Kvaerner's (KVAEF) CEO Jan Arve Haugan on Q4 2016 Results - Earnings Call Transcript

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Kvaerner ASA (OTC:KVAEF) Q4 2016 Earnings Conference Call February 15, 2017 3:00 AM ET

Executives

Jan Arve Haugan - President & Chief Executive Officer

Idar Eikrem - Executive Vice President & Chief Financial Officer

Ingrid Aarsnes - Senior Vice President, IR and Communications

Analysts

Magnus Olsvik - Swedbank

Jan Arve Haugan

Welcome everybody to Kvaerner's fourth quarter presentation here at Fornebu. Nice to see you out of town and coming over to the countryside. A special welcome to those of you who follow us on the webcast.

As usually, I will take us through the key financials and also some of the highlights of our operations and then Idar will give us some more details on the figures. Then at the end, I will give you an update on the market and the outlook and then we open up for comments or questions afterwards.

The picture today is in a way a combined photo and an artistic impression of the Hebron platform that was mated just before Christmas. The GBS or the concrete gravity brace, base that we've produced was completed now in 2016. And we were also among the three parties, ExxonMobil as the client and Peter Kiewit and ourselves doing the mating when that was executed. I'm extremely happy to say that this operation also was executed to the highest safety standard of course but also according to plan and to the precision that was required for such an operation.

As you all know to try to keep up our safety focus also in this presentations, and there are no plan drills for today, so should alarmed [yield], then we have to walk serious or take the exit roots. And then slowly walk outside and meet at demonstrating area, which is at the corner behind us here.

I will now take us through the highlights and I think that the key message out of the quarter was solid operational performance again. This was driven by successful execution of the projects and in particular, completion of key milestones in our projects. But it's also an effect of better performance and improved project portfolio mix that all in all has resulted in improved margin compared to last year.

During the week of December 12, we executed three very important major operational issues or tasks and this was executed flawlessly. Common for all three of them was the extremely high precision and safe execution. I have already mentioned the mating of the Hebron GBS and the topside. In addition, we also executed the last roll-up, the fourth one, which was in total 3000 tons in the jacket construction of Sverdrup. Actually, in total nine different cranes were working together in a joint operation when that job was done. And at the picture that you see now on the screen is when Njord is actually approaching the dry dock at Stord and again very close and narrow both to the sidewall of the dry dock but also underneath. This was again high precision and everything happened in actually one week, the week of December 12.

After the year-end, we have also won two new contracts. One was together with Aker Solutions where we are the formal subcontractor for the offshore hook up of the Sverdrup riser platform. The other one was with Saipem, where we are going to dismantle and recycle the Miller platform in the North Sea. I also would like to highlight that we continued the improvements and strengthening our competitiveness. This year we have further reduced our overhead costs by simplifying the organization and downsizing the workforce with another 40 to 50 employees. As I repeat every quarter also for you, safety is not only a license to operate but it's also a prerequisite to come on the bidders' list. Of course, we are pretty proud of the statistics but there are some key messages underneath that as well.

We have an ambition to be extremely open and transparent when it comes to our performance on the safety results both because we want to drive continuous improvement in the industry but also we believe that our safety performance and our experiences in that can be an important bid criteria for new contracts also in Norway. As the graph to the left shows, our performance is gradually improving every year. The overall performance in 2016 shows an improvement regarding injuries and serious incidents. However, in the third and the fourth quarter last year we had some incidents that absolutely should have been prevented. I also would like to mention that the sick leave in the Company is trending in the wrong direction. Even though our target is 4.5%, we are above that. We have instigated a number of several mitigating actions to trend that the other way.

We do have the right policies in place, the procedures are in place and the management attention are in place. But lack of compliance sometimes causes injuries and also serious incidents. More systematic sharing of experience and root cause analysis from the different projects will be a further ambition into 2017 to improve our performance in this respect. When I look at the key financials our revenue in the quarter was 1.8 billion and the adjusted EBITDA was 219 million. I'm pleased that we continue to deliver strong underlying performance and this is mainly due to improvements that we have implemented in cost, quality and productivity. So when I then look at the jointly controlled entities and include them, the revenue in the quarter was 2.4 billion. And in the year, total year, it was 10.4 billion. And the EBITDA for the 2016, was 741 million and this resulted in a margin of 7.1%. This year the activity level is expected to become lower than previous years. Although the revenue will be lower, the activity at our yards will be higher than in 2016 and in particular due to the phasing of projects and also the mix of the projects. The working capital continued to be negative, lower than 1.5 billion, which is our guided range between 0.5 and 1.5 and we will come back a little bit to that.

