Kvaerner ASA (OTC:KVAEF) Q4 2018 Earnings Conference Call February 12, 2019 3:00 AM ET
Torbjorn Andersen - Head of Investor Relations and Communications,
Karl-Petter Loeken - President and Chief Executive Officer
Idar Eikrem - Executive Vice President and Chief Financial Officer
Conference Call Participants
Frederik Lunde - Carnegie
Haakon Amundsen - ABG
Good morning, everyone. And welcome to Kvaerner's Presentation of the Fourth Quarter 2018 Results. My name is Torbjorn Andersen. I work with Investor Relations and Communications in Kvaerner. The presentation this morning will be given by our CEO, Karl-Petter Loeken; and our CFO, Idar Eikrem. Following the presentation, there will be a Q&A session. The presentation is being webcasted and is available on the link on Kvaerner's website and also on the Oslo Stock Exchange's website. The webcast will be available for replay on our website later today.
And with that, I leave the word to Karl-Petter.
Good morning, everyone. I would like to open today's presentation by pointing to the photo on the front page. 2019 is very special year for our yard at Stord, which celebrates its 100 years anniversary. The anniversary will be celebrated during 2019 with a number of activities and events.
Before we commence, I would like the audience here at Fornebu to pay attention to some safety precautions. If we hear an alarm, we will take that seriously and leave the premises through one of the emergency exits marked here on the map under the signs you see along the walls. Please go to the master area outside on the corner of the building.
Then let us look at some of the main points from the fourth quarter. The last quarter is characterized by high activity, construction starts on projects and that we meet key milestones with Kvaerner's famous precision and quality. At the end of October, Kvaerner signed the contract with Equinor for delivery of the steel substructure for the Johan Sverdrup Phase 2 process platform. This will be our fourth substructure for the Johan Sverdrup field. It also means that we together with partners, have won contracts to a total value of around NOK15.5 billion to this important project. This puts Kvaerner as one of the contractors with most deliveries to this field development. And it also illustrates how we have improved our competitive power.
At 21st of November, Kvaerner cut the first steel for the top sites of Equinor's Johan Castberg floating production storage and offloading vessel. In Verdal, both outfitting and roll up for respectively the top side and jacket the Valhall Flank West commenced in the last quarter. At the 13th of December, Kvaerner and Aker Solutions cut the first steel plate for the new module that our joint venture will deliver to the Johan Sverdrup riser platform as a part of the Phase 2 of this field development. Through the autumn, Kvaerner's crew has been working offshore at the Aasta Hansteen Spar platform and helped Equinor to get the production on-stream before Christmas.
Also, the New Year has started well. We are excited by being awarded the contract for front end engineering and design for Equinor to support their ambitions to build and install 11 floating offshore wind power turbines with concrete hose that so called Hywind Tampen prospects. The Board of Directors proposed to the Annual General Meeting that the dividend of NOK1 per share should be paid.
Let us commence with a review of the status for our operations and start with HSSE. Top HSSE performance is of vital importance for Kvaerner's ability to succeed. We have this autumn and winter a good drive to strengthen the personal engagement and attention for HSSE among all employees.
Looking at the numbers on sick leave, we see a slight positive development during fourth quarter and we will work hard to reduce the sick leave numbers even further. We are therefore continuing executing the internal program aimed at reducing the sick leave.
There are also other KPIs that we need to address. We see from the graphs that we need to take new steps to reduce the number of injuries and the number of unwanted incidence.
Let's take a look on ongoing projects. The common denominator is that all current projects are on track, which has become a trademark for Kvaerner. In Verdal, both outfitting and assembly of the jacket and the top side for Valhall Flank West is ongoing according to schedule. The first role for the jacket was rolled up in December and the second row in January. Key focus on the top side in the fourth quarter and also early in 2019 is the lifting of several large structures into place, such as shelter, weather deck, crane and helideck. For the new Johan Sverdrup jacket, we started engineering work already in November and we will start the pre-fabrication in Verdal early summer this year. The Johan Sverdrup utility and living quarter topside is now almost complete. And hand over to Equinor will take place at the end of this week.
