of course, we think about the oil and gas industry, but it's something that we can drive, which will render us much more flexible and much more asset light and which will allow us to concentrate on the heart of the electrolyzer, which is the stack. On liquified hydrogen, yes, we obtained AIP from ClassNK. Japan is very interested by importing hydrogen. It's very large industrial countries. They need a lot of hydrogen for the steel mills, for the glass industry and for some other industries. So they would like to import hydrogen and they look very much at this kind of ships. That's a country also of shipbuilding. That's a country, which has ventured already in building a very small liquified hydrogen carrier. And so they know, and they are very interested. For us, it was a very important milestone to have this approval in Japan. So our journey is to have the technology ready in the second part of the decade. There are a lot of discussions. You can see with the Total for different kinds of ships and they are looking at different applications. So people, the industry is weighing what are the possibilities, what are the difficulties, and we are here to say it's feasible, and it's confirmed by classification societies. It's confirmed also by the investigations from this energy companies in what we do. And we -- of course, there are some other issues. You need to produce very large quantities of hydrogen. We would like to see that also for hydrogen. You need to liquefy this hydrogen and then you need to transport. So we are on some of these pieces. And as far as the liquified hydrogen carrier is concerned, we are continuing to work. I cannot tell you when it's going to be really needed. And it's really what is driving the project because more time we have, the more we can refine, further refine the technology. But we're in a situation where, once more, by the second part of the decade, we are going to be ready. So your third question is about production in shipyards and possible delays. Well, as a consequence of the orders we received in 2023 and 2022, your -- second part of 2023 is going to see the start of many constructions. And while we are just a little bit cautious about that, it's a ramp-up. So we've always been amazed by the capacity of the Asian shipyards to cope with such strong ramp-ups. But I will say that a little bit of cautiousness cannot annoy us. We know that supply chains may be troubled from time to time. So we better be on the safe side. Another question?