Viridien Société anonyme (VIRI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Second Quarter 2020 Results Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, and I would now like to hand the conference to the CGG speakers. Thank you. Please go ahead.

Good morning, ladies and gentlemen. Welcome to this presentation of CGG's Second Quarter 2020 Results. The call today is hosted from Paris where Mrs. Sophie Zurquiyah, Chief Executive Officer; and Mr. Yuri Baidoukov, Group's Chief Financial Officer, will provide an overview of the second quarter 2020 results as well as provide comments on our outlook. As a reminder, some of the information contains forward-looking statements, including, without limitation, statements about CGG plans, strategies and prospects. These forward-looking statements are subject to risks and uncertainties that may change at any time, and therefore, the actual results may differ materially from those that were expected. Following the overview of the quarter, we will be pleased to take your questions. And now I will turn the call over to Sophie.

Thank you, Christophe. Good morning, ladies and gentlemen, and thank you for participating in this Q2 2020 conference call. Our presentation will cover our second quarter 2020 operational and financial results, and I will start today's presentation by giving some background on the market. On Slide 4 now. So although crude oil prices have improved from the historic lows seen in May, the COVID-19 pandemic has continued to dramatically affect global economies and severely degrade our business environment. The energy sector is experiencing particularly strong headwinds. At CGG, we do not see the direct effect of the macro market. We see E&P companies' reactions. In the past, this created a lag and smoothing effect, but this time, our clients reacted very quickly and deeply. In addition, during the previous downturn of 2015 and '16, our clients extracted large savings from their suppliers in what I will call easy efficiency gains. This time it's different. The service sector is already lean, and our clients are more focused internally, reorganizing and reducing their staff. This has significantly slowed down activity on new projects and award of new work. Our markets continued to deteriorate in Q2, more than was originally anticipated just a few months ago, and the timing for global economic recovery remains uncertain. This being said, I am convinced that as new projects are further delayed, the chances of undersupply are increasing. Energy transition also received more focus, and our clients are increasing their spend towards renewable energies, especially in Europe. They are also focusing oil and gas CapEx on their core areas and producing the most advantaged hydrocarbons. Moving on to Slide 5. In this business environment, we are quickly adapting to reality and to our clients' new activity levels while preserving the future. CGG's strategic rationale is strong, especially in these challenging conditions, and is even reinforced in many ways. We are well positioned in 3 differentiated businesses that are increasingly working together to best serve our clients and develop unique solutions. We continue to invest in our key high-end Geoscience technologies, in our Multi-Client library and a new best-in-class equipment. All are very important as we manage through the crisis and for the long term. To be the most efficient with their investments, our clients need the best subsurface images to position their wells and mitigate drilling risks. Our differentiated technologies provide significant value through our imaging services as well as through our Multi-Client data. In the last 2 years, we have made a conscious effort to increase our participation in development and production successfully and have avoided frontier areas that we believe were less robust. Most of the subsurface imaging projects that we deliver today are linked to development and production, and we continue to lead across all imaging domains, including node processing. Our Multi-Client library is positioned in proven, developed and mature sedimentary basins, and we continue to extend our footprint in these basins as well as reprocess our data to provide enhanced understanding to our clients. Our Equipment business is benefiting from a unique reputation and the largest installed base, although we continue to bring to the oil and gas market best-in-class equipment while expanding into non-oil and gas markets. Another common theme has been digitalization. We have developed, in the last few years, compelling digital solutions, enabling clients to access and utilize their data seamlessly across the cloud and to transform and extract new insights from their data. This area maintains good momentum. We're also continuing to pursue efforts around diversification and are establishing new businesses to address growing demand around green energy and the transition to low carbon. Moving on to Slide 6. Throughout my career, the oil and gas industry has gone through many cycles, and this is the most intense I have seen. Given the magnitude of the revenue drop in just 3 months, the company is rapidly adjusting by reducing its CapEx and its cost structure. As already announced, 2020 CapEx was reduced to around $300 million. We are looking at costs across the board and have started to reduce staff in various locations globally as well as reducing the