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Edited Transcript of KVAER.OL earnings conference call or presentation 12-Feb-20 8:00am GMT

Q4 2019 Kvaerner ASA Earnings Presentation

Oslo Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Kvaerner ASA earnings conference call or presentation Wednesday, February 12, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Idar Eikrem

Kværner ASA - Executive VP & CFO

* Karl-Petter Loken

Kværner ASA - President & CEO

* Torbjorn Andersen

Kværner ASA - Head of Communications

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Conference Call Participants

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* Steve Marshall

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Presentation

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Torbjorn Andersen, Kværner ASA - Head of Communications [1]

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Good morning, everyone, and welcome to this presentation of Kværner's results for the fourth quarter 2019. My name is Torbjorn Andersen, and I work with investor relations and communications in Kværner. The presentation this morning will be given by Kværner's CEO, Karl-Petter Loken; and our CFO, Idar Eikrem. Following the presentation, there will be a Q&A session. And the presentation is being webcasted and is available on the link on our website and it will also be available on the Oslo Stock Exchange's website. And the webcast will be available for replay on our website later today.

Before we commence to the quarterly results, let us review the emergency procedures. If we hear the alarm, we'll take that seriously and leave the premises through one of the emergency exits marked here on the map. And that's an exit right there, at the rear at the basement floor and 3 storeys down. And the investor area is at the (inaudible) guest square outside the main entrance to the conference center.

With that, I will leave the word to Karl-Petter Loken.

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Karl-Petter Loken, Kværner ASA - President & CEO [2]

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Thank you, Torbjorn, and good morning, everyone. I would like to open today's presentation by pointing to the photo on the front page. At the first working day in 2020, all 700 employees in Valhall marked that it is 50 years since this facility was established. At the start, one key focus area was to deliver floating drilling rigs for oil and gas exploration. Since then, the facility has proven its ability to deliver to both offshore platforms and onshore facilities, and it's most of all recognized as the leading yard in Europe for advanced steel jacket substructures. 47 steel jacket substructures for oil and gas platforms have been delivered over the last 46 years. And in addition, comes 49 units to offshore wind power. Currently, we are in Valhall, preparing the large steel jacket for the process platform for Johan Sverdrup Phase 2 in addition to other activities that we will come back to.

Let us look at the highlights for the last quarter. The fourth quarter is characterized by a high activity in all parts of Kværner, and this is also reflected in our financial figures. We also have a high activity for marketing and positioning for new contracts. We predicted already a couple of years ago that only some few important projects will be awarded by end of 2019, hence, we communicated early that 2019 would be a year where we mainly positioned ourselves for contract awards expected to come in 2020 and 2021. However, out of the few contracts up for competition last year, we won the most important one. We put a strategic priority on Hywind Tampen early on and we succeeded with a contract in the fourth quarter. When we put a strategic priority on opportunities, it does not mean that we will enter contracts without sound financial margins. What we do mean is that we put in special efforts to develop an effective execution model and value chains with subcontractors and partners. The aim is, of course, to deliver a bid and a project that is competitive and adds value to the customer with sound financial margins for Kværner. This is also the basis for the FPSO partnership we announced in the last quarter. We have a strategic focus on winning some selected FPSO prospects that we see coming up. And this partnership is one of the measures to enable a competitive delivery model. Towards the end of 2019, the small normally unmanned wellhead platform called Valhall Flank West, started production for Aker BP. Several oil companies have noted that the platform was completed offshore in record time. Hence, this milestone in the fourth quarter is also an important step for winning similar new contracts in the time to come. We are, of course, pleased that the Board of Directors find that Kværner's performance, status and outlook enables them to propose a dividend payment. It is also positive that the dividend policy has been updated to better reflect the cycle in our performance.

Let us commence with a review of the status for operations and start with HSSE. Top HSSE performance is widely important for Kværner's ability to succeed. I'm pleased to note that 2019 have improved our HSSE results in key areas. This shows that the efforts we have reported on at previous quarters are yielding results. We performed 12 million man-hours last year, and the KPIs show that we had no serious accidents where a personnel was permanently injured. However, we did experience one serious incident and we had a number of minor incidents. Our HSSE efforts will be even more effective when we have now joined forces with other leading players. It is a fundamental value for us that nobody is hurt while working for Kværner. In addition, a high standard on safety is what is expected of our industry, from the society, from the authorities and from our owners. On January 29, we signed, together with both Equinor, Aibel, Aker Solutions and Worley, a safety collaboration charter towards 2025. Our goal is for everyone to be safe at all times. The best way to ensure continuous improvement is now through collaboration and standardization. We will together ensure common priorities and those who work for us should recognize themselves as being part of a safe and established culture. This agreement is a strategic step for how the leading players on this charter together will develop best-in-class HSSE performance. It is also showing that we are implementing standardization in one area after the other, in line with what we have communicated before.

Then to a brief status on ongoing work. We are now entering the last phases of the Njord A upgrade before the platform will commence offshore oil production for another 20 years. Over the coming months, our scope is to finalize and prepare for the completion phase prior to tow-out this summer. We're also progressing on the Johan Castberg project, where fabrication is ongoing.

