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Edited Transcript of GTT.PA earnings conference call or presentation 24-Feb-17 7:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 Gaztransport et Technigaz SA Earnings Call

Paris Feb 26, 2017 (Thomson StreetEvents) -- Edited Transcript of Gaztransport et Technigaz SA earnings conference call or presentation Friday, February 24, 2017 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Philippe Berterottiere

Gaztransport et Technigaz SA - Chairman & CEO

* Julien Burdeau

Gaztransport et Technigaz SA - COO

* Marc Haestier

Gaztransport et Technigaz SA - CFO

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Conference Call Participants

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* Raphael Veverka

Exane BNP Paribas - Analyst

* Jean-Francois Granjon

Oddo Securities - Analyst

* Jessica Alderson

Morgan Stanley - Analyst

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Presentation

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Editor [1]

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Audio in progress.

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

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-- for all of those who are following the conference by telephone. It's a pleasure to be with you and to present you the results of GTT in -- for 2016 and the perspective of the Company for the year to come.

Well, you know that we are a French engineering company, a global leader in liquefied gas containment systems.

The key figures for the Company in 2016 is royalties amounting to EUR223.9 million and services of EUR11.7 million.

For services, it's a strong decrease compared to 2015, but here 2015 was very high. Still compared to 2014, it's a strong increase -- it's an increase. For royalties, it's a strong increase compared to 2015.

The net margin is at a level of 50.8%, a bit below what we reached in 2015, but still something fairly acceptable.

As of December 2016, we were employing 358 employees of which 70% were executives, engineers, PhDs, specialists of our systems.

As you know, we're travelling all along the LNG chain, from the exploration, with the tank, on liquefaction facilities. We transport LNG from liquefaction facilities to regasification terminals thanks to the LNG carriers we design. Liquefaction terminals, we can provide tanks, onshore tanks, but more and more -- they are less and less our onshore terminals by the way and more and more floating terminals, what we call FSRUs, Floating Storage Regasification Unit, and we have a strong position in this market.

But we are travelling also on other parts of the LNG value chain such as barges to deliver LNG, LNG as a fuel, to ships which are relying on LNG. We are currently building one in the US and actively promoting this tradition.

We are -- we've delivered in 2016 ethane carriers for example, so we do other things, but we're travelling all along the LNG value chain.

The ecosystem where we work is characterized with classification societies who are approving our systems, the Lloyds, BV, ABS. We have a strong relationship with these persons and as you know we introduce very often new technologies and they have to approve them. So we have a very dense relationship with them.

A relationship with the big players of the LNG industry, the Exxon Mobil, the Shell, ConocoPhillips, Chevron, Total of the world. And there as well we have a very strong relationship with the ship owners, the club of ship owners operating LNG carriers. And we see by the way with LNG as a fuel, more and more people would like to use LNG and this club should get larger over the years.

And, of course, our industrial partners, the shipyards with which we work directly, we work to design the ships they are going to build and we work to assist them in the construction of the tank. Hudong-Zhonghua, Hyundai, DSME, Samsung, Samsung Heavy, Imabari in Japan, Conrad in the US, all different shipyards all around the world.

Well, innovation for the Company is totally key. What's we have achieved for example is that 80% of the -- our order book is from technologies or the evolution type of technologies developed in the current decade. So it shows that we are constantly improving our technologies and that is very well accepted by the market.

And some people are portraying the Company as a patent company. Indeed, we are a patent company but we renew them very often because we renew our technologies very often and that is adopted by the Company -- by the market.

We -- the latest Mark V technology, I'll talk to you about this technology, but it has been adapted by a shipyard and by a ship owner in 2016, so it's formally launched. And it's a technology which is significantly better in terms of thermal performance than the previous technologies we had. So it's a big leap forward for us and for the industry who have been able to introduce these technology and to go ahead with it.

Well, we think that -- when we look at the industry, we think that the capabilities we are gathering in cryogenic technologies is unique. And the relationship we've developed in terms of R&D with our partners, with external laboratories, with universities is also totally unique and is putting ourselves in a very particular position because we are gathering unique competencies, not only in LNG but in cryogenic technology.

We have a pipeline of new technologies, including the NO96 Max. You know that we have two families of technologies, the Mark one and the NO one. And on the Mark one, we sold for the first time the Mark V and on the NO96 Max, we are still formulating it and looking for our first order from clients in the near future.

The metrics for our R&D effort, it's the number of patents we are having. They are beyond 1,000 active patents, so it's quite a strong portfolio of patents.

Well, I will then not enter too much into these details about our technologies, the improvements of our technologies. Just one word. On the left hand side of the chart, you can see Mark V. We enlarged the thickness of the polyurethane foam which is providing the thermal performance and thanks to that we are able to reduce the [boiler] down to the 0.7% of the cargo per day.

On NO96 Max, we are supporting the plywood case by (inaudible) and that allows us to reduce the thermal connectivity passing through these plywood structures. So that's the improvement we are introducing.

Another thing on the Mark V, the secondary membrane is replaced, compared to Mark III by a metallic secondary membrane and we expect that it will facilitate the erection of this system in the ship.

Well, that's the structure of the Company. I would like to add a minute on that. You see on the above part, the subsidiaries we are having. On the lower part, you are seeing the current organization of the Company, with the COO, Julien Burdeau, who is with us today and who is going to present us the -- our innovation and our technological roadmap later on.

