Lamprell's (LMPRF) CEO Jim Moffat on Q4 2015 Results - Earnings Call Transcript

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Lamprell PLC (OTCPK:LMPRF) Q4 2015 Earnings Conference Call March 23, 2016 5:00 AM ET

Executives

Jim Moffat - CEO

Tony Wright - CFO

Analysts

Neill Morton - Investec

Andrew Whittock - Liberum

Alex Brooks - Canaccord

Dan Slater - Arden Partners

Fiona Maclean - Merrill Lynch

Rahul Bhatt - JP Morgan

Jim Moffat

Ladies and gentlemen good morning and welcome to the Lamprell 2015 Results Presentation. My name is Jim Moffat, the gentlemen to my left is Tony Wright. This is the format of today’s presentation, same as usual. I will start and run through a few of the highlights of 2015, Tony will take you through the numbers in a bit more detail. And then I walk you through 2015 operations and give you sort of summary and outlook for 2016. We will close the presentation with question-and-answer session.

So this by the way is a picture of Hamriyah, it’s fairly recent and it just gives you a little bit of an idea how full that yard is, it’s taken from the backend of the yard seas, during this edge and during this edge. But it is pretty difficult to find a square inch in there right now with all the work that we’ve got, which is very pleasing.

So this is our performance in 2015, it’s now a little over three years since I push-presented the Lamprell story and I’m pleased to report another solid performance again in 2015. Pretty much right across the board against a difficult market. It’s now over 18 months since the oil prices started to fall. Certainly we’ve had 12 months of what I would call pretty significant industry headwinds. We continue to plot a course through this, in these difficult times. It’s not just the numbers, which as you will see are good, but is really across all aspects of our business.

In summary, I’m not going to pick on all of these bullets, but our project performance has been solid all through 2015 and continues to be so, it continues to improve. Our yards have certainly been pretty close to capacity through the second half of 2015 and on through -- into this year. With the exception of the physical connection into the national grid where we’re a little bit at the mercy of the local authorities, because local authorities have to make that connection.

The entire aspect of Project Evolution is now complete, the Phase 1 of Project Evolution is now complete and has been handed over to production. So we are seeing savings in all elements of that, Tony will talk through that in a bit more detail. I should also say Project Compass, which is our ERP system went live in quarter three, again it’s been very successful and getting well. As I mentioned on the previous slide, we’re seeing record levels of activity particularly in Hamriyah, it’s not all that long ago that we thought building three rigs a year was our capacity, well there are seven rigs in that facility right now, which is a record for the group.

We continue to follow our strategy, we did as we talked about back in the August presentation of a sort of mid-yield review of the strategy. We continue to believe that that strategy for Boston, and I’ll talk through the strategy in a little bit more detail, when I get into the review. At 66.5 million, our profits were steady in the year, they reflect in my opinion more of what I’d call a normalized year. We did talk about in ’14 really three exceptional events, clearly we had the completion of EDC2 in the Caspian, but that helped our numbers and we had the completion of some North Sea project, North Sea projects generally give us higher margin projects. And we had the benefits of a lot of projects finishing towards the end 2014 and it was the first indications that we were starting to get some contingency improvements, execution improvements. So these numbers all improved of efficient -- had 14 numbers on it, what you’re seeing out here today is what I’d call more of normalized business, very much more focused in execution on the Middle East.

Our balance sheet continues to be strong, our cash position is very healthy, we advise last year we were in a little bit of a sweet spot cash wise. This year through the tail end of ’15 and through most of ’16, we’re into more of a negative working capital, again Tony will go through that in a bit more detail in a few minutes, but our cash is still very strong. Our safety numbers, I’ve said it plateaued, you can see there is a slide in appendix in your books that go through our safety over the last three years. It sort of plateaued in about the last 18 months, certainly through most of 2015 at about 0.3 plus or minus 10%.

Again for anybody that does a little bit of DIY at home. The 0.3, you may not be familiar with the TRIR rate. The TRIR rate means that we are requiring somebody’s to go visit a doctor because of a work related injury roughly every two-thirds of a million man hours. So again to put that into perspective, if you work 50 hours a week, 50 weeks a year, you work for 40 years, you do 100,000 man hours. So roughly we are having someone visit a doctor’s surgery every 6.5 working lifetime. Nonetheless, we still want to improve that number, we think that’s a requirement of the industry. So we’ve got a much greater focus on training in 2016.

Again just touching on training, although it’s not a statistic that’s up here. In 2015, we completed over 400,000 man hours of training, we see that as being a key thing, to be able to extent our people, stretch our people, develop them as they go forward. Again that number is up considerably on 2014 where we did just a little over quarter of a million man hours in that particular year.

We’ll talk a little bit more about the market later, but the bid pipeline looks very healthy here, there has been a bit of drift to the right, but our bid pipeline still we believe relatively strong this time. As I said, I’m pleased with the performance of the group in 2015, there clearly are some external events which very much affect our business such as the oil price, such as some of the IOC shutting down some of the CapEx programs. But again based on the parts of our business that we control, I think it’s been a very solid performance right across the group. I should add that includes some of our smaller businesses, such as land rig services, the E&C business and O&M.