Expansion over quay at Stord is on track for receiving the hull in the fall this year. After which, we will start to lift the topside modules into place. For the modification of the Johan Sverdrup riser platform, the fabrication of the new module is ongoing. Outfitting of the module at Stord started 2nd of January, and the project is on track. We're also already working offshore to assist Equinor in the preparations for Phase 2. Also for Johan Sverdrup, the Phase 2 jacket engineering has been completed and prefabrication at the yard in Valhall is ongoing. Assembly of the jacket has started and the first roll-up will be in the second quarter of this year.

Hywind Tampen was secured in the last quarter 2019. The contract is a very important step in Kværner's strategy to grow within renewables. With 88 megawatts, this is the largest floating wind farm development to date. It will supply 35% of the total power need of 5 platforms at Snorre and Gullfaks fields and will reduce CO2 emissions with more than 200,000 tonnes per year, which corresponds to the emission of 100,000 cars. The project is in an early planning phase. Internationally, the Nord Stream 2 PIG trap facility was mechanically substantially completed by end of last year. We are now moving towards the late phases of this contract. We're also progressing well with preparation for the tow-out and installation of Husky's West White Rose platform offshore Canada. Also in Canada, we have an ongoing project to remove a used jacket platform from an offshore field. We have, in the past quarter, completed engineering for upcoming marine operations, which are expected to start this summer. For the Hydro Husnes upgrade, we are since December completing section after section of the cells in the plant and are on track to complete this project later this year. Several large decommissioning projects will be tended for in the first half of 2020. Ongoing projects have good progress in accordance with the plan. Due to the life extension of the Statfjord field, the Statfjord A project has been suspended, and further work is pending an agreement of the late delivery by up to 3 years. For the Gyda project, Kværner is currently working on several studies for either reuse or decommissioning.

Order intake in the fourth quarter totaled NOK 2.6 billion, including Kværner's scope work in jointly controlled entities compared to NOK 1.7 billion in the same quarter last year. The order intake includes the contract for Hywind Tampen within Renewables and growth in existing projects. The order backlog was NOK 8.2 billion at the end of the year. Of this, approximately 64% will be executed in 2020, while about 36% is for execution in 2021 and later.

I will then leave the word to our CFO, Idar, to comment more detail on the financials.

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Idar Eikrem, Kværner ASA - Executive VP & CFO [3]

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Thank you, Karl-Petter, and good morning to all of you. In the fourth quarter, we continue to run the business on track, in line with our plans, and we maintain a solid financial platform as a foundation for the growth we are aiming at. Let's look at the detail, and I will start with the field development segment review. Operating revenues in the field development segment were almost NOK 2.8 billion in the fourth quarter of 2019, an increase about close to 60% compared to the fourth quarter of 2018. This is a reflection of the high activity level Karl-Petter presented. EBITDA for the quarter was NOK 105 million compared to NOK 75 million in the same period last year.

Moving to the cash flow, the group's cash flow. The net current operating assets or working capital was negative with NOK 361 million at the end of December compared to negative NOK 440 million at the end of the third quarter and negative NOK 949 million 1 year ago. Significant movements in working capital is to be expected, and movements in working capital will impact cash balances. At the end of the fourth quarter, net cash excluding negative working capital was NOK 2 billion. Net cash inflow from operating activities was NOK 54 million in the quarter, mainly reflecting positive results and negative working capital movements. Net cash outflow from investing activities was NOK 150 million in the fourth quarter and is mainly related to capital expenditures. Investment in the quarter include the ongoing Stord yard development and project to increase our use of effective digital tools and robots. For 2019, progress at the Stord yard development resulted in a CapEx of NOK 173 million. Remaining CapEx for this investment is approximately NOK 64 million. The new quay will be finalized in May this year according to our plans, spot on.

Our total maintenance CapEx for the group is approximately NOK 50 million annually. And in addition, we are spending approximately NOK 50 million in productivity enhancement investments. The total CapEx for 2019, including all these investment, was NOK 374 million. Going forward, we expect a more normalized CapEx level, and a lower level. For 2020, we expect CapEx to be around NOK 150 million, including the last phase of the Stord yard development. Net cash outflow from financing activities was NOK 29 million in the fourth quarter, mainly related to lease payments. Net decrease in cash and bank deposit during the quarter amounted to NOK 96 million, resulting in cash and bank deposits at the end of the quarter of NOK 2.3 billion. As of 31st of December 2019, the group has not drawn on its NOK 2 billion credit facility.

