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Edited Transcript of MSEIS.OL earnings conference call or presentation 27-Aug-19 6:00am GMT

Q2 2019 Magseis Fairfield ASA Earnings Call

LYSAKER Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Magseis Fairfield ASA earnings conference call or presentation Tuesday, August 27, 2019 at 6:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Per Christian Grytnes

Magseis Fairfield ASA - CEO

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Conference Call Participants

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* Glenn Lodden

Nordea Markets, Research Division - Analyst

* John A. Schj. Olaisen

ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway

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Presentation

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [1]

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Before we dive into the highlights for the quarter, I would like to take the opportunity to remind you that the combination of Magseis Fairfield, including WGP, has created the undisputed leader in the global ocean bottom seismic market. We are the largest player in a growing USD 1-billion-plus market both in terms of technology, number of nodes and surveys. We have a truly global footprint and a diversed global customer base and an asset-light business model with a flexible cost structure.

Moving on to the highlights for the quarter. I am proud to report that we generated USD 132 million in revenue, an EBITDA of $26 million, including a noncash cost of $9 million, and a positive net profit of $12 million in the quarter. These figures were supported by large and early deliveries of MASS I node system sales and healthy performance in the reservoir monitoring and source business line in the -- when the North Sea season got underway.

The data acquisition business has also had an active quarter. But as we have earlier communicated, the revenue generation and margin capabilities have been limited by availability of nodes and the fact that Artemis Athene was in transition back to the North Sea and, therefore, not in revenue-generating operation most of the quarter.

At the same time, we've been speeding up the integration between the 2 operational departments and all support functions by moving them into a global business unit. Going forward, we see full capacity utilization for the third quarter, but uncertain timing of projects towards the end of the year and, hence, uncertainty with regards to the capacity utilization in the fourth quarter. This increases the risk for our full year revenue and EBITDA guidance. More details on this later in the presentation. We see continued positive market outlook for 2020 and beyond based on increased visual demand.

Looking at the financials in more details. We generated $132 million in revenue for the quarter and $251 million for the first half year, which obviously are far above last year's figures for Magseis on stand-alone basis. The EBITDA was $25.5 million for the quarter, which you should note includes a noncash element of $9.3 million related to sales of used MASS I nodes. For the first half year, the EBITDA was $41.6 million, including $15.9 million in noncash costs.

EBIT improved to $11.4 million in the quarter. Note that accounting principles for amortization of the purchase price allocation, the PPA, were changed in the second quarter, and the amortization was reversed in Q2. Net financials were positive of $1.5 million in the quarter, including a positive effect of $4 million from revaluation of warrants, which gives a net profit of $11.9 million after $1 million income tax.

As you see on the graph on the right, we generated a strong positive cash flow from operations of $32.1 million in Q2 after a slightly negative cash flow in the first quarter due to buildup of net working capital.

Splitting up the figures somewhat more. We see that the MASS I's node system sale provided $40 million of revenue with high margins and cash EBITDA. Z node sales were limited in the quarter, with production continuing for expected deliveries in the second half of the year. The remaining business still reports relatively soft figures even though improving, as earlier communicated, although better than the first quarter. This reflects that we were limited by node availability and the fact that Artemis Athene was out of operations most of the quarter. She transited back from the Red Sea and then into a yard stay. This entailed direct cost of close of $3 million for the quarter, but also lost revenue for SG&A cost coverage. Finally, we had a loss on receivables of $1.6 million in the quarter, reflecting a customer settlement on work done in 2018.

The large contract from MASS I nodes and modular handling systems is now nearing successful completion. We delivered the third batch of nodes in June, ahead of schedule, and the main part of the fourth batch earlier in August. The remaining nodes will be delivered in September, making up the total of 17,000 nodes. The project has contributed very positive to our financial figures over the past 3 quarters, and the total project economics are in line with what we have earlier indicated. You should note that the remaining revenues of some $40 million will carry a lower margin both because of higher shares of new nodes and close-out costs.

Turning to the data acquisition activities. I've already mentioned that the large node sale has limited the availability of nodes for other projects, and overcapacity has also been affected by the transit and yard stay of Athene. Looking forward, we expect higher volume in the third quarter. Our current crew are fully booked on high project margins -- on higher project margins than in the first half of the year. And we also expect less margin leakage related to transition, mobilization cost and other one-off items.

