Fugro's (FURGF) CEO Paul Van Riel on Q4 2016 Results - Earnings Call Transcript

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Fugro NV (OTCPK:FURGF) Q4 2016 Earnings Conference Call February 24, 2017 6:30 AM ET

Executives

Paul Van Riel - CEO

Paul Verhagen - CFO

Analysts

Henk Veerman - Kempen

Dirk Verbiesen - KBC Securities

Martijn den Drijver - NIBC Markets

Wim Gille - ABN AMRO

Quirijn Mulder - ING

Luuk van Beek - Degroof Petercam

Paul Van Riel

Welcome everybody to this -- our presentation of the Full-Year Results of 2016 of Fugro. Of course as is getting to be usual, Paul and myself, the other Paul, Paul & Paul, help you through the results. We'll do it as usual, I will start with a summary and give you little bit of feel of markets and where we're in terms of strategy. And then Paul, will take over with the financial presentation. And I'll end with the outlook and of course questions and answers after that. What has happened in 2016, the major events for the Company. Well, first of all, it's clear that we have worked in an ongoing decline of oil and gas markets and keep in mind that oil and gas is roughly 75% of our revenue. So what happens in that market is of great importance to Fugro. Well, in such a strongly declining markets you can only do one thing as management and that is to just focus on cash flow and strengthening of your market-leading positions which we've done.

On the cash flow side and on the cost side, what we have under our own control is that we have to continue to vigorously adjust capacity and costs to market reality. As in 2015, we took out almost 1,500 staff of the Company. Obviously, very painful for the team, but unavoidable in the circumstances. Lot of focus on winning work and on maintaining market positions, we're actually even extending them. And as a result of all of that, we delivered a substantial cash flow and use that to reduce our net debt. Besides, oil and gas we also work in building and infrastructure and what we've seen there is building and infrastructure revenues flat and in our power segment which is getting close to 10%, we've seen nice growth. At the same time, while we're taking care of this difficult market, for Fugro which has been very important to keep on executing on our strategy, our Building on Strength strategy and we've done that. Over 2016, we built a quite customer centric organization, reorganized the activities of geotechnical survey and subsea into a Marine and Land division and within those two divisions, we recognized two main business lines Asset Integrity and Site Characterization, market positions mention that and the other thing that we also keep up is we're as much as we can, maintaining R&D and innovation budgets and we've yet again seen extreme of results coming out of those efforts.

In terms of financials, Paul will speak about them in more detail, but I think just a couple of highlights, of course revenue down, the backlog, we'll come back to that of course also down, but less than the revenue decline. EBIT, we managed to keep it barely over zero, but at least it's positive, whereas we had felt coming into the fourth quarter that, that would be hard to achieve, but we did it. Cash flow quite strong and we've used at bottom right, to reduce our net debt position and hence improve our leverage ratio. Cost reduction measures. Mentioned a couple things already, but another close to 1,500 people ahead of plan, we had anticipated around -- when we announced the quarter three that we would be sitting around a 1,000, we actually ended up with substantially more. Third party expenses quite important to us is that we managed to maintain a third party expenses in line with revenue in fact, we did little bit better squeezing out more cost on the third party side than our revenue declined. Also besides cost reduction in terms of people, also asset reduction and we took out five vessels from the fleet during 2016.

In terms of markets, our let's say, offshore view on that, but to start with a general comment, it is now clear that demand is exceeding supply and that's partially because of demand growth, but in particular because on the supply side two effects are now having an impact. First of all, OPEC discipline together with Russia that seems to be holding up, they have reduced their output and at the same time you're seeing the impacts of reduced investment where basically the level of investments are not keeping up with the base of depletion. What's important is that in the last two years, in the last three years by now, we're seeing that fuel development is now becoming possible at these lower oil prices we're are at today. And that's because the supply chain has become much more efficient and much more cost effective for the oil companies, so that's good news. At price levels where we're today, 55 or, let's say, in the 50s it's actually possible to develop both shale and it's also possible to develop lots of offshore opportunities. Now, we'll know that shale are lots of relatively small investments which can be turned on quite quickly and what you're seeing is that the investment boost that is now coming through at least which is being announced most of that is going to North American shale.

However, offshore we anticipate growth for all, it takes more time to prepare offshore investments but again for oil companies the good news is that you invest and after that you have a very long time benefit of a very good cash flow once fields get into production. So, I think we will see a balance in overall and in the end we will need offshore oil irrespective to keep up with demand. If we keep on not investing, we're going to get very serious supply constraints and will have oil prices go up, but again it seems that's oil companies are beginning to turn the corner there. Both offshore and onshore needed to fill the gap and of course we're also in a situation that we face the transition to renewable energy and that's definitely gaining momentum. But we have a long way to go before renewables seriously start getting and cutting into oil. So yes, the dependency on oil will disappear, but it's going to take quite well and although that's lengthy period Fugro will be able to continue to benefit from oil activities.

Okay, look at some of our markets. The other markets, building well, basically that is GDP driven activity. So in those areas where there is good GDP growth you will generally see healthy growth in the building market. For example, Asia Pacific, India, Indonesia, Vietnam and Philippines, China perhaps is going down a bit, Europe modest, still too much political uncertainty and of course Brexit as an overhang yet, definitely things are also in Europe, slowly but surely little bit on the increase, South America, Central America at the moment are the weak spots for building markets. Infrastructure, infrastructure worldwide has actually proven to be quite resilient and in particular just the basic infrastructure projects airports, pipeline, water and so on. Good news, I think for Fugro in the State, if Trump indeed follows up on massively boosting spending on infrastructure as they've planned that will be great because with our land operations in the States we're actually quite exposed to that market. Now, even if it won't be the big words of Mr. Trump, any increase of spending in infrastructure will be to our benefit. Also in Asia Pacific and there are all sorts of major construction projects around infrastructure in all the big cities that are developing out there. On top of that in big cities, in places there's an enormous push for Asset Integrity also on land including the infrastructure, so a nice business to grow in.

