Subsea 7 SA ADR SUBCY
Q4 2012 Earnings Call Transcript
Transcript Call Date 03/14/2013

Operator: Thank you for standing by and welcome to the Subsea 7 SA Fourth Quarter 2012 Results Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I must advice you that this conference is being recorded today on Thursday 14 of March 2013.

I'd now like to hand the conference over to your speaker today Paul Gooden. Please go ahead, sir.

Paul Gooden - IR: Thank you and good afternoon. This is Paul Gooden, Investor Relations Officer at Subsea 7. Joining us today are Jean Cahuzac, our Chief Executive Officer; Ricardo Rosa, our Chief Finance Officer and John Evans our Chief Operating Officer. Today's results for the fourth quarter and 12 months period which ended on December 31, 2012. The press release can be found on our website with the presentation slides we'll be referring to in today's call.

Before we start the presentation, I'd remind you that certain statements made in the course of this conference call, which express the Company's intentions, beliefs and expectations, are forward-looking statements. Future results and trends could differ materially from those which are in such statements for various factors. Details of these can be found in the Company's filings, including the Company's Annual Report.

May I also draw your attention to the more detailed disclosure on forward-looking statements that appeared in today's press release. The call will run for around an hour.

With that, I'll hand you over to Jean.

Jean Cahuzac - CEO: Thank you, Paul, and good afternoon and welcome to everybody. I would like to reflect briefly 2012 results and then Ricardo will run through our financials. And before we take your questions I will make some observation on the market and our expectations for 2013.

2012 was another year of significant achievement for Subsea 7. In light of this performance and our confidence in the future the Board recommend that shareholders approved a special dividend in 2013, a $0.60 per share at the AGM in June for payment in early July.

To summarize what has been achieved last year, we have very delivered strong signature results in line with our expectation. As 2012 full year revenue grew by 20% and adjusted EBITDA by 16% compared with the prior 12 month period.

We have reached a record backlog of $9.1 billion at yearend. Our new backlog is a good quality work. It includes a good balance of medium size and large projects with the right split between EPIC, lump sum and day rate. The integration process following the merger in early 2011, has been successfully completed ahead of schedule and we have met our objectives.

We've been able to broaden and deepen our engineering and project management expertise worldwide and have increased this workforce by over 400 in 2012. We continue to attract talented people to our business, helped by our graduate and commercial training as well as our development programs.

We also made significant progress on our fleet enhancement program. The highlight was the addition to the fleet of the Seven Borealis for staff operation. She was delivered on budget and on schedule to start operation on the CLOV project offshore Angola. She has already completed the first phase of project pipe laying scope, with six lines installed in 1,100 meter water depth.

But our investments were not limited to the SURF business segment. The Inagha had started successfully hook up operation in Nigeria early 2012. The Seven Viking, a state-of-the-art licensed (indiscernible) dimension vessel, started its multi-year contract with Statoil on schedule in Q1 2013. The construction of the PLSVs Seven Waves is on-time and on budget, should restart mobilization to Brazil mid-2014. The current shipyard has started the construction of our new North Sea diving vessel and delivery is expected in 2015.

We continue to look at opportunities to announce our fleet in a disciplined manner in line with business growth opportunities. To be clear on our approach, we remain selective with the focus on projects which we expect to deliver the right financial return on investment. Over time, we will also continue to retire or sell our older and lower specification vessels.

We continued with our plans to strengthen our local presence with the right setup and the right industrial partners. We're positioning our self well with the strong local content in targeted markets, and it's approach deliver results. One example has been in early 2013, the award in Nigeria of a large project Ehra North with our newly formed joint venture NigerStar 7.

To conclude my comments on the year, we made record distribution to shareholders with the share buyback of $200 million, distributing a cash dividend of $199 million and spinning off Veripos as dividend income.

I would like now to make some comments on the Q4 results. As you can see on Slide 4, it was a solid quarter in spite of disappointing results in Brazil. In the North Sea, activity levels were high, although margin continued to be impacted by the execution of lower margin contracts awarded in the previous year.

Vessel utilization was good at 88%, but down on the prior year period when utilization had been unusually high as clients were prepared to extend more projects delayed from the previous year and to take the risk on weather downtime.

In Africa, the quarter benefited from a high level of offshore activity and from strong project execution. A number of projects were in their close-out phase, including Block 31 PSVM and EGP3B.

In Asia Pacific, we had also a good quarter. The SapuraAcergy joint venture vessel, the Sapura 3000, was involved in the offshore phase of the Lan Do project in Vietnam before undertaking the successful project in Mexico and the Rockwater 2 was fully operational in the quarter.

In Corporates there was a positive contribution driven by high activity level at Seaway Heavy Lifting, which was active on the Gwynt y Mor offshore wind farm.

Brazil, in contrast, incurred a net operating loss. We increased the estimated project life loss on Guara-Lula by approximately $52 million. This was driven by two main factors. First, a commercial dispute with our clients, which emerged during the last quarter, and revised contingency to take into account risk associated with the timing of delivery from some of our Subsea equipment suppliers.

Turning to Slide 5, we finished the year with a record backlog of over $9 billion. The key award during the quarter was Martin Linge, the biggest award ever in the North Sea SURF market. It underlines the growing importance of our extensive capability and scale in our industry.

But momentum in order intake has continued into Q1 2013, as reflected on Slide 6 where we set out announced order flow to-date. So North Sea has been very active, but it's not worthy that we won our first award in Mexico and our new contracts have also been awarded in West Africa.