During the quarter, we produced for 2.4 billion and the order intake was 768 and the order backlog is now 6.5 billion at year-end. The graph shows that approximately 80% of the total backlog is planned for execution in the year 2017. And new contracts for hook-up and decommissioning totaling around 650 million will be booked as order intake in the first quarter. But we also are looking at and working a lot of tenders which we expect to be awarded now in 2017. And for Njord A, Statoil and its partners are now working towards an investment decision for the project within the second quarter. We have signed a memorandum of understanding with Statoil for the EPC contract and the upgrade of the Njord A platform. However, several conditions has to be met before the final contract can be signed. Our priority now is to execute the pre-EPC project flawlessly and without any incidents.

Now let me take you through some of the key highlights in our operation in the quarter. Our projects has delivered good performance in the fourth quarter and we are on track to complete as agreed with our clients. The Nyhamna project is now completing the remaining construction in parallel with ongoing commissioning. The SVS system which is in a way a filter that takes shocks from the grid or from the plant back to the grid, that has been now handed over to Shell and started operation according to schedule. Mechanical completion, pre-commissioning and handover to commissioning is now the main activities at [indiscernible].

The Johan Sverdrup ULQ topside is now moving from typically prefabrication into pre-assembly. The project headquarter was moved from Leatherhead outside London at KBR's offices and now are located at Stord and our yard in the west coast. The site engineering has now been completed according to the schedule and construction is now ongoing on approximately 10 different sites in Norway, Sweden and actually in Poland.

As you know, we have contracts for EPC delivery of three jackets for the Johan Sverdrup field development. As I already mentioned, assembly of the riser jacket is progressing according to plan at our yard in Verdal. The photo shows the 3000-tonne roll-up that I was talking about earlier. For the production platform and the drilling platform jackets, we are also in the fabrication process now and those are going to be delivered next year. We see actually an improvement from the first jacket and into the second jacket in our productivity and also quality performance.

On the picture down to the right, you see the GBS just before the float over were ready. The GBS was ballasted down to 8.6 meters of rebar before the mating. After the topside were in place moved over onto big barges, the GBS was de-ballasted and then took the load off from the barges and were connected to the top of the GBS.

Our next operation now in parallel with, could you say, safeguarding the hook up phase that are currently being executed is to do the marine operation to tow this huge facility in mid-2017 and putting it down on the right place at approximately 95 meters of water depth at the Jeanne d'Arc Basin and Grand Banks. A vital part of the way we operate is to continue to focus on the improvement going from separate initiatives in the different projects to continuous improvement across all projects. And I am pleased to say that we are on track to continue this improvement process and we are identifying new opportunities and we also document that we are capable of implementing them. So just to give you a flavor of where we, our route is going. From 2014 to 2016 we improved our cost base by approximately 15% to 20%. The largest improvement was in the jacket production, a bit less in topsides.

For 2016 and into 2017 we continue all these efforts. Our ambition is that for new topside bids in 2017 we will have a cost base which is between 20% and 25% lower than we had three years ago back in 2014. This includes that with this year we'll drive down our overhead cost by another NOK100 million. Together with overhead cost reductions we have made over the last two years, this means that we have a total reduction of approximately 300 million in administration cost.

Our implementation of improvements have already effect on the bottom line for ongoing projects. And we also do believe that this is a contribution to refill our order book, which we need. The reduced cost base that we have documented here are direct effect on our competitive power, both for new large EPC projects but even more so for smaller projects where we now compete for medium size and smaller size projects and typically for upgrades and modifications. I'll come back to that when I look at the outlook but then before we do that I will ask Idar to take us through the key figures.

Idar Eikrem

Thank you, Jan Arve, and good morning to everyone. The financial highlights for fourth quarter were as follows; higher margins reflecting improved project portfolio and improved performance. We continue to run the business with a solid negative working capital and it's yet another quarter with a strong cash flow and we maintain a robust balance sheet.