And on the -- there is a change in the senior executives of the Company. Ms. Cecile Arson is not with us. I thank her for what she did over the past years. And now we have Mr. Haestier, who joined the Company since the beginning of the year. And I am very pleased to have him on board. I have to say that it's going to be quite something for him, being on board for one month and a half, he's been able to catch the particularities of the Company very quickly.

So, and we are a responsible company with social responsibility and a very strong social responsibility. First of all, with regards to people. Basically, as you know we are not investing into many things as some of the [test ventures]. And we used to say that we invest in people. And we've gathered a fantastic team of engineers. And the way we treat people is something which is absolutely important in creating value, value for shareholders. So that is really at the heart of the way we manage our business.

We have also a very important responsibility towards the industry because many ships are using our technologies. And the fantastic image that LNG has over the world with no issues is very much coming from the commitment to safety, commitment to transparency that we are putting everywhere. On the bottom of our slide, you can see that. And it's also very much at the heart of what we do and all the employees have to be very conscious of this responsibility that we have.

As far as the environmental responsibility we have, we are taking that very seriously. We know that sometimes, people are portraying fossil fuels as polluting. LNG is a very clean energy. It's a very -- it's a solution for the energy transition. When we see that we are still using very much -- or the first energy in the world is coal. LNG is much, much cleaner and much cleaner than HFO as well. So switching to LNG for the world would be a fairly easy, affordable solution for cleaning up the planet.

So we are going to keep on improving the thermal efficiency of our system. It's a very good way of bringing environmental improvement to what we do.

So key figures. Revenues for the full year 2016, EUR235.6 million. It's an increase by 4% compared to last year, to year 2015.

We received five new orders. One LNGC order received in early October with the new Mark V system, that is a major milestone for us. We have to say that the previous version, the Mark III and the NO96, have been introduced at the beginning of the 1990s, so something like 25 years ago. So introducing a new version, it's something very important for us.

We're a diversified portfolio of ship owners, two from -- two ships received from SK, a very large client group, a ship owner; two from Maran Gas, a Greek ship owner and one from GasLog, another Greek ship owner.

Since the beginning of the year, you probably noticed that we received four FSRUs. FSRUs are becoming more and more popular I told you and that is a very strong number and flow of orders just in the early part of this year, and also for FSRUs.

What is important also to see while people are saying there is a lot of LNG and how it's going to deepen, so on and so forth, FSRUs is a (inaudible) for LNG. Each time a FSRU is ordered, it means when it's going to be in operation, there will be another gate for delivering FSRUs. So four FSRUs, it's four additional gates. Maybe four new countries which will switch to LNG.

In 2016, we delivered 27 vessels, including the very first FLNG, in fact the Petronas one, built by DSME and the very first multi-gas carrier. In fact, it's an ethane carrier. It can transport LPG, ethylene or even LNG. It's dedicated for transporting ethane between the Gulf of Mexico and India, it's for the Reliance Group.

And you may feel that this Company is a little bit boring always designing tanks. But in fact, we -- through our activities, R&D activities, we apply our technology to new applications such as FLNG, such as ethane carrier, something which is different from the LNG carrier. And we are able, in doing so, to open new markets for the Company. Even though they are not yet as big as the LNG carriers, but we open new doors.

We took several initiatives to develop LNG as a fuel. We may talk about that later on. New -- as this market probably due to the hierarchy between the energy prices is not picking up as quickly as we could expect.

New services offering, including the simulator for LNG carrier which has been adopted immediately by several ship owners. The first contract by the way with the American ship owner, TOTE for the training of the crews, not only the simulator but the entire training.

A global service agreement with Teekay that we announced recently. It was not in 2016, it was in 2017. All that shows first of all, that we are developing -- continuing to develop in services. Trying with all the services that we develop, we are packaging that in a framework agreement, in large contracts so to speak, with ship owners. And we continue also in developing software solutions such as this simulator for ship owners.

We opened an office in Shanghai. We do think that China is going to turn more and more to LNG and there will be new applications, new opportunities for us over there. Well, there is no way, if you want to be (inaudible) in China that you can deal that from elsewhere. You've got to be down there.

We maintained the dividend at EUR2.66 so while it's (technical difficulty) appreciable.

The breakdown of our order book as of December 31, 2016. On the right-hand side of the chart, you can see a doughnut with the different technologies which have been adopted by the customers. The red line around the shares of the doughnut highlight the technologies introduced recently and you can see that it represents the bulk of our order book.

On the second part, you can see all the ship owners who've trusted us. So it's a quite large number of ship owners and basically all the LNG carrier ship owners are our customers.

And in terms of end, final customers, it's also very balanced in terms of countries. We have customers either in the States, in Asia, in Japan, in Korea, in Southeast Asia, as well as in Russia.

The market fundamentals, first of all, LNG. We saw in 2016 the supply increasing by 5.5%, so the supply of LNG is increasing quickly. We saw additional volumes coming from Australia. Very large facilities, liquefaction plants were decided at the very beginning of the decade in Australia, now they are coming on line. In the US, also in Malaysia.

We saw in 2016 two new facilities decided and sanctioned. One in Indonesia, Tangguh, and the other one in the US, Elba Island, and that is totaling 6 million tonnes per annum. So while people are saying that why, whoever thinks there is too much LNG, some others say well, the end of this decade or beginning of the next one there is going to be a need for additional LNG and we've got to take decisions.

6 million tonnes, it's not really small. It's 2% about compared to the current maximum production, so it's not insignificant.

