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Edited Transcript of GTT.PA earnings conference call or presentation 26-Jul-19 6:30am GMT

Half Year 2019 Gaztransport et Technigaz SA Earnings Call

St Remy Les Chevreuse Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Gaztransport et Technigaz SA earnings conference call or presentation Friday, July 26, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Marc Haestier

Gaztransport & Technigaz SA - CFO

* Philippe Berterottière

Gaztransport & Technigaz SA - Chairman & CEO

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Conference Call Participants

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* Jean-Francois Granjon

ODDO BHF Corporate & Markets, Research Division - Analyst

* Jean-Pierre Dmirdjian

MainFirst Bank AG, Research Division - Research Analyst

* Martin Boeris

Exane BNP Paribas, Research Division - Analyst of French Mid Caps

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Presentation

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Philippe Berterottière, Gaztransport & Technigaz SA - Chairman & CEO [1]

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Good morning or maybe goodnight to those who are following this conference from abroad. I know that some analysts are not here today, analysts who are following GTT. Some investors are following this conference through the net and also some colleagues, employees who would like to know a little bit more about the company. So good morning.

Very quickly, as you know, GTT is an engineering company, licensing its proprietary technologies through license agreements to shipyards. We do that for 50 years.

We have currently 368 people highly qualified. We design tanks, we -- for LNG carriers and also for onshore storage. And we are actively developing in LNG as a fuel tanks as it's a new business promise through strong development. We provide also different services.

Very quickly, our consolidated key figures for the first half of 2019. The total revenues amounted to EUR 123 million. Royalties to EUR 116 million; services to EUR 7 million; and the net income to EUR 57 million.

The highlights, the strong level of orders in the first part of the year with 26 new LNG carriers. We announced in July 2 additional ones. In first half of the entire year of 2018, we were at 48 LNG carriers, to give you a way of comparing.

We have had new successes in LNG as a fuel with another from Hapag-Lloyd to convert container ship. It's quite interesting to see whether we can provide a solution to convert existing ocean-going vessels to LNG tanks through our solutions. Also another 4 -- 5 container ships for a European shipowner with quite large tanks.

Well, we have new directors -- a new director in the company, Judith Hartmann, the ENGIE CFO, named at the recent shareholders meeting. She's replacing Didier Holleaux, who resigned. We plan to have an interim dividend of EUR 1.5 per share to be paid in September.

So for our core business, I said that we had 26 orders in the first part of this year, in the first 6 months. We delivered 14 LNG carriers and 2 FSRUs. So the order book as of today's -- as of the 30th of June amounted to 95 LNG carriers, 7 FSRUs, 2 FLNGs and 3 onshore storage tanks.

For new businesses, the order book amounts to 18 units with 14 container ships, 1 container vessel to be converted, so let's say 15 if we add the 2; 1 cruise ship and 2 LNG bunker ships. 7 orders in the first part of this year with the 5 ultra-large container ships, the container vessel to convert that I was talking about, and 1 LNG bunker ship.

So LNG is developing and is an energy of the future. We know that gas should be the fossil energy which should go in the worldwide energy mix, while coal and oil should decrease in their shares in the worldwide energy mix. That does not mean that, currently, the productions are decreasing. It's not the case for oil and gas. But their shares in the worldwide energy mix are decreasing.

Well, LNG is growing much quicker than gas as a pipeline is decreasing. So in fact, the development of gas is going -- is mainly -- is due to LNG, which is compensating and beyond the decline of gas trade through pipe.

Well, when we look at the expectations for the next 15 years and when we look at the expectations since 2016, we see that the expectations have grown very significantly in a matter of 2.5 years. The Wood Mackenzie, a recognized analyst -- market analyst on the energy market, has added 115 million tons per annum. So strong expectations of development of LNG.

If we look -- still look at Wood Mackenzie means -- consider that by 2035, in this sector, 2035 is not that far away, the overall production of LNG should be at about 650 million tons per annum while today we are below 400 million. So adding something like 270 million tons per annum. For those who have the, what we call the shipping intensity or the ton-miles in mind, it means a lot of ships.

So in order to fulfill this increase of demand, there is a need for FIDs, final investment decisions, on new liquefaction plants and, of course, on new ships to transport these quantities.