number of contractors that we rely on in the Equipment business when the market is stronger. We are doing this in phases as we need to deliver ongoing projects on one hand and manufacture equipment for Q4 on the other. Time will give us more clarity as visibility into 2021 currently remains low. We expect to reduce our cash cost by around $35 million in 2020 and around $135 million annualized, including around $90 million of fixed cost -- cash costs. Preservation of our liquidity is a priority, and in particular, we're continuing to pursue the monetization of our remaining data acquisition assets. Going on to Slide 8 now. The current environment had a strong negative influence on our Q2 performance. Q2 revenue was $202 million, down 41% year-on-year. Our teams managed through the crisis well, and we did not experience any operational delays related to COVID-19. Our business continued to overall remain excellent, and it's been quite impressive to see how resourceful and resilient our employees and subcontractors have been through these challenging times. GGR revenue was $144 million, down 35%, and Equipment was $58 million, down 52%. As expected, GGR was less volatile than the Equipment business. Our adjusted EBITDA, before nonrecurring charges, was $76 million for a 37% margin. Adjusted operating income before $49 million nonrecurring charges was negative $5 million, not far from breakeven. The current COVID-19 pandemic and unprecedented decrease in oil price and E&P spending have led us to carry a full impairment test in Q2 2020, instead of full -- instead of year-end under normal course of operations and to launch a readjustment plan. A total of $94 million nonrecurring charges were booked in Q2 2020, and Yuri will go over that in more detail. CGG consumed $60 million of net cash, of which $50 million of cash costs are exceptional and relate to our saving plans. This puts our liquidity at $546 million and net debt before IFRS 16 at $626 million. I'll now cover our Q2 2020 operation by reporting segment. To Slide 9 with GGR. GGR directly felt the reduction of our clients' E&P CapEx and, in addition, was impacted in the short term by a client's significant new organization, especially of their geophysical departments. Overall, GGR top line decreased 35% to $144 million with adjusted EBITDA margin at 56%. Adjusted OPINC before nonrecurring charges was positive $9 million. Slide 10 with Geoscience. Geoscience total production was $113 million in Q2, down 12% year-on-year, as the Geoscience business delivered earlier-awarded projects. New commercial activity was particularly low in May and June, and backlog decreased to $214 million at the end of June. Our imaging technology continued to advance rapidly, supported by our exceptional people and industry-leading, high-performance computing capability of 268 petaflops. On Slide 11. Looking at our Geoscience operational highlights, let me first start by saying that Geoscience has continued to deliver quality work on time with the latest technology despite the majority of its employees working from home. Q2 activity benefited from the momentum of 2019 and of early Q1. Q2 total production was down 12% year-on-year and 10% sequentially. Preservation of business continuity and profitability has been the focus throughout the quarter. We know that our clients will spend less this year and postpone some of their plans, but they will keep working on their most important projects to high-grade their portfolios. The key geographical areas of interest include the Gulf of Mexico, Brazil, North Sea, U.K. and Norway, where CGG is well established, understands the subsurface and has an excellent track record of delivering the best images. You see on this slide a striking example of the kind of high definition that we can now achieve. This unmatched level of detail enables our clients to better understand the reservoirs and oil in place, which is critical to implementing optimized recovery methods. On a recent proprietary project, in one of the images, you could clearly see the well trajectory and even the subsea platform made and support structures. The pace of innovation and advance continues to accelerate, and this much higher resolution and quality can significantly improve our clients' ability to successfully achieve their goals. On Slide 12 now with Multi-Client. Q2 Multi-Client numbers were supported by ongoing well prefunded programs in proven and mature basins. After sales were very low as clients reigned in anything, the impending reorganization, reprioritization and rebudgeting. After sales are a good indicator of our clients' mindset. They are the first to reduce in difficult time, but also the first to pick back up when perspective improved. I would also point out that we maintain a strict discipline on pricing and have around $14 million of deals that have shifted to Q3 because of this price discipline. And since the end of June, these deals have been signed. Prefunding revenue was $46 million, slightly down from last year, as we remain quite active this quarter with multiple client CapEx increasing to $73 million with a 63% prefunding rate. Slide 13. We had 4 Multi-Client projects in acquisition during the quarter. Despite COVID-19, all of our operations globally progressed without interruption, and prefunding remains strong. These included 1 land survey, Central Basin Platform in the U.S., and 3 programs in Marine. Nebula in Brazil, our 15,000-square-kilometer program in the Santos Basin, which attracted high level of client interest. 