Kongsberg Gruppen ASA

OSE:KOG

Earnings Call Transcript 2019-Q2

[Geir Haoy, President & CEO]

Okay. Good morning. Very pleased to see so many of you joining us this morning. Welcome to the second quarter and the first half year investor presentation for Kongsberg Group. As some of you might have already noticed, I'm quite pleased with the quarterly performance of the group. We delivered good results across the board. The integration work linked to AIM Norway and Rolls-Royce Commercial Marine has been very high on our agenda in the quarter, and we continue to work intensively on the integration. We will, of course, extend further on this as we go through the presentation.Before I go ahead with the presentation, I would like to say a few words about the external trends that we are facing. We see trade wars. We see increased protectionism. We see some world leaders conduct politics through Twitter. We -- the British are continuing tackling the Brexit. We have the climate crisis. And then we must also master the green shift. And I'd just like to reassure you that at KONGSBERG, we are not working in isolation. We are -- we relate to the world community around us. I think these situations create increased uncertainties, and we see more increased uncertainties, and we see less investment willingness. And given the trends and the circumstances around us, there is greater unpredictability in the geo-political landscape and also in the international economy. We don't know the landscape in the future, but what we do know is that KONGSBERG, we are agile, and we are well-equipped to maneuver through these unpredictable and uncertain times. And I can again assure our stakeholders that we will stay alert, and we will adapt when needed well in advance to protect our stakeholders' interest.So if we go into the quarter. As I started saying, I'm quite satisfied with the first -- second quarter. We have closed the Rolls-Royce Commercial Marine acquisition. We also closed the AIM Norway acquisition. These 2 are important strategic moves from KONGSBERG and also significant in size. We had a very good order intake in the defense area. I'm sure you have noticed the air defense in Australia, which we have been talking about for many quarters and many years. This is now closed. And we have also got extension contract on the composite production for the F-35 program. So the backlog has been strengthened through the second quarter and also continue to do that in the beginning of the third quarter.Maritime. I would say I'm also very pleased with the order intake there despite that we see that, in general, the market is very challenging out there. And then I'm not only talking about the offshore market, but I'm talking about the general shipping market. And the integration of the Commercial Marine is going as planned. We are really working hard on that area.On digital, I'm also happy to see that we continue to build backlog, and we continue to grow also on the revenues. We have a year-on-year improved profitability. And when we look at the backlog, we have now approximately NOK 1 billion in external orders on the digital side. I'll come back to also that further. And then as usual, I have Gyrid Ingerø Skalleberg which will take us through the finance situation and status for the second quarter and the first half year.