It's true that several projects has been postponed in Canada, in Australia, onshore, offshore. And that is probably standing back very much to the issue of these mega projects, while you have opportunities for developing much leaner projects through existing facilities. That's the case in the US. That's also the case for Tangguh, it's the third train in Tangguh, using all the existing facilities.

The demand has increased by 6% compared to 2015. In 2016, we saw five countries, not less than five countries joining the LNG importers club, with Colombia, Jamaica, Malta, Poland and Abu Dhabi. It was three countries in 2015.

So this energy is convincing more and more people. So the volumes for these five countries are not that big yet, but it shows the dynamic of the market and that LNG, thanks to its advantages, cleaner and affordable, an affordable energy, it's convincing more and more people.

While seven new re-gas terminals became operational, including five FSRUs, and it turns back to what I told you earlier, that the FSRU now is the solution of choice for opening new gates for delivering energy. We saw in terms of FSRUs there were some new projects announced, but that is very well demonstrated by the number of FSRUs which have been decided since the beginning of this.

So if we look at the demand growth overall the year 2016 compared to 2015, we see that the demand is coming mainly from China and India, with significant growth. You know that in the energy mix of these countries, coal is still representing a very important part, and that is creating a kind of concern locally because obviously, you need electricity close to big cities. And if you have coal you generate quite a lot of pollution for the cities, which is now a matter of concern in China, we very well know that, but also in India.

On the other part, we saw some countries like Japan decreasing a little bit their consumption of LNG. We know that Japan is the first customer of LNG and has imported very large quantities of LNG since 2011. But we saw a slight decrease, and an important decrease, in South America. And that depends very much on the power generation -- generated by lower electricity in South America. This phenomenon has been largely compensated by the increase in other (inaudible) and mainly in Asia.

Well, the Asian price for LNG, thanks to the increase in the oil price, has increased, and that is allowing American LNG, not based on oil but based on gas price, what we call the Henry Hub point, is now becoming competitive compared to LNG -- Asian LNG. The LNG is produced many as well, there are many different formulas, but what we can say is that most of the other prices are willing on -- are based on oil prices.

So there is -- the fact that all the quantities decided in the US are very much competitive compared to Asian prices. These are very good points for American LNG and the dynamics of the market.

Well, something which is really very important is the fact that the decline in LNG prices due to low oil prices has very much helped this energy to get -- to increase its market against coal. It has been further helped by the fact that coal prices have increased in the second part of 2016.

And while a lot of people know that they should switch to energy, to gas, they may resist a little bit as coal is a more affordable solution. But when it's not the case anymore, then the decision is much easier.

And in times of current low energy prices, it's an ideal situation for the switch from coal to gas in a lot of energy mixes. We see that, and it's coming back to the previous chart where we saw the consumption of LNG in India and in China increased.

So LNG market outlook, while in the -- that is coming from BP. I would like to thank Shell for publishing outlook for LNG. It has been published just at the beginning of the week. So I cannot -- we have not introduced that in our chart. They are strongly positive for the future of LNG.

But we took for this analysis BP outlook, and you can see that gas will increase while oil and coal should decrease, and the increase of LNG over the next 20 years should be very strong. So the long-term perspective of this energy are considered as very positive and well, something by the -- sometime by the end of the next decade, gas should be more important in the worldwide energy mix than coal. We can only wish that.

A strong anticipated LNG demand, in fact, coming from new FIDs for preparing for the next decade. Well, there will be additional demand in the next decade and some sales are going to be reduced. So we are expecting that FID should come back in year 2016 -- in year 2017 and in year 2018. And FIDs, you need a ship to transport the new LNG quantities decided for a new facility.

But meanwhile, we see that in this graph which are coming from Wood Mackenzie that we may have a kind of oversupply of LNG compared to the demand. So we think that there will be an adjustment in these between supply and demand and that will be facilitated by the low prices for energy, low prices due to low oil price, but low prices. Also, due to the fact that the Henry Hub prices are going to be low. And that is standing back to this issue, the fact they have very affordable energy and so a lot of people should turn to LNG to increase the share of this energy into their energy mix.

In the long run, what we say is that most probably it's going to be a US American project, are still a potential for the US, both in terms of LNG quantities but also in terms of facilities which can be transformed -- importing facilities which can be transformed into exporting facilities in the US. And that has quite a lot of importance in terms of shipping intensity. It means in terms of ship you are needing for transporting LNG from the US to the market.

Well, that, maybe I will not answer too much into detail for this graph. You have different projects around the world, including some of them in southern Africa, some others in Asia, and you can see the status of these different projects. So a lot of -- many projects are more or less ready, pretty ready to be decided once the developers of these projects are considering that the markets are secured enough for launching the projects.

So let's look at the shipping review and the outlook. First of all, we saw that in 2016 the charter rates are still low and they have even hit a historical low in the last decade. But what we saw is that there is an increase of the rates, and the average rates that we saw in December have not been higher for almost a couple of years.

So there is clearly an inflection and we may consider that in 2016 we have touched a low point as far as charter rates are concerned. So we think that the market for energy carriers is going to continue to tighten over the year 2017 with higher rates, and so it will mark an incentive for ordering new ships.

So, we kept on saying that the market is needing between 50 and 60 ships and you may say well, where are they? We did not see them in your orders in 2016 so what's going on, what's going on? So we are re-computing and re-computing that and we are talking with different people and everybody is coming to that.