In fact, as we prepared this slide, we have also announced $300 million contract for Seven Seas in Brazil.

One trend to highlight is a growing importance of technology in these new awards. We are one of the key technology leaders in the Subsea industry, and our ability to develop and implement new technologies play the key role in contract awards. For example, the Aasta Hansen project will see the first integration of the Steel Catenary Risers and the first reinstallation of mechanically lined pipe in the North Sea.

I shall hand over to Ricardo, who will run now through the numbers.

Ricardo Rosa - CFO: Thank you, Jean, and good afternoon, everyone. As Jean has stated, the results for the fourth quarter 2012 reflected a generally positive trend with, revenue and net income at higher level than the same period last year. I will now discuss the consolidated income statement and the territories operating results for the fourth quarter, and comment on the cash flow and liquidity. I will conclude with some financial guidance for 2013.

As shown on Slide 7, fourth quarter revenue was $1.6 billion, a 14% increase on the fourth quarter 2011, due to higher activity levels in the North Sea and Canada, Brazil, and Asia-Pacific. Net operating income at $180 million was $43 million higher than the prior year fourth quarter. This was despite a decline in global vessel utilization to 82% from 88% in the fourth quarter 2011.

Despite higher revenue net operating income decreased in Africa and Gulf of Mexico compared with the prior year fourth quarter due largely to project timing and mix. It also decreased in the North Sea and Canada due to lower vessel utilization and the impact of lower margin contracts awarded in previous years.

Asia-Pacific performs strongly in large part due to our Malaysian joint ventures while the corporate segment made a positive contribution as restructuring cost declined and Seaway Heavy Lifting experienced higher activity in wind farm installations in Irish Sea.

Net income was $149 million up 39% on the prior year period, driven by higher net operating income combined with a lower effective tax rate and a net foreign exchange gain. These positive variances more than offset increased finance costs which was $10 million higher than the prior year period, due partly to the issuance of the $700 million convertible notes in October.

Adjusted diluted earnings per share was $0.38 for the quarter, compared to $0.27 for the prior year period, an improvement of 41%. The full year 2012 results benefited from a gain of $244 million on disposal of our interest in NKT Flexible. Adjusted diluted earnings per share which excludes this gain increased to $1.59 from $1.21 in the prior year, an improvement of 31%.

I'll now turn to Slide 8 and the territories operational performance in the fourth quarter and comment in more detail. North Sea and Canada delivered revenue of $699 million in the quarter, up 19% from the prior year period. Work progressed during the quarter on Laggan Tormore, and West Franklin, offshore U.K.; Ormen Lange, offshore Norway; and Siri Caisson, offshore Denmark.

Projects substantially completed in the quarter included Terra Nova, Alta and Skuld. Net operating income so in both abso0lute and percentage terms compared with the same quarter in 2011 due to lower vessel utilization and the impact of lower margin contracts awarded in previous years.

Africa and Gulf of Mexico generated revenue of $611 million broadly flat compared to the prior year period. The MPN Seattleite Field Development was substantially completed during the quarter and there was significant progress on Block 31 PSVM and CLOV. A lower margin on the CLOV project, which was tended in a more challenging commercial environment contributed to the reduction in the territories net operating income margin compared to the prior year quarter.

Asia-Pacific and Middle East delivered revenue of $55 million up 45% on the prior year period. Progress was made on ONGC G1 offshore India and Gorgon, offshore Australia. The territories net operating income of $18 million, compared favorably with a net operating loss of $7 million in the prior year period reflecting both the margins on these projects and the strong contribution from the joint ventures.

Lastly, Brazil recorded revenue of $241 million, a 29% increase from the prior year period, reflecting the higher activity of the Guara-Lula project. Brazil's net operating loss was $29 million due to the $52 million increase in estimated project life losses on Guara-Lula, which Jean has already highlighted.

On Slide 9, we show the revenue and net operating income generated by its territory for the full year 2012. I will just highlight that the North Sea and Canada and Africa, Gulf of Mexico territories in total accounted for 80% of the Group's revenue for the year.

Turning to Slide 10, I will comment on some specific line items in the consolidated income statement. Administrative expenses for the full year amounted to $373 million. This was lower than the $390 million we have guided to driven by cost control measures and integration costs, which came in $1 million below guidance at $29 million of which $9 million were incurred in the fourth quarter.

The contribution from associates and JVs, joint ventures I should say fell to $86 million largely due to the disposal of NKT Flexibles early in the year, net operating income of $808 million is stated after depreciation of $330 million. Net financing costs were $29 million and broadly in line with our previous guidance. The $244 million gain on disposal of a subsidiary related to the sale of our 49% in NKT Flexibles, while the $6 million gain on distribution was the result of the Veripos spin-off as the dividend in kind. Other gains and losses largely comprised net foreign exchange gains incurred during the year.

The full year effective tax rate was 20.8% or approximately 27% after excluding the tax exempt gain on disposal of NKT Flexibles and gain on the Veripos spin-off, reflected the benefits from certain dispute prior year tax items. The underlying effective tax rate excluding the prior year discrete items and the gains on the disposals was 30.3%, a 1.7 percentage points below the low end of our guidance. This reduction in underlying effective tax rate was largely driven by changes in the geographical mix of the Company's profits.

