Kværner ASA (OTC:KVAEF) Q2 2019 Results Conference Call July 12, 2019 3:00 AM ET
Torbjørn Andersen - VP, IR and Communications
Karl-Petter Løken - President and CEO
Idar Eikrem - CFO
Conference Call Participants
Haakon Amundsen - ABG
Good morning, everyone. And welcome to Kværner’s Second Quarter Results for 2019. My name is Torbjørn Andersen, working with Investor Relations and Communications in Kværner.
The presentation this morning will be given by Kværner’s President and CEO, Karl-Petter Løken; and by our CFO, Idar Eikrem. Following the presentation, there will be a Q&A session. This presentation is being audiocasted process and we are running a dial-in conference in parallel. The presentation is available on the link to this audiocast or website and at the Oslo Stock Exchange’s website. The conference call will be available for replay on our website later today.
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. This spring, there's been much focus on the successful final phase of the Valhall Flank West project. The jacket was installed at the 7th of May and the topside at the 22nd of June according to plan. The project sets new standards with respect to schedule, quality and cost. The Valhall Flank West project creates interest from oil companies around the world. I will come back to this later in my presentation.
Let me comment to other key highlights for the second quarter. Let us continue with slide two in our presentation. The Quarter is characterized by high activity in all parts of Kværner. We have in April assisted in getting the Johan Sverdrup Utility and Living Quarter Platform into use. Before the summer, we received the Valhall Living Quarter Platform for recycling. This was a change of guards at the important Valhall FEED as it has same day delivered the topside for the wellhead platform to Valhall Flank West. Through the second quarter, we’ve started on some new and interesting projects such as the Jackdaw FEED. We note that we have a high bidding activity not the least within the wind power segment.
Let us commence with the review of the status for our operations and start with HSSE illustrated on slide three.
Top HSSE performance is of vital importance for Kværner’s ability to succeed. This spring, we've had a good drive to strengthen the personal engagement and attention for HSSE among all employees. We see a positive trend on HSSE performance with zero serious incidents this year. In June, a person squeezed his fingertip, resulting in the first lost time case in 2019. This reminds us of how important it is that HSSE continues to be our first priority.
We have said for several quarters that we have ongoing programs to reduce sick leave. We can now note that we continue to have a positive development in the second quarter of 2019. We will work hard to continue this development and to reduce the sick leave numbers even further, as this will increase our competitiveness.
Let us take a look on ongoing projects. We continue with slide four. The common denominator is that all current projects are on track being a trademark for us. We are now entering the last year of the Njord A upgrade before the platform will commence offshore oil production for another 20 years. Over the next 12 months, our scope in this phase includes installation of topside equipment and hookup and commissioning of systems before tow out next summer. The fabrication module for Johan Castberg is ongoing in Poland and at Kværner’s yards at Stord and Verdal. Modules from Poland will arrive in the third quarter. Upgrade of our quay at Stord is developing well ready to receive the hull arriving from Singapore next year.
At the Johan Sverdrup, we have during the second quarter performed much work to assist Equinor with commissioning of the Phase 1 installations and preparation for production start later this year. For the modification of the Johan Sverdrup Riser Platform, we have started fabrication of the new module in Poland and at Stord. Preparation for start of the work will commence after the summer. We will later provide commissioning assistance offshore towards the start of Phase two in 2022.
Also for Johan Sverdrup, the Phase 2 jacket engineering is ongoing and prefabrication started 20th of June. Prefabrication of risers, guards and braces is scheduled to start early September. Verdal has in this past quarter completed and delivered the jacket and the topside for the Valhall Flank West. And we are currently assisting AkerBP in the commissioning work offshore. Production from Valhall Flank West will start later this year.
Internationally, our work within Nord Stream 2 landfall contract has progressed as planned during the last quarter. This work will commence through coming quarters. Also internationally, we are progressing well with preparation for the tow-out and installation of Husky’s West White Rose platform offshore Canada, where our customer has decided to extend the project schedule by one year to 2022. Kværner has in the period also kicked off the project for upcoming marine operations to remove our used the jackdaw platform located offshore Canada in 2020.
The contract for upgrading our Hydro’s aluminum plant at Husnes at the West Coast of Norway was awarded in the first quarter. This is an example of our new market segment, the Kværner leverage, the expertise from previous contracts for oil and gas facilities on shore. The work at aluminum plant is progressing well.
Through 2018, we receive more than 40,000 tonnes of huge structures that the oil companies have brought in from the ocean for decommissioning, reuse or recycling. Currently, we have processed close to 20,000 tonnes. Kværner just recently received a Valhall Living Quarter Platform and bridge for further deconstruction and recycling, so we have a high activity level at our decommissioning facility as well.