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Thank you, Geir, and good morning, everybody. It feels good to finally release some more figures on the Rolls-Royce Commercial Marine with you. And I just have to join Geir in that we are very satisfied with this quarter and also the development, as I will show you in a few seconds. First of all, IFRS 16 affected this quarter by an EBITDA up with NOK 109 million. And for the rest of the presentation, I will continue without IFRS 16 effects, so we are able to calculate with similar figures for last year. So from 2020, we will start to implement that also in the presentation because then you will have equal figures -- or comparable figures.First of all, first half year. KONGSBERG has delivered top line of almost NOK 10 billion for the first half year in 2019. That's up 40% from last year. And if you take out the NOK 2 billion from Commercial Marine, we have delivered a growth of 11%. So growth is definitely back, I will come back to that, but I can also give you comfort that KONGSBERG will grow in the future. NOK 708 million on the EBITDA, up from NOK 527 million last year, with a margin of 7.2%, only down by 0.2% even if we have accounted NOK 2 billion in revenue from Commercial Marine with 0 margin at all. So not that much affected on the top from Commercial Marine.New orders first half year of NOK 13.4 billion. And if you add on the NASAMS Qatar contract that we got 2nd of July, KONGSBERG have NOK 20 billion in new orders this first 6 months of the year. And that's pretty good when you have a revenue last year of 14 point -- NOK 14.5 billion. So this is definitely a good starting point for growth in the future.And we said last quarter that we will define integration costs and restructuring costs as special items. So this quarter, we have spent NOK 54 million on integration costs and NOK 31 million in restructuring costs. We'll come back to the schedule with the integration costs later. And Lisa will also give some details on what we have been spending the restructuring costs on. So if you look here, you can see that NOK 371 million in EBITDA with a margin of 5.9%. And if you take out the restructuring costs, we have EBITDA of NOK 456 million with 7.3% EBITDA margin. That's up from NOK 6.8 million last year so definitely developing in the right direction. Last rolling 12 months, you can definitely see here that we have the growth on the top line. Even if we have NOK 2 billion from Commercial Marine on the top, we also grow organically by 11% the first half year, which give us upside also in the second quarter but also going forward. If we look at the margin, still even with NOK 2 billion with 0 margin from Rolls-Royce Marine. We have more than 10% rolling EBITDA margin. If we take out integration cost, it is only 1% down. The defense part, still developing with very healthy margin. And if you look at the Kongsberg Maritime, they have isolated 2.9% EBITDA margin this quarter but, again, 6.5% rolling even if we have accounted for Commercial Marine in 1 quarter in 2019. I will come back with some more details on that one.Revenues, look at this one. Last quarter last year, NOK 3.5 billion, up 20% organic growth to NOK 4.2 billion this year. And if you add on Commercial Marine, we are growing on top line by 77%. All the business areas are growing. The defense area, we're now starting to book revenue on all the contracts orders that we got last year. Typically, NASAMS for Indonesia, missiles from Malaysia and also all the new orders on F-35, so 27% revenue growth organically in the defense side. Then if you look at the old Kongsberg Maritime, up by 14.8%. And if you look isolated on the first half year of Kongsberg Maritime, they also grow by 15% compared to last year. So it's really good signs in terms of growing. Commercial Marine, it's on par compared to last year. But on top of that, Kongsberg Digital is growing by 40%. So all the business areas in KONGSBERG are growing at the moment. EBITDA. I said NOK 371 million in EBITDA with a margin on 5.9%. 2/3 of that is from the defense side, and 1/3 is approximately from the maritime side. If you look at the EBITDA margin, 5.9%, down from 6.8% last quarter. But then again, underlying if we take out the restructuring cost, we're up to 7.3%. If you look at Kongsberg Maritime, which everybody's looking at, at the moment because of the acquisition, you see we have underlying EBITDA margin of 8.5%. That's up from 6% last year, so it's definitely moving in the right direction. I'm also very happy to announce that underlying Commercial Marine is delivering positive EBITDA of NOK 22 million. And of course, if we add on the integration and restructuring costs, we have minus NOK 63 million, and that will continue. We will continue to deliver positive underlying results for Commercial Marine from now on, but we will, of course, still be spending a lot of integration and some restructuring costs. Restructuring costs will come with action plans on more cost reductions, but the integration costs will be as planned, as I will show you later. But definitely a real milestone for KONGSBERG.Some of you also have seen the Norwegian part that was also released, and there were also some comments in the newspaper yesterday that the Norwegian part of Commercial Marine that we acquired have lost NOK 900 million last year in 2018. And of course, we have also acquired a lot of other entities and a lot of other assets that are gaining profit, so NOK 22 million positive is for the whole of it. There we are. Status integration. We have said that we will spend NOK 450 million on integration on