CGG : Transcript T2 2021

Q2 2021 Financial

Results

Wednesday, 28 July 2021

Q2 2021 Financial Results	Wednesday, 28 July 2021

Introduction

Christophe Barnini

Head of Group Communications, CGG

Welcome

Thank you. Good morning, ladies and gentlemen. Welcome to the presentation of CGG's second quarter 2021 results. The call today is hosted from Paris, where Mrs Sophie Zurquiyah, Chief Executive Officer, and Yuri Baidoukov, Group Chief Financial Officer will provide an overview of the second quarter and half year 2021 and will also provide comments on our outlook.

Some of the information contains forward-looking statements that are subject to risk and uncertainties and that may change at any time and therefore the actual results may differ materially from those that were expected.

Following the overview of the quarter, we will be pleased to take your questions.

And now, I will turn the call over to Sophie.

Business Overview

Sophie Zurquiyah

Chief Executive Officer, CGG

Introduction

Yes. Thank you, Christophe, and good morning, ladies and gentlemen. Thank you for participating in this Q2 2021 conference call. I will start with general comments on our market environment on slide five.

Q2 2021 Business Overview

Market trends

Overall, during the second quarter, activity of our clients remained similar to the first quarter with the international oil companies maintaining capital discipline, while national oil companies and large independents remained more active. However, the macro environment has clearly strengthened with Brent oil price remaining over $70. This is triggering an increase in short-cycle investments, mostly targeting development and production. We are not yet seeing in our Geoscience space significant changes in behaviour even though there are positive signals.

In 2021, the IOCs will generate significantly higher cash flow and deleverage quickly, even if financial discipline, dividend pay-outs and decarbonisation remain their priorities, we expect they will start accelerating spending to meet hydrocarbon demand recovery and compensate for the depletion of their existing reservoirs. For all the activity of our clients to optimise production from their current reservoirs and to meet growing hydrocarbon demand, CGG's high-end technology will be a key component of the value chain.

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Q2 2021 Financial Results	Wednesday, 28 July 2021

Business performance

Already, we see Geoscience progressively recovering, thanks to increased demand for our superior technologies and services.

Multi-client was particularly slow during the quarter, due to delayed pre-funding and a slow decision-making processes from our clients, mainly DLC. Since then end of June, we have finalised agreements for more than $35 million of pre-funding for our 2021 streamer vessel programmes. Those agreements were expected in Q2 but slipped into July.

It was a slow quarter as planned for our equipment business due to the timing of deliveries. Sercel was recently awarded a major contract for 18,000 GPR300 shallow water nodes which are currently in manufacturing and will be delivered in Q3 and Q4. Sercel is also in advanced discussions with significant land equipment deliveries in Q4.

Overall, after a very low first half of the year, we anticipate an acceleration of our top-line and profitability in H2 2021 and into 2022.

Balance sheet

Earlier this year, I highlighted our business initiatives to dispose of a few assets and divest non-core businesses. During Q2, we hit several milestones. First, the headquarter building sale and leaseback initiative is progressing well, with closing anticipated in Q4. Second, the sale of the GeoSoftware business is progressing as planned and we are confident to close this sale in Q4. At the end of June, our physical asset storage business has been put for sale. This is a non-core business for CGG for the storage of physical assets in large warehouses. These two divestitures enable CGG to further focus on the continued strengthening of the differentiation of our core businesses and our growth beyond the core.

With the expected solid second half of the year, the monetisation of assets and disposal of the businesses held for sale as well as the full impact of our savings, CGG should deliver a positive net cash flow in 2021.

Moving on to slide six now.

Q2 / H1 2021 Key Financial Highlights

Our Q2 revenue of $157 million was down 22% year-on-year. Group segment EBITDA was $42 million, with a 26% margin, mainly due to the business mix. Segment free cash flow was negative $3 million, and net cash flow this quarter was negative $56 million, before $39 million of core premium and fees related to the refinancing.

Our H1 segment revenue of $370 million was down 22% year-on-year, and segment EBITDA was $78 million in H1, with a low 21% margin, mainly due to the business mix. Segment free cash flow was $57 million and the net cash flow for the semester was negative $27 million, before the $39 million of core premium and refinancing fees. Our segment free cash flow in H1 2021 was higher than last year, despite the significant drop in EBITDA, due to an $87 million positive change in working capital and significantly reduced Multi-Client CapEx.

Moving on to slide seven now, with the headcount reduction.

2020 - 2021 headcount reduction

I would like to show you an update on the savings we have achieved from the effort launched in March last year, at the beginning of the pandemic. The reductions which are in line with

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Q2 2021 Financial Results	Wednesday, 28 July 2021

business and legal requirements will amount to a reduction of around 900 employees by the end of 2021. This represents a 21% reduction for the 4,200 employees we had at the end of 2019 in CGG, excluding discontinued operations. Most of the reductions come from our support function and Geoscience.