Now over to power. It's absolutely clear that there is increasing shift of investment to renewables. It's now getting into numbers that are numbers close to those being invested in oil and gas. So it's absolutely gaining traction. Not only that, we have power generation, but also power transmission and distribution. We have lots of investments in there. First of all to handle aging, two, to handle increased demand and also all the things that have to be done to integrate these variable sources of renewable power. Offshore wind in particular, we've seen record low bids in offshore wind recently in the Netherlands and Denmark. And offshore wind is now getting quite close to grid parity and its just a couple of years, I'm sure and I'm confident that with improved technology we'll be there. Also just to get a few big numbers, 13.8 gigawatt already installed and growing very strongly. Just to give you a few, the very, very largest nuclear reactor has been built today, you should think around 3 gigawatt, just to give you an idea of scale of offshore wind today.

Mining, also looking up. Good recovery of commodity prices, demand is taking hold. Our activity in mining is small, but growing. And so for us this is a nice growth opportunity. Following the markets, of course, how do we act in those markets. Well, we have to have a good strategy and if we look at the four components of strategy that we've been working on in 2016. First of all, client-focused market leadership that has been there for a while and it will stay there, it is critical to Fugro in our thinking that where we operate and the market segments that we do operate that we basically go for either very strong market positions and if at all markets leading positions. To do that, we also need an effective organization and I'll come back to that in a minute, but we've taken lots of steps there.

Technology and innovation, for a company like Fugro, core to the way we want to do business. If you want to be market leader, well, you better have the best technology out there and you better have plenty of proprietary technology. And finally, portfolio changes; that's been there and I'd like to take you through where we're and how we ended the year on that. So, client focus, market leadership, reorganization, how are we trying to handle that? Well, first of all, we've taken a look at all the phases of the assets of clients, all phases that really impacts. And when you look how Fugro has been developing over the last couple of years, it's quite clear that Fugro has evolved all the way from concept and feasibility through to decommission. If you would have looked at Fugro five to 10 years ago, it would have been very front-end loaded, but we've really, really spent a lot of time in getting ourselves into that full cycle of the asset lifecycle.

Now, when you look at our activities and when you look at the requirements from clients, what you see is there is a need for integrated site characterization projects and those are the projects, take for example, an offshore wind farm where you first of all map the topography of the seabed, you do environmental studies and once you've figured out where the windmills are supposed to go, you go there and you do soil investigation to understand what kind of foundations you need to build. But that site characterization, we do that in land and we do that in marine environments and that is heavily biased towards front-end of the cycle. Now, after that, once everything is built or at the end of the construction phases, you go into the asset integrity phase where through asset integrity sources, where we make absolutely sure that the clients can keep their assets operational and safe all the way through to decommissioning of the assets. So how if we didn't organize that into two divisions as it was clear from the last site, Fugro at the top, a land organization reporting up to the head of land. Brice is here today to join us five regions and within those regions operated through business lines. Exact same set for marine; of course, that was a very conscious decision, because then we can leverage the synergies and the opportunities to the best. So we have completely symmetric organizations on the land side and the marine side and then finally geoscience, but that's basically the Seabed Geosolutions joint venture with CGG.

Linking all that innovation and technology, there's lots of stuff we share now to think of databases and data management, to think, for example, also our CPT and drilling technology and everything. We apply that throughout in the same goals for shared services that we want to use everywhere. So we have one shared service center for all operations on a country level basis. So, this gets us a lot of efficiency, it gets us a lot of synergy. But most important, we think, we can serve our clients better with this organization. So, already make sure that site characterization services, the goal is to support new developments; and with asset integrity services, the idea is that we help the clients keep their assets operational, safe and operating also sustainably; no leaks from pipelines, for example.

Now, where are we on building our own internal organization? We have transitioned to the land and marine structure. We will start reporting accordingly. Internally, we're now merging organizations into a single country organization where we can, each supported by shared service centers in terms of operations. And another thing that we've spent a lot of effort in the last couple of years is our own central fleet management, because again we want to gain and have the synergy benefits of running one central fleet. We're almost done and we expect to complete the move to the central fleet management group by 2017. So, all those things of actually run very well. And we're very happy with the strategic progress we've made. However, one area perhaps lightly less successful and that is the portfolio changes that we announced two years ago to start working on. First of all, Subsea Services, I think almost everybody in the room here is aware that we almost completed the transaction with Shelf in Asia Pacific. That, we terminated. It wasn't working out the way we wanted to. And what we've done is, we've said fine, we will integrate all the inspection, repair and maintenance services together with the relevant shared services and for asset integrity business line, where the higher part is core. That leaves us with the heavier part of Subsea Services, the installation and construction part. Well, we've not yet succeeded but we continue to work on divestment or partnering opportunities for that part of the business.

Seabed Geosolutions, we're not super active but, to be clear, we continue to be open to opportunities to reduce our stake or extend the partnership as opportunities become available. Finally, Fugro Synergy; Fugro Synergy has been vessel, as an special asset, that's also able to do well services work. Well, in the market today, well, there are no takers at a reasonable price, so we've reviewed our geotechnical fleet and we've decided that we will retain her and optimize her for geotechnical operations which adds one more high-end, high-class geotechnical vessel to the fleet.

Technology, just a nice couple of examples, we continue to innovate, for example on the left, we -- it's a mining area and this is the so-called tailing pond, where all the mine deposits which have been taken out of the mine are dumped. They are, by the way, not dumped but they are retained usually with the dam. And the beauty is with all techniques, a lot of residual minerals are still left. And we have developed a cone, it's pretty unbelievable, but we actually have a little X-ray machine sitting in a cone here that you can press down through the sludge and you can measure every metal content and you can actually rework the sludge to basically have very cheap access to minerals that are still left. On the right, a new method to detect unexploded bombs. The North Sea is surprisingly full of -- lots of mines and bombs from the Second World War. And with this enormous development of wind farms, all those sites need to be scrutinized if there aren't any unexploded bombs left. So, new tools for that. Bottom left, very interesting way to remotely check if, for example, structures offshore are being set absolutely perfectly vertical. You can imagine -- again, take a wind farm, you don't want that huge tower to sit there and not be there perfectly vertical. And to the right, finally, again about asset integrity, a whole satellite positioning base monitoring system for large floating assets offshore.