Let’s take a look at slide five. While we are executing and delivering one new contract after the other, we are also implementing improvements to strengthen our competitive power. We are also driving such improvements among our suppliers and partners. This work is gaining momentum and has started to yield results. Compared to only a few years ago, this slide number five with deliveries to the ongoing Johan Sverdrup development illustrates that Kværner and the cluster of the Norwegian oil and gas supplier have become very competitive.
Let me also show a few examples of how Kværner contributes to the customers cost and increased value creation and how this is important when we bid for upcoming contracts. We move to slide six.
In our presentation of Kværner’s first quarter financial results, we did also announce that our delivery of the Johan Sverdrup Utility and Living Quarter save time and money for Equinor and the partners. The topside from Kværner had such a high quality and was so complete that it took only 14 days from the topside sales from Stord until Equinor could start using the platform. That is one whole month ahead of the original schedule. This is worth a lot to an operator. We can today present a post delivery calculation for the three jackets that have sailed out from our Verdal yard. The slide number seven shows the three jackets we have already delivered to Equinor for Johan Sverdrup where all three were under a common framework agreement. We find the key message on the bottom line. We had a small price rise on the first, which was the big rise on platform jacket, the price on number two, the drilling platform pipeline jacket was almost exactly as budgeted, and the price of the third was delivered under budget.
In total, the overall price Equinor and the partners have paid for these three jackets is the price we promised when we won the contract. And at the same time, we note that all three jackets are delivered at agreed schedule and with agreed quality. This unique position from Kværner is recognized among customers around the world and is essential for us being invited into discussions and bid for an increasing number of new projects.
The slide number eight illustrates that also the Valhall Flank West delivery set new standards. Kværner has over the past three years beat competence for small wellhead platforms because of the several familiar projects coming up. This competence was vital when we were invited to join AkerBP’s alliance for wellhead platforms and Valhall Flank West has the first delivery approved in the potential.
The remarkable results for scheduled HSSE and costs have inspired other oil companies to contact us for similar projects. One concrete example of this is the recent FEED contract we have signed with Shell for the planned Jackdaw development.
Moving on to slide nine. Jackdaw is a satellite resource whereas Shell UK plans to install normally unmanned wellhead platform with a tieback to the existing Shearwater platform. The new FEED contract will be executed in parallel with Rosetti [ph] in Italy. And we understand that Shell intends to go forward with the best proposal to any EPC contract in 2020. Kværner will of course leverage the successful delivery of the Valhall wellhead platform and there are obvious experiences we think can be transferred.
Let us look at slide 10. Order intake in the second quarter totaled NOK732 million, including Kværner’s scope of work of jointly controlled entities, compared to NOK1.9 billion in the same quarter last year. This is in line with our forecast from the start of this year, where we have said that it is expected that 2019 will represent an intermediate year with some few large contract awards this year, but with a higher number of large prospects in process of sanctioning in 2020 and 2021.
Order intake in the second quarter includes the decommissioning of the Statfjord A platform as well as small orders and growth in existing projects. The order backlog stands at a solid NOK9 billion. Of this, approximately 44% will be executed in 2019, while about 38% is for execution next year and the remaining 18% is for execution in 2021 and later.
I will then 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 second quarter were that our operations continued to be on track; we continued to deliver predictable financial results in line with our plans; we continued to run the business with the solid negative working capital; and we maintained a robust balance sheet.
Let's look at the details. And I will start with the Field Development segment review at slide 12. Operating revenues for the Field Development segment was NOK1.9 billion in second quarter 2019, an increase of NOK63 million compared to second quarter 2018.Revenues for the first half year was almost NOK4.1 billion, compared to NOK3.8 billion in the same period in 2018. Higher revenues reflect increased activity within operational area Process Solutions, partly offset by lower revenues within operational area of Structural Solutions and Concrete and New Solutions.
EBITDA for the quarter were NOK132 million, compared NOK118 million in the same period last year. The increased EBITDA is due to recognition of accumulated profit from projects starting recognizing of margin and positive effects from projects in closeout phase. As before, the EBITDA results will be influenced by both, by phasing projects, project portfolio mix and by incentives.
Moving to the group’s cash flow at slide 13. The net current operating assets or working capital was negative at NOK681 million at the end of June, compared to NOK649 million at the end of the previous quarter and NOK949 million at year-end 2018.
Kværner has previously communicated that significant fluctuation in working capital must be expected within the range of negative NOK500 million to negative NOK1.5 billion. We have also stated that we are in a period where we will be somewhat closer to the negative NOK500 million level compared to a situation back in 2016.
Movements in working capital will impact cash balances. At the end of second quarter, net cash excluding negative working capital was NOK2 billion.
Net cash inflow from operating activities was NOK227 million in the quarter, reflecting positive results and working capital movements. Net cash outflow from investing activities was NOK101 million in the second quarter and is mainly related to capital expenditure. Capital expenditure in the period is related to the Stord yard development and ongoing project to increase our use of effective digital tools and robots.