We do that with the different analysts of the market and of the industry. We do come to this type of figure. So we think that at a certain point of time they will be ordered or they will be strongly missing on the market, but what we can say is definitely in 2016 they have not been ordered and they were a wait-and-see attitude on the market which has been quite detrimental for the level of orders.

Well, first of all, ship-owner -- I'm talking about that with larger ship-owners and they are saying that they are fully conscious of this situation. But for the time being they are concentrating on optimizing their fees with paying on the [FID], delaying scrapping of old vessels.

There are consolidations in the industry, for example, when Shell merged with BG, the two of them were controlling a very important [SEA]. So most certainly, even though they did not tell me that, clearly they are working on the optimization of the two plays.

The low charter rates have given a feeling of overcapacity in the LNG SEA market which is not that good. Well, anyway, you need now two years to order a ship. If you have an overcapacity in a given point of time, it does not mean that two years down the road you're going to have the ship. But a lot of people who have bought LNG and who were supposed to arrange the shipping were under the feeling that there is an overcapacity on the market.

The absence of the destination clause, which is a very important factor in the LNG industry, the absence of destination clause in the contract for American LNG has created a kind of uncertainty of where the LNG can go. Is it going to go in South America, in that case it's very close, (inaudible). Is it going to go to Japan; in that case it's very far away.

So that has created a major uncertainty which has not helped the decision in the overall environment. I think that in the long run it will be very beneficial. It will (inaudible) this uncertainty will create more trading opportunities, people looking at the highest price they could get, which will mean that the average (inaudible) of the fleet, the overall fleet, will decrease and there will be an additional need for [porting]. But the first approach, that has created a certain kind of uncertainty and has fueled this wait-and-see attitude from the industry.

The last point is that the spread between the various prices of LNG. Basically, the Asian prices on oil and the American price is on Henry Hub, the price of gas in North America. So the full spread has not created ship trading opportunities. So ships which were very much dedicated to trading were available on the market and as (inaudible) on the market has given this feeling of overcapacity which may be a little bit misleading in the condition (inaudible).

Well, you don't see too much the map of the world, but we know that. What we can say is that the routes, the shipping routes are getting longer and longer and there will be an additional requirement for ships in order to sustain these trading on longer routes.

Well, FSRUs, I talked several times about FSRUs. What we can say is that it's becoming more and more popular. We saw many contracts in 2016 and we see that it continuing to develop in the years to come. And by the way, it's not only corresponding to an urgent need for energy in a particular place in the world, it's also a very quick way to benefit from the low price of LNG.

If you want to switch an onshore facility from coal to LNG, you have to build the onshore facility. With a floating facility, it can go much, much quicker. So it allows -- it facilitates very much the switch between the energy.

Strategy and activity, I'll pass on to Julien.

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Julien Burdeau, Gaztransport et Technigaz SA - COO [3]

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Good morning, everyone. I'll give you an update into our strategy or roadmap. We've been using the same roadmap for some time now. We are an engineering Company, we are a technology Company, which means that our development is much about the improvement and the extension of our technical offering, of our products and service offering, and there are three main aspects.

The first one is improving our product portfolio, our technology portfolio and our core business, and that's what we are doing when we introduce Mark V to the shipyard. It's then how to deploy our expertise into a market that are close to our core business, and that's what we are doing with the FLNG, with multi-gas carriers, and of course, with LNG as a fuel. And it's introducing services we -- the quality of our relationships with owners and the bigger energy companies is (inaudible) an opportunity to introduce new services and to improve the -- let's say our loyalty, their loyalty to us.

So that's also what you have here, maybe the slide is a bit too high that we have on the document, it's the same strategy. Three pillars, three main pillars, and a fourth one, which is here to support the three first ones, to help consolidate our position in the LNG shipping industry thanks to our portfolio of technology.

How to use our expertise to benefit from the expected growth of adjacent sectors especially related to LNG, and expand our service offering. And all these pillars, we believe that external growth can be a lever to speed up and to improve, deepen our approach on the [third] pillar. So I will run you through briefly this desired effects, to give an update on each of them.

Regarding LNG carriers, Philippe explained extensively the situation of the market; here maybe a couple of points to highlight. First, we adjusted -- we fine-tuned our long-term forecast for orders of LNG carriers. It's an adjustment coming from -- let's say an adjustment of the forecast of the long-term demand for LNG.

And then of course we monitor closely the way the vessels are operated, their operating profile, their average speed and things like that, which allows us to model as accurately as possible the long-term shipping requirement. And that's how we came to these figures. So with a range of 235 units to 255 units over the next 10 years.

And on these markets, it's really worth mentioning what are the main strengths we continue to rely on. Technological leadership, and there technological leadership means the quality, the performance of the product that we -- and the technologies that we propose to the market. And the introduction of new technologies, such as Mark V allow us to remain one step ahead and maybe to be a couple of steps ahead of the competition.

Long-term industrial partnerships, especially in a situation where are going hard or going through tough times. This long-term partnership with GTT is really worth mentioning. It has been the key of success for them as (inaudible) of LNG carriers and for GTT as a technology provider.

And the third point is our position within the ecosystem, and it's not just about technology, it's not just about building LNG carriers. It's about creating confidence with a very demanding industry all along the supply chain.

Still on our core business, so close to LNG carriers, just you know what we are doing on FSRU, the FLNG and onshore storage. We also adjusted, fine-tuned, our long-term estimate there. For FSRUs we -- let's say we acknowledge the stronger development of this way to bring gas to important countries.