Turning to the income statement, fourth quarter revenues were 1.8 billion. Kvaerner reported operating revenues of 7.9 billion for the full year of 2016 compared to 12 billion for the full year of 2015. Lower revenues is mainly due to lower activity within operational area process solutions. Adjusted EBITDA for the quarter was 219 million and adjusted EBITDA for the full year of 2016 was 680 million. Depreciation and amortization of 27 million is on the same level as last quarter and the total charge for 2016 was 100 million, which is also what we expect for 2017. Goodwill impairment of 198 million in the quarter is related to concrete solutions. The impairment is based on the Company's impairment test in accordance with the International Financial Reporting Standards, IFRS, reflecting accounting judgment following market developments. The impairment is a result of assessment of the uncertainty of the amount and timing of new projects awards and does not reflect Kvaerner's view on long term prospects within the concrete business. Kvaerner will continue to invest in concrete core competence to position itself to win new projects. Net financial expense for the quarter was 6 million and a loss of 117 million for 2016 with an accumulated loss on embedded derivatives of 128 million. Embedded derivatives are non cash and the profit and loss effect will reverse as the projects progress and cash flow are realized.

Total income tax expense was 66 million and 132 million for the full year. The tax expense reflects an effective tax rate of 62% for the full year of 2016 compared to 42% in 2015. The relatively high tax rate compared to the Norwegian statutory tax rate of 25% is mainly due to goodwill impairment not being tax deductible and tax increasing items related to withholding taxes. Excluding the impact of goodwill impairment, the effective tax rate for the year of 2016 was 32%.

The above results in a loss from continuing operations of 68 million for the quarter. Net loss from discontinuing operations was 32 million in the quarter compared to a profit of 18 million in the same period last year. For the full year, profit from discontinued operations was 345 million compared to 56 million in 2015. The full year results of 2016 and 2015 were both positively impacted by foreign exchange accounting effects on repayment of capital from subsidiary of accumulated 261 million and 139 million respectively.

The result for 2016 is also reflects insurance recoveries related to the Longview power project recognized in second and third quarter.

Net loss for total operations was 100 million for the quarter. Earnings per share in the quarter from continuing operations was negative NOK0.26 and earnings per share for total operations was negative NOK0.38.

Turning to field development. As you know, the main difference between the field development figures and our Group figures on the previous slide are revenues from jointly controlled entities included in field development and unallocated cost deducted to come to the overall EBITDA figure. Field development revenues were 2.4 billion in fourth quarter and 10.4 billion for 2016. The activity level is 2017 is expected to be lower than in 2016 with expected full year gross revenue of around NOK6 billion. Although revenue level will be lower in 2017, activity level at the yards will be higher than in 2016 due to the phasing of projects and the portfolio mix.

EBITDA amounted to 232 million in the quarter, reflecting an EBITDA margin of 9.7%. EBITDA amounts to 741 million for 2016, resulting in EBITDA margin of 7.1% compared to an EBITDA of 613 million in 2015 and an EBITDA margin of 4.1%.

The positive margin developments reflect that Kvaerner has continued its processes to improve cost, productivity and quality. The effect of better performance and improved project portfolio mix has resulted in a higher margin compared to last year both for the quarter and for the year. The quarter is further positively impacted by settlement with a subcontractor related to a completed project. The EBITDA development illustrates that quarterly fluctuations are to be expected due to the phasing of projects, as well as the composition of the project portfolio.

Moving to the cash flow I will start with a review of the net current operating assets or working capital as illustrated at the bottom part of the slide. The working capital of continuing operations remained at the lower end of the indicative range and was negative at NOK1.5 billion.

Looking at the cash flow statement, net cash inflow from operating activities was 244 million in fourth quarter, reflecting the underlying result. Net cash outflow from investing activities was 16 million in the quarter and 201 million for 2016, mainly reflecting capital expenditures. Net cash outflow from financing activities was 4 million, relating to fees paid.

Net increase in cash and bank deposit during the quarter amounted to 228 million, resulting in a cash and bank deposit at the end of the quarter of more than 3 billion. Net increase in cash and bank deposit for the full year was NOK1.5 billion and the increase of 1.5 billion for the year is basically split 50/50 between discontinued business and continuing business.

Turning to the balance sheet. At the end of the quarter our credit facilities were undrawn. Our net cash at the quarter end was more than 3 billion compared to 2.8 billion reported at the end of 2015. The equity ratio was 44%, down from 49% at the last quarter.

Thank you for the attention. I will now leave the floor to Jan Arve for an update on markets and outlook.

Jan Arve Haugan

Thanks a lot, Idar. Yes, I tried to look a little bit into the future and look at the market opportunities. As we are now completing a number of existing contracts our key focus for Kvaerner is to refill the order book. New prospects must be found in segments where we have our capabilities and can add value. New engagements for us will be based on sound margins.