Moving into the fourth quarter, we will bring more capacity, leaving us with available capacity of some 5 survey months in the final quarter of the year. Although we are working on 3 different tenders with a total of 11 survey months, we are uncertain about timing of the project startups of the fourth quarter. There is also some uncertainty on timing for additional node sales in second half of 2019. This increased uncertainty put our guidance levels at risk as the revenue guidance of $500 million and EBITDA level of $100 million depends on continued high capacity utilization and margins also for the fourth quarter.

Order backlog. The order backlog for 2019 reflects what I have said about the uncertainties for the fourth quarter this year. At the first quarter presentation, we showed the backlog implying we had a revenue of $453 million already booked for this year, and that's -- and this is virtually unchanged. We have received some smaller orders or scope increases on existing projects. Most of the projects are actually sort of increasing the scope during the project. But that has been netted out by actually a deferral of one of the projects into -- from Q4 into 2020, still leave us with the same level of $453 million for now.

Although we haven't seen much change in the order book, we remain very confident in the market outlook for 2020 and see continued growth in the visual demand even in the face of more volatile oil and gas prices. The oil companies are looking for higher-quality seismic data, and industry costs are coming down. This is reflected in the increasing number of addressable tenders and proposals for next year.

When we met last time at the Q1 presentation, we were looking on 2 surveys for a total of 7 months, whereas in now, are looking at 10 survey tenders for a total of 35 survey months. In addition, we see a significant amount of planned but not yet tendered activity as regular tenders, large tender programs, multiclient activity and potential system sales and leases. There are interesting business opportunities in all major oil and gas areas, and we will secure our part of that business.

I am glad to report that all operational activities continue to operate safe and with high performance. ZXPLR Crew I is utilizing the REM Saltire with the dual ROVs and the new high-speed loader that transporting nodes from the vessel down to the ROVs. The new system brings significant efficiency gain compared with prior operations with the ZXPLR node. We have successfully completed pickup of the nodes from the world's largest deepwater OBS survey and are, as we speak, starting on the next survey in a series of 4 more back-to-back surveys. The ZXPLR Crew I is so far booked into May 2020.

Moving on to the Z700 crew. Let me do it manually. We are deploying 15,000 Z700 nodes with the deployment being handled by 2 node-handling vessels. The project commenced late January. It is a baseline for the survey, and you could see repeat surveys in this area from '21 and beyond. This survey is now more than 60% complete and operate with excellent stability. As announced yesterday, the Z700 crew #1 -- on this job, we have 2 crews working: crew #1 and crew #2. Crew #1 is booked for a 6-months lease in the Caspian Sea following back-to-back with the ongoing Middle East survey.

Moving on to the MASS node crew, again, manually. We have completed a repeat 4D reservoir monitoring survey with the node handling on the client's onshore facilities and deployed the nodes with the client vessels, very cost-efficient. This survey utilized the Magseis Fairfield containerized source technology. The MASS I crew moved straight into nodes on the wire surveyed with Athene. This survey will run until beginning of October. These 2 surveys showcases the flexibility of the MASS I node with or without containerized surveys. And interestingly, the 4D and reservoir monitoring market with combination of nodes and source will be a growth market for Magseis Fairfield in the years to come. These are often repeat surveys with multiyear contracts, so they will generate better transparency on the backlog.

Source crews. For our reservoir monitoring and source business, Q2 has been a very active period with 3 crews in operation. All the crews are on long-term contracts and fully utilized through the season. These 3 crews are operating containerized source systems and, as of today, mainly shooting into permanent reservoir monitoring systems. Our value position to clients are to use nodes instead of the very expensive permanent systems or a combination of the both. We have already demonstrated cost efficiency and data quality through repeat surveys in the North Sea.

So let's move into Magseis Fairfield integration update. The integration is going well. The integration of the 2 companies is progressing ahead of schedule. We moved in July from a Western and Eastern Hemisphere operating organization to one global operating team. We have also done the same with all the remaining staff and support teams that had not already been converted to a global team under one global manager. We are further seeing great progress in the integration work stream with several already concluded. Migration of all back-end systems -- back-end IT systems has been completed. We have further selected the future global business system, and implementation is underway.