On that I’ll now hand over to Tony, who’ll walk you through the financial numbers in a bit more detail. Tony?

Tony Wright

Thanks Jim. Thanks Jim and good morning everyone. I think most people in the room know me by now, but for those that don’t my name is Tony Wright and I am the CFO of the Lamprell group. And I actually really quite like this picture, it’s been the view from my office in recent times and it shows some of the modules that we are building in Jebel Ali facility for the UZ750 project. This project is a good example of our repeat business, where our client Petrofac has continued to add modules to our scope.

So moving onto Slide 6 and I’m also pleased to report solid financial performance for 2015 with net profit slightly ahead of market consensus, but down on 2014. As I said in August, it’s worthwhile reminding ourselves that 2014 was a year of exceptional results for Lamprell with nine projects being completed and significant contingencies being released. Our revenue for 2015 is $871 million, around 20% down on 2014. This is slightly lower than our guidance, mainly due to walk-in business not materializing at the levels we expected in the second half.

As always we have provided a breakdown of our revenue in a later appendix. But once again, our revenue for 2015 is dominated by our new build jackup business stream contributing 78%. Revenues from our modules business have increased, but our rig refurbishment and offshore platform businesses has seen lower revenues in 2015 again due to lower levels of walk-in business. Our EBITDA margin has reduced to more normalized levels at 10.3%, still strong even when compare to the exceptional performance in 2014.

Savings from our Project Evolution initiatives have been crucial to delivering this margins as well as enabling us to provide competitive price to secure projects such as NDC9. Our strong EBITDA margin has translating into a net profit from continuing operations of $66.5 million, 29% down on 2014, the split [ph] outcome that shows the underlying strength of our businesses. Our net cash has reduced as expected, but remain strong of $210 million.

So 2015 has seen Lamprell deliver healthy results in the challenging environment and Slide 7 provides further details on the year-on-year moment in net profit. As I mentioned earlier, 2015 have seen us return to normalized margins with no large contingency releases such as EDC2 in 2014. The improvements we have made in our reporting systems in 2015 has enabled us to refine the phasing of contingency releases. So they impact margins as projects progress rather than being released in a lump at the end of the project.

The impact of the current competitive environment on our revenues and margins has been offset in part by savings and Project Evolution initiatives, with our land rig services and rig refurbishment businesses also delivering better than expected margins. The quality of our final product has also delivered financial benefits in 2015. As we’ve been able to release some of the provisions held against possible warranty claims, as the warranty periods have expired with low and in some cases zero claims. We have continued to focus hard on our overheads and have achieved further savings to reduce them down to $110 million in 2015, this is the reduction of over $50 million since 2012 and we continue to target additional overhead reductions in 2016.

As I mentioned in August, we have collected significant levels of old debts in 2015, so when we coupled this with the provisions we made in 2014 this is led to a net favorable movement of $13 million. Apart from the benefits to our bottom line, it helps us retain our strong net cash position, which leads me on to Slide 8. Our focus on conserving our cash while investing providently in our yards has helped us maintain strong levels of net cash at the end of 2015. We have been able to support the working capital requirements of our ongoing projects in 2015, and we will continue to do so in 2016 before we collect our final milestones in the second half of 2016 and early 2017. I therefore expect our net cash top reduce through 2016.

We have continued our investment in Project Evolution, spending over $40 million in 2015 with the remaining approved CapEx to be spend in the first half of 2016. In 2016, we will invest an additional $35 million in the next phase of Project Evolution, primarily in a new state of the art pipe shop to improve our operational efficiency and competitiveness. This investment in Phase 2 is significantly smaller than the original spend on Project Evolution. We will also continue to prudently invest in maintenance CapEx in 2016.

As Jim mentioned, on October 1st, we switch the entire business over to our Oracle ERP system known as project Compass and have entered the stabilization phase of the project. We are already seeing efficiencies and savings from project Compass, especially in terms of internal resource where as an example we have been able to reduce our payroll team by nearly half. To implement a full ERP system within two ways and for less than $10 million is a significant achievement and will bring many further benefits to the business as it beds in.

So managing our cash carefully has helped us to maintain our strong balance sheet and as we move to Slide 9, we see that strength as our net assets continue to increase in 2015, all of our ongoing projects are out of their early stages and we therefore are not carrying client’s cash on our balance sheet. With the exception of term loan which amortizes at 20 million a year, our debt facilities remain unutilized and therefore provide us with substantial headroom levels to support the business and pursue new work. In particular through the $200 million revolver setup to support 2080 project financing. We also have comfortable headroom on the financial covariance attached to our debt facilities. Even in the challenging industry environment, we remain on good terms with our banking syndicates and continue to work closely with them to reduce our finance cost while sustaining flexibility within our facilities.

