Viridien Société anonyme (VIRI) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the CGG Q1 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. I would now like to turn the conference over to CGG. Please go ahead.

Thank you, Sean. Good morning, and good afternoon, ladies and gentlemen. Welcome to this presentation of CGG's first quarter '24 results. The call today is hosted from Paris, where Mrs. Sophie Zurquiyah, Chief Executive Officer; and from Los Angeles where Mr. Jerome Serve, Group CFO, will provide an overview of the quarter results as well as provide comments on our outlook. Let me remind you that some of the information contains forward-looking statements. And therefore, that may change at any time. Following the overview of the quarter, we will be pleased to take your questions. And now I will turn the call over to Sophie.

Thanks. Thank you, Christophe. Good morning and good afternoon, ladies and gentlemen, and thank you for participating in this Q1 2024 conference call. I would like to start by first recognizing Christophe's numerous contributions to CGG, after 28 years in the company and holding various key finance, business, and commercial leadership positions, he will be retiring in a few weeks. All the best to you into your future endeavors, Christophe, and thank you for the great work. We're now moving on to Slide 2. We are off to a good start in 2024. Overall, activity was strong in Q1 across all our 3 business lines and across all geographic locations. Exploration activities continue to progressively pick up globally with interest from all client profiles in all geographies, including in an increasing number of frontier areas. To respond to projected supply/demand balance, our clients are also continuing to accelerate their field development programs where Ocean Bottom Node technology, which requires advanced add imaging is establishing itself as the reference in mature basins across the globe. The Gulf of Mexico and Norway remained very active, sustained by demand for incremental barrels, which is driving increased high-end imaging and OBN activity. The Middle East and North Africa are active, while Asia-Pacific is picking up nicely with increasing IOC presence. Looking at PGD in Q1, I am very pleased to report our best first quarter since 2018. Overall, the quarter was strong with excellent performance, and $13 million in net cash flow generation despite $20 million paid for our vessel contractual commitments, which highlights the benefit of our decision to become an asset-light company. Q1 revenue reached $273 million, up 30% year-on-year. Geoscience was up 11% year-on-year at $88 million. Global activity remained strong, supported by demand for high-end large projects and NOC's increasing activity. Earth data was up 50% year-on-year at $97 million, driven mainly by broader geographical demand. Sensing and monitoring was up 35% year-on-year at $89 million, with high deliveries of land equipment this quarter. Segment EBITDA was up 58% year-on-year at $106 million, including $16 million of penalty fees from vessel commitments a 39% margin. Now on Slide 3. There were 2 positive post-closing events in April that I would like to highlight. First, the S&P Global Ratings upgraded our long-term debt, recognizing our commitment to deleverage our balance sheet; and second, the settlement of our long-lasting dispute in India for a net amount of around $13 million. These are positive events for our financial road map. Going on to Slide 4. DDE segment revenue was solid this quarter at $185 million, up 28% year-on-year, with growth in both Geoscience and Earth data. Profitability improved year-on-year to a 56% EBITDA margin while still being impacted by penalty fees from vessel commitments. Let's go on to the business line now. On Slide 5. Geoscience external revenue was $88 million in Q1, up 11% year-on-year. Geoscience had very solid activity led by high-end work in all regions. The market continues to strengthen, driven mainly by increased activity in infrastructure-led exploration and field development. Backlog at $227 million is up 23% since the end of last year, thanks to a catch-up in order intake. Slide 6. Following 18% external revenue growth in 2023, Geoscience grew 11% in Q1 year-on-year, increasing demand for our high-end technologies, along with the increasing size of the projects, drove the solid start of the year for geoscience. Use of our unique elastic for way form inversion is expanding geographically, increasingly providing value in all basins globally across all geologic settings, including those that are less complex in definition and fidelity. We can also apply the latest artificial intelligence and machine learning techniques with our expert modifications to extract insights that accelerate the speed and accuracy of structural and stratigraphic interpretation. The picture on this slide is a very nice example of the added value of AI to detect sand injectites, and they're in green on the picture in the Norwegian North Sea, which are expected to be all bearing. Combining the best geoscience technology with the best data science technology is a powerful combination and fit CGG strength very well. Looking at our low-carbon businesses, in CCUS, we see increasing demand in reservoir screening, along with monitoring design. And in minerals-to-mining, we used our high-end imaging technology to successfully map an ore body of interest deep below the surface in Australia to identify new extraction opportunities. Slide 7. We continue to advance the value of seismic for reservoir management. Reservoir engineers are interested in understanding small reservoir changes in time, which has historically been a challenge. Full Waveform Inversion is increasingly being applied successfully in this space. And this example is offshore Brazil, and it shows our advanced 4D Full Waveform Inversion technology clearly distinguished the producing and water injection layers in the 4D response, helping reservoir engineers adjust their reservoir models and optimize production. Now going on to Earth data, Slide 8. In general, we see our clients starting to expand the breadth of their focus areas, especially IOC's, international oil companies, while regaining interest and becoming more active in frontier areas. Q1 earth data cash CapEx was $50 million, up 79% year-on-year, driven by a larger portfolio of wealth-funded ongoing projects. Pre-funding revenue was very strong at $58 million, driving our pre-funding rate to 116%. After sales were $39 million this quarter, up 32% year-on-year, mainly driven by active projects and interest in South America, North Sea, and Africa. Slide 9. With the strong level of pre-funding, our portfolio of ongoing multi-client project is growing larger and geographically broader in scope. This quarter, we completed our second Gulf of Mexico note project ahead of schedule despite initial weather delays. In Asia, we completed our 2D survey in Malaysia, and started a new survey in Australia. We continued the expansion of our CCUS subsurface data packages in the Gulf of Mexico and in the U.K., mainly for screening application and the recent CCUS round in Norway fits very well our data library. Now on sensing and monitoring, Slide 10. Our Sensing & Monitoring segment revenue at $89 million was stronger year-over-year this quarter, up 35%. The growth was mainly supported by land equipment sales at $39 million, while marine equipment sales remained stable year-on-year at $34 million, driven by demand for OBN equipment. Sales from our new businesses were stable at $11 million. And at this level of revenue, the EBITDA margin of the sensing and monitoring business line was 11%. Now with highlights on Slide 11. During the quarter, SMO sold its first 528 land acquisition system, together with the new V564-vibration electronic system. The 528-land acquisition system includes several new features designed to improve recording capacity, reliability, adoptive and data fidelities, challenging survey requirements. We had significant deliveries of our GPR300 note this quarter in Europe, as clients appreciate the quality of our unique sensor, which enables better imaging. In our new businesses, we deployed a commercial railway monitoring solution during the first quarter, and it is worth noting that we see a progressively increasing portion of our equipment, standard equipment, going to a new group of clients for application outside the oil and gas industry. Let me now give the floor to Jerome for more comments on our financials.