There is a challenging situation in Kvaerner's largest market segment and it looks to be that also going forward. And we can see that cash management among our clients can be a limiting factor both in terms of timing but also in type of developments. However, several oil companies have communicated that the industry's improvement makes it possible to realize new projects now with 20%, 30% and even 50% lower total cost compared to 2013.

Hence, some important projects are moving forward and in the short term in 2017 and 2018, we have identified some few opportunities within our traditional EPC segments. Still several oil companies have a limited flexibility to launch large projects this year. In balance, we see a number of increased activities in segments where we can see smaller or typically less capital intensive projects going forward, more moderate size.

We are of course not allowed to give details on the EPC prospects but I would like to mention some. In the Barents Sea, we see the potential for a handful of new floating platforms in the coming years. The most near-term prospect is of course the FPSO for the Johan Castberg field. Statoil say the decision to start the project is expected already this year. In a few years, we hope to see projects start for floating platforms also for Alta-Gohta and Wisting fields.

Over the next three years, we expect to see significant work started in some of the onshore oil and gas facilities in Norway. One such project is of course the expected expansion at the Mongstad refinery to receive the future production from Johan Sverdrup. Kvaerner has been the key contractor for seven out of seven onshore facilities and our work at Nyhamna, we think is relevant. It illustrates how we can utilize our special skills but what it takes to execute these types of projects in a plant, which is in full operation, and yet complete the work on time in safe operations. Market analysis indicates clearly now that satellite field developments will also come into the picture. Some of these satellites may be development with a Subsea on a Stick solution. For most satellite developments, it is necessary also to upgrade or do modifications on existing host platforms. In Kvaerner, we have identified between five and 10 projects of this type of scope of work.

In addition to Norwegian prospects, we also are in dialogue with a number of oil companies for a handful of projects in other regions. But, of course we are also looking at opportunities which is adjacent to what we are doing today. The core of our strategy is to maintain our reputation as a contractor that delivers predictable EPC projects, hook up and commissioning both offshore and onshore. But we are actively also looking at strategic prospects with focus on adjacent segments. We position our platform modifications such as Njord A but also decommissioning. We will also continue to look at technical development of low cost solutions and again Subsea on a Stick is one of those products, an unmanned wellhead platform, and we are invited to participate in processes by oil companies that really appreciates this type of approach.

In the spring, the large Hebron GBS platform will be towed out and installed as part of the contract that we have with ExxonMobil. Marine operation is also an area where we do see opportunities and our strong competence and expertise will be utilized to offer effective solutions to some of our clients. In addition, we continue to develop new products and services such as for instance the arctic driller which is a concrete drilling platform for exploration of ice infested Arctic waters. And of course, we are also continuing to refine our concrete LNG solution, which we are marketing together with KBR.

Finally, I also would like to mention that we consider structural measures to grow and improve our operations to make an even better company going forward if and when we find the different opportunities.

Trying then to conclude or summarize today's messages. In today's market it's a strength to continue to control our own operations. In challenging times, we have again delivered solid performance now in 2016. When we look forward, our first priority is always to execute ongoing projects safely and predictably. We have proven our ability to implement the improvements and yield effect of this to the bottom line. We will continue to work on this also in 2017, and we have a number of initiatives that we are implementing now.

But we also see that the continued volatile market creates challenges for our activity level this year and next year. Our internal capacity utilization will however not only depend on the new contracts but also the sort of scope that we are going to be responsible for or are responsible for. We are actively pursuing near term prospects and in particular to update or optimize our capacity utilization.

In the market downturn over the last two years, in some segments we see that there are some weak players out there, which have limited strategic opportunities. Therefore, Kvaerner we have a resilient financial platform and this is a fundament for our safeguarding of operations going forward but also to enable us to do some growth initiatives. Our clear ambition is to continue to perform predictably and to continue the base to grow new opportunities at sound margins.

So, by these words I say thanks for the attention today and again I think we open up for comments and questions. And if Ingrid can help us out with administration of that. Thanks a lot.

Question-and-Answer Session

A - Ingrid Aarsnes

Hello everyone, I'm your translator from Investor Relations. I think you all know the drill by now. Please wait for the microphone and please state your name before asking your question so the webcast audience also can follow it. Thank you.

