Kongsberg Gruppen ASA

OSE:KOG

Earnings Call Transcript 2018-Q1

[Geir Haoy]

Yes. Good morning. Thank you for joining us this morning for the Presentation of the First Quarter of 2018 for Kongsberg Group. I'm very pleased to see so many coming this morning. The sun is shining already outside. So we're going to do this in the traditional way. I will start with some few highlights, and then Gyrid will take us through the financial status, and then I will come back and do some business updates and some outlooks. And then we will end the session with some Q&A at the end. The first quarter of 2018 has been as, I would say, as normal for Kongsberg, quite hectic and a lot of activities. Some variations in between the business areas, also in between the divisions as we will see later. But all in all, a very active first quarter of 2018. Very brief -- some highlights from the Q1. We have some temporarily lower revenue on the missile side and the air defense, while we have quite stable activities in KM. You have probably seen the latest press release on the missile side, on the Malaysian missile contract, which we concluded in April. And we also have the -- last quarter of last year, we had the Indonesian and Lithuanian air defense contracts. So we expect that activities to pick up in these areas going forward. The margin in KM, we have earlier said that you will see some variation in the margins in the quarter for KM, depending on the project mix. This quarter, we have a bigger impact on the integrated solution versus more third-party involved, which also then impact the margins. In addition, we have also lower activities in the Maritime Simulation area. Also now more impacted on the downturn in the oil and gas and offshore sector. In addition to that, we have also further increased development on the new digital solutions. And then, in March, we also signed on very important MoU with Barzan Holding in Qatar. This is a very important milestone for us, and I will come back to that a little bit later. But all in all, as I say, a quite busy quarter with some mix of the margins impacted. So by that, Gyrid, you will take us through the finance.

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

Yes. Good morning everybody. Thanks for joining Kongsberg today. Financial status, I will give you some more details on the financial. Top line down by 4.5% this quarter, underlying, I want to bring your attention to Kongsberg Maritime. First time since 2015 that we actually are back on growth on Kongsberg Maritime. It's only 1.6%, but again, it's a milestone for us to then turn that one. Combined with the order from Kongsberg Maritime, we also see that is quite a good order intake for this quarter. So the combination of those 2 gives us comfort that we will now be able to have a flat top line for 2018. Bringing us to the orders for the KDI, it will fluctuate between the quarters as the large contracts there comes quarter-by-quarter. The return on average capital employed, 8.8% this quarter, still a solid and healthy finance position. Brings me to the revenue, down by 4.5%. Again, KM turned to growth first time since 2015. KDA down by 10.9% this quarter, temporarily lower revenue due to missiles and air defense. But as you can see, we have newly signed orders or the orders that we have newly signed are in a early phase, so we are producing them now, having a bit up at the end of 2018. As you can see for the revenues this quarter, Kongsberg Maritime does 50% of the total revenue for the group for this quarter. So KDA and KM are almost equal, but again, Kongsberg Maritime, still the largest division in the Kongsberg group. Bringing me to the EBITDA and the earnings for this quarter. 8% EBITDA margin is down from last quarter 2017, that was 9.1%. And as you can see, we are down by NOK 53 million. To address that one, I wanted to divide it into 3 main reasons: Reduced EBITDA in KDA due to volumes because the temporary lower activity in the missile and air defense. Turning me onto Kongsberg Maritime, where we have a mix this quarter of integrated concepts that has a lower margin due to third-parties deliveries. What we see when we look at the backlog also in this quarter, we will see that this will continue, both in the first and the second quarter. But for the last half year, normally, Kongsberg Maritime has a better margin and a better result due to more working days than normally they have in the first half year. So this will continue. The margin will continue, we believe, for the second quarter, but then rest a bit for the last half of 2018. Kongsberg Digital has also an area called Kongsberg Maritime solution. They deliver services at the end of offshore value chain. What we see is that we had to do a restructuring of that area this quarter. So the combination of the volume effect in KDI and the margin and the restructuring of Kongsberg Maritime solution is the main 3 reasons why the EBITDA is a bit down from last quarter. New orders. As you can see, we have a very small growth in Kongsberg Maritime. Combined with a good order backlog, we are now at the book-to-bill of 1.6 for the Maritime. That's compared to 0.9 from Q4. So it's actually increasing a bit. If you look at Maritime sector, we have positive signals from the merchant segments, especially in tank and LNG. Again, back to KDA, the orders will fluctuate between the quarters. And if you look here, you can see fourth quarter last year, we had a very high order backlog or intake and that was due to the orders from Lithuania and Indonesia. As you will also see, we will end up a bit for the second quarter as the order from Malaysia went into order books in April 2018. And as said last time, that I will continue to split the orders between the different divisions, so it will be easier to follow where we will add orders in the different areas in each division. Here you can see that for the first quarter, subsea in Maritime sector had the largest order intake for 2018. What you should be aware of is that when you look to the global customer support, it's not the aftermarket for the subsea. So if you took the aftermarket for the subsea that's included here and put it to the global customer support, they will be approximately equal. But as you can see, we have a bit lower intake on vessels and solution compared to subsea and global customer support in this area. What you also should be aware is that the first quarter in 2017, Kongsberg Maritime had a large order from the Norwegian Navy of 4 HUGIN underwater vehicles. So if you compare quarter-by-quarter, you have to take that into consideration. If you look at Kongsberg Defence & Aerospace, you will see that aerostructure has the largest intake this quarter, and that has to do with orders from F-35. You can also see that we have a lot of different divisions under in the defense area, which make us quite diversified in that area. Missiles, this quarter, only 8%. But when you follow us for the next quarter, you will see that this will increase due to the orders from the Malaysia coming in April 2018. Cash flow, not that much changed for the cash position for Kongsberg this quarter, still quite healthy, almost NOK 3 billion of cash also after Q1. The changes have been some buybacks from -- to the employee share program and we also did some purchases at last purchase for electronic for some areas in the maritime sector, last buy. And also, very limited investment that we have booked our own R&D this quarter. Still quite a strong balance sheet. As I said, interest-bearing debt is only NOK 3.3 billion. I'll split it for you on the next slide. Cash almost NOK 3 billion still. Equity ratio of almost 36% and return on capital employed almost 9%, a bit down from 2017 due to lower earnings this year, but not more capital employed that we have in 2017. So that brings me to the debt position. A quite healthy profile on the debt profile. All our debt is in the bond market, and you can see the profile here, over the next 8 years. And you also can see that we have a net bearing -- net interest-bearing debt of only NOK 600 million at the end of first quarter. So beat back to more business. Geir?