Turning now to Slide 11, net cash generated from operating activities in 2012, totaled $515 million, after absorbing a $356 million increase in net operating assets. This increase in part reflected the growth in trade receivables during 2012, generally driven by higher activity and in part reflects the reduction in deferred revenue as certain customer advances were consumed in procurement of materials. The main elements of this increase have been monetized in the first quarter and we do not expect to see further growth in the net operating asset balance.

Turning to investment activity; cash capital expenditures totaled $713 million, slightly below our guidance, due to the timing of payments and were partly offset by net proceeds from the disposal of NKT Flexibles, which amounted to $344 million.

Net cash inflow from financing activities was $258 million with a $699 million in proceeds from the 2017 convertible bond issuance, more than offsetting the amounts distributed to shareholders in the form of share buybacks and dividend. We finished the year with the strong balance sheet and high liquidity levels that were reflected in the growth cash balance of approximately $1.3 billion.

I'll now turn to Slide 12 to provide you with some financial guidance for 2013. We do not expect vessel utilization in the first quarter to match the high level achieved in the first quarter of 2012, and we will be executing the offshore phase of the Guara-Lula project throughout 2013. Nevertheless, we expect both revenue and adjusted EBITDA to show some progress, although higher depreciation, finance costs and effective tax rate are expected to negatively impact earnings per share, when compared to 2012.

I will now provide you with guidance for 2013 on certain expenses lines. We expect administration expenses to be between $350 million and $750 million. No additional integration costs are expected to be incurred. Financing cost net of capitalized interest in finance income is forecast to range between $45 million and $50 million, higher than 2012 due mainly to the recent issuance of the $700 million convertible notes. Depreciation and amortization is expected to rise between $380 million and $400 million. The increase in prior year mainly reflecting new built vessels, such as the Seven Borealis joining the fleet.

The underlying effective tax rate is projected to range between 32% and 34% subject to changes in a geographic mix of revenues. We are projecting capital expenditures in 2013 to total between $750 million and $850 million. Of this amount between $425 million and $475 million is expected to be operating in nature and will include drydockings and upgrades of the existing fleet as well as investment in other equipment and onshore facilities.

The remaining expenditures ranging from $325 million and $375 million are mainly earmarked for the ongoing construction of acquisition of new vessels as part of our fleet enhancement program which John will update you on.

Lastly I will comment on our use of liquidity in 2013, we expect to continue generating significant cash from operating activities. We intend to use the liquidity to fun continued capital investment in response to growth opportunities a recent example of this being our acquisition in this first quarter of the Seven Sisters.

In addition we expect to fine tune our debt profile where value adding and fund the cash dividend of $0.60 per share proposed by our Board.

With that I'll pass you back to Jean.

Jean Cahuzac - CEO: Thank you Ricardo. I would like now to provide some additional color on the outlook.

Slide 13, levels of tendering remain strong with improved pricing. Structure on drivers means that the offshore oil and gas CapEx is likely to increase over the medium and long-term and we should be well positioned to benefit.

We have not changed our views on the business environment compared with what we said last November. We continue to see strong opportunities in particular in the North Sea and Africa, but we expect the outlook in 2013 to be suffered by a number of factors, such as delays in project awards in 2012 which have deferred the execution of some projects beyond 2013 and supply chain bottleneck for our clients which drives their costs up and impact timing of certain projects in the sector.

Turning to Slide 14, I will make specific outlook comments by territory. In the North Sea the market is good, and tendering activity remains high. There are some factors to bear in mind. Our backlog was built late during in 2012 and a significant volume of the associated offshore activity will occur post 2013. As you can see in the chart, vessel utilization in the North Sea was unusually high in Q1 2012 as operators sought to progress projects in spite of the risk of bad weather. We would expect a lower vessel utilization in Q1 '13, more in line with historical values.

The Seven Oceans, we'll be transferring from the North Sea to Brazil in 2013, where she will operate on the Guara-Lula project. This redeployment would reduce the available Subsea 7 fleet in the North Sea. Q1 results, will also be impacted by a number of planned dry-docks.

Turning to Slide 15, in AFGOM, the market tendering activity is also encouraging. However, as I said on the previous call, West Africa, we move through a period of lower offshore activity in 2013, as our recent awards win offshore in '14 and beyond. In the Gulf, the market is picking up in both the U.S. and Mexico.

In APME, we expect to see a positive business trend, as Subsea 7 will be in the offshore phase of Gorgon in Australia and SapuraAcergy JV will be active on the offshore phase of Gumusut in Malaysia.

Finally, in Brazil, we expect tendering activity to be high, but Brazil remains a challenging environment. Our Brazilian business is in two parts. We have the flexible PLSV business and EPIC and lump sum projects which are largely driven by Petrobras pre-salt development. Starting my comments with the PLSVs, it's mainly a day rate business with limited project execution rates. We expect this market to grow in the coming years, as Petrobras needs more vessels for flexible pipe installation, most for their pre-salt and post-salt projects.

We are well positioned in this business. We are presently in discussion with Petrobras for the renewal of four of our six PLSVs in the second half of '13. We have also participated in Petrobras tender for new PLSVs and expect market awards later this year. We will be ready to invest in new asset build outside of Brazil, if we can agree with our client's day rates will give us an appropriate rate of return. The per-salt Petrobras EPIC business in Brazil remains challenging for our industry due to a number of factors.