Magnus Olsvik

Magnus Olsvik, Swedbank. A question on the decom award with Saipem. Do you see any more of these similar awards coming to the market this year and how is the capacity at Stord for these type of projects?

Jan Arve Haugan

I think that the decommissioning market in a little bit wider perspective has always been a future market. But we do see a number of opportunities coming up now and as you know we are working together with some of those heavy vessel owners, and we try to cooperate with all of them. That is an important feature in our operation. Our decommissioning capacity at Stord will be available and of course, these can also be in a way stored waiting for access into the decommissioning area. So there is no limitation as we see it today in the number of projects. But there are opportunities.

Magnus Olsvik

And a second one. How do you see margins develop during 2017?

Idar Eikrem

Thank you. I think first of all we are not giving any guidance on margins going forward but looking at a company like Kvaerner I think you need to look at the margin development over several quarters when you assess your margin. What we can see and what we have communicated throughout the year, we have continued our improvements, cutting cost, improved quality as well as solid performance that give also bonuses and incentives in some of our contracts. Therefore, fluctuation you will see from one quarter to another but as I said, I can't give you guidance on future margins. We are happy with the performance on the current portfolio.

Magnus Olsvik

Thank you.

Unidentified Analyst

[Indiscernible]. I see that the order backlog dropped almost 2 billion and the difference between revenues and intake was about 1 billion. What explains the difference?

Jan Arve Haugan

The order intake for the quarter and also for the year of course has not been at the level that we would like to see it, so we have been reducing our order backlog. But we are working on several prospects that we are hopeful should be showing up in 2017. But the order, I'm not sure if I got exactly your question but the revenue is basically 2.4 billion and order intake is 700 million for the quarter.

Unidentified Analyst

Revenues is 2.4 billion?

Jan Arve Haugan

2.4 billion for the field development segment, yes.

Unidentified Analyst

Okay, alright. Then I'll look [indiscernible]. Sorry. Okay, thanks.

Jan Arve Haugan

And the order backlog is [Multiple Speakers]..

Unidentified Analyst

I looked at it as 1.8 billion?

Jan Arve Haugan

Yes and then I understand your confusion. Look at field development figures when you're looking at order backlog as well as margin developments.

Unidentified Analyst

[Indiscernible] I have a question about your workforce reductions and if you could comment on where that will take place and if, and how long you think that process will last.

Jan Arve Haugan

First of all I think you, we communicated our challenges when it comes to the workforce back in 2013 and in 2014. And we indicated at that time that it would be between 250 and 500 employees. So far we have had a, we stopped employing new people technically could you say, so that has been one driver. By natural process, we have reduced our workforce by approximately close to 400 now. We have indicated now that there will be some further reductions in staff administration and in order first of all to reduce our overhead cost. That has been a key driver.

So the regions or the geographical situation is still a little bit open but of course it belongs mainly to the topside production. That's where we see that further reduction. Then I do hope that I can say to myself and to my colleagues that we are already in a way down at a level where we are going to be robust going forward. But, of course, it's difficult to be very firm on this one but this is absolutely our ambition to be in a way finished with these processes now.

Unidentified Analyst

I have two questions. One question is that your activity for 2018 seems to be quite unclear and any thoughts on your ability to book orders in 2018?

Jan Arve Haugan

First, I think we have to realize that we are in the process of bidding at a number of prospects now for 2017. And into 2018, I think that as I indicated there are signals from our clients that they seek opportunities now to go into the market and book contractors in a way. I think we have indicated before that one of the strengths that we can provide is actually to have what we call warm teams. And warm teams, that's in a way an advantage when you also bid because teams are well working together. That's why we try to promote our capability now to our clients. I think we have also indicated that during the downturn over the last three years one of the additional challenges in a way in addition to the global competition has been that clients are actually stopping or postponing a number of projects. I would like to indicate at least my gut feeling today is that that risk has been slightly reduced because we the industry have really lowered our cost base going forward. And again, it's really not a specific answer to your question but it's an indication that we do see a number of opportunities going forward.

Ingrid Aarsnes

We also have one question from Pareto. It's about the settlement with the subcontractor and if we can comment on the size of that.

Jan Arve Haugan

Yes. We are not specific on the size of it but of course it's large enough to be mentioned in the quarterly report. So that, I guess, is answering at least part of the question.

Ingrid Aarsnes

Okay, then we thank you all for coming and wish you all a nice day.

Jan Arve Haugan

Thank you.

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