So, we're doing well and we continue to do well with generating successes with our innovation pipeline. With that Paul, we've come to the financials, if you can take over from here?

Paul Verhagen

Thanks, Paul. A few highlights for the financials. Cash flow, as mentioned, €186 million. Good performance relative to market condition and especially also relative to what we achieved last year with regard to working capital. First half €67 million, that included €111 million you see at the bottom of the page. The operational part was negative first half. Second half year, strong performance, €119 million. EBITDA €99 million, €91million. So, regionally split between H1 and H2. Pretty remarkable performance as well given the continued revenue decline, of course, that we've seen in Q3 and Q4. Working capital decreased €89 million and large contributor to that was the DRO, 92 days. Last year, we were at 102 days. I was still dreaming at that moment in time of 90 days. We're getting close to 92 days. We should get below 90 days; will be a challenge. And as I said before about the period, it will not be one linear line down, it will go with ups and downs, but the trend over a few quarters should be down. The proceeds, I mentioned the Voyager sale and lease back and the divestment of CGG loan. Now that results in a net debt of €351 million; net debt-to-EBITDA which excludes the debt part of the subordinated convertible, 1.1; and a fixed charge cover of 2.4.

Now as Paul has said, strong revenue declined 22.7% currency comparable, almost 25% on a reported basis. EBIT marginally positive 0.5% which indeed was not anticipated when we updated you with our Q3 year numbers. Capital employed €1.3 million. ROCE, unfortunately, negative. And cash flow last year €315 million and this year €186 million which means in last two years, in a pretty deep and harsh crisis, we have been able to deliver almost €0.5 billion of cash after investments. Other important point in this slide is market positions have either been maintained or strengthened, especially core which should position ourselves well for a recovery when that comes; and capital employed, of course, mainly reduced because of impairments but also simply because we invest less than we depreciate.

Now, here there is a picture by division. You see basically all divisions are hit, double-digit declines in all divisions. 11% in Geotech, 22% in Survey, 20% in Subsea, 50% in Seabed which, as you know, is somewhat of a lumpy business; two, three contracts can make a break at a year. So, in all divisions double-digit revenue decline. EBIT mainly year-on-year decline in Survey. So, at least, we have more opportunity to manage costs in line with revenue developments than we had in this year. Seabeds, very remarkable I would say, we have 50% revenue decline year-on-year, only €6 million EBIT decline that includes obviously a one-off of €11 million, but even then it is still a remarkable performance and resulting €9 million.

Cost reductions. Now we have -- let's say €550 million of revenue decline, EBIT declined more or less €100 million, that's in itself pretty good ratio on all fronts. Third party costs down more than the revenue decline. Personnel expense further reduced, depreciation and amortization of course the result of impairments. And as a result of that we have less depreciation and of course also lower investments. And all other expenses were also reduced by €50 million. So strong effort to cut costs to compensate for the revenue decline. Just zooming in on FTE and on vessel. So 1,430 FTE reductions which more or less is also in €100 million annualized cost saving. The vessels five reduction especially in the subsea, [indiscernible] annualized saving €40 million, total €140 million. What is important is that almost 50%, 45% of this €140 million saving you see already in the 2016 P&L, the remaining part will see in 2017. So still a substantial part of the cost savings will become visible in 2017.

Impairments for the full-year €227 million, for the second half €75 million. In prior years, the majority was in goodwill and intangibles, this year actually approximately half is in vessels and equipment. And still also reasonable chunk €75 million in goodwill and intangibles. As I said €75 million in the second half, this is a reflection of market conditions in 2016 that were worse than we anticipated and also a reflection of the fact that as we believe the recovery have shifted a little bit to the right. And as a result of that, we had to take some more non-cash impairments.

Restructuring cost €22 million, that relates to the 1,430 layoffs that were done. And onerous contract provisions actually is a positive. We have taken in prior years some provisions actually, especially in seabed we did better than anticipated which meant we could reduce these provisions. And now quickly review by division. Geotech, pretty large difference between onshore and offshore. Onshore revenue declined 6%, offshore 19%, EBIT onshore actually improved year-on-year. EBIT margin while at offshore though still profitable, saw a pretty steep decline in EBIT margin. And capital employed was mainly related to two vessels impairments and goodwill in Africa, that's now reduced to zero. And some software that we wrote down and of course the sale and lease back.

Survey and I've seen the EBIT bridge hit by severe pricing pressure and lower activity levels, mainly related to overcapacity. Almost 22% revenue decline, basically across the board we saw results coming down. Geophysical, mainly price pressure, but in construction, support and in positioning, signals and services mainly volume related. Actually in geophysical utilization was even slightly better, both second half but also the full-year than prior year not a lot, but slightly better which is also an indication of how our market share is developing in that part which is important to us. And last but not least, service. Quite significant growth in renewals. So they declined some work also outside of oil and gas. EBIT and I talked about that and the capital employed still €0.5 billion in the books, declined mainly related to working capital. Actually survey did a very good job in managing, especially the euro, but also CapEx cost was curtailed in 2016.

Subsea, it is not a very nice picture. More than €70 million EBIT loss over two years, €43 million this year. Still a significant revenue decline of 20% almost. I think a little bit of good news is that in Brazil, we had strong results, strong profitability coming of course a number of years ago from a loss giving position there. So Brazil team has turned around that business pretty well. Also Middle East was down still, reasonably well, but APAC was not good mainly because of all the charges we have there and also Europe was under a lot of pressure and loss giving. Seabed then, as I said pretty remarkable performance. We've a 50% revenue decline, EBIT here, of course, looks a little bit better than really is at face value €23 million last year, €17 million this year. But even if we take out the one-off of €11 million, there is still €6 million left on the revenue of €173 million. So that's still again given the 50% decline, a good performance.

We've put a lot of effort in the last two years to make the cost structure of this what we call lumpy business more variable. So we can deal a little bit better than before with swings in revenue from one year to the other, of course everything has its limits. So an idea of 50% down would not be a very good obviously, but showing what we've done in 2016 relative to 2015 is at least an indication of how the cost structure has been developed and managed over time. And also some impairments in the seabed mainly on goodwill and ocean bottom cables. A good working capital performance again which is important. And then the green part is related to Finder. Finder is still on the books and net of capital employed fairly low, given that there is an addition to the assets, some payables and accruals. So almost neglectable capital employed, but of course, potentially this could represent quite some value, but we know when we know. So I don't want to speculate on that right now.