[Geir Haoy]

Thank you, Gyrid. Okay. So then I go to some business updates. I'll start with Kongsberg Maritime. Gyrid have already mentioned the order intake and also the stable revenue, and she also mentioned that we see some positive signals from the volume market. I recently was traveling in Asia, a round trip in Asia and I will say that I was having some positive feedback from the shipyards, especially in Korea and China, the order-- the contracting has picked up quite much actually compared to 2017, especially within the container and LNG market, but also some on the bulk side. So it's not going to be a hockey stick, but at least the contracting is picking up in some of these segments. In addition to that, the subsea area, where we have the marine robotics, and also the fishery side, both on the commercial fishery, but also on some aquaculture project, the subsea sonars, we see the stable positive trend in the market. So all in all, we see still some slow areas in the volume market, but there are signals at least out there that the shipyards are eager to make contracts. So we hope to see that this will continue going forward. On the Kongsberg Defence & Aerospace, we already mentioned that there is some impact on the lower activities on the missile side and also on the air defense. This is temporary. We know our backlog now and we know that these activities will pick up. We have signed orders for F-35 parts recently and there is good activities in the F-35 program on the parts there. And also, in January, we announced -- or not we, but Patria announced the contract for the Hamina Class, a significant contract for Patria, which they are now executing on. Already mentioned, the Malaysia contract, that was also an important contract for us to finalize. Now these activities are starting and we are going to start delivering on that program going forward. The MoU with Qatar, as I say, that is a great potential for us. So if we look at this -- this is divided in 2 actually. It's -- we have signed an agreement with Qatar and with Barzan to further explore the opportunities, not only within defense, but also within the maritime industry and also on the digitalization. I think in the little further down the road, we will see some opportunities in these areas. But the first part now is related to [ analgesia ], the armored vehicle program, which we announced in March. This is a great potential for Kongsberg, but also for our sub-suppliers. We're talking about 170-ish sub-suppliers. We are talking about 15,000 man years when and if we conclude this program. Of course, we are now in negotiation to finalize the scope and agree on the terms and conditions. Hopefully, we will see some conclusion of this within this year. At least, it's a huge potential for Kongsberg. Very brief on the other areas. Kongsberg Digital, Patria and space. We have said earlier also that we are increasing our activities in the development on new digital solutions, especially on the digital platform, the Kognifai platform, but also on the digital twin area. And we have further increased the activities on these areas this quarter. There has been some reduced simulation activities, naturally due to the offshore downturn and we also then, I would say, see the willingness to invest in training stimulators for these segments has been impacted. On the Patria, we have some increased revenue in the third quarter compared to last quarter -- not the last, but the first quarter in 2017. And also on the EBITDA, we see a slightly improvement. We have, however, a slow or challenging start of the land business in Patria. Unfortunately, we lost the land 400 in Australia to the competitor. That was not very -- we were not very happy about that. So this is something that we are addressing now. We need to have further focus on the land business area in Patria. If you look at the other division in Patria, they're delivering as expected, and we see positive signs within these areas, especially on the maintenance side, which is 70% of that business. On the space side, a solid quarter for Kongsberg Satellite Services. A 26% increase in the EBITDA, and we are continuously investing and building the infrastructure. We have now 18 new antennas, and very soon, we will have a new ground station in Greenland coming into operation in just a few weeks and also in New Zealand very soon. So a mixed picture, as you can see, both in KDI and Patria, but Kongsberg satellites continue to deliver a very solid results. So to summarize, the outlook, and Gyrid already mentioned, despite some challenges in Q1 and we also expect some margin at the lower level in Q2, we will remain on our future guidance for the whole year. We still believe that the action that we implemented in 2017 and continue working on will impact overall profitability and we'll see a slight improvement going into 2019. We expect stabilized revenue on Kongsberg Maritime and a slight improvement also on the profitability in Kongsberg Maritime. KDA, I'm still very confident in Kongsberg Defence & Aerospace. We are in good positions for the programs that we have been working on for a long time. Very difficult to predict when things are concluded, but still very confident in these opportunities. Kongsberg Digital, we will continue investing in these new digital solutions, and especially, increasing now also on the digital twin area. And that goes both for the maritime, the oil and gas area and also the utility area. So all in all, we remain with our guidance as we did last quarter, I'm confident that Kongsberg will have a better improvement or an improvement in the all in all for the margin going out of the year. So we will see. And then I think I open for some Q&A and then ask Gyrid to join me.