For FLNG, let's say the first unit was delivered last year and was put in production at the end of 2016. Another one will come soon. Still, these are complex units. There may be addition for a new one in 2017 off the coast of Mozambique, but we have to be -- we consider that there will be between 5 and 10 over the next 10 years. It's slightly down over our previous estimate.

I just wanted to mention this fourth item there. It's again something in between a floating storage and an onshore storage, gravity-based structure. It's an illustration of the type of innovation that we are bringing to the market together with partners. Interesting concept in terms of reliability, in terms also of permitting, so the benefit of being offshore and in terms of ease of installation and the simplicity of a gravity-based system.

So that was for the first pillar. The second pillar or what were -- let's say the opportunities offered by adjacent markets, and especially I'm very clear that LNG as a fuel is a great opportunity on the long run.

As we said, maybe when one could have expected some years ago a quicker take-off of this market, everybody realizes how important it is and that it is really an energy transition for the whole shipping industry. When I say the whole shipping industry, I'm talking of tens of thousands of vessels. There are 80,000 to 90,000 vessels worldwide.

Here we just mentioned the bigger ones, the ones that consume the higher quantities of energy, so the big bulker carrier, big tankers, big container vessels and the equivalent in (inaudible) ships, so 25,000, 27,000 vessels. It gives another magnitude of what the whole industry will need to go through in the next years in order to comply with stricter emission -- stricter regulations in terms of environment. And there, LNG is really offering a compelling solution from an environmental standpoint for reduced emissions of nitrogen oxide, sulfur oxide but also particles and CO2.

So if we are talking of an energy transition, so it means a lot of things to do, a wide range of initiatives. And we are taking our share of that and so it's worth mentioning a few of these initiatives in 2016. Industrial initiatives, technical initiatives, technical issues together with the ship owners, with the engine manufacturers, with the classification societies, so lots of partnerships and good developments have been undertaken last year. Really what is key is to be able to bring the best solution to -- the best technical solution to this market.

It's also a, let's say, initiative to improve the whole awareness of the market, and there are the big energy companies, the bigger owners, the equipment manufacturers. They are thinking together about what will be required in terms of commercial initiatives to really make this happen and that's what we are doing within GLNG, which is a consortium created in June last year.

From an industrial standpoint, we are building the network, the industrial network in Asia, in Europe, in order to offer the possibility to owners to find our and to erect our technologies in other shipyard. But still, we know that with the decrease of the -- with the hierarchy of energy prices today, the situation is not as favorable as it could be, and that the economics probably still need to improve from a (inaudible). But there we are -- we must bring also our bits with an improved -- with a cost-efficient solution and that the economics will still need to improve in order really for this market to grow, to accelerate.

Services, a wide range of services. We continue to introduce new services. These new services continue to be adopted by the market, by the owners. Last year it's simulation software, it's training, it's monitoring systems. Well, in terms of turnover it has not been as nice as in 2015, not because of our new services but because of the share of the core engineering services.

And now we have a very extensive offering which allows us also to bundle these services and that made big owners, major owners, appreciate a lot having -- relying on this range of services from inspection to monitoring to technical assistance during maintenance and also to online assistance. We see really how the expertise and the knowledge that we have of the real operation of the owners allows us to increase our intimacy and to offer them a value-added service.

We've been talking about the possibility to grow -- to use not only organic growth but also external growth. As a matter of fact, in 2016 we have not come to a conclusion yet, I would say, on that front.

Why are we doing that? Well, by -- it's to support these three pillars of our strategy. So there, we are talking of technology, we are talking of energy efficiency, we are talking of expanding of our market reach on adjacent markets. We are talking of a cautious approach, of course, and we are very selective.

We continue to work on that. We believe it's one lever among others to let's say allow us to execute our strategy based on technology and expertise.

That's what I wanted to update you on this morning, thank you for the attention. I leave the floor to Marc, to --

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Marc Haestier, Gaztransport et Technigaz SA - CFO [4]

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Good morning. Just a short personal word before I start to say how pleased I am to be talking to you today, and to be talking to the market generally, something I haven't been doing for quite a few years now. So that explains my interest also, but it also makes me feel quite a bit younger.

Anyway, let me take you through the financials.

Revenues, we've talked about quite a lot. Up by 4%, 7% on royalties. The featured, of course, is the service revenues, which are quite a bit lower than 2015, but 2015 was an unusually good year for the service business.

The other indicators you will see in absolute terms are all on the increase compared to last year, whether we're looking at EBITDA, up 1%; operating income, 1%; and net income, 2% at EUR120 million. Margins -- net margin at 50.8% slightly down from last year at 51.8%.

When we look at the cash flow, you see that the free cash flow has decreased to EUR107 million from EUR137 million, a 22% decrease, which is largely attributable to the change in working capital.

Now, the change in working capital in fact results from, I would say, two main characteristics. The first -- and that's the first level -- is the decrease in the number of orders taken between last year and this -- 2015 and 2016 -- and of course, when you get less orders you get less down payments. That's the first impact on working capital.

The second impact, which of course also becomes more visible when you have less orders, is the fact that the order book is aging, and the ships are, therefore, in a further phase of their construction. You know that when you look at the overall period of construction of the ships and how the working capital evolves, there are periods where you have cash consumption in working capital.

So those are the two reasons.

Cash position at EUR74 million against EUR73 million. You may ask well, considering the above levels, why is our cash position stable? Very simple. We have, in fact, financial investments -- cash financial investments which are classified in the assets, financial assets, which have decreased by EUR7 million between last year and this year.

