Financial Overview. Olivier Dubois President and CFO. Investor Presentation Paris, October 17, New York, October 19, 2007

Transcription

1 Financial Overview Olivier Dubois President and CFO Investor Presentation Paris, October 17, New York, October 19, 2007 Good morning ladies and gentlemen, I am Olivier Dubois, Technip President and Chief Financial Officer. Following Thierry s presentation on Technip s growth strategy, I will now present to you the financial overview describing Technip s current financial situation as well as our financial targets for 2010 and general trends for Before entering into the core of my presentation, I remind you that we are now within the one month period preceding the release of the third quarter results. As a consequence, you will have, during the course of my presentations, no reference to any forecast neither for the full year 2007 nor for the third quarter. 1 of 17

2 Current situation 2 Technip financial statements FULL YEAR FIRST SEMESTER Change Change Revenue Subsea Onshore/Offshore 5,376 1,798 3,578 6,927 2,209 4,718 29% 23% 32% 3, ,183 3,619 1,182 2,437 14% 21% 12% Operating Income* Margin Ratio % % 44% % % 111% Subsea Margin Ratio % % 80% % % 105% Onshore/Offshore Margin Ratio % % 17% % % 139% Corporate (9) (22) (2) (10) Net Income Margin Ratio % % 114% % % 92% Profitability improved since 2006 but still behind best-in-class * Recurring activities 3 2 of 17

3 Starting with the current situation, let s have a look at the Statement of Income. Concerning our financial reporting Technip will, starting 2008, report only through three business segments: Subsea (former SURF), Offshore (former Offshore- Facilities) and Onshore (former Onshore-Downstream combined with Industries activities). Similar information for the previous years will obviously be provided for comparison purposes. However, Technip will continue to report through its four current business segments till the end of In this presentation, we will provide combined figures for Onshore and Offshore as these two segments have the same business model (with no capital employed). The Subsea business will be presented separately. This first table presents the income statement for the full years 2006 and 2005 and for the first half 2007 and It is interesting to read it horizontally in order to underline the evolution of our financial performance segment by segment. At the Group level, we enjoyed in 2006 a 29% revenue growth year on year at EUR 6.9 billion. This growth came from Subsea and Onshore/Offshore showing revenue growth of +23% and +32% respectively. For Onshore/Offshore growth rate derived mainly from the large awards of 2005, which were in full execution in Comparing first half 2007 to first half 2006, Group revenue shows a 14% growth, highlighting the unfavorable base effect from large onshore projects under execution. Subsea revenue grew 21% first half on first half demonstrating the favorable trends of this market. Now let s move on to the operating income. In this table, we present only operating income from recurring activities excluding the impact of the non recurring events such as disposal of assets or activities. At the Group level, FY 2006 operating income stands at EUR 333 million showing a 44% yearly growth. The associated operating margin ratio stands at 4.8% compared to 4.3% a year before. Now, looking at the first half 2007, this margin ratio reached 6.5% with a EUR 236 million operating income highlighting a significant financial performance improvement trend. At the business segment level, while Subsea margin ratio stood at 6.6% in 2005 it progressively improved to 9.7% in 2006 and reached 13.5% for the first half This level of performance results from a good business environment, a high level of utilization rate of our assets and good project execution. 3 of 17