So to Slide 10, and in summary, 2015 has been a year of strong operational and financial performance even when compared to our exceptional performance in 2014. Although our revenues were lower than expectations, our profitability is slightly better than expected due to our operational excellence, once again showing the resilience of our business. With 90% of our closing backlogs relating to 2016, we have good revenue coverage for this year, and our yards are currently busy in a challenging market. We continue to use our cash sensibly to deliver efficiencies to maintain our competitiveness, such as investing in equipment like the T-Master we see in the picture, which significantly reduces the cost of fabricating our beams. And we continue to focus as well on reducing our overhead levels. But most importantly of all, we have our strong balance sheet to shield us now and enable us to grow when the industry recovers.

And on that I will now pass it back to, Jim.

Jim Moffat

Thanks Tony. Now let me talk you through the operations highlights for 2015. As we mentioned early, in 2014 we completed a record number of projects. We had a large number of projects finishing late in 2014 and literally five projects that split either side of Christmas with three been complete early in '15. So we came into the 2015 year, completing those three projects and starting lots of our new projects.

So there was a distinct split of our activity in '15 between these new projects starting up in the first half of the year and then the increased activity as all of these projects moved into the mid part of the S-curve which is far more labor intensive in recognizing higher revenues and obviously higher profits through the course of the year. Our yards, all three of our yards, main yards were very busy and the main construction phases which has continued through into 2016. I'll talk more about the market in the next couple of slides. But in 2015 we did actually have a reasonable win rate percentage. We were able to convert one of the NDC options, I believe that was one of only three jackup orders that were placed in the year as well as winning a number of modular contracts for the ZADCO project in Abu Dhabi. Our ENC group also won the biggest project in the history winning a contract for some suction piles and buoyancy tanks for a new client.

As I said all of our yards have been busy through the second half of 2016, [indiscernible], we increased our work force by about 1,500 people through late summer and into quarter three to take on this additional work. And as we mentioned earlier Hamriyah is currently building seven jackup rigs which is a record for the group and all are progressing well. Not unsurprisingly with the downturn in the levels of worldwide drilling activity after a busy start to the year we've seen a big drop off in the rig refurbishment contracts. We currently have nine rigs which I guess I would say are stacked in our yard, we are doing some small amounts of rig refurbishment work on those rigs but the real benefit for us is when they go back to work and we do expect to get refurbishment work out of them, when they do so.

Finally with the slowdown in orders being awarded generally in the industry our backlogs declined year-on-year from 1.2 billion at the end of 2014 to 740 million at the end of 2015. The oil business has been significantly affected by the low oil price. We've seen a large number of projects either drift to the right or disappear altogether. There have been major CapEx reductions by all of the IOCs and even several of NOCs have been cutting back and squeezing down on prices. As I'm sure you've heard Wood Mackenzie published a report saying that $380 billion worth of off shore work has just evaporated since the oil price started to collapse. Clearly, we're not immune to this. 2015 saw a very jackup projects coming to the market and similarly our off shore business has seen very few awards. Particularly in the areas where we feel we are truly differentiated such as the North Sea. Our current activities in the yard are high and we do see that continuing for a couple of more months, but over the next six month period we do anticipate a ramp down in our mining level as we start to work off the work.

Moving to Slide 14, while on the surface the bid pipeline increased slightly from 5.2 billion to 5.4 billion let me spend a minute or two discussing this, so it’s clear. Firstly, let me say we continuously review the pipeline. So when a project goes on the pipeline it doesn't stay there forever or until that project is awarded or some structure, we continuously review that and to ensure that the projects on there are at least likely to be awarded or at least are potentially awarded. However in today's environment I believe that one of the major features of our pipeline is there is a buoy [ph] wave building up because there is a steady drift to the right on many of these projects. So we are, we're sort of pushing projects in front of ourselves.

The makeup of the pipeline today clearly has a greater focus on the Middle East than it did even a year ago, but even that region is not untouchable in today's market. I do not think there is any question that the long term fundamentals are still sound. The world demand for energy continues to rise, and oil and gas are still the preferred solutions. The giant fields are being found on a less and less frequent basis and the reality is that more wells have to ultimately need to be drilled to find the oil and gas that we're using up today. There is however unquestionably a glut today which is driving the price down. The timing of us getting back to such stability and exactly what that price is going to be however remains unclear.

There is no question that there has been a significant slowdown in awards. Our win rate in 2015 is down a little bit from 2014 but is still a healthy number. As I stand here today we think we have reasonable coverage for 2016 of about 85% and we have a large number of bids outstanding at this time. But there is no question that longer term recovery for Lamprell requires price stability. For the avoidance of doubt we do not need a $100 oil we simply need stability to give our clients confidence to proceed with that project.

As I mentioned earlier we cannot control the oil prices our main focus therefore is on the things that we control. I believe our long-term strategy is sound, as we advised in August we reviewed our strategy in an oil lower for longer scenario and we still think the strategy is robust. Our key focus as always is working for Tier 1 contractors and broadening our offering to make use of the clear strength that we have of safety, quality, schedule reliability and price competitiveness. I believe today these are still fundamental differentiators for Lamprell.