Thank you, Sophie. Good morning, and good afternoon, ladies and gentlemen. I will comment the Q1 '24 financial results, starting with the P&L on Slide 13. Our segment revenue was up 30% year-on-year at $273 million, which was our best first quarter since our decision to become an asset-light company in 2018. As mentioned by Sophie, all group businesses were up this quarter with Geoscience growing in line with the E&P CapEx, EDA driven by both higher prefunding and after sales, and SMO benefiting from strong land system deliveries. The respective contribution from the group businesses were 32% from Geo, 35% from EDA, and 33% from the SMO segment. Adjusted segment EBITDA was $106 million, despite 16 million fees related to vessel underutilization. Segment EBITDA was up 59% year-on-year at a margin of 39%. Segment DDE -- the segment EBITDA was at $103 million or 56% margin, and our SMO segment EBITDA was at 10 million, an 11% margin. Adjusted segment operating income was $29 million or 11% margin. And with an IFRS 15 adjustment of negative 8 million, this led to an IFRS operating income of 20 million for the quarter. Net income was close to breakeven at minus 3 million. Moving on to Slide 14. Q1 '24 segment operating cash flow, which is EBITDA minus tax but before change in working capital was at $102 million. This quarter, we had no change in working capital with the negative impact of our revenue growth, offset by the tight management of the Sercel inventory during the first benefits of the transformation plan that we initiated in Sercel at the end of last year. Q1 '24 CapEx was 58 million, up 11% year-on-year. Industrial CapEx was 4 million down back to a more normal level, while 2023 included 18 million related to the construction of the new HPC data center in U.K. Research and development CapEx was $4 million castable. And our multi-client cash CapEx was $50 million, up $22 million versus last year, driven by our first node project in the Gulf of Mexico. Pre-funding ratio remained very high at 116% this quarter. After 2 million of other financial items, $12 million lease repayments, 3 million discounted operation, the net cash flow ended up for the quarter at $30 million. As a reminder, the $30 million net cash flow does not include 30 million settlement from ONGC, the Indian mitigation that Sophie referred to initially that we received early May. Moving on to Slide 15 on the group balance sheet. The group liquidity at the end of March amounted to 350 million, excluding 90 million of undrawn RCF. Before IFRS 16, group debt -- gross debt was close to 1.2 billion, and group net debt was at $858 million. After IFRS 16, group gross debt was close to 1.3 billion, and net debt was $966 million. Segment leverage ratio of net debt to segment EBITDA improved to 2.2 multiples at the end of March '24. I now hand the floor back to Sophie for the conclusion.

Thank you, Jerome. As a summary, I'm very pleased with our first quarter performance. We continue to see gradual improvements in our core markets, abide with continued volatility quarter-to-quarter, especially in SMO and EDA aftersales. Overall, we see a positive dynamic in our backlog and a higher level of client interactions, which increases our confidence in delivering our 2024 objectives. And in our new businesses, while they are still in the early stages of development, increasing market interest and early feedback from our new clients is building confidence in our unique value proposition and our ability to develop meaningful businesses in the low carbon markets of CCUS and mineral mining, as well as outside of energy in HPC & Cloud Solutions and infrastructure monitoring market. Thank you for your interest, and we're now ready to take your questions.