Commercial Marine. And it's extremely detailed integration plan, so that's why we can be that accurate also on the integration cost. As you can see, we have actual year-to-date spent NOK 133 million. And for 2019, we will keep on to say that we will spend approximately NOK 240 million on integration. And because we can be that accurate is of course because we have very detailed plans on it, meaning that we will spend approximately NOK 107 million more of -- the rest for the rest of 2019, having approximately NOK 100 million to 2020 to do the last action plans in the -- actions in the integration plan. What we actually have spent those money on is, of course, IT infrastructure, that has been the largest part of it; branding, and branding is not only signs, it's all those small details that you have on clothes, you have it on everything, as you know, and that will keep on going; legal, we have now 16 new entities into our system from Commercial Marine, so we have a plan for legal entities how to utilize that in a more efficient way, and also tax planning is still ongoing; harmonization and streamlining, Lisa will come back with more details on that; but also, of course, the organization design, that has been a huge job during the last year since we announced the acquisition in July last year.New orders. Look at this one. NOK 5.2 billion or NOK 5.3 billion in new orders last year, up with 33% to the -- from the older KONGSBERG to almost NOK 7 billion. And then when you put the Commercial Marine on top, we have NOK 9.6 billion in new orders this quarter. More interesting is the order backlog. Coming out of first quarter, we had NOK 7.3 billion in order backlog with a book-to-bill of 1.07. Now entering out of the second quarter, we have NOK 27.7 billion in order backlog with a book-to-bill isolated for the second quarter for 1.54. But year-to-date our book-to-bill on 1.4., that's amazing. So it's more than double the revenue from 2018 in the order backlog at the moment. If you then add on the order that we got from NASAMS Qatar, 2nd of July, we have more than NOK 33 billion in order backlog for the first half year for 2019. And every -- all the areas, both the maritime part, the defense part and also digital part, as Geir said, the digital part has now NOK 1 billion in external orders in order backlog. All the business areas are growing. And this is the reason why we are so confident that KONGSBERG will grow in the future.New orders in Kongsberg Maritime. As I said last quarter, we have divided into 3 different divisions. Now we have added on the Propulsion & Engines and the Systems & Deck Machinery, meaning that this will be the split that we will provide you with new orders in the future. As you can see, that's probably most of the most interesting KPIs to follow is the global customer support, which is 33% of the orders this quarter. Global customer support has higher margin than the rest of the order intake in the company.Included in Sensors & Robotics, we also have the aftermarket. That's not included in global customer support. So if you move the aftermarket from Sensors & Robotics, 40% of the new orders this quarter in -- is from global customer support and the aftermarket with very healthy margin. Even more interesting is that 60% of the revenue in Commercial Marine now comes from the aftermarket. When we started to look at the company 1.5 years ago, only 47% of the revenue was from the aftermarket, so this is a quite healthy development in terms of which kind of revenue we actually now see from Commercial Marine.Looking at new orders in Kongsberg Defence & Aerospace, you can see this is the second quarter, and this is the first half. But looking at the second quarter is 2 main orders, that's our dominant. It's the new order of NOK 2 billion on F-35 equipment that we are producing for the Lockheed Martin and also the NASAMS Australia that came in at the end of April this year, which is really important orders for us going forward. Both of them will be.Still very healthy balance sheet. And if you look hindsight, you see that a lot of the large defense orders that we have gained over the last 12 months, this has been important to have confidence and shows that we really have a healthy balance sheet. Gross interest-bearing debt, no changes on that one. And as you can see for the cash position, we have now paid for the acquired company. And in terms of AIM, we have also closed that transaction this quarter. I will come back to that on next slide. Equity ratio, still quite healthy on 36%; and the return on capital employed for this quarter, on 11%.So if you look at the cash development this quarter, we see that we have an EBITDA of NOK 479 million, but we have a decrease in the working capital. And that's -- the reason for that is the large defense contract where we not have received the prepayment yet, and then we had to spend some working capital to start the production on those contracts.If you look at acquisitions here, which is the largest one, a bit more than NOK 5 billion, NOK 5.059 billion. We actually paid for Commercial Marine. But then we acquired AIM also, which had a net positive cash position. So that's why it's NOK 4.850 billion here. Other investing activities is dividend from associated companies. And then you can see we also have paid out dividend this quarter. It was paid out in May this year.So this is just to show you that we still have the same position on the bonds and a very healthy maturity profile. No changes in that from the last quarter. But then more interesting to hear more about Commercial Marine and the business areas. Thank you.