Here you have the projects, the projects which have been sanctioned in -- recently. The FIDs taken since October 2018, it represents 50, 5-0, million tons per annum with Canada LNG, Golden Pass, Sabine Pass Train 6 and, very recently, Mozambique, decision -- the decision that has been taken on the 18th of June and adding 12.6 -- 12.9 million tons. So a lot of things had been decided. And still there are some additional FIDs which are expected in the not-too-distant future.

But the case of Arctic LNG 2, the kind of Yamal project in the northern part of Russia, representing 18 million tons. Very recently, we know that they managed to close the investors with investments from Japanese companies. And the past -- a couple of days ago, a very large contract to TechnipFMC for their liquefaction plants. So that is on track even though the FID has not been formalized yet.

Qatar expansion, Mozambique LNG-4, Calcasieu Pass and PNG expansion. So that's projects which could be decided soon because all the engineering studies have been made and it could be sanctioned. And then beyond, there are sales projects which are -- where the energy companies are working on preparing them for decisions. So there are things which are in the offings for decision.

So here you can see our estimates for long terms. We still consider that between 2019 and 2028, there should be between 280 and 310 units. In terms of FSRUs, between 30 and 40 units. In terms of FLNG, up to 5 units. And onshore and GBS tanks -- GBS, that's these gravity structure kind of concrete tanks which are lying on the seabed, there is only the upper part emerging from the sea and connected to the shore, there should be between 10 and 15 units in the next 10 years.

A look at the new businesses. We know that the International Maritime Organization has implemented emission regulations, and LNG is the only solution allowing comprehensive environment compliance, whether you're talking of sulfur oxide, nitrogen oxide, CO2, as LNG is significantly reducing the emissions of CO2 and also particulates. You can see that there is no particulates with LNG. There are very little nitrogen oxide and there is no sulfur oxide.

So we have to work on the improvement of the availability of LNG for fueling ships. That's the logistics which has to be put in place. And earlier on, I have shown you that we got a contract in the first part of this year for a bunkering ship, so we are continuing on this path. And that is a very good sign, not only because it's business, but also because it means that the logistics for delivering LNG is improving.

Well, currently, there are about 320 LNG fuel ships which are in operation, mainly with small tanks. And the -- fueling a ship with LNG is something that we know very well. We do that as a living for years for LNG carriers. LNG carriers are very special ships which are burning their own cargo. So we know that, we do master that and we can make that available.

Just a word here, in fact if we look at the total fleet, the orders for LNG as a fuel, we see that we provide tanks -- very large tanks for container ships and there are plenty of small ships with small tanks.

And when you look at the volume, the total volume of LNG as a fuel on big ships and the total volume of the other technologies for small ships, you'll see that, finally, in terms of volume, not in terms of number of ships, the GTT technologies are representing about 1/2 of the volume, something like that. So in fact, as of today, we have already become a solution of preference according to this criterion in terms of volume stored for LNG as a fuel sector.

The scrubbers, they are banned in key areas more and more. You know that it's a technology which is very much (inaudible) for complying with the IMO rules. Basically, it's -- you clean up the emissions, thanks to a kind of shower, not exactly water, but water plus some products. And you collect this mass, where you have this water and the -- some emission, some oxide, sulfur oxide and you dump them into the sea. So a lot of places are banning that, in the case of China, India, where there is an increasing environmental concern. It's also the case of Singapore, Ireland, California, Norway. So it's a concern. And so in order to comply with the rules in these places, you've got to go to closed-loop scrubbers where you are collecting this acid mass and you have to discharge this acid mass in a harbor, which is a costly expense. And for those who have open-loop scrubbers, they cannot operate in these places.

Well, a way of looking at the payback on LNG, we see here that currently the payback against compliant fuels according to the prices of the barrel could be very short, lower than 1.5 years at $80 a barrel, the oil barrel or a bit longer if we take into consideration $60 a barrel. So in fact, you may say, well, it's a no-brainer. Well, it's what we think. It will come. We are keeping on thinking about that. So you may look at these figures and see when the market is really going to take off. It's an efficient solution. Of course, it's additional CapEx in terms of upfront, so you may have other alternatives. But we think that, finally, it will take off.