The challenge created by local content requirement, the administrative constraint specific to Brazil and more generally the worldwide supply chain bottleneck for some of our Subsea equipment. Before I leave Brazil, I would like to give you an update on the Guara-Lula project.

We expect this project to be largely completed in 2013 and as per the revised schedule agreed with Petrobras late 2011. The project is now operationally 43% complete at the end of February and a vast bulk of engineering is behind us. Looking at the two main elements of the project; the buoy and the riser system this is a short status of where we are. The first two buoys have left China and that's as per our revised plan, and are presently in transit to Brazil. When I mention revised plan, it's a 2011 revised plan. This represents a major milestone for the project. Slide 16 picture shows some buoys loaded on the dry-dock vessel. The fabrication of the two remaining buoys is on track for Q2 delivery.

On the riser system is that pipe production in Germany is complete and cutting is underway in Brazil. Our Spoolbase Ubu is ready to commence production as the riser system in early Q2.

Our operation team is in place in Brazil, ready to execute the offshore campaign. The Seven Polaris will be the first vessel to start operation on this project in Q2 this year with the installation of the Buoy Foundation and the tethers We have completed recently a detailed review of all our plants and we believe that we are well prepared to manage the remaining scope of the project including equipment delivery from our suppliers and offshore operations. However, as with any projects offshore installation remains a critical phase from a response standpoint.

Turning to Slide 17, we set out key changes into fleet since 2011. I have already talked about the key additions to the fleet and the vessels currently under construction. We have also been proactive at taking full ownership of some vessels where it makes financial sense. For instance, we acquired our partner stake into Seven Havila now renamed as Seven Falcon and acquired the Seven Sisters and now renamed the Simar Esperanca, and we've been proactive in releasing vessels where we believe it makes sense. Our fleet is well-balanced, technology-advanced and is a bigger in the industry. It's one of our strategy differentiators.

Turning to Slide 18; in summary, we have made significant progress in 2012 and we remain positive on medium-term and long-term prospects. As previously highlighted, we expect timing issue to temper the rate of progress in 2013. Nevertheless, it will be a year of progress at both the revenue and adjusted EBITDA level. We have seen good order intake in Q1. We have entered 2013 with good momentum and see growth opportunity in all our markets. Subsea 7 is well-positioned for the future. We have the people, assets, technology and operational track record.

Now, I would like to turn to your questions.

Transcript Call Date 03/14/2013

Operator: Goran Andreassen, RS Platou Markets.

Goran Andreassen - RS Platou Markets: Just a quick question regarding your guidance for 2013. It's quite vague and I guess a bit vaguer than what we expected. Would you say that you expect to manage to reach consensus for '13 in terms of EBITDA adjusted which implies increase of 13% year-over-year or is that a stretch for you guys the way you look at '13?

Jean Cahuzac - CEO: I mean you know as every year, at the beginning of the year, we are cautious on regarding the visibility of '13. We're indicating that we're seeing progress on both revenue and EBITDA, which gives an indication if we had concerns versus consensus, obviously we would have to highlight it.

Goran Andreassen - RS Platou Markets: Then just two simple questions on Brazil. First, on the Guara-Lula project, did you say that you have reached 50% completion? Then, the second question regarding Brazil is the fact that you're going to renew four day rate contracts in that region through '13. Could you say anything regarding what you expect to achieve in terms of potential increase in day rates on those contracts and when will we see a material effect of that to the P&L?

Jean Cahuzac - CEO: Regarding Guara-Lula, I mean we're getting ready to start operation in Q2 offshore. We've reached 43% of operational completion. That's again, in line with the schedule that we had in Q4 2011. Regarding the PLSV renewal, we are in discussion with Petrobras on the commercial aspect of this renewal and you will understand, we cannot give indication on what is our rate of (acquisition). The market shows a shortage of supply of PLSVs in the future. So, we are encouraged by this market for the future. In terms of P&L impact, it will not have a P&L impact before the second part of this year and there are different schedules for the renewal of this contract.

Operator: Tom Ackermans, Barclays Capital.

Tom Ackermans - Barclays Capital: Just a couple of questions for me please. First of all, if I look at backlog for 2014 year end about $2.5 billion that compares to $2.8 billion for 2013 a year ago. I realize that Q1 order intake has been very strong so far. So, it doesn't look like it's too much of a concern for you, but could you perhaps give us your current thoughts on the growth potential after this year. Then on Brazil, if I take the $52 million Guara-Lula charge out of the results, you have actually had quite a decent quarter. Again, if we think about this business slightly longer-term, should we expect margins to converge to the kind of North Sea and AFGOM type margins over time? And then a small check if I look at your project progression chart, I think the Jasmine project in the North Sea has actually gone backwards from around 90% in Q3 to less than 80% in Q4. Is there anything to be concerned there or has there just been expansion of the work scope?