[Geir Haoy, President & CEO]

Thank you, Gyrid. Yes. Then some business update on the Kongsberg Defence & Aerospace. I think you all have now seen that the revenues has increased in all the business -- or all the divisions except for Protech Systems. And the main reason to that was that in last year, we had a heavy delivery on the medium caliber for the Stryker program in U.S. And Gyrid also mentioned that we are now project -- speeding up the project deliveries for the new contracts signed last year, the missile contracts and also the air defense contract. Kongsberg Defence & Aerospace are -- these are long programs, and they have extremely high focus on the project delivery. That's incredible, important for this project going for that long period. So solid project execution is definitely high attention too.Gyrid already mentioned the order intake and also that we have a record-high order backlog both for the quarter and the first half year but also this continue with the NASAMS contract on the air defense in Qatar. So I think we would -- we see now that we have a very solid foundation for a long period, and the baseline is lifted that we can be quite confident on the growth going forward.We closed the Kongsberg Aviation Maintenance Services that is previous AIM Norway that was closed 29th of May. And this is the maintenance, repair and operational support to the air forces for the fighters and helicopters. At the same time, we also then sold 49.9% to Patria. This was a natural step for us as we did the acquisition of Patria was to get a solid position in Norway and in Europe on the maintenance and repair and operational support. I think also very important strategic agreement that we signed in July -- in beginning of July with the national defense logistics operations. This is an important contract for us that says some about what we are looking at for the future as a corporation partner to the Norwegian Air Force -- Norwegian forces. So I think also we can say that integration work with AIM is going as planned. We see a lot of enthusiasm in that business area, and I'm looking forward to follow this towards the end of the year.It has been mentioned several times that the F-35 composite production for us is a great potential. So far, we have now booked NOK 5.7 billion. We have delivered 500 ship sets from our factory. And with the latest orders on the composite production, we now have booked orders for 1,000 ship set. And here you see the program -- current program of record, which is the source is Lockheed Martin. And also, as we informed last quarter, that Japan has placed first initial delivery contract for the JSM. And also I think last week, Japan also announced that they increased their number of air fighters from 102 to 147 -- or 105 to 147. This is -- this potential is, of course, you have the JSM potential comes in addition to this.For the Kongsberg Maritime, it's a strong quarter considering the market in general. The Sensors & Robotics is delivering very -- continuously delivering very strong. We see that the revenue is growing also due to the strong order intake in past year. AUV and fishery is continue delivering strong order intake, and the Q2 order intake was close to NOK 1.3 billion. I also like to mention that in June, we signed the first AUV new HUGIN contract, the HUGIN Superior. This is a vehicle which goes down to 6,000 meters with enhanced capability of collecting data, and I think it's close to 30% increased endurance for this vehicle. So this is well received in the market, and we signed the first contract in June. The global aftermarket is important for Kongsberg Maritime. Lisa -- Gyrid mentioned that for CM, it's 60% of the revenues in this quarter. And it's also important for KONGSBERG -- earlier Kongsberg Maritime. And with the combined CM and Kongsberg Maritime, we see a high potential to address the 30,000 vessels which we have already delivered equipment to. And then we -- of course, we need to harmonize the product and the systems so that we can deliver competitive solutions for the aftermarket going forward. That is a strong focus for the teams as they continue.I would like to mention the LNG and OPU. That was also strong in last quarter and last year. This has continued to be a driver. LNG is very positive. We also signed a second semi-sub for Awilco, and this is now a joint package from previous Rolls-Royce Commercial Marine and Kongsberg Maritime, so a very significant order for us.And then Propulsion & Engines had a record-high order intake in Q2 with NOK 1 billion in order and very much due to the Awilco project but also -- and that comes later. But that was very important for us to get that order intake in Q2.If you look at this, this is the previous Kongsberg Maritime. And the reason why I have not included Commercial Marine here is that they are currently categorizing their orders differently than Kongsberg Maritime, so it was very difficult to put it in here without confusing all of you a lot. So we are working on that. But this is how it looks if you compare Kongsberg Maritime -- earlier Kongsberg Maritime from H1 2018 to H1 2019. And we have an increase of NOK 1 billion if you compare year-on-year. I mentioned that the OPU is -- OPU/LNG is continue -- continues important for us. What we can see here is that the Seaborne and Pax is lagging behind on the newbuild contracts. And subsea is continue to be a strong area for us, and that is marine robotics. And this is one of the reason why we had NOK 1 billion in order intake for Propulsion & Engines. We have not been allowed to announce this earlier, but I'm quite sure a lot of you already know this project. This is the Coast Guard -- new Coast Guard vessels for Norway. We have a significant delivery to these vessels. And this was the single-biggest contract for Kongsberg Maritime this quarter of NOK 280 million. These vessels will be produced at Vard Langsten, and 80% of what we are going to deliver to these projects is manufactured in Norway. There is some coming from Sweden and some coming from Poland. But these are, of course, important contracts for KONGSBERG and also looking into the future when it comes to new technology.Gyrid mentioned that KDI is continue growing on the top line, and they are continue deliver improved profitability. The book-to-bill in Q2 was 1.1, and for the first half year is 1.1 as well. I'm very pleased to see that. Furthermore, we continue to invest heavily in KDI, and we continue to see increased interest in the new digital offerings. And I'm confident that we will see -- in the coming quarters, we will see some important breakthroughs for Kongsberg Digital.Patria. The Q2 revenues increased compared to last year, up from EUR 116 million to EUR 134 million. And this is due mainly to the MRO business in -- within Millog. And this is 70% of the Patria business today. We continue -- I talked about it last quarter as well. We continue to make focus on capture teams to position ourselves to capture contract particularly for the land business. These are extremely important, and the administration and also the team from KDI is really putting a lot of efforts now to secure orders on the land business. I mentioned that they acquired the 49.9% of the AIM. This is important for the MRO business of Patria. And they also acquired 100% of the BEC, the Belgium Engine Center, in Belgium which have maintenance on the F-16 engines. So looking at the figures, the net profit was NOK 5 billion -- NOK 5 million. I wish it was NOK 5 billion -- compared to NOK 2 million in 2018. Then I would like to invite Lisa. She was also here last quarter. She will give us some more updates on the status of the integration.