Sail-away from Stord is planned for mid-March. After installation, we will start on the next phase over scope offshore to assist in starting operation of the platform. The Johan Sverdrup riser platform modification has started fabrication of breach landing. At the start of this year, we passed the milestone "Common system design freeze" and further fabrication is now commencing at Stord. Kvaerner is also working offshore to prepare the Johan Sverdrup riser platform for production startup later this year. Simultaneously, we are together with Aker Solutions preparing an upgrade and a new module for this riser platform and the subsequent commissioning assistance offshore towards the start of Phase 2 in 2022.
For Njord A, key focus in this phase continues to be the lifting of several large structures into place. A large part of these lifting activities have been related to the new blisters we installed in the fourth quarter. These blisters on the whole will give the platform additional buoyancy to carry the new systems we install on the top side.
During the fourth quarter, we've also passed important milestones for our work with Johan Castberg FPSO. The fabrication modules has started in Poland and at Kvaerner yard, at Verdal and Stord. We have seen a positive growth for our business to recycle old offshore installations. Through 2018, we received more than 40,000 tons of huge structures that the oil companies have brought in from the ocean for decommissioning, reuse or recycling. For a typical project, we recycle about 99%.
Internationally, our work the Nord Stream 2 landfall contract has progressed as planned during the last quarter. We are continuing developing the site and in parallel constructing the technical facilities where the 12 meter deep anchor blocks currently are the main activities. This work will continue through the winter. Also internationally, we are progressing well with preparation for the tow-out and installation of Husky's West White Rose platform offshore Canada.
The total order intake during 2018 was NOK9.8 billion, up from NOK9.2 billion in 2017. The book-to-bill ratio was solid also in the past quarter. The P2 Jacket contract was of course, the single largest contract at the end of the year. In addition, we had some smaller new orders and some growth in existing scopes. The order book reflects that we are competitive and have succeeded in winning new contracts.
Further, the graph shows that we maintain the good visibility. 63% of the total backlog is estimated for execution in 2019 and 37% for 2020 and onwards.
Then I leave the word to our CFO, Idar, to comment more detail on the financials.
Thank you, Karl-Petter, and good morning. The financial highlights in the fourth quarter where that our operations continue to be on track. We continue to deliver predictable financial results in line with our plans. And we continue to run the business with a solid negative working capital. And we maintain a robust balance sheet.
Let's look at the details and I will start with the field development segment review. Field development revenues were almost NOK1.8 billion in the last quarter. This is about the same level as in the previous quarter and also about the same level as in the fourth quarter 12 months ago.
The EBITDA in the recent quarter was NOK75 million. The EBITDA margin ended as planned with 4.3% in the quarter. EBITDA margin for the full year was 6.7%. The lower margin reflect facing of projects. Project in early phases are not yet recognizing margin and last year was significantly impacted by close out activities and recognizing of bonuses and incentives towards the end of completed projects.
For 2019, the full year gross revenue is expected to be above NOK7billion. As before, the EBITDA result will be influenced both by phasing of project, project portfolio mix, and by incentives.
Moving to the Group's cash flow. The net current operating asset or working capital was negative with NOK949 million at the end of the quarter. To illustrate how important it is to not look too much to the individual quarter's, it can be mentioned that if we have closed the accounts one day before, the negative working capital would have been closer to NOK600 million, as effect of payments from customer that was received on the very last day of the year.
It is important for the understanding of our business to know that we handled such fluctuations on a regular basis.
Looking at cash flow from the cash flow statement. Net cash inflow from operating activities was NOK370 million in the quarter, reflecting the quarterly results and improved working capital. Net increase in cash and bank deposit during the quarter amounted to NOK236 million in the fourth quarter, resulting in cash and bank deposit at the end of the year of almost NOK3.2 billion. And as of 31st of December 2018, the Group has not drawn on its credit facilities.