We've had instruments which have matured, and that explains why the cash position -- the accounting cash position -- is stable, while the overall cash position, if you like, is on the decrease.

On the order book evolution between last year and this year, in number of units we have a decrease to 96 units from 118, and that flows through the next few years. As shown on the chart, 39, 32, 21 and 4 ships delivered by -- for each of the following years.

Translated into euros, that will -- the value of the order book goes from EUR619 million to EUR426 million, and again phased in the following years; EUR216 for next year -- well next year, 2017. EUR160 for the following year, and EUR46 million and EUR4 million for the next two years.

Now, if we look at the cost base, external costs, as you can see from the slide, are stable between 2015 and 2016 in terms of percentage of turnover. However, in absolute terms, they are on the increase. They increased by 7% between 2015 and 2016, and that is mainly due, in fact, to two factors.

One, we've had higher fees, and in particular legal fees, in 2016, but also we've had cost links to patents, because obviously we are renewing and improving our portfolio of patents over time.

The staff costs show an overall decrease by 2.5%, however, that decrease is mainly due to the phasing of profit sharing plans, and performance share plans. However, I have to say that despite my relatively low seniority in the Company, GTT is not complacent when it comes to costs.

In fact, even if you see that salaries and social charges have been increasing by 2%, if you look at the headcount, the average headcount between 2015 and 2016 has been roughly stable from, say, 380 to 376. But if you look at year-end headcount, that has decreased from 378 to 354. So, the effect of those staff reductions will feed through in the course of 2017.

Last point is the other. The other, in fact, reflects the variations in provision. In 2015 we had reversed fairly large provisions for EUR4.5 million, so that raised, obviously, a base effect, the balance being the new provisions we have accounted for in 2016.

Finally, the dividend. As indicated, the Board would propose a dividend of EUR2.66 per share. That represents a payout ratio of 84%.

And that's it for me.

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Philippe Berterottiere, Gaztransport et Technigaz SA - Chairman & CEO [5]

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Thank you, Marc. Well, the outlook for 2017, we consider that the revenue should be estimated in the range of EUR225 million to EUR240 million. We are fully conscious that we surprised you a little bit with the revenue in 2016, which was slightly below what we announced at the beginning of the year.

We had very significant delays of turnover. It has not disappeared; we are going to find it in 2017 and 2018. We have been surprised, or we've been hit, by the low level of services. It shows, by the way, that this market is quite volatile.

We use to transform the volatility of the fundamental market into something fairly stable, but sometimes we can have some variation, and we would like to have an envelope for the turnover for 2017.

As far as the net margin is concerned, we know that the net margin in 2017 should be above 50%. Whereas (inaudible) the IPO for a couple of years we guided the market about a net margin around 50%, we are now more convinced that we can sustain a net margin above 50%.

The dividend payment in for 2017, we guide on the dividend at least equivalent to 2015 and 2016, even though 2016 is not yet decided by the general assembly. It means EUR2.66, so -- and for 2018 and 2019, a payout of at least 80%, which was the figure on which we guided at the time -- or the percentage on which we guided at the time of the IPO.

So, thank you very much. We are ready to answer to your questions.

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Questions and Answers

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Operator [1]

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Thank you. (Operator instructions).

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Raphael Veverka, Exane BNP Paribas - Analyst [2]

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(Technical difficulty). Sorry, my second question is on your LNGC order guidance for 2017 to 25, which has been reduced by about 30. Can you also maybe cover in detail? Is it because you're taking into account the fact that this year, and maybe next year, will be transition years, is that how it's worked out, or is it anything else?

The last one is on your 2017 guidance. There's still some range between the low end and the high end of the guidance. Can you maybe come back on what are the main uncertainties, and what is your feeling today? Whether you think the middle of the range is reachable. Thank you.

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

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Well, thank you very much, Raphael, for these questions, which are really at the heart of our activity. The LNG as fuel, it's very true, and I do not hide that, that the ramp-up of this market is much slower than expected.

So we're working hard to develop solutions appropriate to this market, and what we see is that in fact, the savings ship owners make back from switching to LNG as a fuel are not enough to justify the installation of the cryogenic tank on their ship.

So some of them, which are operating very close to the shore, are doing that. Generally, it's small ships, and they are using small tanks, and it's not the sweet-spot for us, because our tanks are complicated. They go with stronger, important engineering studies, and you can amortize that on a large tank.

But once large ships are going to begin to switch to LNG, we will be in a much better situation. For the time being first of all they are few ships, and these ships are small. That is due to the fact that energy, or not that much energy, but the clean fuel, the clean oil fuels that you can use to meet the regulations, are cheap enough, affordable enough to comply with the regulations, and you don't need to invest in it.

So basically, we are in a certain way, because I talked very much about the prices of the other energies. When we talk about oil price, bioenergy price, but we are quite dependent on oil price, and it may play in a favorable manner on some aspects of our business. Some other aspects, it may not.

The guidance on the number of LNG clients, I have to say that we see that, finally, LNG is very -- it's a very volatile market. We think that decision should be taken for accommodating the growth of the demand of this energy in the next decade.

Whether that's going to be taken immediately, or a bit after, in 2017 or in 2018, may have a major impact on the demand of LNG clients. We think that markets may, or should restart -- should begin to restart in 2017, but a year of delay -- it has not an overall consequence on the quantity of LNG produced by the end of the next decade, but for us, and for the demand over the next 10 years, it has a consequence.