4 For Onshore/Offshore, despite the doubling of the operating margin ratio from 1.7% to 3.5% between the first half of 2006 and the first half 2007, the performance is still unsatisfactory. The reason is mainly the status of the major projects which have now entered into the construction stage. Finally, looking at the first half performance, despite an operating margin more than doubling and growing 8 times faster than revenues, Technip s profitability, which has improved since 2006, is still lagging behind its best in class peers in each of the segments as you saw earlier in Thierry s presentation. * Project revenue & profit recognition NORTH SEA SUBSEA PROJECT LARGE EPC LSTK Revenue Gross Margin 1, Revenue Gross Margin Costs 400 Costs M1 M3 M5 M7 M9 M12 0 M1 M12 M24 M36 M42 PM & Eng. Procurement Installation PM & Engineering Procurement Construction Progressive margin recognition policy 4 The purpose of this slide is to make you better understand the way Technip recognizes revenue and profit on its projects. We have taken two very opposite examples; a typical small size Subsea project with a 20% gross margin and a large LSTK EPC onshore project with a 10% gross margin. This slide presents the cost associated with the three phases of the project execution, Project Management & Engineering, Procurement and Construction / Commissioning. On top of the cost we recognize the gross margin and report the project revenue evolution. On the left hand side, the typical EUR 50 million North Sea Subsea contract, executed over one year; 4 of 17

5 On the right hand side, the typical large EPC contract, which execution lasts 3 to 4 years for a contract value above EUR 1 billion. You can see that for both contract types, 25% of the revenue is recognized during the first third of the contract life, 50% during the second third and the remaining 25% is recognized during the last third. However, the cost structure is different depending on the type of project. For the Subsea project, installation costs are higher than procurement ones as significant assets are required for the offshore campaign. For large Onshore EPC project, the procurement costs are more important because of the cost of the main equipments. Concerning the gross margin, in green on the graphs, we start recognition when we consider that we have enough visibility on the profit at project completion, which occurs at around the end of the first third of the project life. Then we progressively increase the amount of margin recognized, most of it being recognized during the last third of the project life. This progressive margin recognition policy is certainly unique within the industry; Technip has been applying it for years, as we believe it is the safest way to account for profit in a sector mainly driven by LSTK projects. * Balance sheet as of June 30, 2007 Permanent Resources Shareholders Equity 2,237 71% Bond Loan % Provision and Other Liabilities 265 8% TOTAL 3, % Total Non-Current Assets 3,352 Net Working Capital (200) Positive cash situation does not result from excess of permanent resources 5 5 of 17

6 After this reminder, we are now providing you with detailed information on Technip cash situation. Starting with the group balance sheet as of June 30th, Permanent resources amount to more than EUR 3.1 billion, 71% coming from shareholders equity (EUR 2,237 million) and 21% from the corporate bond issued in 2004 which amounts to EUR 650 million. Non-current assets amount to more than EUR 3.3 billion resulting in a EUR 200 million negative net working capital as of June 30th, This clearly demonstrates: - that the positive net cash situation the Group enjoys is not resulting from an excess of permanent resources, i.e. an excess of shareholders equity - that the balance sheet is already leveraged as 21% of our permanent resources is corporate debt. Cash & cash equivalents as of June 30, 2007 Total: 2,352 M Down payments 10% Others including suppliers & subcontractors 28% 62% Customer milestone payments Cash situation results mainly from project payment conditions Customer milestone payments averaging 12% of backlog over the past 18 months 6 6 of 17

7 Now let s analyze our positive cash situation. At June 30th, 2007, Technip cash position stands at EUR 2,352 million. On that slide we disclose for the first time the sources of this cash position: - Only 10% comes from down payments which can be assessed through the outstanding bank guarantees associated - 62% from the customer milestone payments - And 28% from various sources including credit on suppliers and subcontractors Bear in mind that during the bidding phase, we negotiate the terms of payments both with customers and suppliers and sub-contractors in order to reach a positive cash situation at the project level. At Group level, the customer milestone payments represent on average 12% of backlog over the past 18 months. As of June 30th, 2007, we are slightly above this level, at around 15% thanks to the large LNG projects. Down payments contribution to cash situation % 350 Down Payments* (M ) % 8% 10% Down Payments (% of total cash) Dec Dec Dec June 2007 % of backlog 2.0% 3.1% 1.9% 2.5% On average, down payments account for only 10% of total cash and 2.5% of backlog * Estimates based on outstanding bank guarantees 7 Now let s have a detailed focus on the evolution of projects down payments. The significant jump from EUR 136 million at the end of 2004 to EUR 344 million a year later, is the direct consequence of the high project awards of 2005 both 7 of 17