Jean Cahuzac - CEO: Regarding the backlog as I said last year, I mean I'm not looking at backlog on the quarterly basis and backlog is I mean has been significantly improving before and we have very indication on what’s happening in Q1 2013. Probably I'm not concern by the backlog in the years to come. I mean we are quite successful in a growing market to acquire the right project. Regarding Brazil as I mentioned before, I mean there are two business, we look at it two different type of business, we'll do business model, sorry in Brazil. You have the (P&SV), which is a good market and something that we – where we are performing well, with very limited downtime on our vessel and that's reflected by the results. They are obviously the negative impact of Guara-Lula that I mentioned before. I would be cautious on looking at Brazil on the quarter-by-quarter basis, as we have a number of write-offs which can impact some of the results on a quarterly basis. Regarding the margins, we can get good margins on the PLSV vessels which are day rate with some incentive on performance contract. Our approach for the large EPIC project in the pre-salt is basically to say that we will not commit to projects if we don't believe that we can mitigate the risk associated with Brazil operation, which is likely to require a different rig sharing profile that we have done compared with the one we have in Guara-Lula on Petrobras. So, we are quite disciplined in the way in we look to the future of this large deal projects and we will not acquire project if we don't believe that we cannot meet profitability similar to what we can do in other part of the world. Regarding the progress on Jasmine, I'm going to let John Evans comment.

John Evans - COO: Good afternoon, Tom. Yeah, Jasmine is a project in the North Sea. There's no issues to some changes in works flow we've agreed with the clients. So our clock has gone back slightly, but we're kind of at the end of the project and it's been a good project for us.

Operator: Phillip Lindsay, HSBC.

Phillip Lindsay - HSBC: Just a couple of general questions really. The first one's on shareholder returns. Obviously we've had about $200 million or so as a special dividend, but you did have a buyback last year. So it's half the return year-on-year. I do understand that there is a convertible maturing in October I think it's in the money at the moment. So, you may prefer to have extra cash, sort of swashing around. So, looking ahead free cash flow profile looks pretty good, it's improving over the next couple of years. So, I'm just trying to get a sense of what potential is would you consider restating an ordinary dividend or regular share buyback program, that's the first question?

Jean Cahuzac - CEO: Ricardo do you want to answer?

Ricardo Rosa - CFO: Yes. Good afternoon, Phillip. I think the status of our policy regarding shareholder returns has been set out in our press release effectively and the Board has indicated that we will continue to prioritize value-adding investment opportunities in our business, particularly with this growth market that we are seeing ahead of us. I think the reiteration of a special dividend of $0.60 a share highlights of confidence in the business and to the extent that it makes sense and to the extent that the Board feels comfortable with it, we will look at opportunities for returning cash both in the form of additional special dividends or potentially share buybacks. There is not at this stage a commitment to any form of regular cash return to shareholders in view of the need to prioritize reinvestment in our business.

Jean Cahuzac - CEO: With the right return I know it makes sense, I mean that's limited.

Phillip Lindsay - HSBC: Second question, you talked in the statement about shortage of qualified and experienced personnel presumably a lot of that is engineers and the several other players targeting growth in offshore and subsea currently I suppose will also be targeting your staffs. Is this happening? Is it getting worst right now? What are you doing to prevent this? And then sort of second part to that question would be management of risk in relation to that. So, your order intake has been incredibly strong off-late. If you are sort of short of key personnel now what comfort can the market have that you've got enough engineering resource to perform at thorough front-end of these projects and therefore minimize issues during the execution phase?

Jean Cahuzac - CEO: I think you are quite right when you mention that one of the biggest challenge of the industry is the people and will remain a challenge in the years to come. The way I look at it first is that we've been very successful in recruitment of people both through our normal, I would say, recruitment program but also conversion program from other industries and that has allowed us to increase – those are net number – by 400, the number of engineers in engineering and project management. We have seen a decrease of attrition in the second part of 2012 and the 2013 first months are quite encouraging. I think it come to the fact that people see growth in the company that see more and more interesting projects, technically advance projects and I am quite encouraged by these results. Regarding the management of the risk which relate to customers, we are very disciplined in the sense that before we actually did the job we obviously identify the resources which are required and there is a detailed analysis of what we do to I mean to prepare the project and making sure that we will be able to execute this project in an efficient manner. We like to ask John to give a bit of color on that.

John Evans - COO: So, we do a lot of work on manpower planning as Jean talked about by discipline, different engineer disciplines and different project management disciplines that we need, and we run very detailed models of the workload coming off as the projects completes and how we start again. So, as Jean said, we are quite disciplined about which jobs we want to take and how we take them to make sure that we are resourced accordingly. The turn in the last six months has been very positive to Subsea 7. We have retained a lot of people and we do see that as a very distinct strategic difference between us and a lot of the new players here and that we have the resource base and we're growing that base. But as Jean says, we do invest very heavily. We've got over a 100 engineering graduates starting this year. The conversion costs of taking engineers from other industries is very expensive and time-consuming process but at the end we got exceptionally well-qualified and trained engineers for our business. So, we also take our share of developing the pool as well rather than moving the pool around between different players.

Jean Cahuzac - CEO: When you look at our execution of projects, I mean obviously, I'm disappointed with the Guara-Lula project as you can imagine. But when you look at the overall results of the Company in the last quarter in 2012, it shows the depth of expertise that we have and that it could demonstrate that outside of Guara-Lula, we've been executing projects very, very because if not, we wouldn't be where we are. I expect that we'll continue in the future.

Phillip Lindsay - HSBC: Just a very quick follow-up, if you don't mind. Just on the PLSVs in Brazil, I know you're trying to renew I think four you said in the second half of this year, I think you've got six or seven in total on long-term charter. There will be a lot of new tonnage coming in over the next sort of three to four years, does that impacts your position here in terms of some of the older tonnage? And if so, would you be able to find the home very easily for the older vessels?