If we look at the payback of LNG and scrubber against compliant fuels, you see the red line, it's the scrubber. The blue line, it's LNG. And you have the conditions which are indicated below. It's for a quite larger ship, 14,000 TEUs container ship. And there you see that you have a kind of breakeven point between LNG and scrubber after 7 years. 7 years, it's long, it's a bit of time. But we feel that the LNG solution is far better environmentally. You can see in the long run, on the life of a ship with a supposed life of 20 or 30 years, 7 years is a bit short. But here you have the possibility to select something which is going to be environmentally friendly for decades.

Well, we are keeping on working on various designs for adopting membrane technologies to ocean-going vessels, well, container vessels, that's what you can see, but also bulk carriers, cruise vessels. And we are developing LNG bunker barge and bunkering ships. And we have already orders for -- not for all of them, not yet. We have not orders for bunkers, but we have orders for barges, for bunkering ships, for cruise vessels, for container ships. So what is important, in my opinion, at that stage is to see how we are capable of breaking into a new segment of the shipping industry.

And so container, you have plenty of ships. Cruise vessel, not that many. Bunkering ships are very good indicator of the development of the logistics, of the LNG logistics and are we going to be able to break into new sectors, such as bulk carriers or maybe tanker ships or any other sectors of the shipping industry. So a bit nervous this morning.

So as you know, we develop the full range of services for decade. And these services have proved to be -- have proven to be very helpful for helping shipowners to adopt LNG as a fuel. If they need to train their crews to LNG, we have subsidiary LNG GTT training, providing training solutions for years. If they need assistance in their bunkering operations, we can offer that to them. If they need hotline to be helped 24/7, we have a hotline in place working quite well for LNG carriers for years.

We have a wide range of partnerships with 25 shipyards under licensed agreement. We have a network of membrane tank outfitters, it means companies which the shipyards can subcontract the construction of the tank to. We have close relationship with engine makers and also fuel gas handling system providers. So I would say months after months, we've developed this network of partnership with the idea of making LNG as a fuel as simple as possible.

Our commercial success, a quick recall. 5 ships for container ships in beginning of this year. Hapag-Lloyd conversion of very large container ship with 6,700 cubic meter. The CMA CGM order 15 months ago with 18,600 cubic meters. The PONANT expedition ship with 4,500 cubic meter. The MOL bunker ship, 18,600. Another MOL bunker ship, 12,000. So quite smooth flow of orders.

Services. We can provide studies through our consulting activities. We can provide training, we can provide assistance to operations, we can provide emergency assistance. We develop our activities in the software with -- we have a strong digital activity. We have capability of assisting owners in their maintenance activities. We have -- we can provide tests to see whether membrane tanks have defects or in which states they are, and we can provide also a lot of engineering assistance.

Our strategic road map. Not a lot of change, I would say. Of course, at the heart of the company, there is the willingness to maintain the -- its capacity of offering state-of-the-art LNG carrier technologies, and that is very important. Through that, we can provide technologies for offshore activities, for the -- such as FLNGs or FSRUs. We work on multigas carriers, capable of working different gas. We work with some gravity-based system, which is something that we're working on, introduced last year, and which is attracting a lot of interest.

Beyond (inaudible) enlarging that to services and LNG as a fuel, you know that. Two areas of stronger activities in terms of research, development and innovation, it's gas handling technologies, very much needed for LNG as a fuel and also smart shipping with the acquisition of Ascenz 18 months ago. And the quest of the convergence between these 2 in the growth technology transformation that we call by its acronym, GTT. And from there, going towards lower emission maritime world in the future, which is an absolute requirement.

Marc?

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Marc Haestier, Gaztransport & Technigaz SA - CFO [2]

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Thank you, Philippe. Good morning, everybody.

I want to take you through our usual tour of financial matters, starting with the order book.

So this is, as you know, the photograph of the order book at the close of the period, 30th of June, which stands at EUR 603 million and does not include, of course, the revenues from the first half which amounted to EUR 111 million for the core business royalties. Now that translates, as you can see on this chart, into revenues for 2019 at EUR 257 million, 2020 at EUR 333 million and 2021, EUR 114 million. So quite a lot of visibility and positive visibility on our future revenues.