Summing up. We have successfully executed the deliveries under the large MASS I node system sales contract and had a healthy performance in the reservoir monitoring and source once the North Sea season got underway. On the other hand, data acquisition had a soft first half, although volumes and margins are set to improve. We are fully booked in Q3. The timing of project volumes in Q4 is still uncertain. This uncertainty increases the risk for our full year revenue and EBITDA guidance.

Looking further ahead, we remain confident in the future of the OBS market and in our strong position in this market. We are an industry leader with the largest node pool and a diverse and global customer base. We see a large number of tenders and tender programs coming to the market in 2020 and beyond as well as increasing multiclient activity and more system sales. This will provide opportunities for profitable growth in the years to come.

On that note, I will open up for some questions.

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Questions and Answers

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Glenn Lodden, Nordea Markets, Research Division - Analyst [1]

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Glenn Lodden with Nordea. Just to understand how you are thinking going forward, you're seeing a lot of -- well, a lot more tenders and, at the same time, you're selling part of your nodes -- node pool. Are you looking also now to maybe increase investments into new nodes to meet that common demand in the future?

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [2]

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Not beyond what we have communicated. You're absolutely right, we have sort of restocked the inventory. We have been selling off 17,000 nodes. But during the 2019, we have been investing, as earlier guided, in CapEx for new nodes. So by end of this year, we will have still one crew with the MASS I; we are building the second crew with MASS III, increased battery life; and we are building the ZXPLR Crew #2 for the Gulf of Mexico. Early next year, we also plan to top off with one additional crew for MASS III, but that's so far we see today. And we need to gauge and look at the market prior to making any further investment.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [3]

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It's John Olaisen from ABG. A couple of questions. I'm a little bit confused on the backlog chart that you show with the MASS crew 1, 2, 3, et cetera. I just wonder, which one of those is Athene?

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [4]

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We have not divided anything like that. We have taken the crews. So the MASS crew 1 is where Athene has been as of late. And that ended up in not tracking the vessels, but tracking the nodes. So Athene, sort of she operated down in the Red Sea until beginning of April, then we actually transported the nodes to the North Sea and started the reservoir monitoring job. And then those nodes moved into the back-to-back nodes in the wire with Athene. So the nodes actually operated while Athene was transitioning back to the North Sea. And that's the beauty of the model where we have sort of multiple handling systems, the nodes can easily be transported from region to region.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [5]

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Does Athene or the nodes on her right now, do they have a job in Q4?

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [6]

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No. And that's as indicated. Those nodes are still marketed.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [7]

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And if I look at the year-to-date revenue, $251 million, and your backlog of 2019 work of $202 million, it seems like you have booked $453 million in revenues for 2019 as of now or minimum at least. What's the chance -- or where are you looking -- which one of those crews, et cetera, would you think is likely to get some work in Q4 on top of what you have already?

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [8]

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Sort of all of them. But there is sort of different regions we are looking at. For the ZXPLR Crew #2, which is coming online, it's predominantly marketed into the Gulf of Mexico with all activities going on there and both with proprietary service and with the client. While the MASS crew is more sort of from here, Middle East and somewhat eastwards. So we are kind of -- have different regions for the nodes.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [9]

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And the probability, like, are you looking at these particular tenders now that you think will be likely to be booked and...

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [10]

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We are, unfortunately, not in control of the decision process at the clients. But we are chasing -- it's real tenders that they are offered into. As stated, they are submitted into 3 different tenders, these nodes. And they're also chasing other opportunities for them. So real tenders is 3 of them that they are sort of addressed in and then we are addressing sort of other opportunities in that. In addition to the acquisition side, we have throughout the year invested into, I wouldn't say backlog, but we have produced some Z100 nodes for sale, and those are also actively marketed to multiple companies across the globe.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [11]

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So you don't rule out that it could be -- although you say there's downside risk on $500 million revenues, you don't rule out $500 million? Could we still hope for $500 million or is that too optimistic?

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [12]

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I don't rule it out, but the matter of the fact that we haven't seen any sort of traction on the backlog over the last 3 months. But they are still actively chasing. That said, this is a typical sort of seasonal sort of where you are before the 2020 budgets are released and the companies are still holding tight on the surplus 2019 budget. So coming now beginning of September into December, the client will see what kind of excess capital or spend they have to use in '19.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [13]

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Clearly the discussion on the margins, please. On the node sales, how many nodes do you have remaining unsold on the big contracts for sale now in Q3? What was the remaining number...