[Lisa Edvardsen Haugan, Executive Vice President of Finance]

And I will start with recapping what we presented last quarter. What I said was that we were going to deliver savings of NOK 200 million in 2019; and by 2022, we are going to deliver NOK 500 million. These savings are divided into 3 main categories: it's footprint and delivery streamlining with NOK 225 million; it's SG&A savings and synergies with NOK 225 million; and it's product portfolio optimization with NOK 50 million. And we are on track. We have delivered NOK 87 million of savings in the first half year, which is contributing to the positive Q2 result of NOK 22 million in the underlying result for CM, which is very positive. And I -- it also gives me increased comfort that we are going to be delivering on the NOK 200 million, as we had promised. And also for the headcount reductions, which we announced for 260 FTEs, we have by mid-August reduced the head count with 180, and we are delivering according to the schedule. These reductions are equally distributed between Nordics and the international operations. And you will see the P&L effects of this realization in -- by end of Q4.And of course, reducing the loss within Systems & Deck Machinery and ships design is a key priority. And we will continue to look into how we can rightsize the organization to fit the market outlook as we are seeing it. And of course, we will do other measures as well. We have already plans and started establishing the Brattvåg Innovation Park. And the plans for exiting Vung Tau, the manufacturing site in Vietnam, is still going according to plan.So how does this savings of NOK 87 million distribute between the 3 categories? For footprint and delivery streamlining, we are delivering NOK 18 million for the first half year, and we have now co-located 12 sites. Last quarter, it was 6. And the plan is still to co-locate 20 sites, and we are sticking to that. For SG&A savings and synergies, we are delivering NOK 59 million by the first half year. And then most of that comes in with having a leaner support functions but also savings within sales and marketing. And as you all know, KONGSBERG had been investing significant amounts into digital marine solutions, and we aim to take on #1 position within that market, and so was the goal for Commercial Marine. And by merging those 2 companies together, we will get more for less. And already by first half year, we have a saving of NOK 10 million within this product optimization. So NOK 87 million by first half year and comfort around the target of NOK 200 million by the end of the year. Geir?

[Geir Haoy, President & CEO]

Thank you, Lisa. So as I started saying, it's a high focus on the integration and work with harmonizing CM and Kongsberg -- earlier Kongsberg Maritime. And I'm pleased with the performance. It's a good start. It's important to underline that there's still a lot of work to do in that area.To remind you about the Capital Market Day which we're going to have here -- not here but at the Felix Conference Center at the 24th of September, start at 12 and should be finished around 15:30. So I hope you all will join us there. We will give some updates on the strategy and business update. And then also we will share with you some financial targets.Looking at the outlook. Kongsberg Maritime continue to increase the backlog. And in particular, I think the focus and importance of the aftermarket will be important. We see it already in Commercial Marine, and we see it -- have seen it also in earlier KM. I think that the newbuild market will continue to be challenging, but we see some increase in the aftermarket activities, so this will definitely be a market that we will have focus on going forward and to make more cost-effective solutions together with our new product portfolio. We will have some impact on the profitability. As we have said, there will be some integration costs and some restructuring costs.KDA has confirmed their solid position. I think with the backlog and with the opportunities that we also see lay ahead of us, I'm very confident that we will see growth in the defense area going forward. With a backlog of NOK 19 billion and as Gyrid also mentioned that for the group overall, we have now NOK 33 billion in backlog. KDI, we have a solid backlog. We continue to build backlog. We are continuing to invest in KDI within our niches in the digital area. And I would mention that this is not only comes with digital, but it has very close connection with Kongsberg Maritime to take the digital position in the maritime area. And we have installed base of 30,000 vessels, which is relevant for us to address out there. So the launching of the Vessel Insight was important for us, and it has been well-received in the market. And I'm really excited about the opportunities that we're going to see going forward for KDI and KM. So we will continue to develop, put efforts into the development both on the digital twin and digital platform and also applications and Vessel Insight systems.So by that, I will open up for some questions and if Gyrid and maybe Lisa would like to join as well or -- we should move over here. Yes?