Net cash outflow from investing activities was NOK126 million in the fourth quarter. For 2018 as a whole, net cash outflow from investing activities was NOK335 million. CapEx last year was mainly related to the Stord Yard development and digitalization initiatives, as well as investment for increased capacity within our Decom business and normal maintenance CapEx.
For 2019, we expect the CapEx level of about NOK300 million, mainly related to the ongoing expansion of new key facilities at the Stord Yard and further investment in automation and digitalization tools. The working capital level is expected to increase somewhat during 2019. And the proposed dividend of NOK1 per share will represent a total payout of approximately NOK269 million.
We will implement IFRS 16 for leases from 1st of January 2019. The effect will be that EBITDA for 2019 will increase by approximately NOK58 million as lease payments will be presented as depreciation and finance cost rather than operating expenses.
Interest expense for 2019 will increase by approximately NOK13 million, depreciation for 2019 will increase by approximately NOK47 million, due to the implementation of IFRS 16.
Thank you all for your attention. I now leave the floor to Karl-Petter for an update on market and outlook.
Thank you, Idar. Our current backlog gives Kvaerner in general a good foundation for utilizing our resources. The activity level is high at all over locations. Also in the fourth quarter, we noted that many customers are now considering new projects and new investments. Kvaerner is considered to be a very relevant contractor for several prospects and several customers have invited us to discuss solutions for potential upcoming projects. Kvaerner is working to continue to improve the competitiveness that we have established over the last years. They also know that more and more customers are attracted by the value of Kvaerner's proven ability to deliver projects fast and the predictability with respect to quality, schedules and budgets.
Compared to 12 months ago, Kvaerner sees an improved market and more customers considering new projects. The market in and around Norway will continue to be important, but several key prospects are also in international regions. Over the coming years, the main part of Kvaerner's activity will continue to be in our traditional market segments with delivery of top sites and sub structures to new offshore oil and gas platforms.
In parallel, we are steadily developing our business within our growth segments and within renewable energy solutions in particular. The new contract for front end engineering design for Hywind Tampen is of course one interesting step forward.
During 2019, it is expected that several key prospects will pause important decision gates and move further towards project sanctioning and project execution. We anticipate that potential contract awards for near term larger contracts will mostly come in 2020 and 2021.
Let me give you our updated view on the market and the opportunities. To start with the Norwegian continental shelf, we see some upcoming prospects of large size and we also see several medium sized prospects. But even with several prospects will fit for Kvaerner, we believe that the number of prospects for new build platforms at Norwegian continental shelf will be lower the next year's compares to the years behind us. This is however balanced by a healthy number of prospects in other regions both for new oil and gas platforms and for offshore wind power and other growth segments.
Over the many projects, our customers consider we are currently following more than 16 large prospects and a similar number of medium sized prospects. In addition, we see an even higher number of opportunities for smaller contracts. For example, for smaller valid platforms with no or little manning.
As you see from the legend here, the large prospects include a good handful of projects for large offshore and onshore oil and gas developments in Norway. When we include prospects in growth segments, and also include international prospects, there is a healthy market outlook. For the medium sized prospects, we see the same distribution between Norwegian oil and gas projects, onshore and offshore versus other prospects.
In total, we estimate that the addressable market for Kvaerner is worth in the magnitude of NOK30 billion to NOK50 billion each year over the five year planning period shown here. This level is comparable to the market we have behind us.
So let's recap the results Kvaerner got out of that. Over the seven years behind us, Kvaerner has delivered predictably for 30 quarters, none of them with a negative surprise to the market. During those years, we have executed projects, one new project delivered again and started a new cycle of winning. The red line shows the short term fluctuations in EBITDA margin from one quarter to another. The lower gray line however shows the average EBITDA margin for the whole period. And the upper gray line shows the average EBITDA margin for the last three years. The graph what we have behind us also illustrates well, how Kvaerner see a positive potential going forward.
Let us sum up today's presentation and see how we plan to harvest this potential. First, we will continue to strengthen our competitiveness which will enable us to continue to win a significant share of upcoming contracts in our home market at the Norwegian continental shelf.