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [14]

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On this big contract, that's only a few nodes that we are producing and going to ship off in September. Did you refer to the sale to the big 17,000 chunk?

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [15]

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Yes, yes.

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [16]

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Yes. We have sort of guided for the remaining revenue, that is about $40 million is remaining revenue which is going into Q3. But the composition, the margin picture there will be slightly weaker than you've seen previously due to new nodes and some close-out costs, but then that's sort of offset by higher margins on the data acquisition side.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [17]

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But on the nodes, is it possible to say -- because in one of the slides, you show the revenues and EBITDA from the node sales. Is it possible to give some more indication on how much lower the margin will be on those revenues in Q4?

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [18]

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I would rather not be sort of very specific on that.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [19]

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And year-to-date, your margin has been below 20%, and your previous guides are still existing guidance, although with downside, is for 20% margin for the year. If revenues turn out to be $453 million, what would you likely do? Is it possible to give some indication what the margins would likely to be then?

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [20]

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Just let me give a general comment. It will not be $453 million. So -- but that said, the margin will most likely decrease somewhat because we, in the outlook for -- and the guidance for the year, it was on higher-margin project at the end because we've seen the margins picking up on acquisition projects. If those projects are not coming in, the overall margin picture will suffer somewhat.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [21]

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So even with revenues closer to $500 million, you expect margins below 20%, is that what you're saying?

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [22]

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I'm saying that the margins will suffer if we are not getting the project we have been anticipating, yes.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [23]

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And going forward into next year, one thing is the top line which is, of course, highly uncertain. But what about the margins going forward? Is like 20% plus/minus, is that what you're targeting for?

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [24]

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But we are -- over the last year now, we have been sort of deploying a slightly different strategy, not only going for the sort of the major revenue-driving acquisition project, which is it's a good chunk of revenue. It's starting to get to a decent margin, but the risk picture is, of course, higher because of you have like -- you are also kicking in for a lot of subcontractors. So on some project, we are sort of having like 5 vessels in operations. And we have, as you know, seen some downtime on our subcontractors. So one of the areas we have been sort of suffering is actually underinvestment into the oil and gas service over the last couple of years.

That said, we are -- as you saw the contract announced yesterday, which is a leasing contract, which is lower on the revenue picture, but it's significantly higher on the margins and definitely on the risk. In addition to that, we're also looking at the reservoir monitoring market which, in many cases, are long-term contracts. It's repeat business and sometimes lower on the top line revenue, but definitely higher on the margins. So we are sort of pushing the margin envelope with having a mix of these types of contracts.

So we are in the process of starting to build budget for 2020. We are, of course, sort of looking at how the market is developing and looking at our pipeline. So we will sort of come back, I guess, in the Q3 report to take a more deep dive into how we look at the 2020 market and how we would guide on revenue and also on the mix of projects going forward.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [25]

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My final question, if I may, is on the CapEx side. Your CapEx year-to-date is $19 million, almost half of the EBITDA. Is it possible to give some guidance on investments -- expected investments or CapEx in 2019?

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [26]

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2019, you said?

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [27]

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Yes, this year.

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [28]

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We have earlier on, if I remember correctly, we stated in December about 15,000 -- $15 million in sort of maintaining CapEx, R&D and maintenance, and then around $50 million in growth CapEx, new nodes, the ZXPLR crew, the MASS III crew and the handling systems. We have sort of upped the inventory of about 1,500 MASS I nodes, so we have about 6,000 now, and so that's a small addition. And that's kind of what we are sticking to for '19. And then into '20, without giving any guidance, and as earlier communicated, we are looking at least of building 6,000 MASS III crews, so we have like 2 crews, and that's what you see on this -- so we are sort of replacing the crews we have sold.

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John A. Schj. Olaisen, ABG Sundal Collier Holding ASA, Research Division - Co-head of Research & Managing Partner for Norway [29]

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So this is sum of $15 million in maintenance and R&D and $50 million plus in growth CapEx?

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Per Christian Grytnes, Magseis Fairfield ASA - CEO [30]

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Yes. But that's pretty much in line with what we have communicated in December last year.

Thank you. Okay, on that note, thank you.