Finance costs, now the total goes up which is a little bit strange, but there is everything to do with the fact that we have done a lot of voluntary repayments in 2016. We have had three amendments of governance in 2014, 2015 and refinancing in 2016. There we have incurred costs, fees, if you all will know. In addition, we had one repayment that was done with make-whole, the majority was done without make-whole. And all these costs, plus this make-whole fee under IFRS you have to put on the balance sheet that was done and then is being amortized over the lifetime of the loan. Now what happens is, if you almost fully repay the loan is of course, that you have to take that cost in one go and that's for this year. The real interest expense, of course, has come down €15 million because debt have been reduced, but also the mix. Our revolver versus our USPP has been improved and the revolver carries a significantly lower interest rates than USPP. And then we had exchange rate variances unfortunately on cash positions in Angola and in Egypt.

Tax, yes strange despite a €300 million loss almost still some tax accruals. Luckily, we still make money in certain geographies and unfortunately countries don't look at our global profitability, but at country profitability. So where you make money, you still have to pay taxes. The other part which is important, I said last time as well, very limited recognition of deferred tax losses that does not mean that they disappear, they stay where they are. The fact that they're not on the balance sheet doesn't matter, if and when we start making money again in these countries where we have them, we will benefit from those. Also, we had to write-down certain previously recognized tax assets which of course would does reduce the tax credit, you would expect that based on the €292 million net loss and also goodwill impairments are typically not tax deductible, so there you will not get a tax credit that you might expect.

Now, working capital well managed. You see here the trends half year 2014 18% which was again an improvement compared to 2013. And then since then, not one straight line, but at least down now at 10.9%. DSO same 2014, was an improvement compared to 2013, not one straight line but down now to 92 days which is good performance. Hopefully, we can do more, but the thing is we do see and we have increased payment terms with a number of our customers. So it will become more difficult, there is clearly pressure from our customers to extent the payment terms. We have been able to optimize our work in progress, timely billing, milestone based billings, all these things and that's what you see reflected here in these numbers, but of course there is an end to that, but anyhow so far so good and we're very pleased with the 92 days.

Cash flow, €29 million operating cash flow, €195 million from receivables. The only other reduction payables, of course, we have less payables in our balance sheet if revenue declines, we see that here. CapEx €69 million and not €92 million that's because of the difference is the financial lease collected which is CapEx under IFRS, but which is not a cash out, €111 million proceeds from transactions and that brings the total €186 million. Now balance sheet. Good ratio, a lot of pass room, very pleased that we're in this position given where we're on the crisis. There's a lot of oil field service companies that look at very different numbers. So we're happy that we have these numbers. Debt maturity profile €15 million matures in this year in May, I believe. Note, small amount also in 2018, €57 million and the first large maturity is only in 2020. And of course, 2021, the large number you see there will depend better or not the bond is converted or not. If it's not converted, of course, it will have to be redeemed. But assume it's converted, then the maturity would only be €83 million. As I said, almost €0.5 billion of cash generated in two years' times, so net debt from €801 million to €351 million.

Outlook, Paul, that's for you.

Paul Van Riel

Thanks. So, two views on the outlook. First the numerical table and I think the most interesting part of that is the column at the right hand side. What we see there, year-on-year, we see a revenue decline with the exception of Seabed, where we book only in the backlog revenue that's there. And we've already said that 2017 maybe bit more difficult -- well, will be more difficult than 2016. But we see a decline with less so than the decline in revenue. When we look quarter-on quarter, what we're seeing there over the whole is a quarter-on quarter increase in backlog and Survey and, in particular, Seabed quite an increase, but the increase is there overall.

Small word of caution there, it's a measurement at the end of the year. Nevertheless, if you look at the next slide, there does seem to be a trend developing where we're -- when we look also in the monthly basis, where we're becoming increasingly confident that the backlog is actually stabilizing. But again, please keep in mind the bump up in the end of the year -- in the end they vary from month to month. Yet, there appears to be clear stabilization.

That is part of the foundation for our outlook for the year. I'll come to that in a moment. So, we share you our own backlog, but we also want to take a look at the general trends that we see in the business. And basically, when we look at it from a market perspective, we absolutely expect that for offshore oil and gas markets will continue to decline significantly over the first half. But also from the market side, if you read and see what oil companies are doing, we do expect that, in our market, the oil and gas companies will also in offshore cautiously start preparing for a boost in investment for the future. To be clear, we don't expect any V-shaped recovery, any recovery will be gradual. And, of course, given how far the market has declined, we will be facing overcapacity for quite a bit, just to caution everybody that we don't think things are going to improve dramatically and drastically in a very short time. Again, oil and gas, 75% from market. The other 25%, we anticipate most growth in building and infrastructure, power and mining markets.

So, the picture, a view on our markets, plus what we're seeing in our backlog that then leads to our outlook for ourselves. So the first half of the year, we expect a further strong decline in revenue, but less severe than in 2016. We also, because of the ongoing decline and because of overcapacity in the markets, we do expect ongoing pressure on margins. And then towards the latter part of the year, we expect to bottoming out of the revenue decline and again, like I said, supported by what we're seeing in our backlog development.

What are we going to do about this and how is Fugro going to act? Well, we've been showing that we do a good job and we have a good ability to adjust our cost base. So we will just keep hammering away on that and make sure that our cost base is in line with the revenue decline as much as possible. We, again, are going to shoot for a positive cash flow from operating activities after investments for the full year, because until we're out of this difficult market, we're steering on basis of cash. CapEx, we will -- are maintained -- we expect to maintain similar levels as our last year, around €100 million.

So with that, thank you and I'd like to open the floor for questions.