2/3 of the program was acquired at the end of June. We have received permit extensions that would allow us to continue acquisition in this successful area in 2021. Gippsland in Australia. This 8,700-square-kilometer program in the Gippsland mature producing basin is now completed. And the third program is an ocean bottom node survey in the Cornerstone area of the U.K. North Sea. In addition, we also commenced this quarter the reprocessing of our Multi-Client StagSeis marine survey in the GOM. The first phase of this reimaging project is bringing a new light to the data and raising significant client interest. We may conduct additional phases based on industry interest and funding. During these challenging times, reprocessing opportunities can extract significant uplift from the data and bring to market cost-effective alternatives to new acquisition. Looking at the rest of the year, we expect 2020 Multi-Client cash CapEx of around $225 million with a solid prefunding rate of more than 75%. Moving on to Slide 14 now with equipment. Equipment revenue was down 52% year-on-year at $58 million. The percentage drop is accentuated by the fact that last year was front-loaded with mega-crews. Nevertheless, activity has fallen significantly and is now largely driven by land opportunity. Marine equipment represented only 17% of total sales and was mainly the sales of spare parts. Equipment adjusted EBITDA was at breakeven, which shows our strong ability to adapt our structure to meet market conditions. During the quarter -- on Slide 15. During the quarter, equipment delivered over 60,000, 508 X-Tech land data acquisition channels and 10 big Nomad 90 vibrators, mainly in North Africa and Asia. Equipment also delivered its first WiNG nodal land system. At this time, the tended mega-crews in the Middle East are still pending award, and the most likely scenario is that 2 should be awarded before year-end to geophysical contractors who will then purchase equipment. Demand for Marine equipment, both streamers and nodes, is expected to remain low in 2020 as geophysical contractors stack more vessels and continue to try and reuse old streamers. In our non-oil and gas segment, the first pilot test for Sercel's new Structural Health Monitoring node prototype, designed for the growing high-end infrastructure monitoring market, was performed in France with promising results. Equipment also acquired a stake in a French start-up specialized in autonomous robots. I'm on Slide 16 now. CGG is continuously recognized as a leading service company from an environmental sustainability and governance standpoint. External rating agencies rank companies over a list of criteria, and we achieved an excellent AA rating with MSCI and 55 rating at Vigeo Eiris. The average company score is 30. MSCI and Vigeo Eiris are the 2 leading ESG rating agencies. One important ESG KPI is our carbon footprint. After our exit from acquisition, our scope 1, which is direct emissions, has reduced to virtually 0. Based on this, our focus is now on scope 2 and scope 3. Scope 2 is mainly the electricity that we use in our data centers but also in our manufacturing facilities, and we continue to enhance the efficiency and percentage of green energy. As of H1 this year, 23% of our power comes from renewable energy. On Slide 8 -- 17. While we have many more ESG initiatives that I could show on this slide and technologies, I thought it would be timely to show you some of our technology and business initiatives in this area. Not only are we focused on improving our own environmental footprint and sustainability, but also our core Geoscience expertise and technology is valuable to our clients in their ESG efforts. And it is clear that the current crisis is accelerating many of our clients' ESG and renewable energy strategies. We're leveraging our expertise and technology to support our clients' efforts in this area. And while the revenue associated with this emerging business is marginal to our overall performance today, it is a promising area of focus for our future. When it comes to environmental footprint, one of the key technologies is carbon capture and monitoring. Going forward, many of our clients will be more and more integrating carbon capture and monitoring systems into their developments. This requires a detailed understanding of the subsurface, which is precisely our area of expertise. A satellite mapping machine learning technology helps our clients monitor offshore position. We have a contract with 1 client today to monitor all their platforms globally. We have also expanded our client base and now have mining companies using our technology to monitor the structural integrity of their operations. A satellite mapping and Sercel technology can be applied to a wide range of challenges that the world faces today, including structural integrity monitoring for infrastructures and earthworks as well as monitoring for geohazards, subsidence and the environment. With our Sercel QuietSea equipment, we provide passive acoustic monitoring to detect marine mammals' presence with an unequaled degree of precision. I will continue to update you on the successful developments of these new business initiatives as they continue to progress. And I will now give the floor to Yuri for more financial highlights.