[Haakon Amundsen, Lead Analyst]

Haakon Amundsen from ABG. Just a question on the integration process to whoever wants to reply. I believe the initial expectation was for an underlying EBITDA to become positive maybe later in '19 or early 2020. Now it's already in Q2, but still you say that the integration is going according to plan, so I'm just wondering what is going better than planned. Or how should we think about this given that we say it's going to be positive EBITDA for the rest of the year as well? And it looks like it's going better than expected.

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Yes. I can start answering, and you can continue. If you look at the underlying business, you can see that it's more healthy business in total and that we also see that we had a really detailed plan from the start. So when we started on the 1st of April, we started to stop the leakage. And as Lisa had mentioned, we had already taken out the 180 FTEs, we have closed down 12 sites, and all of that has already started to gain profit. We also saw that Commercial Marine probably took a lot of action plans before we took it over. They also have a lot of overhead costs that we don't need today. You have a lot of IT systems, you have a huge overhead in the U.K., things like that, that we are running now from KONGSBERG operation that we don't need anymore, so that's some areas where we definitely see better profitability. And also as I said, 60% of the revenue is from the aftermarket, which has much better margin than the other parts like the offshore part that Rolls-Royce had a lot of before we acquired them. Maybe some more comments, if you have.

[Geir Haoy, President & CEO]

So I think you mentioned it. I think it's -- when you say that we're going to deliver positive underlying results, I think it's -- of course, we are depending on the market. So that what I started to say is that the environment around us will also ultimately impact KONGSBERG. But I think that what we see in general is that there is more -- slightly more activities out there, and that is definitely good for the businesses in Kongsberg Maritime. And then I also think that the plans that we made initially before we took over the CM, we see that we have -- I will not say that we are ahead of the plan, but it has gone as planned. Then of course, you can be a little bit more confident that you will reach your targets, as Lisa has underlined today. And then of course, we also -- we will see some challenge going forward, of course, but there is plans to handle them, and I'm confident that we're going to do that.

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

We also used work like -- words like perfect fit. Those teams have been working together before. And third quarter last year, Egil Haugsdal, who's leading Kongsberg Maritime, was also on the stage, and he said we'll be more hands-on in everything.

[Geir Haoy, President & CEO]

He said actually, handsome.

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Handsome he said, yes. But I think that's typical to KONGSBERG DNA. You just adapt it, and you just take responsibility. And I think what they have done from the maritime side with the integration plan is that everybody has their action plans that they are to deliver on. That has been working quite well over the last years even if we only have owned it for 5 months.

[Haakon Amundsen, Lead Analyst]

Okay. And if -- you booked the contract in Qatar in July, could you give some color on the remaining opportunities you have there and the potential timing of those?

[Geir Haoy, President & CEO]

Yes. As we announced in March, there is a huge opportunity. If you are referring to Qatar, that is continue, ongoing, and I would say that it's processing as we expected. On the timing side, it's actually impossible to say. I think we said last time that we hope for '19, we expect maybe '20, but it's hard to say. What is giving me confidence is that we are in a very close contact with the customers. And also the other selected vendors are sitting in the same negotiations, so it's moving in the right direction.

[Eivind Sars Veddeng, Analyst]

Eivind Veddeng, DNB. Two questions, please. One, on the margin in defense, revenues have for the last 3 years, if you annualize '19, been fairly flat, but margins have continued to increase. Can you help me understand what's driving that? And that is excluding IFRS 16 and also excluding the JVs, so the underlying defense part. Second question is you have given us a lot of color on what's going on above EBITDA; but below, there's been a large increase in depreciation, amortization and also finance costs probably due to M&A. But can you give us some guidance for the rest of '19 and also touch upon how you will utilize the tax shield from the Commercial Marine acquisition?

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Yes. That was a lot of questions, and I think everybody wants to finish.

[Geir Haoy, President & CEO]

Up to the latest.