Question-and-Answer Session

Q - Henk Veerman

This is Henk Veerman of Kempen. I've got a couple of questions. On your third-party expenses, I think you have well managed to decrease that in line with your revenue up to 62%, I think, of sales that you're at now. I think, of the -- of the efficiency that you have implemented, some of them are, obviously, also structural. So, would you guys, calling the trough in 2017 basically 62%, is that more or less the number? 62% is more or less a number that you guys are comfortable with? It's my first question.

Paul Verhagen

Of course, the aim is to keep it there, set the target for the organizations to reduce costs, third-party cost, in line with revenue. We see differences per division, means the total for the Group looks good. But if you go division by division, there are some differences. So it's definitely the target and now we hope to be able to achieve that.

Henk Veerman

And on your personnel expense which is now around €700 million, you guys are saying that you want to sort of increase the costs in line with your revenue. To what extent are you still able to do that in your personnel expenses regarding SCE reduction, obviously and then also at what expense?

Paul Verhagen

In our personnel ex, we did not fully reduce in line with revenue. If you look over three-year period, it went actually up by quite some percentage points. We have done a lot, but to do it fully in line with revenue is not possible, in particular in Survey because of pricing pressure. If activity gets less, then of course we can adjust more, but if you still have to do activity, if you still have to do geophysical surveys, but you just get paid 20% less, then it gets tough. So personnel did not fully decline in line with revenue. We can do still more. We have to do still more. There's a few restructurings actually ongoing now amongst others in Africa and onshore geotech. But yes, of course, it gets more and more difficult. That's what we clearly realize.

And two, it's a very fine line between -- already certain places might have crossed that line between retaining people and capability for hopefully a stabilization and a gradual recovery that is hopefully around the corner. So there we have to, especially now, be more critical between short term savings versus medium term hopefully a stabilization and maybe a recovery, but a number of actions will still be taken in the first half of 2017.

Henk Veerman

And my last question will be on CapEx. You're guiding €100 million. Already maintenance, I think, is much lower than that. What kind of opportunities do you still see where you want to invest in?

Paul Van Riel

Well, we've already taken one. We announced that we had the opportunity. As you're aware, we announced a couple of long term subsea inspection contracts, inspection, repair and maintenance contracts in Australia. We had the choice there to either enter into a mid or long term charter or had the opportunity to make a very good deal on that particular vessel that we had in mind. So, a quarter is already spent. The rest will be mostly for maintenance, dry-docks, equipment and project related.

Dirk Verbiesen

Dirk Verbiesen of KBC Securities. Follow-up question on the maintenance CapEx level with the current fleet and after all the adjustments made, what would be a realistic number going forward, at least, say for the next one or two years? The other question I have is on the work in subsea which you signed after full-year 2016, what is the kind of the volume in total of the contracts signed that should be added to the order book or could be added to the order book? And the other question I have is on the recovery, let's say, the first signs of recovery we see in the backlog, particularly survey, geotechnical as well, but in that same absolute numbers, a bit less, but what is the overall pricing environment in those markets? And are there any differences, maybe aggressiveness of competitors in geotech offshore versus survey and also maybe that there are early signs that other parties are also acknowledging a potential for market recovery in 2017? And in respect of debt, also with regard to offshore wind, you mentioned the sharp decline in subsidy rates on recent tenders in Belgium, there also some gaps being discussed on some offshore wind projects, how does that affect the overall supply chain? Pricing, that is.

Paul Van Riel

Okay. Paul, you want to make competence on the maintenance CapEx?

Paul Verhagen

Yes. The maintenance CapEx, say, for the coming year, coming two years, will be capped of course if that was possible. I think that will be around €50 million or so. It is never a very hard number, but you can take into account slightly less even, I think we can do it. No, I don't think that's a sustainable number but, for now, it should be doable. Then for the order book for subsea, actually, as you know, our order book has a fixed, signed, sealed and delivered component which Paul also showed and a probable part. So the APAC contracts were, end of year, already in the probable part. So the APAC contracts were and of year already in the probable part, because it was probable that we would -- win these contracts not certain, but probable. So they will move from probable to fixed, but that doesn't increase the backlog and you are only in for 12-months. So these were three year and five year framework agreements so they are not in for the total value, but just for the 12-month value and then you should know that the bulk of the work only starts in the second half. So there is of course a number in, but not extremely high.

Paul Van Riel

Then perhaps comment on the backlog and how that is developing? I think we've been clear in the last couple of opportunities that we've had to sit down and discuss things with you. Paul mentioned, it's also is that price pressure and margin pressure is increasing. As the markets declined, the volume of overcapacity increases. So we really out there fighting on price. So that's a fact and that's going to be with us until either volume starts picking back up and/or capacity starts being taken out of the market.

Capacity being taken out of the markets, everybody use step by step. We took out a couple of vessels in 2016. We'll see what we need to do in -- sorry, in 2016, we'll see what we need to do in 2017 and I'm sure that our competitors are going through the same discussions and the same thinking. If you look at the general pricing environment, that's very varied across the globe. There are areas and regions where due to our market leading positions or other competitive regions our pricing power is still pretty okay or it may be on niche market segments. There is not much deepwater work, but if there is deepwater work, well there we do actually still come out healthy margins. So it's a balance from region to region, it's a balance from niche to niche and it's varies all the time. So, I can't really give very clear answer if there is any specific area or service where it would be higher or whether it differentiates between geotech and survey.

About offshore wind. Yes, you had the comment about offshore wind. Yes, prices are coming down for offshore wind. They are actually beginning to get very close to what's called grid parity that's wonderful. I think give it another two or three years and we will actually be at grid parity and we no longer need any subsidies to make wind farms goal. Looking at the work volumes that are out there, I do definitely have the impression that the governments around Europe, but also elsewhere in the world are actually prepared to -- last little extra bit until the industry is really at grid parity. So we don't see any reason for a slowdown for that reason.

Dirk Verbiesen

And let say the pressure on subsidy rates and returns, there is -- somewhere there needs to be kind of a pressure on the supply chain raising or -- in the offshore region?

Paul Van Riel

Yes, but it's also -- it's not -- that there will most likely be pressure on the supply chain. The Fugro part, the wind farm part that Fugro does is not let say it is a medium kind of technical work. So we need to do high volume and do it very efficiently given the nature of our fleet, we can and that's why we compete there and compete well. We're not I don't think experiencing much additional price pressure beyond -- that's okay.