As we discussed we've also been focused on the bay in the last few months on how best to monetize these trends. We believe one of the areas to do so is to partner and through strategic alliances where each partner brings their strength and as such we’re able -- we’re either allowed to participate in the market that in our own we can't or where they being a stronger aspect a part of our business. I believe that MOU that we've signed with Saudi Aramco, Bahri and HHI in January as well as the recent MOU that we've singed with Dubai Drydocks earlier this week to collectively pursue FPSOs and FPUs that we are pursuing partnerships where we are much stronger together and which will offer us long-term success and stability in markets we otherwise could not realistically participate in.

In the next couple of slides I'll try to go through our strategy and the status of it. This is a little bit optical, but if I -- this is timed and this avenue and this is kind of progress to date and on some of these topics just to give you a flavor with we are on a journey, so don’t look at this and say just the 50% through, this is something that just develops and moves forward. But this central part here is the sort of -- is the biggest focus of this. And so as I -- since I joined the company the main focus as you recall was kind of back to basics. Recognized leaders, it don’t matter what you play in your [indiscernible] can be picked up a lot of sporting things, if you follow the All Blacks, they do all the basics really well and that's why they are world champions.

That's the things that we've got to do well. We've got to be safe, we've got to have high quality, we've got to a schedule delivery and be cost competitive. We also try hard to work with our clients so that we get a solution that they want, we want content clients who believe that they get very good value from money when they leave our facility. I think that's one of the things that we do really well and I think our clients both today and historically will support that position. We need to have cost effective facilities which blend our low cost labor appropriately with the right quantum of automation to ensure that we have low-cost, high-quality solutions.

I think where the completion of the First Phase of Evolution and the start to Phase 2 we are well on the way in that journey. We also need a strong business development solution to do this we need to focus on where the market is, which unquestionably today is in the Middle East which is where we have our greatest focus. Success however is all about being competitive and that's what we try to describe here in Slide 17. You can offer the best solutions in the market, but if you cannot do so comparatively you will never reach your true potential. This is been our major focus over the last three years and we've been very successful driving our cost down across the board and driving our continuous improvement efforts as well as training our people.

As it notes on the slide, these are aspects of our efforts that are well advanced. Yard Automation the Evolution program is now paying dividends. We've optimized the yard layouts, safety that we've talked about is a key element in order for us to attract Tier 1 clients. Procurement and sub contracts synergies rather than doing them as individual projects, doing them across all of our facilities. Our focus in streamline organization based on the three legged stool if you win work, you execute work and you get paid for work, and that is the structure that we've adopted.

Our overhead reduction. Our overhead is now down by almost exactly one third since I joined the company and of course as Tony mentioned earlier our ERP system is fully live and in all of our facilities. Continues improvement however as I said earlier is a journey and the next steps that we are taking as Tony mentioned was to improve in our piping arena it's an area that I believe today where we can and as such we are looking to put in a new fully automated piping shop. As well as trying to get rid of some of our more expensive land real estates and optimize our land as we go forward.

Again as with Phase 1, we do anticipate a good payback period for the pipe shop and it also makes very good use of our cash. Our overheads as always remain in focus, particularly if we have to flex down our activity in the next two years.

Lamprell had some of its most profitable year with considerably lower revenues than it has today. In my opinion therefore it’s all about just right sizing that overhead to set the market, some of which you’ve seen in the efforts that we’ve done in the ’15. This link is clearly not linear, but I do believe that we have the ability to flex further down if our activity decline. These are some of the reductions that we’ve got here. Reduction welding man hours by 20%, our overhead I touched on, Phase 1 Evolution is a part from SEWA connection is complete and Phase 2 is obviously approved.

So moving to the outlook. In summary, the industry headwinds show absolutely no sign of abating today. We fully expected 2016 to be a challenge. Unless there is some price stability, we see that also continuing into 2017. That is no question that our pipeline is big and we believe is made up of high quality project that are likely to proceed to date. Similarly however, there is no question that the project that were in that pipeline a year ago, I would have made exactly the same statement and many of these projects have subsequently being cancelled or delayed and I expect some of the projects that are into this pipeline to do exactly the same.

We do have pretty good coverage for 2016, but we do expect our revenues to be down about 5% over the ’15 numbers this year. Our focus remains on the things we control and we feel, we’re doing a good job in this area. Our balance sheet remain strong which gives us opportunities and we’re excited with the possibilities of announced annual use may bring us with Saudi Aramco and with Dubai Drydocks. 2015 undoubtedly was a tough year and I’m pleased with our progress, I think it was a solid team effort across the board. Our focus however is on our bid pipeline and converting as much of this as we can to help fully secure of 2016 and obviously into 2017.

That covers the presentation I’m supposed to make. I’ll open up the floor for questions.

Question-and-Answer Session

Q - Neill Morton

It’s Neill Morton, Investec. Jim you mentioned the MOU with Aramco and Dubai Drydocks. I appreciate you’re undertaking due-diligence right now. But can you maybe perhaps give us some insight into what parameters you’re looking at with Aramco. There is a concern in the market this might be so-called pay-to-play type deal. And the other aspect of that unsettled and unclear about it is would this be in addition to the existing Saudi LTEs or would it potentially cannibalize them?