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Yes. If I start with the margins on the defense side, there have been some restructuring costs earlier on the defense side. So of course, no, when you has have a plane business going on with a lot of new orders that we start to deliver on, the margin are more healthy and will continue to be that. On the large defense -- air defense contracts, it's always like in the beginning, they are lower margin, and then you will increase the margin at the end of the contracts. So like for now, we have started to produce on the Lithuanian contract. And we also have quite stable margin on the F-35 deliveries that we have. So when those increase, the total part of -- the total, then we will have more stable and healthy margin on that one. Then you have the tax regime. Of course, as I said, a lot of the loss carryforward is from Norway, which means that we will be able to utilize that going forward. We'll come back with some more details in terms of the tax on the Capital Markets Day on the 24th of September. And then you had some question about the depreciation?

[Eivind Sars Veddeng, Analyst]

Yes.

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Of course, yes. On the depreciation, you will see that we have increased the depreciation in terms of the trademarks and also the technology for acquiring Rolls-Royce Marines with approximately NOK 68 million, and that will continue. We have depreciation profile on those for 7 to 10 years. There's quite a lot of technology that we had to put up in our balance sheet. Approximately together on the customer relationships and the technology is NOK 1.4 billion in total, which we will depreciate on a 7- to 10-years profile. Then you also see that NOK 89 million is increased, and that's because of IFRS 16, so it's not have any cash effect related to both over the EBITDA and below the EBITDA. In terms of property, the depreciation are increased by approximately NOK 49 million, and that we will look into now what we will do with those different properties. Some of them we will, of course, keep where we will keep the sites, and some of then we will probably sell them. But that's part of the ongoing integration project. Was that all?

[Eivind Sars Veddeng, Analyst]

Finance cost.

[Geir Haoy, President & CEO]

Finance cost.

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Finance cost, it's only due to -- what's that?

[Geir Haoy, President & CEO]

M&A.

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

M&A cost, yes. M&A cost during the last year.

[Eivind Sars Veddeng, Analyst]

So that's something we should extrapolate in Q2 going forward into taking that for '19?

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Yes, exactly.

[Geir Haoy, President & CEO]

Maybe just to add some comments to the margins in KDA, and I think it's -- we are working continuously to improve our project deliveries. And of course, the margins will fluctuate depending on what kind of contract we are at any time working on. But the project execution and in particular in the [indiscernible] where we produced composite parts to the F-35, it's a continuous work on cost-effective measures because we are, of course, challenged by the -- our customers to lower the costs. And then of course, it's important for us to continue to chase the margins. So I will say project execution continue working on effect -- as effective model as possible in the project deliveries and then on the mix of the projects.

[Hans-Erik Jacobsen]

Hans-Erik Jacobsen, Nordea. You mentioned in your introduction that you have a lot of headwinds not particularly for the KONGSBERG [ OPU ] but more in general from the environmental move, also the financial -- or not financial crisis but the trade wars. Is this impacting you at all, or do you see some areas where you are more afraid that this could impact you in the future?

[Geir Haoy, President & CEO]

I think my point was that this will impact all of us in the end. The impact today on the trade wars is not, I will say, significant. But of course, we see and I think you see a result of -- what we see, you have all these things, with the Brexit, with the trade wars, with the protectionism, we see that there is uncertainties out there. And I think things are happening from week to week due to Twitter -- certain Twitter messages, and it creates an atmosphere of unpredictability and uncertainties, and that is concerning me. Not that it directly will impact us, but I think we have to be aware of how long will this continue, how will it finally impact the whole trade situation. So I think it will be wrong to say that we are not impacted by it, at the end at least. So -- but I think it's, in general, something that all of us should be concerned about.

[Christopher Møllerløkken, Research Analyst]

It's Christopher Møllerløkken from Carnegie. Three questions. You have given guidance on the integration costs, but could you give guidance on the restructuring costs expected? Secondly, could you care to give rough indications of how much of the cash balance is prepayments from defense customers? And finally, with the accounting question but how much of the depreciation is cash costs related to leasing?

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Yes, I'll take the last one first. That's NOK 89 million. That's related to listing on the depreciation. And the prepayment of the cash now is NOK 1.8 billion. And the first question was...

[Christopher Møllerløkken, Research Analyst]

Any guidance on restructuring costs?

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Yes. We try to avoid restructuring costs. That's the easy answer there. So what we have said, that if we are using restructuring cost, then it will come with an action plan that actually will take down the cost in the future. So we haven't done any guidance on that because we are calculating that from case to case.

[Geir Haoy, President & CEO]

It depends on the business case and what we're going to do. And then of course, we will then give you the figures when we know it ourselves.

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Okay?

[Geir Haoy, President & CEO]

Okay. Thank you very much for joining us this morning. Have a continuous good day.