I think where the savings are coming from are the main impact is that people are getting more efficient at their foundation solutions, their foundations are roughly 25% of the cost of the turbine, but most importantly the size of the turbines is increasing all the time and their productivity is increasing. So I don't think it's getting cheaper because of the big squeeze like we're seeing in oil and gas, I think it's because technology can still be made much more efficient.

Dirk Verbiesen

And then as an ending question, general the policy of pricing for new contracts, is that still on that you are willing to go for up to zero EBIT margin or do you need to be more aggressive here?

Paul Verhagen

Very, very varied. There are areas where we have asset that we're very keen to keep working for competitive reasons or what than we may actually be prepared, I mean we always were a cash flow positive, including risk otherwise, I mean otherwise forget it. For example, I think that was well published, we walked in the end from that ocean bottom contract in Pemex which was a big projects that was out there last year and it was for exactly that reason. At 8.0 -- given the risk profile of the project, you walk and you say enough is enough. So, yes there are projects we're prepared to go in a little bit below EBIT or going EBIT negative, but then with good cash flow including taking care of risks, but there are still many, many areas where we can operate profitably. The key thing, the key thing, the key thing for profitability at this point is utilization. That's really watered, if you have a vessel sitting idle alongside.

Martijn den Drijver

Yes, Martijn den Drijver for NIBC Markets. First question with regards to seabeds, what measures can be taken if there are no contract wins in the near term. It's a lumpy business, I appreciate that but given your Q4 loss, if we extrapolate that if you don't have any orders, what can you do more to reduce those operating losses, if and when necessary?

The second question regards to the measures on slide 18, merging operating companies, expanding the number of shared service centers and the central fleet management. Can you quantify either in margin wise or operating cost, what the effect of all those measures will be in a specific period preferably H1 2017 to H 2017, bit more granularity on that?

And then the third question is with regards to subsea, one vessel ROV and its charter in early 2017, one early in 2017 excuse me, the second half of 2017, that means that then only the Symphony remains given the €74 million in EBIT losses, would just a sale, even at fire sale prices be preferable to continuing to generate these operating losses? And then the final question, in 2014 you mentioned some mid term margin targets. Geotech 9% to 12%, survey 12% to 15%, subsea 69%, are you still comfortable with those margin targets or have things changed, especially in survey? Thank you.

Paul Van Riel

Paul, could you take the first two question.

Paul Verhagen

Yes, of course I mean every business that gets no orders is not a very good prospect. And so the first thing will be to get orders and then we're tendering, so we're in tender phase with [indiscernible] which of course is, we believe very competitive and we'll see where it brings us. There is a limit to cost reductions, we can still be more in this seabed, but we've just little bit more than 200 people on our payroll and the rest is all contracted with important [indiscernible]. We also have bought [indiscernible] so although it's a cost in terms of depreciation of this, it's not a cash that is out of the window. We still have to pay for the lease contract, but we know that at the end of the lease contract we have a vessel. So it's kind of investment if you will. So what we can still do is literally taking out more people, if you would for longer time have no business.

I mean it's unlikely that year we had in 2014 will come back, I mean we had €100 million loss, that's not going to happen. But yes, of course, in Q4 we only had one crew working, you see a decent loss in that business. Q1 there will be two crews working. Total in Nigeria and we have ADNOC crew working, but yes, for the rest of year is uncertain. We'll see how these tenders will develop and depending on how they develop, we will have to either take out more costs or hire more people.

Martijn den Drijver

If I may, react to that. You mentioned that you're not super active with regards to seabed. What does that mean? Do you have a data room available for potential buyers or is it really you're waiting -- you're in sort of waiting mode?

Paul Verhagen

We have been on the market with the seabeds, so indeed we have a data room, but we've learned with the discussions that we had it in this market. It's very hard to extract the value, that we have this belief this businesses worth. We had an EBITDA of more than €60 million in 2014 and more than €40 million -- 2015 sorry and more than €40 million in 2016. We have still limited utilization, so if this business actually starts to be fully utilized, it can throw off quite some money. In this market, at least as our experience, you don't get that value, because the parties that want to have it have no money. So we have said that I mentioned this morning, the sale sign is out of the garden [indiscernible]. So we're still open for bids, it's known in the market, but for now at least in this current environment, we're not going to proactively do something. But if somebody knocks on our door tomorrow and as a great proposition, we're very willing to entertain it.

Martijn den Drijver

Well, the number five is Schlumberger, they have deep pockets.

Paul Verhagen

They did knock on our door yes, so, but I'm not sure if they're watching, but they are welcome to. Shared service centers, we said last time but it will not be in the first half of 2017, but then between, after 1% and could it be little more? Yes, it could be. The whole let's say country merging of operating companies shared service centers is the primary objective why we do this has client focus and present Fugro across customers instead of 10 different OpCos in one market to a customers, Fugro's Land and Marine to a customer. That's the prime objective. The secondary objective is quality improvement. We see it already now where we have shared services operating that the quality actually is improving relative to the individual activities that we had in the individual OpCos. The third one obviously is also efficiency. We definitely want to see efficiencies, we'll manage efficiencies. And we've made an estimate and maybe some of them deserved site, I'm not sure, but we've said 0.5% to 1% margin improvement as a result of this.

Martijn den Drijver

At the end of 2017?

Paul Verhagen

No, not -- that's where I started, not in 2017 yet. This will grow very gradual. In few countries already it's partially in place. This will be a two-year journey. So, in 2017, actually a lot will happen, but if you complete it, let's say, in Q3 or Q4, then we'll have a few months of savings. Then Paul--

Paul Van Riel

Yes, I'll take subsea. So, at the end -- well, first of all, we have to take into account that we now, together with the current new contracts that we have in Asia Pacific, we also already, we announced, I think, two years ago, have a long term contract running for Shell in Malaysia. So we have a real, let's say, backbone of work to work from in the Asia Pacific region going forward and that requires vessels. Nevertheless, as part of that, we have identified the Scour Ocean which is the largest vessel we have in the fleet over there. That ends it charter in the course of 2018 and that's also end of 2018. That vessel is also targeted towards more of the construction end of things, light installation and construction; that will go. We don't want that vessel in the fleet. So, that takes care of that one.