And then just secondly on Dubai Drydocks, what would you be looking to do that they can’t do already? Thank you.

Jim Moffat

Unfortunately I’m covered by a non-disclosure to do with the MOU. I can give you a sort of oversight of it. It is in a development of a yard in Saudi, a significant yard in Saudi, which will look at elements of ship building, we’ll look at elements of rig refurbishment, building new rigs and building offshore platforms. It is significant in size should it go ahead. As you see it right now we’re in the due-diligence period, we’re looking at how the whole thing works. But as you can imagine the make-up of the partners is such that the partners all what the same, to be successful. The Saudi government have been studying this for some considerable time and so it’s not a case about getting HHI and ourselves on-board and then proceeding to FID hopefully and then on to registering the company and building and developing the facility.

In the case of Dubai Drydocks, it is something that we’ve fundamentally did before. As we’ve talked about with participate in 14 FDSOs [ph] before on several of those we did in conjunction of Dubai Drydocks. We do think that there is a possibility of some FDSOs, not in the immediate future but in the longer term future. The market is certainly dominated by the Singaporean and Far Eastern yards. We have sort of picked up in the marketplace, but a lot of clients would like a Middle Eastern solution. And it’s about playing to your strength, I think again we could go out and offer that, we have marine facilities, we have built some ship-shape products in the past, not particularly if it’s a vessel. But for us to do it on our own just frankly doesn’t makes sense, I mean we’ve got a massive partner just down at the other end of town in Dubai, a recognized ship provider. So why not put these two things together and offer Middle East solutions. They have a highly automated yard, again with low labor. We have a highly automated yard with low labor, we’re both successful in our businesses, why can’t we offer it to the industry. And I think it's make a lot sense to me.

Neill Morton

So they run to [indiscernible] versus the LTEs?

Jim Moffat

Around cohort several different development -- they have a same cohort maintained potential and maintain potential is all about the fields that they already have in play. They have some of the biggest fields in the world and as these fields come down, they have to study the geology of these field and they look at putting PCs in this. But it’s then the LTA program, which covers sort of new building some Brownfield. The concept would be that this yard would take on the maintained potential and a percentage of the LTA work. But the size of it is sort of so big that the immediate LTA projects would not in any way be affected, it will take several years till the yard was actually operational before it could even compete in those businesses.

Unidentified Analyst

Yes, I am [indiscernible]. Two quick questions on the pipeline actually, first of all I know you’re going to say that you knock on capital margins to get more business with it, is there an option in that pipeline at some stage during the year to say, yes, we’ll take in a bit of extra business and see whether that option exists.

And the secondly is, are there any -- I assume there are, but how many really big value items are there in that pipeline that might swing it one way or the other, I mean another rig from Abu Dhabi, for example?

Jim Moffat

Okay, to answer the first question, every bid we look at, we look at pricing it as competitively as we can. As I’ve said on several occasions, we are not going to go and taking a bath and end [ph] this thing out, I have done that before in previous plays and that haunts you for years to come as you execute the project. So we intend to use the facilities that we’ve got, as Tony pointed out, things like the beam line, they make us significantly cheaper, the power line, the wielding processes. So we are going to use that ability to help leverage to win work. But we need to cover our costs, we need to cover our overhead. We are publically owned, we need to make profits for our shareholders. So that is still the intention going forward.

What was the second thing you asked?

Unidentified Analyst

Any particular big project?

Jim Moffat

Yes the big projects. Yes, there are big projects in some of these Saudi LTA projects are enormous. I mean the first one that we done was certainly into the billion numbers as opposed to the 100s of million number. So there are big projects out there. We think as I said that bid pipeline is robust, it has two or three mega projects in it or in the fabrication part, two of three mega projects in it and it ranges down to some much, much smaller projects obviously. But it the big range of projects.

Andrew Whittock

It's Andrew Whittock from Liberum. Three questions I think, from memory, the last time you gave us a formal guidance was at the end of November, trading updates. Where you gave us a steer for revenues in 2015, and today you completely missed that guidance. Now the market hasn’t changed, I think as you said and so can you give us a feel for the risks attached to your 5% down guidance for 2016? That’s question number one.

Question number two is the National Drilling Company I think it's in Abu Dhabi extended the auction period for its two jackups till the end of March. Can you give us a guidance as to how you think they will decide? And finally Jim, what are you doing here? Can you give some an updates on the timeframes for your replacements, where are you? Where do you think you will be et cetera, et cetera?