I have to say that although we had the feeling that we were not so much understood last year when we were bullish on the demand, and I thought a lot about that. I have to say that we have to recognize, in a certain manner, in our forecasts, the high volatility of our fundamental market, and we have to think also how we get prepared to demand which may be bumpy, while we see in our company figures that we are much more stable.

So we transform, in a certain way, the instability or the volatility of the market into a stability of our corporate figures.

For 2017, it's true that we've given an envelope which is a bit wide, and the two main factors here, which may explain these wide envelope, and which may impact us; it's delays in the ships that we have to deliver, so we don't deliver ships in 2017 but in 2018. That could impact us significantly.

It has impacted us in the last couple of years. It may impact us in 2017, even though I think that, first of all, shipyards are going to be (inaudible) in their current situation to accommodate these requests for delays, first.

And second, finally, ship-owners are going to need these LNG carriers. Maybe they've ordered them a bit earlier, but they are going to need them for transporting LNG from around the world.

So, difficult to say, difficult to anticipate, but we took that into consideration.

The other factor, and to be totally candid, it's the services. We saw -- we've been disappointed by the level of services, the turnover in services in 2016. While we increased by 40% in 2015, we decreased by something like 35% in 2016, so it's very volatile.

Ship-owners, when the market is not that good, they are trying to reduce their costs by everywhere; or energy companies, they are trying to reduce their budgets everywhere. So it's a very -- an advanced indicator, to have a translated French word, of the anticipation of the market.

And there, for me, I have the feeling that -- and it's what we tried to demonstrate in our presentation -- that we've hit the lower part of the business, of our business, in 2016, and in 2017 we are going to see a rebound, including a rebound in our services, to be demonstrated.

If we are able to -- if we are right there, then we should see an impact, a significant impact, on our turnover.

Other questions? Or are we trying to be shorter?

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Jean-Francois Granjon, Oddo Securities - Analyst [4]

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Jean-Francois Granjon from Oddo Securities. One question regarding the working capital. What do you expect from this year, 2017, after the depreciation or the degradation of this level in 2016?

And another question regarding the margin; what do you expect for next year, 2017? How do you intend to reduce some costs to confirm a high level of margin -- EBIT margin, or a net margin at more than [50%]?

And last question, post-2017, so for 2018 and 2019, with probably a strong drop in terms of sales, taking into account the current order intake or backlog, what do you expect in terms of margin? Do you think it's reasonable to expect a lower 50% net margin in 2018 and 2019? Thank you.

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Marc Haestier, Gaztransport et Technigaz SA - CFO [5]

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Regarding your question on working capital, if you consider the explanation I gave earlier, swings in working capital arise when there is a shift in the number of orders.

Now, we've had five orders in 2016. We've already have four orders in 2017. So you would expect that, come the end of 2017, there should not be a major shift in working capital, and in fact, if the order trend carries on during the course of this year, it should probably be in the right direction, i.e. a move towards better working capital.

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Philippe Berterottiere, Gaztransport et Technigaz SA - Chairman & CEO [6]

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On your point on costs, I would say that you saw that in 2016, we've been able to get -- to be in control with costs, and in particular with the employment costs being reduced by more than 2%.

So we've never been complacent towards costs. We've always been a lean and fit company, and we do intent to continue to be like that. We will not implement the specific cost control program, as we always had a cost control attitude.

So we will continue. That will allow us to remain lean, probably to continue to reduce our costs, and to maintain the jewels of the crown, which are on the one side the engineering -- and we are offering an excellent engineering.

I mean, if we have this position in this industry, it's because we are providing something which is excellent, and we are not going to compromise that through an extraordinary cost program.

The second jewel, it's our innovation capability. And you see that we've entered into -- we've delivered new things. FLNG, ethane carriers in 2015. We got the contract for a new technology, Mark V, in 2016, and that is coming from our innovation capabilities that we are not going to compromise through cost reduction.

But we will continue to be very cost-conscious, as we did in the years, and it's what explained the figures of the Company.

On the margin for the years to come, beyond 2017, well, we don't guide on that. So you see that -- you see our guidance for 2017, so I leave you to your models to forecast what could be the margin beyond that.

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Unidentified Participant [7]

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(Technical difficulty). So, that's obviously a good thing for you, in terms of transportation of LNG, but why is it behind that graph? Why is pipeline transportation decreasing? Is it for environmental issues?

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Philippe Berterottiere, Gaztransport et Technigaz SA - Chairman & CEO [8]

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It's not for environmental issues. I think that, in fact, the quantities exported from Russia are expected to decline over the next 20 years, so whether it will happen or not remains to be seen.

Definitely -- well, we could talk about the kind of competition between LNG and gas, and mainly in Europe, which can receive gas from Russia and gas from -- and LNG. But it's expected that, probably, Russia will not be able to maintain a very strong (technical difficulty).

There is a question on the call?

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Operator [9]

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We will now take a question from Jessica Alderson from Morgan Stanley. Please go ahead.

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Jessica Alderson, Morgan Stanley - Analyst [10]

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Hi, yes, Jessica Alderson here. Yes, two questions from me, please. So the first one, I was wondering if you could give a bit more color about why you're reverting to a payout policy, regarding the dividend, after 2017 again.

And the second question was -- I mean, you touched on it a little bit, about your bullishness last year on LNG, and I think this point last year you thought that there would be around 30 LNG carriers ordered for projects that had already been sanctioned, and then we didn't really see this materialize.