Kværner has delivered predictably for 34 quarters in a row. During this period, we have executed project, one new project delivered again and started our new cycle of winning. The red line shows the significant short-term fluctuation in EBITDA margin from one quarter to another. The graph also illustrates well that you should -- sorry, the gray line, however, shows that the average EBITDA margin for the whole period is solid and about 6%. The graph also illustrates well that you should not look too much on our individual quarters. The nature of this business is significant fluctuation from one quarter to another, but that gives little indication of the actual performance and trend. Our project typically lasts for 2 to 4 years, and that is when you see the end result and performance. We have, in the fourth quarter 2019, communicated the planned development for 2020 and our plans to grow annual revenues to about NOK 10 billion for 2023. We have said that in 2020, revenues will be around NOK 6 billion, with our EBITDA margin for the full year around 3%. As we see from the graph, we have seen similar fluctuations before while still delivering a solid EBITDA margin over time. With our strategy for growth in new segments, this graph also illustrates well the positive potential we see ahead of us.

New dividend policy. The Board of Directors has decided to change the dividend policy where dividend payment until now have been considered 2 times per year to an updated policy where dividend payments is evaluated once per year. Decision to the actual dividend payments shall depend on outlook, liquidity and considerations such as alternative use of cash and future strengthening of the company's financial structure. The dividend payments could either be through cash dividends and/or share buybacks. The proposed dividend of NOK 0.50 per share for 2019 corresponds to about 55% of Kværner's net profit in 2019. With the payment of NOK 0.50 per share for 2019, the total dividend paid since today's banner was listed in 2011 corresponds to approximately 60% of net profit in the same period.

Thank you for the attention. I now leave the word to Karl-Petter for an update on market and outlook. Thank you.

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Karl-Petter Loken, Kværner ASA - President & CEO [4]

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Thank you, Idar. During the third quarter in 2019, Kværner reorganized in order to offer services in 3 new operational areas. We focused on segments where we see we can add value and have maximum competitive power. The majority of our business over the last 5 years have been related to the activities we define under process and structures. There is a strong trend towards smaller unmanned facilities. These are installations, similar to what we have just delivered to Aker BP for Valhall Flank West. we also see significant opportunities for new onshore projects for oil and gas, both in Norway and internationally.

FPSOs is the other new operational area. In this area, we already have Johan Castberg FPSO under execution, and we build on the experience from several previous FPSOs. Going forward, we see a number of similar harsh environment, new FPSO prospects.

Renewables is the third area where we will now expand our business. As we see from the right side of this illustration, Renewables includes several different segments where we see that Kværner can provide attractive offerings. For all our 3 focus areas, we are currently developing bids and positioning for upcoming contracts. Let me comment more specifically on the opportunities we see.

The prospect pipeline we have adds up to more than 55 defined opportunities where the expected total contract value exceeds NOK 165 billion. These are named prospects which we believe will be awarded in the time frame from 2020 up to 2025. To the right is our so-called prospect funnel. We only take into the funnel prospects where we believe there is a real potential contract opportunity for Kværner. Out of the total of more than 55 prospects, we see that 50-plus prospects are in the stage for early pursuit. For all of these, we have a dialogue established with the client. For many of these prospects, we are involved or expect to be involved in studies or early-phase engineering. When we look at prospects, we expect to be awarded in the short to medium term. We note that we are already working on bids or positioning for 15 prospects. We see that these include both oil and gas platforms and onshore facilities, marked in gray; and FPSOs, marked in red. We anticipate that we will see awards or key decisions for some of these FPSOs and other new oil and gas platform prospects during 2020, possibly already during the first half of this year. On the short and medium term, we follow around 5 renewable prospects. Several of these are medium- to large-sized contract opportunities and include both wind turbine foundations and larger offshore wind power units. It also includes green onshore facilities. For several of these renewable prospects, we expect to see key decisions for further progress during 2020, most of them probably in the second half of this year.

So let us sum up. The results for the fourth quarter and for 2019 as a whole is in line with our plans. We are progressing well on our strategy for renewed growth in Renewables and when it comes to results. Through this year and onwards, we will focus on our 3 key market segments and expand our business activities, including activities in selected international regions.

That concludes our presentation, and we open up for questions. Torbjorn, will you facilitate?

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Questions and Answers

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Torbjorn Andersen, Kværner ASA - Head of Communications [1]

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Certainly. Certainly, Karl-Petter. We will open up for questions, both from the audience here at the conference center and from the audience following us at the webcast. (Operator Instructions) But we will, I think, start with questions from the audience. We ask you to state your questions quite loudly so -- in order also to let the webcast audience hear you.

So we'll come around with a microphone for you. Anyone?

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Steve Marshall, [2]

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Steve Marshall from Upstream. Regarding the recently signed safety charter with the other contractors. Do you see this as a springboard for a wider collaboration for deliveries in the 3 segments?

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Karl-Petter Loken, Kværner ASA - President & CEO [3]

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Not necessarily, but we see this as an advantage when it comes to having a common approach on HSSE for companies or contractors and major oil companies that are involved in project at the moment. And it's beneficial to have a common schedule going forward when it comes to KPIs. You see that there are targets both for this year until 2025, and that will -- that is the same KPIs for all companies that are involved. But of course, good HSSE performance, as we have communicated before, is very important when it comes to winning new contracts.

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Torbjorn Andersen, Kværner ASA - Head of Communications [4]

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Then we are ready for other questions from the audience. There seems like we have no further questions, so then I think we will conclude this common session. And thank you all for coming this morning.