Jim Moffat

I’ll on to the second two questions, and let Tony answer the first one. I’ll go in reverse order this time. As I have said all the way along, I’m not going to rush out the door, I have agreed with the company and we have signed a deal that I will do a minimum of one year consultancy work after end my CEO role, if that becomes a few months one with another, I’ll let you know that I am perfectly flexible in that arena. We are continuing to search the people, we have been reasonably advance with a couple of potential candidates, believe it or not I think the obvious thing everybody is saying that is in this market there is going to be lots and lots of people looking for jobs. I think actually probably the opposite is the case. If guys look for good companies with very professional people, are in secure long term benefits, do they want to jump ships? I think people still remember Lamprell as of 2012 model, again we built sub job and in this job this was the 15 numbers, but I think it’s still seen as that question mark historically.

So what we've seen is guys are less -- I won't say not willing, but if had a good role you have to ask the question at this stage in your career. But we're comfortable with the process, we'll produce a candidate, we're comfortable that we'll have a sensible handover and we believe that will work.

In terms of the question on the auctions, I think the options will lapse and that is literally driven more because of I think everybody's seen it in the media there is a new head of Adnoc and obviously although we don’t contract with Adnoc we contract with NDC, but NDC owns Adnoc. So there's a new head in Adnoc and he's looking at all sorts of new cost control, having said that it is interesting if anybody that follows the media would see this morning, but although he's put that in place, he's actually gone ahead and released the new terms of drilling contracts.

So how long that is going to last I truly don't know. I absolutely believe 10-11 and probably 12 at some point will all go ahead. I think we will win that work. NDC do promote the, Built in the UAE for the UAE slogan, and so I think that Lamprell will -- these projects will come to Lamprell, I just don't think it'll come under these existing auctions. And I think to be fair to NDC we priced out the existing auctions and I think if we went back to the market today we would probably get them a better deal quite frankly and some of the material costs. If it were me, I would go back into the market. I don't think there is any surprises there and we’ve structured the 2016 numbers on that basis.

I'll let Tony answer the first one on guidance.

Tony Wright

Just on the guidance, obviously whenever we guide and we assess what our guidance is going to be, we take a view on the walk in work for 2015 at that point in time we made an assessment of the walk in work and it just hadn’t materialized as we thought it would, as I said earlier. For 2016 in terms of the risk around that, as Jim said we were 85% covered for 2016 with a very moderate assessment of walk-in work in there that would be a much higher coverage than what we would usually see, and of course it’s a difficult market out there, but -- and there is risk of course within that 15%, but we think that's quite small.

Jim Moffat

I think one thing I would add to that is, as I said we also have the ability to flex our overhead. Our projects staff go up and down as we win projects. That overhead can go up and down. It's not linear, I don't want to suggest that it's linear, but there is some given thought [ph] and that's why in the 2015 numbers although our revenues are down our profits are still very healthy.

Alex Brooks

Yes, hi, Alex Brooks. To continue off from that. You're going ahead with this cost centric new investment in the pipe shop, $35 million. Can you sort of give us a flavor of that needs to justify itself. How much work do you need to run through it, for that to be realistic?

Jim Moffat

I mean this is real-real-real round number is 50,000 feet. I mean pricing on a module represented by a third of the workload. Now the pipe shop does not do all of that work, but it does a fairly large part of it. So again continuous improvement is all about making incremental steps. And yes you're right, the $35 million is not a small amount, but we are looking at this long term. It's going to take us over a year to put this thing in. The market is going to come by, I'm absolutely convinced the fundamentals in this market are robust so we sit on a strong cash pile, we know that there is a strong market out there. We want to use the cash as constructively as we possibly can and we think the pipe shop gives us a big opportunity going forward.

Dan Slater

Hi, it's Dan Slater from Arden Partners. Two or three questions if I may. I just wanted to ask about fixed costs, I think you said in the press release that 2015 fixed costs were about a 110 million. So does that mean of the sort of 800 million of costs in the P&L otherwise about 690 of that is flexible based on how much project work you're doing. Is that right, or have I got that wrong?

Two, how might we sort of come to a view about what you're working capital draw might be in 2016, either sort of a direct guidance or how we might sort of work that out. And also I was wondering if you could kindly remind me what the covenants on your debt are, I think you told us before, but I can't remember.

Jim Moffat

I'll let Tony answer those.

Tony Wright

On the fixed cost, the overhead the 110 that I referred to is a mixture of fixed and variable, but there is an element of fixed that's in our cost of sales as well, because we have a quick little charge in there and the owner has depreciation. Ultimately in 2015 the fixed cost was about 8% to 9% of the overall cost of the group and in terms of the working capital were in 2016 as I said we are in the first half of the 2016 with the purchases progressing and we start to see some final mass [ph] start to coming in the second half and through to Q1. I would expect when I said it's going to decrease in 2016, I would expect to see a probably a similar level a reduction in cash between ’14 to ’15, ’15 to ’16.

In terms of the covenants themselves we have a debt service covenant which is two times, we have a net worth covenant which is -- we’re very comfortable with as well and then we have -- there is an EBITDA covers well which as I said earlier we are very comfortable with at the moment.

Dan Slater

Can you tell me what level was that?

Tony Wright

I think it's 3.5 to 1.

Dan Slater

Is that net debt to EBITDA?

Tony Wright

Yes.

Dan Slater

Okay, thanks.