For 2019 [Technical Difficulty] at Stord will imply a CapEx of around NOK200 million. A total maintenance CapEx for the group of approximately NOK30 million to NOK50 million is expected annually. And our total CapEx for 2019 including these investments is expected to be around NOK300 million.
Net cash outflow from financing activities was NOK293 million in the quarter. Outflow is mainly related to dividend payment in April of 268 [Technical Difficulty] bank deposit during the quarter amounted to NOK163 million, resulting in cash and bank deposits at the end of the quarter of NOK2.7 billion. And as of end of June, the Group has not drawn on its credit facilities.
Thank you for your attention. I now leave the word to Karl-Petter for an update on market and outlook.
Thank you, Idar. Let us continue on slide 14.
From the end of 2018 and through the first part of 2019, we have in many ways seen an accelerating interest from customers and we have started the concrete dialogs related to upcoming projects. The recent and ongoing improvements and investments in the quay at Stord, new digital tools and new concepts, places Kværner in the strong position, targeting several of these prospects.
The contract opportunities currently pursued by Kværner include FPSOs, large topsides and jackets for traditional platforms, wellhead platforms, platform upgrades, concrete technology projects, onshore facilities and projects within renewable energy. Our expectations to the offshore wind power segment have continued to increase through this spring. During the first half of 2019, Kværner has delivered bids for several offshore wind power projects.
As a Norwegian Continental Shelf, we expect some few large Greenfield oil and gas projects to be sanctioned over the next 24 months. We are optimistic with respect to our opportunities for some of these prospects and we will in parallel position Kværner to win more projects internationally. Let us comment in brief on our marketing strategy.
We see the overview on slide 15. First, we will continue to strengthen our competitiveness which will enable us to continue to win a significant share of upcoming contract in our home markets 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 base and improved delivery model and not the least to ensure that we maintain the optimum competence profile for the business ahead. This focused strategy supports our objective to grow Kvaerner’s business to above NOK10 billion over the next year.
Let me move to slide 16 and sum up are key messages for today. Our financial results show that we are on track to the target for the full year. We maintain the outlook for 2019 with full year gross revenue of more than NOK8 billion. As before, quarterly fluctuations in earnings are to be expected due to phasing of projects, project portfolio mix and incentives. In the market, we expect some projects to be awarded during the second half of 2019, but more of the prospects we pursue will likely be awarded in 2020 and the year after. While we pursue upcoming opportunities with full force, our first priority will always be to continue to execute the ongoing projects safely and predictably. Our financial position provides flexibility to selectively follow up structural opportunities, and also to further develop Kvaerner’s business.
That concludes our presentation. And we will move to the Q&A session.
Yes. There are two ways you can ask questions. If you're logged on via the audiocast, you can email your questions; and if you're using the dial-in conference, the operator will now give you instructions.
Then, if there are no questions, we thank you all for attending our presentation. And wish you all a great day. Thank you.
We have received a question from Haakon Amundsen of ABG. Please go ahead. Your line is open.
Yes. Hi there. Thanks for taking my question at the end there. Just your favorite topic, margins and dividend. If you could give some color on what projects contributed on through the first margin recognition this quarter, and if that includes Johan Castberg or if that is coming in the second half? So that's my first question. Then second question, I just wondered, given your rather strong operating performance and balance sheet, your Board decided not to declare a dividend. Should we interpret that that you have a much more firm opportunities for large investments in the near term as the key reason for that dividend not come? Thanks.
Thank you. And I’ll start with the margin first. Yes, as stated, our margin this quarter is positively impacted of the fact that we have started recognizing margin on one of the projects that we were awarded last year and we have now started to take out profit on the Johan Castberg project. So that is included in the second quarter as well as positively impacted by the development of successful delivery of some of the other projects in being both the Johan Sverdrup ULQ that was delivered at the end of first quarter and now in the second quarter, the Valhall Flank West platform.
When it comes to the dividend question, yes, the decision was not to payout any dividend at this point in time. However, as stated here, we are -- our aim is to develop the company going forward and our aim is also to position our self in growth markets and new segments. And strong balance sheet is vital asset that we bring to the table when we are positioning ourselves for that.
When it comes to your question about near term, let’s say, investment opportunities et cetera, we cannot sort of comment on that one other than saying that a strong balance sheet will also put us in a position to assess strategic opportunities going forward.
And finally, I’ll just remind you -- everybody on the call that we on the 9th of April, paid NOK1 in dividend, so based on the result from last year.
We have no further telephone questions at this time.
Thank you. And then, I think, if there’s no further question, we wish everybody a nice and happy summer.
This will conclude today’s conference call. Thank you for your participation. You may now disconnect.