In the Europe theater, the other part where we're generating losses, we have -- starting in March, we get all vessels, all the big vessels busy until October with wind farm work. At that point in time, we have the option to take the Saltire out at a cost or we run it into, I think, May 2018 and then it goes automatically. So, there is, let's say, the de-risking. I think that's the most important part. The de-risking opportunities are there and they're sort of insight. And so I think that risk over time will disappear and, with the volume of work coming in, that's mitigating it already anyway.

In terms of targets, yes, we're sticking to our targets. You will see in the annual reports that comes out next week, we've actually recalculated the target to the new divisional structure. And we think that once the markets -- the oil and gas part of the market stabilizes, we've reviewed it, we've discussed it and we don't see big reason to change the targets, we'll keep them.

Wim Gille

Wim Gille, ABN. Going back to the Subsea division, obviously, you mentioned potentially two vessels that can take vessels and probably expensive vessels that can still leave the fleet. But what are the thinks can you do to stand the losses in that area? And maybe a bit more high level, the subsea space is in desperate need of consolidation, there's a lot of smaller players out there and basically, what's your role in this whole saga that is ahead of us, given that you walked away from the deal earlier on?

The other questions that I would have is on the offshore wind market. Can you give us a bit of an indication on how big offshore wind, across all divisions, is within your accounts, roughly speaking? And obviously we're seeing a lot of kind of changes over there in terms of potential structures monopiles versus jackets versus floating. Do all these different foundation technologies -- does it vary how much work needs to be done for Fugro or is it all more or less the same?

Paul Van Riel

Okay. All right. Maybe start with Subsea division. Our role -- well, I'll make a small joke here, but [indiscernible] is under leveraged. So, we're going to be the consolidator, right? No, absolutely not. Let's go back what I already explained, what I already explained in the -- let me discuss the portfolio. We definitely wanted to have inspection and the associated really light, repair and maintenance services as part of the core together with the similar services as part of the core of the asset integrity business line. So we want to maintain that business and we think we can really make a good business out of it, because it's going to get -- over time, it's going to get more technology intensive as we go. And so we think that we have a good position there and we want to maintain it. That leaves us with those heavier vessels. Either they will go out automatically and gradually. However, we've also said that our trenching business which is our construction part that we have in the North Sea, that's opened for divestment or partnership. And rather than play the consolidator, we'd like to see ourselves or that part of the business being consolidated into something else. That would be for us the preferable outcome.

Wim Gille

But would that kind of solve the €40 million losses that you're making in the subsea?

Paul Van Riel

I think if we would be in a situation that part of the business plus those two heavy charge -- those large charge we talked about, if those would be gone, I think we would have almost if not fully get there.

Paul Verhagen

No, the thing is, of course there is utilization in combination with the charges and then we have especially this large ones they also cost lot of money unfortunately with very low utilization. That combination doesn't bode well. Now the Southern Ocean is still there until the end of 2018. So that's definitely a problem, unless if possible and which we'll try of course, we'll get work. So that's of course the key objective for these charges. And then same as for Europe, there at least we know we have work from let's say, in the high season not Q1, but Q2, Q3. Thereafter, we can get rid of the Saltire at a discount, but still at a cost and we will make that call at that moment in time. But yes, the losses will for sure be reduced when this is also a business that needs to make money otherwise.

Paul Van Riel

Okay. Then on to offshore wind. If we look at offshore wind for us in our what we call our power market segment. That's running at around 9% or 10% of the total revenue. And within that segment, wind is by far the large chunk at this point in time. That gives you a bit of a feel for what it is. Now the question about, does it make a big difference? What kind of structure and foundations? Not really, every foundation whatever kind of whatever type requires our site characterization technology know-how. You need to know the total strength with the design of any foundation. So I think from that perspective, not really a big difference. Also what's interesting is that all of these turbines are getting bigger and bigger and that they require more and more sophisticated source total investigation. So from our perspective fine. We can advise the clients what kind of foundations to use, so it's also good for our advisory services that we provide. So really good from that perspective.

Wim Gille

And then few bookkeeping questions primarily obviously for -- can you give us an indication of what the size of the in-recognized tax losses? The other thing is the infra business in the U.S., you mentioned obviously Trump telling everybody he is going to invest heavily in infrastructure, how big is that in the overall for your business I assume it is all or I'm sure, geotech or most of it. When are we going to get the new comparable numbers for the new split, Marine, Land, etcetera? And that was it. Thanks.

Paul Verhagen

The size of the unrecognized losses is not -- I don't think it was around €200 million. Number would be materially different, I will let you know, but it's around that level, its sizable. The land U.S. is actually quite big, relative to the total, I think it's around a quarter or so of the land business, but I'm looking at briefs now, yes [indiscernible] so, it is good. So, potentially, of course, depending on what happens there, that business will partially benefit from that as of course a variety of activities that we do there. So that's in entire U.S. And then comparable numbers, I'm looking at Katrine, they will come soon, but if you want a specific date, do we have a specific date already Katrine or not yet?

Paul Van Riel

No, not yet. But I think we said 84 months or so in Q1 results to be well in time.

Paul Verhagen

Yes, well in time. I see some nodding Katrine, so maybe a little bit earlier, but I know, point taken guys, the earlier the better.

Quirijn Mulder

Quirijn Mulder from ING. Couple of questions. I had made calculation with regards to USPP in the range of about €250 million when you would use them for the redeemed, let me say the convertible for the redemption of the USPP, but it seems that you have only handled 80 at this moment. So maybe you can elaborate on that? And then on the order book, maybe you can give some idea about what's the reason that survey was doing was so well and in spite of losing Australian, let me say, MH370 contract which was ending I think in last month. And then my question about Brazil, can you maybe give some idea about the situation in Brazil with regard to the vessels and the size of the contracts and what you're heading for in 2017 in that respect?