Thank you, Sophie. Good morning, ladies and gentlemen. To help navigate our Q2 and H1 results, we have added supplementary information on Slide 19. The global economic crisis triggered by the COVID-19 pandemic, an unprecedented drop in oil price and E&P spend of our customers, have led CGG to carry a full impairment test in Q2 2020 and launch cost reduction actions designated as COVID-19 plan. As a result, we booked this quarter $94 million of nonrecurring charges, and I would like to provide you more details on where they landed in our consolidated income statement. At the EBITDA level, we had $7 million of severance costs related to the COVID-19 plan, including $6 million in GGR and $1 million in Equipment. Below EBITDA, at the OPINC level, we also booked $17 million noncash charges, mainly related to the fair value remeasurement of GeoSoftware business available for sale and $24 million noncash goodwill impairment related to GeoConsulting business, which is mainly focused on exploration and appraisal. Below OPINC level, we additionally had $37 million noncash charges related to fair value remeasurement of other financial assets and liabilities, OFI, mainly related to exit from Marine Acquisition business transaction and $9 million noncash impairment of deferred tax assets. It is important to mention that our goodwill remains largely intact and has been reduced by a limited amount of $24 million related to GeoConsulting business. A total of $166 million of nonrecurring charges related to the economic crisis triggered by COVID-19 pandemic and our industry downturn was booked over the first half of the year. Looking at the consolidated income statement for the second quarter of 2020 on Slide 20. Segment revenue from our new profile amounted to $202 million, down 41% year-on-year. GGR contribution was $144 million, a 35% decrease year-on-year with 71% weight. Geoscience external revenue was $83 million, 11% lower year-on-year, and Multi-Client sales were at $62 million, decreasing 52% year-on-year, mainly due to significant drop in after sales. Equipment revenue contribution was $58 million, down 53% year-on-year with 29% weight. Segment EBITDA was $68 million, including $7 million of COVID-19-related cash costs at 34% margin. Segment operating income was negative at $53 million, including $48 million of nonrecurring charges. IFRS 15 adjustment at operating income level was positive $21 million, and IFRS operating income after IFRS 15 adjustment was negative $32 million. Our cost of financial debt was $33 million with a noncash peak component of $11 million, flat year-on-year. Other financial income, OFI, had a loss of $36 million, including $37 million noncash charges related to fair value remeasurement of other financial assets and liabilities. Income taxes were $33 million, including $9 million related to the noncash deferred tax assets impairments. Net loss from continuing operations was $134 million. Net loss from discontinued operations was $13 million. Group net loss was $147 million. Adjusted net loss from continuing operations, excluding a total of $94 million of nonrecurring charges described previously, was $40 million. Moving to Slide 21 and looking at our cash flow statement. In the second quarter of this year, segment operating cash flow was $81 million, a decrease of 35% year-on-year despite a 55% reduction in adjusted segment EBITDA. Our Multi-Client cash CapEx of $73 million was 30% higher than last year, driven by solid portfolio from growing well prefunded projects. In the second quarter, cash prefunding rate was 63%. Industrial cash CapEx and R&D costs in our Geoscience and Equipment businesses were flat year-on-year at $16 million. Segment free cash flow was slightly negative at negative $8 million. Cash cost of debt was flat year-on-year at $32 million, and lease repayments were at $15 million. Net cash flow from discontinued operations was 0 this quarter compared to a negative $20 million in the second quarter of 2019. And overall, our nonrecurring cash costs amounted to $25 million this quarter, and our net cash flow was negative at $77 million compared to negative $31 million in the second quarter of 2019. For the first half of 2020, our net cash flow was negative $60 million, including $54 million of cash costs related to exit from acquisition business and COVID-19-related plan. Moving to Slide 22 and looking at our group balance sheet and capital structure. As a result of the negative net cash flow, our liquidity decreased to $546 million at the end of June 2020. At the end of June 2020, our gross debt was at $1.329 billion or $1.172 billion before IFRS 16 with the following breakdown: $614 million of first-lien U.S. dollar and euro bonds due in April of 2023; $543 million of second-lien dollar and euro bonds due in February 2024; $159 million of lease liabilities, including $41 million of Galileo financial lease and $116 million of operating leases under IFRS 16; and $13 million of other items, mainly accrued interest. Looking at our financial leverage ratios at the end of June 2020. Net debt-to-shareholder equity ratio was at 60%, and segment leverage before IFRS 16 was at 1.1x net debt to last 12 months EBITDA. At the end of June 2020, our capital employed was at $2.1 billion, down from $2.3 billion at the end of 2019. Net working capital after IFRS 16 was flattish at $153 million. Goodwill was at $1.18 billion corresponding to 55% of total capital employed. Our Multi-Client library net book value after IFRS 16 was at $480 million. Other assets were $480 million, including: $277 million of property, plant and equipment, down from $300 million at year-end, including $159 million of IFRS 16 right-of-use assets, of which $41 million related to Galileo financial lease; $159 million of other intangible assets, stable versus year-end; and $44 million of other noncurrent assets, up $14 million from year-end, mostly from Shearwater Vendor Notes of $23 million. Other noncurrent liabilities were at $157 million, including $101 million of noncurrent portion of liabilities related to capacity agreement with Shearwater, including $49 million related to off-market component and $52 million to idle vessel compensation. Shareholders' equity was at $1.35 billion, including $39 million of minority interest mainly related to our joint venture, JunFeng, in China. In most turbulent and uncertain times of global economic crisis triggered by COVID-19 pandemic, which is further exacerbated by severe downturn in our industry, preservation of cash becomes more imperative than ever. This is why we continue to stay focused on generating cash, significantly reducing our cash costs and preserving our liquidity. Now I hand the floor back to Sophie for an update on our business outlook and conclusions.