Ricardo Rosa - CFO: Well, I think the way I look at it is we are as we are doing for the rest of the fleet continuously improving the quality and the specification of the vessel. So, some of the new vessels that we are building and if you take the Seven Waves and if we're successful – if we're to be successful on this new run of tender I mean this vessel will be the vessel that Subsea 7 will operate in five years, ten years or 15 years and we will retire some of the older vessel. If I take the Rock (Naga) for instance it's a vessel which comes to end of her life. So, I'm not concerned with the additional capacity that you've seen coming to Brazil, for two reasons. I mean, first there is a limited number of companies who are actually bidding for this PLSVs job, because it also required a strong local to operate them successfully. It requires the strong Brazilian presence and some operational and engineering capability. There were only three bidders in the last round of bids. And when you look at the program of Petrobras and what they need not only for pre-salt but post-salt I think there is a strong possibility that there will be a shortage of PLSVs rather than over supply of PLSV in the years to come. So, it's a business that we like. We have demonstrated and we're comfortable that we can make the right profitability in this business.

Operator: Ryan Kauppila, Citigroup.

Ryan Kauppila - Citi: Appreciate the granularity you've already given on Brazil. But in a statement on the current provision you mentioned a commercial dispute with Petrobras. Have you noticed any change in the Brazilian operating environment for the worse or for the better with the new management and with some of the cash flow constraints that we're seeing in the press and mentioned by Petrobras? Then secondly again on Brazil, on the ICMS tax dispute, if you could just highlight what exactly the ruling was this quarter and how that whole process we should expect to evolve from here?

Jean Cahuzac - CEO: I will take the first part of the question and Ricardo will comment on the ICMS. Working in Brazil is a difficult environment and one of the reason is the Brazilian administration constraints, which are very specific to Brazil and very different from other part of the world. When you talk about importation rules, when you talk about a number of probable issues and we mentioned in that we've taken in the 52 million take into account, commercial dispute that we have with Petrobas. I cannot comment specifically on the dispute as you can imagine because we are in the middle of the negotiations. But I would say that the general business environment in Brazil had not really improved on the pre-salt lately and that's why we are to be very disciplined and making sure that when we commit to something, if we commit to new projects, it's with the level of risk, which is similar to what is available outside of Brazil that's not always easy, so we will see what future will show. Regarding ICMS, Ricardo?

Ricardo Rosa - CFO: As you know in Brazil, I mean, one of the challenges of operating there is the plethora of indirect taxes and the relatively aggressive posture that the authorities adopt in assessing companies for infringements or alleged infringements of the regulations there. So, having a number of ICMS cases that we are managing is not unusual for any company operating in our sector or others. The recent developments are ones that don't cause us any additional concern. We have a number of cases outstanding. They are being heard at what we call at the administrative level of the tax authorities and they will tend to find in favor of the inspector. After this initial ruling there are number of levels of appeal within the judicial system and we are working actively to defend our position there and our lawyers who advise us on this remain confident that ultimately we should be successful. This being said, the whole process of working a case through the course in Brazil can take a very long time. So, I cannot tell you today when we believe this will be resolved. There is slightly to be many and many years.

Ryan Kauppila - Citi: And just a quick follow up on the first, sort of, the recent Petrobras it looks like shift took the flexible risers for the next developments. I know you were tendering for the others. Was that a process that sort of caught you off-guard, or is this something that you could see sort of happening under the surface?

Jean Cahuzac - CEO: No, it didn't take us by surprise. But I mean, first, I'm not sure that I would share fully your view on what Petrobras said regarding the development of the pre-salt. I mean, they obviously indicated that the next two fields – or three fields will be developed with flexible. They also indicated to us that there will be field developed with rigid pipe solution, and that should be clarified in the months to come. So, no, I mean it was not a big surprise for us for the next two fields. What I find – I mean, one point I want to highlight is that even when the decision is to develop some field with flexible pipes, it's not bad news for Subsea 7 as the last contract that we just signed with Seven Seas shows the $300 million of contract is in fact flexible pipe installation that we're doing on behalf of Petrobras, part of this job being on lump sum and it's a free placement from Petrobras on the flexible pipe. And I think one of the strength of Subsea 7 worldwide not only in Brazil is that we can provide whatever technical solution is a best at the given time for the operator, from rigid pipe lays to flexible pipe, and that gives us a lot of flexibility in the way we look at the market. There will be more rigid pipe development in pre-salt in my opinion, but again, I mean, we will take a very prudent approach for this project, especially when supply chain is deeply involved like it is on Guara-Lula, so that the level of risk and the expected profitability is in line with projects outside of Brazil, and that may mean that our backlog may take some time to grow on the pre-salt. I mean if it is – what it means it will be okay with me. We'll do it when we are ready.

Operator: Robert Pulleyn, Morgan Stanley.

Robert Pulleyn - Morgan Stanley: Most of my questions have been answered, but just a couple of extra, if I may. First of all, could you give us some indication of what sort of timing you see for some of these large West African contract awards? But also and of equal interest on, what’s going on in the Gulf of Mexico and potentially a pickup in activity there? And then secondly, I know you already mentioned and given a lot of color regarding the first quarter, and obviously the impacts of North Sea weather and drydocking. Could you give us maybe a little bit more of a steer relating to the exact movements of those vessels out of the North Sea and when they should impact and how we should think about margins within the first quarter? Thank you very much.

