CGG : Transcript T3 2022

Q3 2022 Financial

Results

Wednesday, 2nd November 2022

Q3 2022 Financial Results

Wednesday, 2nd November 2022

Introduction

Christophe Barnini

Head, Group Communications & Investor Relations, CGG

Opening

Good morning, ladies and gentlemen, and good afternoon. Welcome to this presentation of CGG's Third Quarter 2022 Results. The call today is hosted from Paris, where Mrs Sophie Zurquiyah, our Chief Executive Officer, and Mr Yuri Baidoukov, our 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 subject to risks and uncertainties.

Following the overview of the quarter, we will be pleased to take your questions. And now, I will turn the call over to Sophie.

Q3 & 9 Months 2022 Overview

Sophie Zurquiyah

Chief Executive Officer, CGG

Q3 & 9 Months 2022 Macro Environment and General Overview

Thank you, Christophe and good morning and good afternoon, ladies and gentlemen. And thank you for participating in this Q3 2022 conference call.

So, let me start with a few comments on the macro environment. With the combination of continued underinvestment in exploration and production, strengthening of global energy demand and the heightened level of geopolitical uncertainty that has emphasised the importance of energy security, we are seeing positive market signals worldwide and are increasingly confident that our industry is entering a favourable multiyear upcycle.

As always, when entering [inaudible], all markets do not react at the same speed. And today's unique macro environment has created an unusually high degree of volatility across our client base and across the regions where we operate.

In 2022, the North American market was strong, while Latin America, Europe and Asia lagged. The Middle East began ramping up but multiple seismic projects were delayed to 2023.

We also saw similar variance across our client base. Independent and private companies reacted first with a progressive increase in their exploration activity while NOCs maintained their activity level.

In contrast, IUCs continued to focus on shorter term shareholder returns, energy transition, product levels and infrastructure-led exploration.

Overall, this shaped 2022 into a year of transition for CGG as we began to see the strengthening commercial activity around our core businesses and established our Beyond the Core technology and growth businesses with some key pilots and commercial successes.

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Q3 2022 Financial Results

Wednesday, 2nd November 2022

The underlying fundamentals are clearer and I'm increasingly confident in our path forward. Energy transition will be a long process with demand for energy and the requirement for energy security both increasing. With this, the responsible exploration, development and production of oil and gas must play a key role going forward. We see this in action as governments globally move forward with further developing their resources, including UK, North Sea, Norway, the US Gulf of Mexico and Brazil.

Offshore activity is picking up again worldwide. Middle East onshore is growing and Asia Pacific is starting to recover.

The underlying industry fundamentals are favourable to CGG despite the business variability and volatility that we saw from our clients in 2022 as they took different paths to address market conditions.

Demand for our technologies and especially our subsurface imaging is becoming increasingly more important for energy companies to effectively optimise their investment, not only for traditional oil and gas prospects but also for energy transition, including CCUS.

Our core basins of the US Gulf of Mexico, Brazil, UK, Norway and US Land remain the priority for a majority of E&P companies and will receive a big share of the budget increases.

Acquisition contract prices, particularly in marine, are going up, which should strengthen acquisition companies and allow them to renew their equipment. There is more visibility on long-term land contracts in North Africa, Middle East and Asia, supported by NOCs that will require new land equipment.

Order intake for geoscience was up 37% year-on-year and SMO order intake was down 6% but the level commercial bids is at a historically high level going back to 2016.

So, despite this high level of commercial interest and activity going forward, Q3 2022 was soft, mainly as our earth data and sensing and monitoring businesses saw several contracts and projects shift from Q3 to Q4 and to 2023.

Our group 2022 top line is expected to remain flat year-on-year, with 18% growth in DDE offset by lower revenue in SMO. But our 2022 EBITDA should increase pro forma year-on- year by around 15% with a higher margin, which is now expected to be around 42%. More importantly, 2022 free EBITDA is expected to be broadly in line with original guidance.

As the market, industry and CGG have progressed to this year of transition, I have become increasingly confident that we're entering a multiyear upcycle and that CGG will benefit from the increased activity as we move forward.

So, we'll move now on Slide 5.

Q3 & 9 Months 2022 Key Segment Financial Highlights

After this general overview, let's review the third quarter in more detail.

So, in Q3, CGG saw volatility result in lower financial performance. Segment revenue was $217 million. Segment EBITDA was $77 million, a 35% margin. Q3 segment revenue was lower than anticipated as some EDA pre-funding revenue and SMO projects slipped to Q4 and into 2023. Q3 net cash flow before $19 million M&A cash cost was minus $59 million including $40 million negative change in working capital.