Paul Verhagen

I will do the first one USPP. Indeed, Quirijn €250 million was outstanding at year-end, so we had a huge repayment over in 2016. We have make-whole by the way which is important to us. The key is that the coupon on USPP is significantly higher than on our revolver. So we've partially increased, we've drawn under our revolver to repay, but also internal cash flow of course has been good, but we've also used to repay. And as a result of that, we'll see a significant decline in interest cost 2017 compared to 2016 and also the accelerated amortization of course for the €180 million part, there is still amortization and we accumulated fees and a little bit of make-whole that we did over one repayment. But of course we'll also be much less than and what you've seen in 2016 what I just explained.

Quirijn Mulder

What was the fee you paid for the, let me say the redemption of the USPP in 2017, 2016 sorry, outside the IFRS booking?

Paul Van Riel

I think we -- in the repayments, if I'm not mistaken, that we did in 2016. I believe, we didn't pay -- no, we didn't pay any fee. I think the fee was paid in 2015. I could be wrong, but I know for one specific proceeds of the transaction we had agreed to pay make-whole and of course we got a few other things in return, but the majority, the vast majority is paid without make-whole, so no fee. Paul?

Paul Verhagen

So Quirijn, yes indeed survey components growing are already mentioned. There is always little bit of statistical glitter in the results, it is a snapshot, it's a snap look at exactly that particular date. Same of course holds for the quarter three result as well, but the general trend seems to be up. I think in survey it's safe to say that there is no particular region or no particular activity that stands out in getting to that result. North Sea probably a busier season in the summer than same time last year. As an example, Middle East some additional activities it's all over the place, just a tick up of what we see in the pipeline.

No specific reason or no specific thing standing out. In terms of Brazil, well that's of course, the big [indiscernible] around vessels every time they come up for renewal. There's always this of thing what they call blocking, anybody who has Brazilian assets in principle gets preference. So as soon as a vessel comes up for renewal of contract or an opportunity to cancel the usually one, two or three year contracts in the current areas that we work that really is a big samba dance around that vessel. And your vessels get blocked, you do the same trick of course to others. And then, after the dance, things shake out and -- well, we through bidding together with our partners have actually been able to get to a quite a few contracts extended. So I am not sure, but I think we'll mention it? Katrine, I think we have six ongoing contracts? Yes, exactly. So at the end of the year we have six contracts ongoing in Brazil and that's actually -- we did a bit better than we had anticipated.

Quirijn Mulder

But, I think that 46 contracts is only one year as I understand? So the whole then starts at the end of 2017 again?

Paul Verhagen

Yes, absolutely.

Paul Van Riel

Yes, keep on dancing.

Quirijn Mulder

Okay that's except Aquarius, I think then.

Paul Van Riel

Yes, the Aquarius -- is yes. That's on a two year.

Quirijn Mulder

My last question is about survey, my view is that you made a loss of around €5 million in the fourth quarter, is that indicative for the first quarter of 2017?

Paul Verhagen

Unfortunately, I'm not going to get in that Quirijn, nice try.

Luuk van Beek

Luuk van Beek from Degroof Petercam. First question about the price levels, obviously rate by straight price declines over the last year's and also by a mix shift from say deepwater to now to near shore and using -- and vessels for basically easy work. Do you already see a mix shift away now that all comment and looking more at deepwater projects again or is it too soon to see such a thing? It's the first question. The second question is, in the backlog is the order intake mainly focused on the pre-FID part of the work or is it across the board? And the final question is on the balance sheet which obviously have strengthened quite a lot and many of the other players in the industry do not have such a good balance sheet. So maybe opportunities in the coming year to acquire assets at distressed prices, do you see that as an opportunity or do you think that's not part of your strategy?

Paul Van Riel

Okay. Well, first of all, the question as to deepwater projects and the mix. I think it's too early to tell if there is a change. Definitely it was changed over the last two, three years as we entered into the crisis that's really new deepwater projects have stopped, but projects that were already targeted for development are actually ongoing. I think of Mad Dog by BP, but also a very big program by ONGC. So these things continue to go and they have their fair share of site characterization and other work that needs to be done. Too early to tell, if there is going to be moved back to deepwater, other than the activities that's already planned and are already known.

In the backlog, I don't think that there is a big shift at the moment between [Technical Difficulty] post FID, too early to tell. It's also what we cautioned for in our outlook statement. That we think that in the second half of the year we will start seeing more preparatory work i.e., in other words more front-end work, but it's just a feeling that we have right now that will start again as people start looking at new projects. At this point in time too early to tell if there will be a shift in the balance between pre and post FID.

Then balance your sheet strength we have that question this morning. Well we did we acquired the [indiscernible] as an example, but we're not, we still absolutely have to watch our net debt position also in absolute terms. And not only from a leverage perspective, so we will be, we will be very, very cautious and -- if there is something really exceptional that's fits right there, we will consider it, but there's not going to be any, there is no plan for big spending spree to pick up low cost assets. Any questions from people listening in Kathrine. No, all right. Sorry.

Unidentified Analyst

I see that in the second half of the year. The EBIT which is €7.1million is mostly affected by the €4 million effects from activities that you divested in 2013. Now is this -- what the stake in year-end or what was exactly reason why it was taken like now in the second half to 2016? Can you maybe elaborate a bit on that? Thank you.

Paul Verhagen

I would actually even know to be honest, but this [Technical Difficulty] it could be, but is it EBIT because tax, I know we had some tax provisions related to divestments, where of course we look and adjust and assess every year, but obviously you should keep them or partially release them. But EBIT doesn't ring an immediate bell.

Unidentified Analyst

As in other geoscience, caused by reversals on used tax provisions from [indiscernible].

Paul Verhagen

Okay. That part, yes. So it was tax, yes. These are provisions that were taken for potential liabilities when you do a transaction, they need to be assessed every year and if based on progressive inside it turns out that you don't really need these provisions, you can raise them, but we do it basically every half-year and every year.

Unidentified Analyst

So this does not explain the 5% EBIT margin in Q3 or --?

Paul Verhagen

No, no.

Paul Van Riel

All right. Then I would like to thank everybody for attending and for your thoughtful questions. Thank you.

Paul Verhagen

Thank you.

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