Thank you, Yuri. In conclusion, in 2019, we successfully -- this is Slide 23 (sic) [ 24 ]. We successfully transformed the company into an asset light people, data and technology company, well ahead of schedule, and managed to reinforce our leadership positions across all core business lines. Looking forward into the second half of 2020, it is clear that the business environment will be very difficult. However, when I put this into perspective, we are in a much stronger position. We still have 5 vessels, and I'm confident that our current strategy and our teams are optimal for managing CGG through this crisis. Outside of exceptional costs, we have managed to control cash spend despite the 41% revenue drop. This was achieved through strong cost control across all business lines. We also continue to see interest from our clients around the enhanced insights that we can provide to them in their co-basin through our leading technology and data. Our technology remains fundamental to our clients' success as we play a significant part in the efficiency and effectiveness of their business. I'm confident that our value proposition remains intact, and that we will succeed in preserving our capabilities to capture future growth. While our visibility remains limited, our H2 top line will depend heavily on the continued evolution of the COVID-19 pandemic, oil price and our clients' reaction to the changing landscape. At current, our clients are adapting their organization and entering into the budgeting cycle for 2021. Assuming stable market conditions with the pandemic under control and at oil price above $40, we should see more stability, which could be conducive to an uptick in Multi-Client sales in Q4. Equipment performance will depend heavily on the Mid-East mega-crews. The entire CGG leadership team and company is determined to deal with the current challenging conditions and to make the best of this crisis to further reinforce the company as well as plant the seed for future growth. Thank you for your interest, and we're now ready to take your questions.