Jean Cahuzac - CEO: Regarding the first question on Africa, as you know, I mean, it's always very difficult to put an exact timing on the contracting in Africa. One of the point that I may start with is Nigeria. The next contract probably to be awarded is Egina. Not sure that we are well positioned for this project, but future will tell, but I am not sure that we are, but Egina could be the next one to be awarded to market in 2013. There is still the issue of the PIB and the tax law, which probably will delay further announcement of deepwater project in Nigeria. We've been quite pleased to see Erha North being awarded to us in the first part of 2013, and that’s where the ships are moving. In the first part of the year of 2013 we expect for Tullow in Ghana will be awarded to market. There is some -- a number of big projects which are being tended in particular Total Kaombo Block 32 in Angola is very last project that we are bidding in consortium with Saipem. We expect that this project will be awarded to markets in the second part of '13. And then there are other projects of different sizes in West Africa. So, I would say the momentum is still there. There is always a question of timing for some of the projects, but outside of Nigeria we are seeing things going in the right direction, but timing is always difficult to predict. Regarding the Gulf of Mexico, we are seeing an improvement of activity with different type of models. There is one of the large project, the EPIC project, which will be awarded to market, I think, in '13 would be Algerian project for Exxon, but we see more projects coming to market and we see this trend to continue in the years to come. Operation on this project will be post '13 and in some case post '14. And then we see increase of activity in Mexico. We got our first project for PEMEX with the Borealis, and there are additional prospects and projects, which should be awarded to market later this year and in '14. So this part of the world is improving.

Robert Pulleyn - Morgan Stanley: Just on when we are thinking about 1Q margins, so we don't overestimate the profitability in the next set of results, is it going to be substantially weaker in the North Sea than the first quarter last year?

Jean Cahuzac - CEO: In terms of utilization, we are going to see lower utilization for Subsea 7 and for the market that we have seen compared with what we've seen in Q1 '12. We're back to historical good numbers. I mean, it's not that it will be lower than '12. In terms of the margin of the North Sea, we see the margin going in the right direction because of the activity there and the tender. There is one point to take into account when you look at overall margin of big projects, is a trend towards epic last project that we start to see in the North Sea. As a reminder, when you have a large project and you have a significant part of this project, which can be 30%, 40% 50%, which is procurement, our approach for procurement is to actually mitigate the risk, share the risk with the operator especially into the market, and therefore go with lower margin on procurement. So, the profitability on the non-procurement operation is, I mean, going in the right direction, improving. When you have a large project, it can be tempered because on the procurement side you have lower margin, but overall it's good, it's encouraging. One of the points that I mentioned in my comments is that the Ocean will not be in the North Sea in the second part of 2013, because she will be operating on Guara-Lula and therefore there will be no pull-through of the Ocean in the North Sea during the 2013 summer.

Operator: Christyan Malek, Nomura.

Christyan Malek - Nomura: Gentlemen, two questions only. First, I just want to understand why in Q4 '11 when you provisioned for the number, what did you miss then that you revised now? Because sort of having to revise again, I understand the moving parts, I guess the fear is that you do it again in six months' time having recognized other issues. So what's changed and I guess going – if you can walk us through that. And why you don’t think you'll do it again? And then the second question relates to day rates, and can you quantify or talk about the uplift in the day rates renewing on the current vessels? What are they currently, where are they going to, how much of your business is also a day rate business?

Jean Cahuzac - CEO: To answer your question on Guara-Lula, where are we on Guara-Lula and why did we took this additional hit. I mean, the first comment I would like to mention is that part of that, and a significant part of that is a commercial dispute that we are having with Petrobras, and that’s the kind of thing that you cannot really predict. So it's something which emerged late Q4 2012. That we did not have in the radar screen in 2011. The other thing is that we are starting operation now and we have kept the contingencies that we usually have on project prior to start operation, because it’s a risky part of the business. And as we said before, I mean, you actually release contingency once you have done the operation. The project being under loss, any bad news is going to hit the bottom line, and we had some challenges with some suppliers that we have taken into account. So today when I look at the overall project, we are starting the critical phase, one of the critical phase of the project, the last phase of the project operation, and what we have in the number is our best estimate like we have on other projects.

Ricardo Rosa - CFO: Before John starts answering your question on day rates and vessels on the day rate contract I just like to add two comments to his explanation. First one with regard to the commercial dispute, I mean clearly we have taken a prudent approach. But this does not mean that the issue is not under discussion with Petrobras and we will work towards some form of resolution, but at this point in time we're not in a position to conclude that we will be successful of that. The second point, I want to make is just to clarify Jean's comments about looking at risks and the associated provisions and contingencies, I mean, this is something that we do every month. We evaluate the risks associated with each project in the light of what we know at time we're doing the evaluation and we will assess the impact on the margin at that time. To the extent that that risk is wholly mitigated subsequently, we will make the necessary adjustments to our contingencies and to our margins. But I want to emphasize that this is a robust and ongoing process. With that I'll hand back to Jean to talk about day rates.

Jean Cahuzac - CEO: I mean talking about day rates, I've already committed on the PLSVs. We have some vessels in the North Sea which are on day rates some diving operations or some live construction vessels, but I would say the core of our fleet, the majority of our fleets are not on day rates, they are on projects. So, I mean say altogether, we're seeing this trend going in the right direction for the vessels on day rates but we are a project Company and most of the revenue doesn't come from day rates outside of the PLSVs. So I look at project profitability more than day-dates.