8 onshore and offshore. The associated down payments provoked a peak at the end of 2005, amounting to 16% of the total Group cash at that time. Since that date, we came back to a more normal situation with, on average, down payments representing around 10% of Group total cash or 2.5% of its current backlog. In conclusion, down payments on projects are clearly not the main source of our positive cash position. Return on Capital Employed SUBSEA ONSHORE/OFFSHORE** GROUP H H H Non Current Assets 2,709 2,701 2, ,377 3,399 3,352 Working Capital and others (528) (601) (793) (1,769) (2,134) (2,024) (2,297) (2,735) (2,817) Capital Employed* 2,181 2,100 1,862 (1,101) (1,436) (1,327) 1, EBIT After Tax + share of income of associates (equity method) Net Return on Capital Employed (annual/annualized) 4% 7% 14% na na na 15% 38% 77% Subsea and Onshore/Offshore constitute two complementary business models * Based on the consolidated balance sheets without restatement of the goodwill already amortized. ** Corporate segment included in Onshore/Offshore 8 On this slide we have split the working capital between Subsea and the other business segments in order to provide you with the capital employed by business segment. Capital employed computed here is based on Technip consolidated balance sheets without taking into consideration the goodwill already amortized. The figures confirm obviously that Subsea is a very capitalistic business and conversely that onshore/offshore have no capital employed as they have a small amount of fixed assets and goodwill and a negative working capital. For Subsea, capital employed as of the end of June 2007, amounted to EUR 1.9 billion which is exactly the amount of the net goodwill outstanding at that date. On the opposite for Onshore/Offshore, capital employed stands at minus EUR 1.3 billion. 8 of 17

9 At the Group level, consolidated capital employed decreased from EUR 1.1 billion at the end of 2005 to EUR 535 million at June 30, Net Return on Capital Employed computed here, is based on EBIT after tax plus income accounted for using the equity method. It is meaningful only for the Subsea business where it improved from 4% for 2005 to 14% for the first half of 2007 on an annualized basis. This achievement is nevertheless still below our target of 15% post tax. We will come back later to this objective when we will disclose our financial targets onwards. This table clearly illustrates that Subsea and Onshore/Offshore constitute two different business models from a financial point of view, but also that they are extremely complementary in terms of financing. Financial targets Following this quick update of our financial situation with the specific focus on our cash position and capital employed, I ll present now our financial targets for 2010 in terms of revenues, operating income margin, cash flow generation and uses. 9 of 17

10 Subsea operating targets 3,500 3,250 M Targeted Revenue 3,000 2,500 2,209 M Revenue from New Assets Revenue from Existing Assets 2,000 1, % (H1) 15.0% 15.5% 16.0% Operating Margin Ratio* 1, % 9.7% Revenue from June 30, 2007 Backlog f 2008e 2009e 2010e 2011e 2012e New assets will drive future growth of Subsea * Recurring activities 10 Starting with the Subsea business. In 2006, Subsea revenue amounted to EUR 2.2 billion and generated close to 10% operating margin ratio. For the first half 2007, revenue was EUR 1,182 million and operating margin ratio reached 13.5%. The green doted line represents the scheduling of the revenue coming from backlog in hand at the end of June You can see that this backlog will be mainly consumed by the end of This illustrates the fact that Subsea backlog is today mainly composed of small and medium size projects, executed over a few quarters. As a consequence, the improvement of market conditions and the quality of new contracts are therefore quickly reflected in our backlog and in our statement of income. The Subsea business is capital intensive, and Technip currently has a large investment program under execution in order to increase the number of its vessels and the capacity of its manufacturing plants. We will come back to this later on. It is clear that, taken into account the high utilisation rate of our assets today, close to full utilization, Subsea revenue growth will be driven primarily by the new assets and by price increase. We anticipate that our new assets on an aggregate basis should generate around EUR 1 billion additional revenue by of 17