Fiona Maclean

Fiona Maclean at Merrill Lynch. How much of your roughly 200 of cash is actually your cash and where can that number where it go? That's first question and the second one is, you talk a lot about your backlog and you’re bidding pipeline and volumes. You are not talking very much about profitability, so what should we be thinking in terms of where your margins can go and that kind of goes back to Andrews point around your guidance tends to be quite volatile versus what actually comes back, so where should we be looking there? I’ll leave it at that, thank you.

Tony Wright

Okay so I'll answer the first one. So on our cash, Fiona, as I said earlier, it's basically we don’t hold any client cash at the end of December. The projects are in just sort of the pinch points that we see, so which is why again through 2016 it -- the cash position is going to reduce a little bit, then we head into the final milestones where in effect the final milestones restore the cash position. So it's a pretty much all our cash at the end of 2015.

Jim Moffat

Regarding the profitability of projects we've talked about this before, it's very difficult to give a one size fits all, almost every business that we will look at has different margin. Some of the -- even as I’ve said before we feel the workforce, feel the odds with North Sea work, the numbers would look terrific. And there are some rig refurbishment jobs we get, if it’s an emergency and there is a lot of time and materials, they’re lower revenue but a very high margin jobs.

And more on bid competitively, it really depends on who you are bidding to, if you bid to Tier 1, as BP, as Shell, someone like that, the fact that we offer the safety quality all the rest of it is taken into account in the bid and hence we can bid that in what I call reasonably aggressively. In Kansas if it just goes out to the marketplace in perhaps more of an NOC environment or perhaps bidding to a contract then we’re just bidding against the world as a whole. And as such depending on the business stream we see quite a difference in those deltas in each one.

Fiona Maclean

Okay. And then just looking at the fact that the terms of the 200 cash that you have is going to come down this year.

Jim Moffat

On a working cap basis.

Fiona Maclean

Yes exactly, you haven’t paid a dividend for many years and that was six years of all the -- this kind of chaplains of scene going on, but that’s clearly settled down now, what should we be thinking about in dividends or shareholders returns in the future and when would you expect that to come back at the earliest?

Jim Moffat

Good question. It was asked at Analyst Day as well. I think we need some stability in the industry is really what it's all about. A cost pilot is obviously increasing and you can see the profitability of the last three years, it was $370 million of EBITDA. We are in the right issues we talked about how we were going to do it and what we were going to use that cash for, but we need some stability in the industry. If we can get decent backlogs built up I think it's something that the board would consider. It's a board decision, I think if you look to this a year ago, we knew we were coming to a price decline, but I don’t think anybody really believed that price decline was going to last nearly as long as it had. I think that’s in part as due to the resilient of shale oil in the U.S. I think a lot of reports stated by the impact to happen much, much quicker and hence the prices literally spiked back up and we’ll be back to business as usual.

But it hasn’t and it's stayed down and yes it has come up I think about 20% this year, but it's still pretty volatile at this time. So I think once we do so and once we get back to steady state we’ve all talked about this before, it is a very cash generative business and we would look forward to paying a dividend to all our shareholders at that time.

Unidentified Analyst

I was just trying to ask Tony you had a little slush fund which was [multiple speakers] previous financing, I think I remember you saying that you wished you’ll be able to have something to spend it on, which was specific names, and something came up. Does that expire that year?

Tony Wright

No. If you’re referring to the revolver, I told you about earlier the 200 million, 2080. No that remains in place for the five years through to 2019.

Unidentified Analyst

And that will, according to that, to remain in place that it is [multiple speakers].

Tony Wright

I’ve talked about it before, it’s particular to the gain sales. So it’s a [indiscernible] project, secured shelf projects have been able to beat those. So it’s very useful for us to have it, even though there is a cost that goods with them.

Unidentified Company Representative

Okay.

Alex Brooks

Hi, it’s Alex Brooks, Canaccord, couple of questions. Firstly, and you referred to this with the NDC options Jim. If I try to do sort of like-for-like, how much have your costs come down. Can you give us a very rough range of where those were compared to where they were at peak, setup ’14 whatever?

And the second question is, if I look at your bid pipeline. Also the module businesses, there is still some decent optionality there, jackups, I think it’s terrible but other people might take a different view. But the offshore platforms were up to the more automatic and that’s sort of gone quite well and now that they’ve really not very much left in the backlog today. And I just sort of -- has that gone very quiet or should we expected that there might be something there?

Jim Moffat

No. I think there are reasonable amount of offshore platforms in the bid pipeline. I think there are a number of opportunities there today, particularly in the Middle East. I think

Alex Brooks

And I mean, if you were to risks some of this, I mean where would you say the risk of this coming is most attractive.

Jim Moffat

The risks of this coming it’s most attractive. Help me out will you.

Alex Brooks

The opportunity, where in [indiscernible]?

Jim Moffat

I think in offshore, I think there are some, still some good opportunity there. You can pick up from that, I’m not going to mentioned specific projects. But you pick up upstream magazine for the last three months, you can pick out all the projects in the offshore [ph] in Middle East and we’re participating in all of those.