[Christopher Møllerløkken, Research Analyst]

Christopher from Carnegie. Just a very quick bookkeeping question. You did mention you had some restructuring costs in the first quarter. Could you quantify them, please?

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

If you look at the lower EBITDA for this quarter, it's NOK 53 million. Half of it, it's the restructuring combined with the margin in KM and the other half is the volume reduction in the KDA. So 50-50.

[Geir Haoy]

No, and the other half of it is KDA and the simulation, together with the lower revenue at...

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

Not together with the lower margin in Kongsberg Maritime. Those 2 together is 50% and the other 50% is the volume reduction in KDA, the defense area.

[Geir Haoy]

KDA, yes.

[Christopher Møllerløkken, Research Analyst]

KDA.

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

If you have NOK 53 million in total in lower EBITDA for the first quarter, half of it is the restructuring in KDA combined with the lower margin in KM, and the other half is the volume reduction in the defense area. We don't go out with the exact number of the KDA, to be specific on that...

[Christopher Møllerløkken, Research Analyst]

Yes. At least you managed to make it slightly complicated for me. You have succeeded there.

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

It was the hard way to say that I want to give you the exact number of KDA.

[Christopher Møllerløkken, Research Analyst]

And then, for Kongsberg Maritime, you did expect fairly low or stable margins also in the second quarter. But would you expect further restructuring charges this year?

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

No. We don't have any plans for that.

[Christopher Møllerløkken, Research Analyst]

So the Q2 guidance is mainly the project mix?

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

Exactly.

[Hans-Erik Jacobsen]

Hans-Erik Jacobsen, Nordea. We're getting closer to the sales start of the JSM, but still probably a couple of years away, but still could you see some interest in that product from potential clients? Any developments that you could make us aware of?

[Geir Haoy]

Yes.

[Hans-Erik Jacobsen]

Good.

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

More confident.

[Eivind Sars Veddeng, Analyst]

Eivind Veddeng, DNB markets. Is it possible to get the EBITDA split between old Protech and the old defense? What was driving the softness and how do you see this for the rest of 2018? And maybe on a higher level, Raytheon talks about an MoU with Qatar for NASAMS. Is it possible for you to add some color on this?

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

If you take the higher questions on the NASAMS, I can take the margin afterwards.

[Geir Haoy]

Yes. Well, we are working on several programs with Raytheon and I cannot comment on any specific program. And yes, we have noticed that they have signed an MoU on the air defense, but I cannot comment on any specific programs.

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

And on the margins, you are all aware that we merged 2 divisions last year in the defense sector. And for analysts purposes, we will help you out with that so in the IR afterwards.

[Haakon Amundsen, Lead Analyst]

Haakon Amundsen from ABG. Just to be clear on the Maritime margin guidance, you're expecting improved profitability on '18. I think, you reported 7.9% in '17, but that included some restructuring. So I believe you were at double digits underlying. So do you refer to the reported or to the underlying margins when you say you will have improved profitability in '18?

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

No, if you take out the restructuring cost in KM for the last year, you are at 9.1%. So when we now have 7.5% for this quarter, we believe that we will -- we guide for double-digit in KM, and we will still do that for the whole 2018. But we see now that we have a lower quarter due to the product mix of solutions in the first quarter, we believe that, that will continue in the first half year. But then, we also see that for the second half of 2018, we normally have a lot more working days. So we feel like historically, at Kongsberg Maritime, we always have a better second half than the first half. So double-digit for the whole year.

[Geir Haoy]

Okay. Then we have to meet him outside to clarify the KDA and KDI. Okay. Thank you very much. Appreciate it.