11 Along with this revenue growth, we are targeting a further profitability increase over the next three years aiming at 16% operating margin ratio by This ambition is based on the market outlook which remains extremely sound for this business, on a balanced portfolio between, small, medium and large projects and on further improvement in the quality of execution. Beyond 2010, we believe that there is still room for further improvement but we obviously have less visibility. Moving to the Onshore/Offshore targets. Onshore/Offshore operating targets 6,000 5,000 4,718 M 5,500 M De-Risking Effect Targeted Revenue 4, % Operating Margin Ratio* 3, % 2,000 1, % 3.0% 3.5% (H1) 3.8% Revenue from June 30, 2007 Backlog** f 2008e 2009e 2010e 2011e 2012e Future revenue growth driven by de-risking initiatives Progressive margin improvement due to long backlog run-out * Recurring activities ** Including Khursanyah 11 These activities have generated EUR 4,718 million in revenue in 2006 with a 3.0% operating margin ratio. Future revenue from today s backlog is expected to be recognized over a longer period than for Subsea activities. As an illustration, we have already in hand for next year more than EUR 3 billion in revenue. This situation explains that the margin improvement will take more time than in Subsea business and will be more progressive. Technip s strategy for these low capital intensive businesses is to intensify the implementation of its de-risking policy. The future 2010 revenue target, embedding de-risking initiatives, is estimated to reach EUR 5.5 billion. This moderate growth, beneath the market trend, is a consequence of these 11 of 17

12 de-risking initiatives since the exclusion of the construction of the scope of some lump sum projects will impact the revenue downwards. It would however contribute to the profitability improvement. For these activities, we are now targeting a 6% operating margin ratio by Group financial targets 2010 and trends H (e) CAGR (e) Revenue 6,927 3,619 8,500 5% 10,000 Operating Income* Margin Ratio % % 700 8% 20% % Net Income Margin Ratio % % 480 6% 24% EPS ( ) % Operating income from recurring activities growing four times faster than revenue * Recurring activities 12 At the Group level, consolidated financial targets for 2010 and trends for 2012 can be summarized as follows. From a revenue close to EUR 7 billion in 2006, we are targeting EUR 8.5 billion in This represents a 5% CAGR over excluding the impact of any acquisition. Operating income from recurring activities should more than double from EUR 333 million in 2006 to EUR 700 million in This represents an average annual growth of 20% over the period. In 2010 our operating margin ratio target at Group level is 8%. Consequently, from EUR 200 million net income in 2006, representing less than 3% net margin ratio, we are targeting EUR 480 million by 2010 or 24% average annual growth rate, thanks to further efficiency of our tax management with an effective rate target of 25% in 2010, to be compared to 32% in of 17

13 Finally Earning Per Share should follow the same growth rate of around 24% p.a. from 2 euros to 4.6 euros in Trends for 2012 for which we have less visibility, based also on organic growth, show revenue of around EUR 10 billion and operating income of approximately EUR 850 million representing 8.5% operating margin ratio. Funds from operations (e) Funds from Operations Subsea Onshore / Offshore Corporate (15) 1,720 1, (15) Changes in Working Capital Cash Flow from Operations 946 1,720 Strong cash generation from operations cash flow from operations amounted to EUR 946 million. It comes from funds from operations for EUR 352 million and from a positive contribution in working capital for EUR 594 million. Funds from operations came mainly from the Subsea business contributing to EUR 252 million, Onshore/Offshore accounting for EUR 115 million and Corporate showing EUR 15 million expenses. Changes in working capital were directly connected with the 2005 order intake and more precisely to the cash situation on the large Onshore Downstream projects. Over the period, we estimate that the cumulated cash flow from operations should amount to EUR 1,720 million (net earnings after tax plus depreciation). We expect it to be wholly fuelled by funds from operations as we don t anticipate change in working capital over that period. 13 of 17