Now just a word on comparison between semester and semester on revenues. Here, we are looking at revenues -- again, royalties over the various half years, last year and this year. You see first half of 2018 was comparatively high because, of course, it was made of revenues relating to orders prior to 2016, and we had a pretty high level of orders. You remember that in 2016, we had only 5 orders. And clearly, that created a decrease in revenues in the second half of 2018. And some of you might remember that, last year, at the same time, I suggested that one shouldn't multiply the first half revenues by 2 to have an idea of the full year. And actually I am now delivering the same message this half year, but more the other way around because, now, in the second half of 2019, we will be getting the benefit from the large flow of orders in 2017 and 2018 and which has continued flowing through 2020.

We did indicate already for the full year that we were preparing ourselves and gearing up though we see we need a bit more -- you need a bit more means to cover a level of activity covering 50 orders than you need for 5 orders, so we announced that we would be increasing our head count and subcontractors, R&D efforts. And that also has some practical aspects in terms of facilities because besides our R&D book, a lot of subcontractors are actually hosted on our site in Saint-Rémy.

So in terms of key numbers, I want to go back to revenues, EUR 120.6 million (sic) [EUR 122.6 million]. We understand the movements from last year. EBITDA at EUR 70.9 million, down, and I will cover the cost base in the next slide, but that reflects of course what I've just mentioned. Net income at EUR 56.6 million, obviously affected by the reduction in EBITDA but also by a one-off effect we had last year. If you remember, we had a tax refund for EUR 5.7 million which was linked to the cancellation of the 3% tax on dividends which had been implemented in France. Free cash flow remains strong. CapEx, lower but clearly more in line with the trend. Last year, we had the CapEx which were related to the acquisition of Ascenz. We paid a large dividend last year, so that affected also our cash position which remains, however, extremely strong at EUR 155.6 million.

Now the cost base. First of all, it's interesting to note on the chart that the proportion between staff costs and external costs remains relatively stable over time. But here, we will see of course the increase in costs linked to the increase in activity, in particular on subcontracted tests and studies which are increasing by more than 50%. As you know, this is our -- clearly our major operational lever, which is clearly being used in this first half.

Other external costs are also on the increase, which is also the direct consequences of this increase in activity. Just for an example, you have a lot more people on sites, they need computer, they need IT support, you need more purchasing power to actually recruit these people, these subcontractors. So of course you also have increases in other external costs.

Salaries and social charges increased globally by 5%, which also reflects the increases in head count we've had since the beginning of this year.

So that's the overall picture on the financial side, I will hand back to Philippe as far as the outlook is concerned. Thank you.

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Philippe Berterottière, Gaztransport & Technigaz SA - Chairman & CEO [3]

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Thank you very much, Marc. So the outlook for 2019 is upgraded with revenues estimated in the range of EUR 260 million to EUR 280 million against EUR 255 million and -- to EUR 270 million previously. For the EBITDA, consolidated EBITDA is estimated in the range of EUR 160 million to EUR 170 million compared to EUR 150 million to EUR 160 million previously. For the dividend, a dividend payment for 2019 and 2020, payout of at least 80%.

So now if you have questions, Marc and I would be delighted to answer to them.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Philippe Berterottière, Gaztransport & Technigaz SA - Chairman & CEO [2]

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Mic is coming.

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Martin Boeris, Exane BNP Paribas, Research Division - Analyst of French Mid Caps [3]

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Is it working? Okay. Martin Boeris, Exane. I have 3 questions. First of all, what's your view on the currently pretty low spot LNG prices? And do you think it could deter shipowners to place order for the rest of the year?

Secondly, could you give us a sense of how many LNGC orders you expect from all the new FIDs that were announced in the start of the year, namely Golden Pass, Mozambique, Sabine Pass Train 6 and Calcasieu Pass?

And finally, since the start of the year, there have been several new tenders for LNG fuel bulk carriers. Is there anything new on this side? And have you get new prospects for potential LNG fuel bulk carriers?

