EuroBusiness Media (EBM): Technip, one of the world's leading oil services companies, just reported first quarter profit. Daniel Valot, welcome. You are the chairman and CEO of Technip. Since the recent profit warning at the end of April, and judging by the sudden drop in your share price, it appears that the market expects these first quarter earnings to be disappointing. So, now that the figures are out, what is the exact nature of your first quarter results?
DV: What I said in the end of April was not a profit warning. It was interpreted by some operators as a profit warning, but it was not, since we are keeping our guidance for the full year. We didn't change [our guidance]. We gave first indications on the first quarter, as we hadn't said anything on our first quarter before. But nevertheless, it was taken by the market as a profit warning, and hence we had a very sharp decline in our stock price. Now that our numbers are available, they are not that bad compared to what people had thought they would be. Our operating income is slightly better than during the first quarter of 2005 - just slightly, +7% -- on revenues which are up 31%. So our operating profit ratio is down, which is what we said, and that comes mainly from the onshore downstream segment which is, in terms of operating income, practically at zero. So it is not great - we said it would not be great - we are just in line. Now, if you go down to the bottom line to the earnings per share, you will find out that we are up 22% compared to the first quarter of 2005, given the fact that we made further progress in terms of financial income and tax rate. So altogether it is not that bad.
EBM: Shares plunged when you mentioned margin pressure in onshore downstream contracts, which is the segment where most of the 2005 new orders took place. Would you please explain what you meant exactly, which got the market so worried?
DV: I believe the market still makes a confusion -- or some people make a confusion -- between our current earnings and our current order intake. Obviously, when we take a contract, it is most of the time long-term contracts, i.e. contracts executed over a 3- or 4-year period of time. Our rules are such that we [recognize] most of the margins at the end of the execution of the contract. For annual results in a year like 2006, most of the margins we are showing on our books come from contracts which were taken in 2003, and which are now close to completion. And most of them were hit by the big increase in raw materials cost which took us, like everybody else, by surprise in 2004-2005. So what I said is that people should understand that the margins we are showing today are the direct result of what happened in the past 3 years. Now, on the new contracts we took last year, we are now in a much different position in which the market is much better, so we are able to secure better prices and better contractual terms. And in addition to that, these better margins are not presently reflected in our books: they will come in 2007 and 2008. So I know it is a bit difficult to visualize, and to fully understand this matter, but it is very important if you want to understand Technip's earnings.
EBM: At the end of February you were talking about a margin of 5% in 2006, and then just two months later you talked about margin pressure. Why this sudden change in tone and guidance?
DV: There has been no change in guidance: we are still targeting 5% on revenues, which translates into about €340 million for the full year. The guidance is not changed. What has probably changed is the tone: we realized, month after month, that there are more tensions on the market. It is very visible from one quarter to another, from one month to another, that delivery times for some specific equipments take longer and longer and longer. The prices for this or that type of equipment suddenly increase by 10-20% -- there is more and more heating up in the market -- which is not a surprise, because there are so many oil and gas projects coming out all at the same time. This is happening on a backdrop of a world economy which is growing at 5%, which is incredible. So there is a lot of tension in the market. Our guidance has not changed, but our tone probably is a little bit more conservative than it used to be.
EBM: What can you tell the market today about the likelihood of seeing bad margins, at a future date, concerning your most recent batch of new orders?
DV: We are always facing this type of risk. We are in a risky business. The real question is: what is the balance between the risks and the rewards? Do we have enough contingencies, enough buffers, to weather the risks we are taking? Some years ago, the market was such that we had to take a lot of risks with very narrow margins. So it was a highly risky business. Today, the market is such that I want to take fewer risks with better rewards, so I do believe that in the long run - and the long run means in the 2 to 3 years to come - we will be in a less touchy situation than the one we have been experiencing in the past 3 years.
EBM: What is your outlook on the higher cost of energy and raw materials, which are the two negative factors which have been penalizing you? How long do you expect these negative factors to continue to remain a problem?
DV: As long as the world economic growth continues to be what it is today, which is something pretty close to 5%. We have a pretty strong growth in the world - not so much in France, but in the world, generally speaking - and that creates tensions on manufacturing capacities, on execution, on construction capabilities, and so on and so forth. So I do believe it will continue, with ups and downs, as we have seen recently on the price of steel, which went sharply up, and then down and then is coming back. There will be more volatility, and we have to adapt to the situation.
EBM: We have heard you confirm your guidance for the full year but, more importantly, what is the likelihood that you will reach this target?
DV: Well, as usual, it is a target. For us, it not a forecast. We want to have challenging targets in order to motivate our teams, and to motivate the whole company internally. So when we go to the market and say 'This is our target', we are, I believe, extremely cautious in saying: 'this is not a forecast, it is a target.' We are now in May, and when we set this target at the beginning of the year we thought it was very likely that we could make it. Today, we still maintain this early target, but it will be more challenging than it was a few months ago. That's it. But it is still our target for the year.
EBM: And finally, you have just announced today that the board has authorized you to buy back up to 10% of your shares. What are your comments on this announcement?
DV: That is very simple: after the conversion of the convertible bonds, we now have a net cash position of €1.3 billion, and moving up. It is obvious we don't need all this cash to run the company. And for the time being, we have not found the right target for external growth. So our intention is to return all the excess cash we have to our shareholders, and very soon - next Monday - we will start buying back shares on the market.
EBM: Daniel Valot, chairman and CEO of Technip, thank you very much.8
DV: Thank you.