14 The funds from operations would be coming mainly from the Subsea business with EUR 1,275 million, Onshore/Offshore generating EUR 460 million and Corporate expensing EUR 15 million equally split over the period. We believe that over the period despite the expected growth of the Group revenue, the working capital should remain stable for the two following reasons; - the de-risking policy on Onshore/Offshore, excluding some construction packages from lump sum contracts, will have a negative impact on the working capital, - for the projects currently in our backlog, in the coming years we forecast that the spending of part of the positive cash will not be fully compensated by payments received on new projects. Technip investment program Other Development Capex 150 Fleet Development Capex Maintenance Capex Let s see now what should be the utilization of this cash flow generated over the period. As previously announced, Technip is committed to increase notably its asset base, both in vessels and in manufacturing units. It is estimated today that Technip will spend around EUR 950 million over the period, split between maintenance capex, fleet development capex and other development capex. 14 of 17

15 Based on the investment projects launched or about to be launched, we anticipate a yearly capex of 250 million per year from 2008 to 2010, including maintenance capex stable at around EUR 100 million per year over that period. For 2008, we anticipate the remaining EUR 150 million in capex to be equally split between fleet development and other developments such as the new flexible pipe manufacturing unit to be built in Asia and expansion of the existing umbilical manufacturing plants. In 2009 and 2010, due to the large investment for the new pipe lay vessel to be delivered in 2010, it is likely that the proportion of fleet development capex will increase significantly over the period. Free Cash Flow and dividends Cash Flow from Operations Capex Free Cash Flow before Dividends Ordinary Dividends* Other Return to Shareholders Free Cash Flow after Dividends Net Cash (Year end) (157) 789 (142) (368) 279 1, (e) 1,720 (750) 970 (500) 470 1,885 Excluding acquisitions, net cash should remain well above 1 billion * Including 51 M downpayment on 2006 dividends 15 Based on this estimated cash flow from operations and forecast capex programs, our estimation for free cash flow over the period is as follows: For comparison purpose, in 2006, free cash flow before dividend payment amounted to EUR 789 million, including EUR 594 million from change in working capital. After 2005 ordinary dividend, down payment on 2006 dividend (EUR 142 million) and EUR 368 million of other returns to shareholders mainly associated with the convertible bond conversion, the free cash flow amounted to EUR 279 million. Net cash at year end was EUR 1,540 million. For the period, free cash flow before dividends should be around EUR 1 billion. 15 of 17

16 Over that period, Technip intends to maintain its dividend policy with a stable payout ratio comprised between 50% to 60% of its EPS. Cumulative dividends paid in 2008 to 2010 should amount to around EUR 500 million, leaving around EUR 470 million of free cash flow. At year end 2010 and prior to any acquisition, net cash should be in the range of EUR 1.8 to 1.9 billion financial targets: conclusion More balanced portfolio with higher Subsea content Double-digit revenue growth for Subsea Changed risk profile for Onshore and Offshore Major improvement of operating profitability 8% for the Group Sustained 16% margin for Subsea Restored margin for Onshore and Offshore at 6% Subsea ROCE above 15% Shareholders return through dividends and growth 16 As a conclusion of this financial presentation, we can say that the successful implementation of this development plan should result in a more balanced portfolio with: - higher Subsea content driven by double digit revenue growth during the period based on new assets - an improved risk profile for Onshore/Offshore with a lower revenue growth rate resulting from the implementation of the de-risking initiatives. Improvement of operating profitability should bring the Group operating margin ratio to 8% by 2010, supported by a sustained 16% operating margin ratio for the Subsea business and a restored 6% operating margin ratio for Onshore/Offshore. 16 of 17

17 This shall be achieved with a ROCE above 15% for Subsea activities. Finally, our objective will be to create more value for our shareholders through dividends and growth. Thank you for your attention, we ll have now a short 15 minutes break, then Onshore, Offshore and finally Subsea operations will be presented to you. The presentations will be concluded by a Q&A session. Thank you again for your attention. 17 of 17