Alex Brooks

And on the sort of cost reduction number?

Jim Moffat

Again, I’m not sure there is sort of one number fits all. I talked about L.A., we’ve taken the third that of our overhead. I mean, we’ve taken work for 162 million down to below 410 million. So that’s 50 million saving and not one line items. We’ve talked about the path to Evolution pays for itself over about a three year period. So again, you can work out those numbers. We are looking at doing things more efficiently, our man hours to build jackups are coming down all the time, as we get more and more and more productive. I just see that as a sort of continuous journey.

Alex Brooks

I’m not talking about third-party purchases, I mean where that’s been?

Jim Moffat

We see that as well. I mean again, if you remember about two years ago I explained this. Previously in the Lamprell of old, we won a project and we gave it to, Tony as Project Manager we’ll just say and say Tony of you go and try to do it. And Tony had to go and procure that do his own subcontracts et cetera, et cetera, et cetera. And that’s 60%, 70% of the job. If you can go out and offer people long-term relationships, alliances, where you win, we win, type stuff. You can make significant savings in a lot of that, if you buy across all projects for plain vanilla material, you can make considerable savings, if you standardize you make considerable savings. And we’re working all of these avenues.

So I don’t think there is a number that I can pull out and just say it is X percent. But I mean, I could honestly think that costs even with inflation, I think our costs could be less than the [indiscernible] when I joined the company.

Alex Brooks

Thanks.

Fiona Maclean

If I were to place an order for a desktop [ph] with you today. When would you give us -- deliver it to me and how much for the cost made?

Jim Moffat

[Multiple speakers] There is more important, what you want?

Fiona Maclean

I am trying to understand all of this investment that you’ve being putting in, into this Project Evolution. You’ve talked about these bits are savings you his time, these bits are saving your money. I want to understand what is actually the end result?

Jim Moffat

The end result is we have options to drill all sorts of things for you. I mean we’ve build, I think in the great ships, the second great ship platform in the 18 months. If we needed to, if that was a driver for you and you wanted to get to the market quickly, we could do that. Now we could probably actually do it even faster than that by working additional shifts and weekends and things like that, it depends on what you want. What would it cost you, it’s like saying, go buy a car, how much is that going to cost to you? If you go buy a mini, it's a low cost, if you go by a roller it’s a big cost and so --.

Fiona Maclean

All the rigs that are build are the same?

Jim Moffat

No, no, no?

Fiona Maclean

No it's well I want particular on '16.

Jim Moffat

That’s like saying they’re all BMWs, if it a one series or six series or seven series and you get them with steering wheel and a manual drive versus all sorts of bells and whistles on the -- and if you look at NDC versus ANSCO [ph], these are radically difference with no doubt both 116 part of.

Fiona Maclean

Are you willing to say even for those clients, for your generic line, how much does that price change versus two years ago?

Jim Moffat

I don’t think I can tell. It's not that I don’t want to, I just don’t think I can tell you one number and it would be dependent on how the makeup of the rig looks like. There are some parts that we can significantly automate and make significantly cheaper. It depends on the makeup of the particular rig that you want.

Fiona Maclean

Okay thanks.

Neill Morton

So, it's Neill Morton again. I am just looking at the projects summery in the appendix. Am I right in thinking that first [indiscernible] rig is due to deliver in a little bit earlier than previously sort of H2 in my head, but really just sort of following on from that, [multiple speakers] we have seen the numbers clear look to fair deliveries of jackup which was auctioned recently and the name is I think under itself. I supposed one of these issues that you don’t until you know, but I guess particularly with them it’s going to be less raw shelf than NDC, risk of then --?

Jim Moffat

They’re both in the water now, I mean they’re both in the 90% plus complete, the first is almost finished. And it to be delivered in April, so I think minimal.

Neill Morton

Okay thanks.

Rahul Bhatt

Hi, Rahul Bhatt from JP Morgan. If I could ask the question on tax rate, there has recently some -- at least recently I picked it up, but Kuwait has introduced like a 10% corporate tax rates and they have been talk about of VAT being introduced in all the GCC countries, is this a risk for in the near next two, three years, do you expect anything, should we start modelling something in?

Jim Moffat

Certainly VAT is been brought into the UAE, I think from 2018 but I could be wrong there. There is no doubt that we’ll have some cost impact certainly for consumers especially. The rules are still very vague, that it is still very early, there is a lot of descriptions still going on, so it's very difficult to comment overall, we as a normal company would be assuming they adopt UK similar structures, we’ll end up being a payment vehicles more than anything. But it's still very early to say. We are certainly monitoring that.

Rahul Bhatt

Just to confirm on that, if VAT is introduce, does it affect your tax line or does it increase your cost and can you pass that on?

Jim Moffat

I mean -- there is still a long way to go before we understand us a manufacturer, how those rules will work with the free zones you operate in, there is a lot of clarifications to come on that. It's very early to say.

Tony Wright

Very good anymore? Very good thank you very much for coming along.

Jim Moffat

Thank you.

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