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Philippe Berterottière, Gaztransport & Technigaz SA - Chairman & CEO [4]

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Bulk carriers? Okay. Thank you. The lower LNG prices -- well, first of all, I would say that we are in the long-term industry. We -- deciding liquefaction plant, it's an investment for the next 40 or 50 years. Deciding on the ship, it's also an investment on the next 40 to 50 years as LNG carriers are almost like diamonds, they are forever. So the spot price, which represents only a part of the LNG trade, spot prices are a bit low now. And we always consider that 2019 could be a year where you would have a lot of LNG. But what is impressive is that, in fact, in spite of this feeling about the spot market, LNG companies, energy players are considering that very soon there is a lack of LNG, which is driving the final investment decisions which are taken that we talked about in the presentation. And you saw in the presentation the gaps which are existing in terms of LNG availability in the next decade and even more in the following decades. So all that may look far away for you. But in fact, taking into consideration that building LNG production facility requires between 4 to 5 years and sometimes even longer, these gaps are not that far away and decisions have to be taken. And with the growth, the strong growth of the demand of LNG, mainly driven by the substitution of LNG to coal in a lot of energy mixes, mainly in Asia, the growth in demand should remain. And the apparent overall capacity that we can see through low prices should be absorbed very quickly.

Just one final remark. Of course, we are not touched directly by the low LNG prices. But low LNG prices are positive in many respects for our business. First, if LNG is very affordable, it's a further incentive to substitute LNG to coal for power generation. It's also a very strong factor for switching to LNG for protection of ships. So not everything is negative in this element.

Your second point about FIDs. Could I guide you about the number of LNG carriers which should be deducted from the million tons decided? Well, we talked about that in previous investor presentations, so you may refer to that. I would like to give you some elements. It depends very much where the liquefaction plant is. Mainly, the market is in Northeast Asia, about 75% of the market. And the farther away you are from this place, the larger number of ships you need to transport LNG. The trip is very long and the ships cannot perform a lot of voyages in a year.

So Mozambique is not that far away. Gulf of Mexico is very far away. West Coast of Canada, it's a bit better but not that much, you still have to cross the Pacific. I would say that in -- well, another clue, Northern Russia is very far away, very complicated because you have to cross the Arctic Ocean to -- thanks to icebreaking LNG carriers, we're going slowly into the ice. And if they go slowly, you'll need a lot of ships. So I would say that we are still at about the figure we gave you some years ago at about 1.7, 1.8 standard ship per million ton.

The third point you're referring, bulk carriers. Yes, you're quite well informed, congratulations. There is a significant tender there for bulk carriers to be fueled by LNG. It's in the professional press. So we are working on that. We are proposing our designs. Well, let's see how it's going to work. I would say that is how solutions are considered and that already is a significant progress because, some time ago, it was not the case.

Sorry for this long answer. Another question?

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Operator [5]

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(Operator Instructions)

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Unidentified Analyst, [6]

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Can you give us an idea what potential is meant to LNG as a fuel (inaudible) produced? You mentioned that, that is -- that only happens when the market (inaudible). What could be the potential in terms of demand here (inaudible)?

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Philippe Berterottière, Gaztransport & Technigaz SA - Chairman & CEO [7]

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Well, that's an exercise, to be candid, we're doing for years. And you know for, as far as production forecasts are concerned, it's always very interesting to see what you planned years before. So I do that, and I do that regularly while we never published these figures. And I come always to the conclusion, thanks God, we did not communicate these forecasts. So it's hard to predict what a market is going to be when it's a new market. There are variables there. We tried for the first time to give you some elements to rationalize on the potential of this market, thanks to the breakeven points we saw. But I would say that while we like to give guidance in which we do believe, in which we have a high degree of confidence, so we are going to keep on to that. I would say that we do believe that this market is going to take off. And if this market is taking off as expected, it has the capacity to significantly change the size of the company.

Well, I do hope that this is the answer you were expecting. Another question?

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Jean-Pierre Dmirdjian, MainFirst Bank AG, Research Division - Research Analyst [8]

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Yes. Jean-Pierre Dmirdjian, MainFirst. I have a question about the gravity-based structures, also known as GBS. You've mentioned that this new market could offer some opportunities for GTT. Can you give us some color about that? And more specifically, I think that the Arctic LNG 2 project is based on the construction of 3 such huge structures. How confident are you that GTT could receive an order for those 3 giant structures?

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Philippe Berterottière, Gaztransport & Technigaz SA - Chairman & CEO [9]

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Well, new opportunities, yes, we think that it's quite promising. As you know, we've designed all the FSRUs in the world, FSRUs that LNG carriers basically with gas facility on the deck and capable of anchored or close to the shore and capable of sending gas to the grid or to a power station.