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Q3 2022 Financial Results

Wednesday, 2nd November 2022

At the end of September, net cash flow was minus $65 million, including $37 million M&A. In 2022, our CapEx spend [inaudible]. We have already invested 90% of our EDA CapEx at the end of September.

We also significantly increased the inventory of SMO products, consuming an additional $17 million cash since the beginning of the year to be ready for the large upcoming tenders for land and OBN equipment that are expected to be delivered in 2023.

So, moving on to Slide 7.

Data, Digital and Energy Transition (ex-GGR) Key Financial Indicators

Q3 DDE segment revenue was lower this quarter at $131 million, down 16% pro forma year- on-year with growth in geoscience offset by a decrease in earth data due to lower pre- funding.

At the end of September, our core businesses continued to gradually recover as markets strengthened. Year-to-date DDE revenue climbed 30% pro forma year-on-year.

As a result, DDE profitability for the first nine months is up significantly with a solid 58% EBITDA margin and a 29% operating income margin driven mainly by strong recovery in multi-client after sale.

Slide 8 with geoscience.

Geoscience Key Business Indicators

Geoscience external revenue was $69 million in Q3, up 8% pro forma, and year-to-date revenue was 214 million, up 19% pro forma compared to last year.

We continue to anticipate high single-digit growth for geoscience in 2022 and in line with our expectations. Overall, the geoscience KPIs are progressing as expected in the increasingly solid market worldwide with high demand for our technology.

We also see the full effect of efficiency gains in our revenue per head metric.

Slide 9.

Geoscience Q3 Operational Highlights

Commercial activity is increasing worldwide. Total geoscience dollar order intake was up 37% pro forma year-on-year during the period of January to September 2022.

While activity initially picked up in North America in the second half of last year, we now see increasing commercial activity in Europe, Middle East and Asia. In addition, Europe demand is also driven by our Beyond the Core businesses, including our data hub technology and earth data for CCUS projects.

The picture on this slide is a horizontal depth slice through the subsurface. It shows ancient buried river systems with greater precision than the industry has ever seen before. CGG's advanced full waveform inversion technology can resolve not only the larger river channels but also the much smaller tributaries and streams that fed these rivers.

Of course, these old rivers and streams are now filled with rock, which can sometimes be a hazard for drilling or an excellent target for hydrocarbons. Being able to see them this clearly brings significant benefit to our clients.

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Q3 2022 Financial Results

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Now on Slide 10.

Unique Elastic FWI Technology Leveraging CGG HPC

The success of CGG is built on technology differentiation. Our unique elastic full waveform inversion, which was developed by our scientists for complex geology and challenging reservoir development is the most recent example of this differentiation and the commercial success it drives.

Full waveform inversion imaging not only gives improved resolution of shallow heterogeneity but it also increases certainty with respect to their true locations in the subsurface. These finer details enable our clients to do less drilling and optimally position their wells.

On this picture, it is important to note that the results between the left and the right side are coming from the exact same data set recorded years ago. Initially developed to solve critical Gulf of Mexico challenges, elastic full waveform inversion is now applied outside North America.

As an example, this picture is from offshore Brazil where, as you know, pre-salt geology is complex and the application of the most advanced technology can bring significant value.

Looking forward, with recent advancement in elastic full waveform inversion, it may be possible soon to quantitatively provide further rock property information directly to our clients, reducing timeframes and increasing the accuracy of interpretations.

Moving on to Slide 11.

CGG HPC and Cloud Services

Our highly specialised and therefore, highly cost performance HPC capacity has been a key enabler for the continued release of our technologies. Often this technology advance and differentiation requires orders of magnitude, more compute power and hence a unique and specialised solution.

Today, we operate three main data centres in Houston, London and Singapore that are interconnected and form our CGG cloud. We continue upgrading CC capabilities to mainly serve our geoscience activities but also to ensure our CGG cloud can be leveraged by our clients as we continue to build our Beyond the Core businesses.

At current, we're constructing a new HPC hub in Southeast England. It is progressing as planned and expected to be operational in the third quarter of 2023.

The building of this new data centre in the UK also gives us the opportunity to use 100% green renewable energy, improving our electricity power usage efficiency ratio and contributing to our greenhouse gas emissions reduction.

Our company's high end technology business profile, along with our low carbon intensity footprint and our continued reduction have been recognised by ESG rating agencies. Only two oil field service companies, including CGG, have achieved a double A rating with MSCI. With an index of 17.9, CGG is also ranked number two by Sustainalytics among 113 energy service companies. And finally, Gaia Research recently further improved the rating of CGG from 54 last year to 65 in 2022. We're proud of our ESG leadership and achievements to date and are committed to reach our goal.

So, we'll move now to Slide 11, with earth data.

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