Compared to 2019, the associated savings will represent $90 million of reduced personnel cost per annum by the end of 2021.

In parallel, we also hired around 100 new talent, mainly in Geoscience, to support our growth beyond the core initiatives. The $90 million in savings does not include additional savings associated with cost control and the reduction of our geographical footprint.

I will now cover our Q2 2021 operation by reporting segment, starting with GDR on slide nine.

Operational Review

GDR key financial indicators

GDR segment revenue was low this quarter at $110 million, down 24% year-on-year, but slightly up sequentially at 10%, thanks to the progressive recovery in Geoscience. Adjusted EBITDA margin was impacted by the revenue mix with less Multi-Client sales than last year. Adjusted OPINC was positive as a result of improved Geoscience revenue and our lower cost base.

Geoscience key business indicators

On slide ten, Q2 Geoscience external revenue was $73 million, down 12% year-on-year, and up 11% sequentially. Geoscience saw the start of a progressive recovery during the quarter. Backlog at 1st July stands at $222 million, up 4% year-on-year. In H1 2021, order intake more than doubled year-on-year, and we are anticipating further significant awards during H2 in the major active basins.

The renewed focus from our clients on field development is driving demand for OBN, especially for our leading processing and imaging technology, which is critical to providing the most detailed understanding of the subsurface to de-risk investments. Our top priority in Geoscience is to remain the undisputed technology leader and this was confirmed by the recent 2021 Kimberlite survey.

On slide 11, the Kimberlite survey is a third-partybi-annual survey of sectors within the EMP industry. Their recent report on subsurface imaging shows that CGG has a clear market leadership position in both technology and the service that we deliver. The chart shows us in the premium offering quadrant, where clients are willing to pay for the better image quality, state-of-the-art technology and turnaround time that we deliver.

Moving on to slide 12.

The same Kimberlite survey compares the different subsurface imaging competitors on a number of criteria. CGG consistently performs well above the industry average and better than any other competitor. The largest gaps in this chart are around the technology and quality of the image we deliver.

And I want to show you now an example on slide 13.

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Q2 2021 Financial Results	Wednesday, 28 July 2021

Continued innovation on OBN imaging

The use of ocean bottom node seismic is on the increase with increasingly larger-scale surveys designed to provide greater interpretation certainty in areas of complex geology. Around the world OBN technology is being adopted where business decisions require superior subsurface imaging to reduce risk, as the technical advantages over tool stream, the data sets are clear, especially with differentiated processing capability. And this is very much the case in the Gulf of Mexico, North Sea and Brazil, and also in the Middle East as well.

The uplift from nodes combined with our best-in-class imaging technology in this Gulf of Mexico comparison provides an excellent example of how dramatic the improvements can be. The new insights that were delivered enabled our clients to de-risk their well locations both from an HSC and project economy standpoint.

Moving on to the next slide, Multi-Client key business indicators.

Multi-client key business indicators

Multi-client revenue was $37 million, down 40% year-on-year. Q2 remained similar to Q1. The ISC play an essential role in our Multi-Client business and they have remained very disciplined in the first half of 2021, given the macro environment volatility and their focus on the energy transition and restoring financial performance. Sales were also impacted by the lack of bid rounds in the Gulf of Mexico and in Brazil.

We have significantly reduced Multi-Client cash CapEx from last year. In Q2, we had two vessels working on Multi-Client programmes as we started to work on a five-month 3D Multi- Client programme in the Norwegian North Sea in addition to our ongoing Brazil project.

Pre-funding revenue on our Multi-Client project was at $17 million with a pre-funding rate of 39% as targeted pre-funding slipped into Q3 2021. As I mentioned earlier, since the end of June, we have finalised agreements for more than $35 million of pre-funding for our 2021 streamer vessel programme, and I am confident that we will catch up on pre-funding in the second half of the year.

Multi-clientafter-sales were $20 million this quarter, up 28% year-on-year, but still lower than expected. The segment library net book value was $297 million at the end of June 2021, split 85% offshore and 15% onshore.

Multi-Client - worldwide footprint in proven and mature basins

Looking now at the Multi-Client footprint, we continue to expand our library in the most resilient basins. And indeed we have made a conscious effort to increase our participation in development and production successfully and have avoided those frontier areas that we believe would be less robust.

Brazil and Norway receive most of our investments, and we also look for those well pre- funded reprocessing projects that leverage our imaging technology.

I will also point out that we are starting to see new players in the carbon storage space come to us with interest in our data, especially in the North Sea and around the potential development of future major CCUS hubs. I can see where our data library will be very valuable in that new space.

Moving on to equipment.

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