For a RU, you could replace the floating structure, the LNG carrier, by a concrete structure. And it means that the CapEx and the OpEx could be lower. You don't -- you will not need to send the FSRU to yard every 5 years for being completely checked. You will not need a crew on the FSRU. So that could be quite simple. You could build this tank, which is almost an onshore tank. You could build it in a highly qualified environment -- industrial environment in a yard and then tow it.

So in fact, there are many stronger advantages there. And we believe that for large liquefaction plants, it could have an advantage. We believe also that for islands, small islands, it could be very interesting. You know that in these places, having a concrete onshore tank may not be appreciated because the land is scarce. Very often, it's touristic places where they do not appreciate to have this kind of things. So if you will put all that into the sea, you decrease very significantly the negative points of an onshore tank. And these places have energy issues. Very often now, they are relying on heavy fuel oil, very polluting; on diesel oil, polluting and expensive. And relying on LNG, they could rely on a much cleaner and a cheaper energy.

So it's opening new gates to gas to power, how you can generate power in small islands, thanks to LNG. Cleaner, less expensive. So we have that in mind. We are talking to people about that. We are promoting that and, well, let's see.

And second, on the Arctic 2 project, well, we do not comment negotiations or perspectives, so well, we -- what I can say that the final investment decision for this project has not been taken yet. And we -- and that we don't comment ongoing negotiations or perspectives.

Other questions?

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Jean-Francois Granjon, ODDO BHF Corporate & Markets, Research Division - Analyst [10]

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Jean-Francois Granjon from ODDO BHF. First question, could you make an update regarding the technology and the competitors' technology? Do you see any risk for the next time?

Second question, could you [provide some updates regarding] the Korean request? So since 2016, we don't have any more news. Do we see now more risk from that?

And the last question, could you give us some trend you expect for 2020 due to the strongly huge [number] of order intake. So a good -- a pretty good 2019 fiscal year, I suppose we expect a very strong growth increase in 2020. So could you give us some more color about that?

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Philippe Berterottière, Gaztransport & Technigaz SA - Chairman & CEO [11]

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Thank you. Well, on competitors, of course, there are competitors and people proposing competing technologies. The case in Korea, where they built 2 KC-1 ships and people are promoting various forms of technologies. They still must.

So on the smaller-sized ships on LNG as a fuel, there is a technology named C-type. There is a technology promoted in Japan and in Korea, which is the type B technology. So you have many competing solutions. It's a very competitive environment. And it's why we have to maintain our efforts in terms of research and development and innovation in order to keep on convincing people. Well, I would say that we are doing that and we do not intend to reduce this effort in the years to come.

The second point on KFTC. While we have some exchanges, limited, I would say that -- I would say still that, on this case, we are fully collaborating with potentially the -- with the KFTC. And we keep on considering that we did not and do not abuse our position. And it's why, well, we did not constitute any kind of pollution over the years. And it's why of course we are very determined to fully collaborate with the current fair trade commission.

For 2020, it's an exercise. We do not guide on the number of orders we are supposed to receive. But from the chart where you see the decisions which have been taken and the decisions which may be taken in the near future, you may expect that 2020 should not be a too disappointing year. The -- for example, while you have projects which have been sanctioned, quite large, which have not taken their decisions in terms of ordering ships, that's the case for Golden Pass, for example, but it's not the only one. So well, we may expect that in the coming months or next year, they will have to take a decision on that. But of course, it's -- as it is the structure, it's hard to predict.

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Marc Haestier, Gaztransport & Technigaz SA - CFO [12]

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If I can just add one element. Yes, if I can just add one element. You've seen the chart on the order book during the presentation, which shows already royalties -- royalty revenues which are already in the order book for EUR 333 million, so that gives you some kind of indication.

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Philippe Berterottière, Gaztransport & Technigaz SA - Chairman & CEO [13]

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Another question?

Well, if there is no other question, I would like to thank you very much for having followed the conference here in Paris and elsewhere in other countries or in other places. Have a good day. Thank you.

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Marc Haestier, Gaztransport & Technigaz SA - CFO [14]

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Thank you.