Secondly, we will grow and deliver more oil and gas projects in selected international markets. We will especially focus on regions where we already have a strong market position, as well as regions where we can bring to the table special expertise and added value.
Thirdly, we will increase our business in growth segments, for example, within offshore wind power and within marine operations. The fundamental enablers that we are already working to get in place is strong HSSE improved cost space and improved delivery model. And not the least, to ensure that we maintain the optimum competence profile for the business ahead. The focused strategy supports our objective to grow Kvaerner's business to above NOK10 billion over the next years.
That concludes our presentation. And we will move to the Q&A session. So Torbjorn, will you please help us to facilitate the questions, please?
A - Torbjorn Andersen
Yes, Karl-Petter, thank you. For the benefit of the web calls - webcast audience, we ask you to raise your hand if you have a question and get the microphone. So, yes, Frederik.
Frederik Lunde, Carnegie. I'm just curious of the dividend which is a big positive surprise by the way. Is that a regular dividend, is it semi-annual or how should think about this going forward?
Dividend policy remains unchanged and the same as before. We have a semi-annual dividend policy and normally after half year and full year. And now we are after full year and we are happy to see that the board have decided to propose 1NOK per share as a dividend payout.
I'm a bit slow so just to put this in clear wording. Should we expect the same dividend after Q2 or half of this dividend as a regular 50?
As I said Frederik, the dividend policy remain the same. That means that we will evaluate dividend payouts on every half year and that will also go as the policy going forward. When that is sad, of course we have communicated before, a strong balance sheet is important for Kvaerner, it's important for Kvaerner's competitive power when we compete for new contract. And it's also put us in a position to take part in strategic development of the company if we find the right business opportunities. So all these will be taken into consideration when we are evaluating the dividend payout or the proposal for dividends next being of the second quarter 2019.
Okay, loud and not very clear. Also, on the margin, how do you see 2019 should expect the back end loaded improvement in the margins based on the progress of the bigger projects? So bit lower margin in the first half and then implements?
Sorry, could you repeat your questions?
On the margins for 2019, should we expect somewhat lower margins in the first half and then improvement in the second?
When it comes to the margins and development from quarter-to-quarter and in margins in general, we are not sort of giving any sort of guidance on that one. As you saw, we deliver slightly more than 6% this year. And as you saw from the graph, we have had a track record of delivering in average over the entire period from 2011 and up to now of around 6%. And as pointed out in my presentation, you should expect courtly fluctuations going forward. Some of the larger project that we won in 2018 and that we have started on is still not recognizing any margin on those. But all of those will be coming to a point where we start recognizing margin on those in 2019.
Thank you. Haakon Amundsen from ABG. Could you comment on the CapEx program, the CapEx profile for '19 verses '20 because I believe your previous CapEx guidance included some CapEx in '20 as well? Will the upgrade be completed in '19 or how should we think about this facing?
Yeah. Take the Stord Yard development, which is very important CapEx project for us and it will be positioning ourselves quite nicely in the increasing floating segment that we see. The total was NOK370 million. Out of that approximately NOK130 million or NOK129 million was spent in 2018, approximately NOK200 million will be spent in 2019 and the remaining in the first part of 2020.
In addition to that one, we have invested in digitization programs and we will continue to do that in order to improve our productivity and be more competitive in the marketplace, as well as normal maintenance CapEx that you could estimate to be in the range of NOK50 million per year.
And just Idar just said, the Stord Yard development project will be finalized this spring 2020.
Okay. Understood. But for like the 2020, will that be the NOK50 million in maintenance CapEx plus what's remaining on Stord or will you have automation and digitalization CapEx as well going forward?
That we will have to come back to you, but it will not - we are not forecasting a similar type of CapEx level as you see in 2018 and 2019 going into 2020.
Okay. Thanks. That's very clear.
Thank you. I don't think we have any further questions. So if not all, we thank you all for attending and wish you a good day.