I was just wondering what exactly happened. So did the clients start using vessels that were on the spot market? If this is the case, then do you think that specific vessels will still be ordered for these projects, or do you think they'll just continue to use LNG carriers from the spot market?

Yes, thank you very much.

(Technical difficulty)

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

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The one on -- on your first point, we wanted to give visibility on the payout beyond 2017. We did not guide about a fixed dividend beyond the year -- the coming year in the past, unless we had this kind of percentage.

It's exactly what we said in 2014, at the time of the IPO. I think what we are feeling is that there was a strong expectation on what we are going to do in the years to come, and we are (inaudible) that with the visibility we have on 2017 and 2018, on the revenues we are going to secure, this percentage will provide a certain comfort to the people.

On the LNG carriers, while we see in the paragraph on the wait-and-see attitude -- we saw on the paragraph on the wait-and-see attitude that there are several factors which have played into this phenomenon that we did not see tens of orders in 2016, while analysis agree that there is a need for 50 ships to 60 ships to be ordered. One of them being the fact that the trading opportunities are not there. Ships dedicated to trading activities are weighing on the market.

But it's not the only one. It's also the fact that there is an uncertainty on the destination, and people have the feeling that LNG should go to much closer destinations than what they were expecting. Before doing ships, they wanted to further assess what could be the routes.

The fact of the matter is that more than 70% of LNG is burned in Asia, and finally large quantities of LNG is going to end up in Asia, and you will need a ship to transport that. You can develop swap strategies, whereby in order to provide LNG to Japan, to swap a contract from the US against a contract from Australia to reduce the need for ships, but at a certain point of time Japan is importing very large quantities of LNG, and it will have to come from fairly distant destinations.

So it's what we say, a wait-and-see attitude. At a certain point of time it will have -- these orders, we think -- we still think -- will have to materialize.

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Jessica Alderson, Morgan Stanley - Analyst [12]

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Okay great, thanks very much.

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

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Am I clear enough, Jessica?

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Jessica Alderson, Morgan Stanley - Analyst [14]

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Thank you.

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Philippe Berterottiere, Gaztransport et Technigaz SA - Chairman & CEO [15]

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Other questions, yes?

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Unidentified Participant [16]

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Kepler. Could you provide us with some light on the competition and your power pricing compared to -- against your competitors?

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Philippe Berterottiere, Gaztransport et Technigaz SA - Chairman & CEO [17]

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Well, the competition -- in fact, we have two competitors on the LNG carriers. One, it's the Maersk technology, which is used for decades, and which is now used in Japan.

In fact, we saw in year 2015 many orders for this technology, this -- the shipyards are fairly busy with that, and they are mainly used by Japanese ship-owners for Japanese utilities. We see that the consumption in Japan is slightly declining. We did not see them really active in 2016.

We still assess that our technologies are better in terms of performances, and also more affordable, so that's two strong factors.

Your second point, about the pricing power, we're heading -- it goes back, in fact, if your technology is better and you sell it for less, you are not exactly particularly good, because you could sell something which is better for a higher price.

Well, we still think that the combination we are having, of advantages and pricing, is offering to the Company a certain stability and confidence from the industry.

We do not intend to change our pricing approach in order to maintain the very trustworthy relationship we are having with various players of the industry, whether they are the big LNG players, the ship-owners, and of course our industrial partners, the shipyards. And particularly in this period of time, where shipyards are suffering quite a lot.

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Unidentified Participant [18]

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(Inaudible), Raymond James. Just -- sorry, but the question -- I just want to know about the Korean situation. What is going on about the shipyard, and about your process --?

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Philippe Berterottiere, Gaztransport et Technigaz SA - Chairman & CEO [19]

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Inquiry.

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Unidentified Participant [20]

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Inquiry.

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Philippe Berterottiere, Gaztransport et Technigaz SA - Chairman & CEO [21]

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Well, the current shipyards for more than a year, almost a year and a half, are receiving very few orders, not only for LNG carriers but for everything. Whether you talk about container ships, bulk carriers, gas carriers, and other kinds of vessels, they are receiving very few orders.

So it's a major issue, because they are very large facilities, companies, and first it's a crisis for their industrial set-up, where they are to lose workers, and then the second crisis is they don't have activities for their engineers.

So they are really in the middle of that. It's coming -- it's also coming very much from the off-shore, because the off-shore demand has globally collapsed since the oil price has decreased significantly.

So it's a major difficulty. The Korean Government is at work in providing assistance to these shipyards which will allow them to cross this difficult period. They are trying to adapt their cost base and their structure for these more difficult environments.

Of course, we are trying to work with them in order to see how we can optimize our relationship, our working relationship, in order to facilitate their rebound and the common activities, and to be able to work on a lower cost basis for the two of them.

As far as the inquiry is concerned, we received a request for information from them, from the KFTC. There is going to be a back and forth process. We are going to answer to this request for information.

Obviously, this is a process that we don't control. It can last for a while, and it is the KFTC which is in control of that, and they can ask what they would like, and they can decide on the timing.

What we can say, well, except this request for information, there are no significant developments in this matter, and of course we will keep the market informed about any possible developments.

No, no calendar. We don't control the calendar.

Other questions? On the telephone?

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Operator [22]

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There are no further questions on the telephone. (Operator instructions).

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Philippe Berterottiere, Gaztransport et Technigaz SA - Chairman & CEO [23]

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So, if there are no other questions, I would like to thank you very much for attending this presentation, and we are always available to answer to your requests of information.

Thank you. Have a good day.

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Operator [24]

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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.