Christyan Malek - Nomura: Just following up just back on the first question, I mean, I sort of understand the commercial dispute in terms of contingency management. Has something structurally changed in the last 12 months that would preempt and understand future contingencies, because clearly what's happened is that you've had to resource more than you thought you had to and therefore that's what creates to further loss? So, what's changed systematically within the business that would preempt this sort of thing happening again over time on the 12 months?

Jean Cahuzac - CEO: As I said before, we have this detailed review of the project. We are closer to the end of the project. So we have a lot of things which are behind us. We've made a pretty good project and very good progress on the project in fact. With the delivery on time, of Q4 schedule of the (indiscernible), but where we are on the arrival. So the closer you come to the end of the execution of project the more comfortable you are, but we still have to do the operation, so as any project, there are risks associated with operation which are not Brazilian risk in that case, which are operational risk. I would say that and we believe that what we've put in a number will reflect all that. Any project has a risk until it's completed. It's true for Guara-Lula, it's true from some other project. I think experience when I look at the 147 projects that we are running in parallel, encourage me that we know where we are.

Operator: Kristian Diesen, Pareto.

Kristian Diesen - Pareto: Question on the CapEx; the operating CapEx you're guiding on, is that what we should assume as being maintenance CapEx going forward or how would that split on the $800 million you've guided for the next five years be in terms of all maintenance and expansion?

Ricardo Rosa - CFO: I indicated that our guidance for 2013 was for operating CapEx or maintenance CapEx as you refer to it. Of between $425 million and $475 million, now embedded in that figure is a number of investments you obviously have the drydocking of the vessels offshore, but you also have equipment that is needed to enhance or the existing fleet and also includes investments that are required on shore based facilities, be their spoolbases or offices or potentially investments relating to local content. But overall the – if you are looking for guidance over a multi-year period I think it's reasonable to assume that that is a reflective given current levels of activity its reflective of our continuing needs on the CapEx side.

Kristian Diesen - Pareto: Then on the North Sea given the order intake we have seen now for past couple of years could you update us little bit on the pricing environment there sort of are you seeing further tightening and improved pricing and what's the effect of call it new or smaller players getting part of the work?

Jean Cahuzac - CEO: We are seeing improved pricing in the North Sea, both in the Norwegian and the U.K. sector. Again as I said before I mean when you look at some larger project which include procurements, I mean the margin not necessary increase when you have a significant part of procurement at the lower margin, but lower risk. Talking about the competition there is more competition not only in the North Sea, but also outside of the North Sea and that’s what we would expect in the growing market. So we are seeing more competition the differentiator that we have come from our engineering project management capability and the size of the fleets which give us a lot of flexibility. So I am not – I think we have to take that into account but I think Subsea 7 is very well positioned in the market in spite of strong increase in competition. I would say that most of this competition comes from the lower end of the market and actually targeted small projects which are handled with smaller vessels, which is not really the market we are focusing on. So, I would say I'm optimistic that we will continue to differentiate ourselves in a market where we see more competition. It's not a big concern for me, but it's – we have to acknowledge we have more competition here.

Operator: Andrew Dobbing, JPMorgan.

Andrew Dobbing - JPMorgan: You've mentioned supply chain risks. Can you give us a bit more detail on whether these are currently coming from the timing of awards for new projects or as in the case of the project in Brazil, the Guara-Lula project, if it's – is it putting risk on profitability contracts currently under execution? So I realized it's perhaps most related to Brazil, but I mean are there other projects which are ongoing, where you can see risks of this supply chain?

Jean Cahuzac - CEO: I think when I look at supply chain and further to discussion that in fact I had very recently with a number of our customers, our clients, I think we all have the same view. The compliance on supply chain is everywhere on the Subsea equipment and some other equipment on the worldwide basis; from last company suppliers, from last suppliers and smaller suppliers. So, I think it's something we have to take into account all of this. In some cases, it can postpone some of the project of the operator without having any impact on Subsea 7, but some projects are pushed to the right. The costs are going up and that cost that we pass to the operator, but it increased the cost base for the operator which is something which is a factor that we have to acknowledge. The risk associated with the supplier exists on all EPIC projects and that's why we need to have the organization that we have, the resources that we have to assign to mitigate this risk. In the specific case of Brazil, the $300 million project that we signed is result supply chain. It's placement from Petrobras and it's the type of project that we know how to handle in Brazil. But supply chain is a challenge for the industry, it's a challenge for Subsea 7. I think it's something that we are handling rather well, but it's a risk which exists and we have to acknowledge this also.

Andrew Dobbing - JPMorgan: On most of these projects you're committing to delivery date, I guess completion date – how well are you to kind of insulate yourself, or protect yourself against equipment being delivered late?

Jean Cahuzac - CEO: You never cover 100%. You cannot protect yourself 100% on this project. That's why you have actually contingency build up in the project and also a backup solution. The biggest impact of delay of some equipment on some of the project is the impact that we have on the sequence utilization of the vessels and then on lot of projects, that's where the risk. We can mitigate somewhat this risk, because of the size of the fleet and the fact that we can swap vessel et cetera, but will never eliminate competitive risk. It's a risk which is part of our business, and it's a risk that we need to manage. I think we've come to the end of our session. I'd like to thank everybody for the participation and look forward for also the discussion after our Q1 results in 2013. In a business which definitely quite encouraging I would say. Thank you.

Operator: Thank you. This does conclude the conference for today. Thank you for participating. You may all disconnect.