Thank you. [Operator Instructions]. We will now go to our first question. And your first question comes from the line of Daniel Thomson from BNP Paribas.

Congrats to Christophe on the retirement. Firstly, Sophie, if I could just touch on the point around the IOC demand, and that's sort of coming back. And I think you said previously that that's kind of been the one missing ingredient in this up cycle for the seismic companies. So, I wondered when did you sort of first start seeing the demand from IOCs coming back? How does it compare to previous years? And is it 1 or 2 of them, or all of them? And lastly, when can we sort of start to see the benefits flowing to CGG? And then the second question is just on the cash flow. You've left guidance unchanged. But obviously, we've had a very good Q1. And then combined with the ONGC settlement. I was just sort of wondering on what your expectations are for the rest of the year in terms of cash flow, and particularly working capital as you've left that guidance unchanged?

Yes. Thank you, and good evening, Daniel. Thanks for the great question as usual. So, the first to comment on the more sort of the macro environment, IOCs actually have never really left. They've always kept portfolios in frontier areas, but kind of some of them had put them more in the dormant mode and had made comments like they wouldn't go into new countries and things like that. So, we're starting to see them this year break those paradigms. And so, we're seeing some IOCs say we won't go into any new countries starting to enter new countries. So, I'd say, really, this year marks a bit of a broader interest from pretty much across the board. So obviously, as you would know, the American IOCs were always, as of last year, already looking more broadly. And initially, when you look at broadly, it doesn't cost you a lot of money because it is more acquiring, sometimes just 3D seismic data, all the data, looking, evaluating. So, you could start doing those things a bit cheaply under the radar. And I think a lot of that happened last year, and this is becoming more visible. So, I would still add a caveat to that, is that they still remain very disciplined, right? So, you'll see them focusing on Suriname, focusing on Libya, Egypt. But more and more, we're seeing same Malaysia emerge. We're seeing countries like Uruguay, which is sort of an equivalent to Namibia on the other side, starting to emerge. Brazil, definitely saw the last be drawn, good interest in the Pelotas area. So, I think last year, maybe under cover more work was happening that was visible externally, but it is becoming more visible this year. And on the cash flow side, I will let Jerome answer the question.

Thank you, Daniel. So honestly, it's a bit early to upgrade the cash guidance at this stage. To be fully transparent, we were actually contemplating a potential strategic but nonbudgeted investment in our library. And the good news on ONGC could help partly from this investment. So again, a bit too early, and I think we'll provide more details in July for our Q2 results.

Thank you. [Operator Instruction]. And your next question comes from the line of Baptiste Lebacq from ODDO BHF.

Yes. A special word for Christophe, when I started, he was already there, and I wish for him, let's say, a good new life. A question, let's say, from my side regarding -- you already answered part of this question, but regarding, let's say, the cash coming from the ONGC settlement. If I understand quite well your answer, this cash will be used as, let's say, CapEx and not to reimburse part of your debt. Please correct me if I'm wrong. And second question regarding your target in terms of petaflop, what is, let's say, the target that you have in mind for the end of the year and for the next 3 or 4 years, because we clearly see that there is an acceleration of appetite from IA and so on. What do you have in mind in terms of target of petaflop from your side?

Thank you and good evening, Baptiste. I might actually make a comment still on the cash side. I think really what you need to get, to take away from our response that it's a little early to really define exactly where we'll land. So, we have a few moving parts and we just want to be cautious at this point in time and not change the guidance. On the -- and Jerome can add later on. On the petaflop, this year, we're not going to see a huge increase. Last year, if you remember, we increased our petaflop by 50%, 50, from 350 to 500. And the reason we did that is that we invested into a new center, we decided to upgrade and change a lot of the material that was -- and computing that was in the old center into the new centers. So, that was a big step up. So therefore, this year, we don't expect that number of petaflops to increase significantly, still around the same number, maybe a 5% increase to 530, somewhere along these lines. But I think as of next year, we'll continue the ramp-up, and we have defined sort of a 5-year road map, and you should see us definitely going into the 600 and 700 petaflops in the next few years. And it is a bit of a -- there's always a balance investing by what do we need for our computing. We're looking, of course, at our CapEx and our profitability. So, we're putting all these elements into the equation. And keep in mind as well, we work on our efficiency gains. So, we constantly work on optimizing our workflows so that we could do more with the same amount of petaflops. So, all these things are happening in parallel. And every year, we reevaluate what we need for the following year. But we did a big step up in 2023. And therefore, this year, we don't need to do such a big step. So, Jerome, you want to add on cash?

No, no much further ones. But I said, I mean, obviously, if this investment does not materialize, the additional CapEx -- sorry, the additional cash will be used for paying down more debt, either through debt buybacks or at the time of the refinancing as per the financial road map that we outlined in May. So, those options are on the table at the moment. And it's a bit of PC. So that's why we don't want to commit at this stage.