Enough, operator.

[Operator Instructions] And your first question comes from the line of Jean-Luc Romain from the CIC Market Solutions.

My questions relate to the non-oil and gas applications of both your Services and Equipment businesses. How big you see geothermal sciences and carbon capture monitoring markets in, say, 5 to 10 years? That's for the Services. And for Equipment, you mentioned successful tests in the first half of your infrastructure proposition. When -- do you see some turnover already in H2? Or should we expect it more in 2021?

Okay. Thank you, Jean-Luc, for your question. I'll take that. So basically, your questions are around efforts into non-oil and gas areas or kind of around it, like the carbon capture and the geothermal. So the market size, I mean it is a growing market. As you see the -- definitely with the energy transition, the carbon capture is the most sort of effective and obvious technology that would allow us to reduce our carbon emissions. So therefore, it's going to growing very significantly. So I think for us, we -- right now, our participation, at least for a start, will be more around the understanding of the subsurface. And I don't see any reason why, at some horizon, this can be almost equally the size of what we're doing right now in the processing and the Geoscience organization. It's hard for me to say when and how fast this will go there, but it might become a significant portion of what we do. On the Equipment side, it is early stages. We're more at the stages of testing the prototypes. And there, I don't think there will be revenue this year. But yes, probably starting 2021, we should start seeing some revenues from it, especially as the results of the tests are encouraging.

And your next question comes from the line of Christopher Møllerløkken.

Yes. This is Christopher Møllerløkken in Carnegie. I noticed that your partner, Magseis Fairfield, announced a new prefund around the Cornerstone project this morning. Does that mean that it would be fair to assume prefunding percentage to increase for CGG in third quarter versus second quarter?

Christopher, thank you for the question. I mean I would say this is just normal course of action, and that's why you haven't seen the sort of the equal announcement from our side. I think we're committing to that 75% prefunding minimum, and we are still on it. So we've seen nothing so special as we discern over the course of action. As we do our project, we continue to bring prefunding to that.

You expected 2 of the mega-crews in the Middle East to be awarded to seismic companies by the end of this year. But did I understand correctly that you also assumed then that it could impact your sales already in 2020? Or is this more a 2021 event?

I mean we're trying to figure that out, right? So the current view is that, right now, there are three 3D mega-crews tended and one 2D. What we understand is one 3D and one 2D are shifted into next year to be awarded, so definitely, that's not 2020. And two 3D mega-crews will be awarded this year. So right now, there are 2 mega-crews in operation that are going to be finishing work in September. So we would expect that the country will want some level of continuity, not exactly starting October, but in not too long afterwards. So if those crews are awarded, I'd say, early enough in the fourth quarter, I would expect those sales for the equipment providers to happen in Q4. And we're getting ready for it because, obviously, we can't manufacture equipment in a short turnaround, so we're having to anticipate that. So we're still, right now, anticipating that we might have sales in Q4. But it depends on when those are actually awarded, but the current plan is for that to happen sometime in Q4.

Guillaume Delaby.

Yes. Maybe I took the call 15 minutes late, so maybe you spoke about it. My question basically is on Geoscience. Because I find your sales performance in Q2 disappointing, especially when you read what you have said during the Q1 call. So my question is very straightforward. So what happened exactly in Geoscience in Q2? Was there some bad news? Were you a little bit too optimistic or too confident in Q1? And my second question, of course, is what is the outlook for Geoscience in H2?

I'm not sure what I said that might -- that made you believe that Geoscience was on a more optimistic view. I think what I said on the outlook for Geoscience is that the business would gradually reduce, and it's actually exactly what's happening. So we're seeing an 8% reduction from last year, which is much better than what we're seeing in Multi-Client or Equipment. So we're sort of confirming that Geoscience is actually indeed a bit more resilient because of the backlog. So nothing really happened in Geoscience during the quarter. We still maintain that view that the decrease in Geoscience will be gradual. But because of that backlog, it gets hit by the downturn with a delay. So we do expect actually that Geoscience will suffer more into 2021 and as the backlog, so the order intake sort of reduces into the following quarters. But we continue to deliver on our projects. We have leading technologies. So the value proposition of Geoscience remains there. I'm actually quite happy with the performance of Geoscience in the second quarter. So I'm not too sure, perhaps you can expand on why you think the performance was disappointing.