Kongsberg Gruppen ASA

OSE:KOG

Earnings Call Transcript 2018-Q3

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

Good morning, everyone, and welcome to the presentation of KONGSBERG's Third Quarter Results for 2018. Today, we will have a little extra for you, so to say. We have lined up, in addition to Geir Haoy, our President and CEO; and Gyrid Skalleberg Ingerø, our CFO; we have Hege Skryseth from Constant Digital, and Eirik Lie from Kongsberg Defence & Aerospace; and Egil Haugsdal from Kongsberg Maritime, that will give you a little extra on their business areas.So after -- first, we will take the regular quarterly presentation. Then we will have a free 4-minute break to -- so you could fill up your coffee cups and do your necessary. And then we will go on with the business areas.So with that, I'll leave the word to Geir Haoy.

[Geir Haoy, President & CEO]

Thank you, Jan Erik. Good morning, everyone. Good to see you. It's not been so long time since we saw you last time, only 7 weeks. It has been 7 very busy weeks for KONGSBERG, so we will take you through some of the highlights and some of the business updates through the quarter presentation. We will do it almost the same way as we always do. This time, we are, unfortunately, not able to give you any outlook, and that is due to the right issues, which is coming up early next month. So -- but we will, of course, also open for questions after the quarterly presentation, and then we will see if we can answer or not.It has been a busy quarter, exciting, as always, in KONGSBERG. First and foremost, I think it was -- we was very happy and pleased with that Parliament, unanimous, confirmed that they will follow up on their shares on the right issues, so that we was, of course, very pleased with that. And then maybe the second very, so to say, highlights which we are very pleased with is the order taken in Kongsberg Maritime and book-to-bill of 1.7, almost. Of course, that is very important for us. And I think we see now that the integrated solutions that we are taking -- that we are taking positions in that area. And then, of course, also that we now finally also concluded the CROWS follow-on contract or the frame agreement there. Has been a long journey to conclude that, but very important for us to get that concluded in September. And then we'll also get the first, so to say, contract on that frame contract, which was, I think, USD 74 billion -- USD 74 million. And this is also a frame contract. This then, of course, will continue for 5 years. And the total of just below USD 500 million.By that, I think I will leave the word, and Gyrid will take us through the finance update.

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Thank you. Okay. Let's start with the year-to-date. The trend with increasing orders is continuing. And if you look at the orders year-to-date, we now have new orders about 12.7 billion, with a backlog of orders on 17.6 billion. So the trend continues almost into the third quarter as well.The revenue has a temporary decline due to the air defense contract that we have back in 2014 with Raytheon. And with the new orders on their defense on Lithuania and Indonesia, we will start the revenue recognition on them from 2019.EBITDA margin of 8.5% year-to-date, in line with year-to-date last year but isolated for the third quarter. We have 11% EBITDA margin, up from 8.4% last year.So let looks -- let's look at the revenue. Declined by 3.8%, as I said, it's in line with the temporary decline in the air defense system and division. Looking at Kongsberg Maritime, only down by 0.9%., that's almost flat as this contribute for only NOK 17 million down. Also look at the Kongsberg Maritime this quarter, it contributes for 60% of the top line, so it's almost as it was in the old days.The EBITDA margin slowly picking up as KONGSBERG has been for 2 years into a rightsizing period: 6.6% EBITDA margin in 2016; 7.7% in 2017; 8.5% year-to-date; and now 11% in the third quarter 2018, up from 8.4% last year. You should also take into consideration that last year, we have 90% -- NOK 90 million in restructuring costs in the defense area. And in this quarter, we also have accounted for NOK 25 million in integration costs. Looking at Kongsberg Maritime, we had 60% of the top line. It's also contributes with 60% of the EBITDA. So it was a solid delivery on the EBITDA this quarter compared to last year.New orders. And this slide is what's makes me really proud because we're contributing more and more signing up, more and more orders. And into these figures, you will also see this quarter that we have NOK 280 million in new orders in Kongsberg Digital. That's a really milestone. Kongsberg Maritime, more than 3 million -- 3 billion in our new orders this quarter. It is a product mix there, and Geir will give some more comments on the different contracts this quarter. But you will also see that we have a book-to-bill for the whole group for 1.42, with a book-to-bill on Kongsberg Maritime for 1.68 and a book-to-bill for the defense part on 1.08. So it's a good position going forward, with the order backlog over 17 billion, 17.6 billion at the moment. You'll also see that even if Kongsberg Maritime has a really good order intake, also the defense part has a good order intake this quarter, with the new CROWS contract of USD 498 million. So all the divisions are contributing with good order intake on this quarter.We see that the orders are fluctuating a lot between the quarters, so we decided to give you information both on this quarter for new orders but also on year-to-date. And what you can see when it comes to defense part, you see the Protech System with the new contracts -- CROWS contract is dominant on this quarter. But year-to-date, you see the missiles with the 3 large contracts that we got on the second quarter with Malaysia, with Germany, and the test missile on [ JSM ] is the dominant year-to-date.In terms of the Maritime part, we have a lot of new orders in terms of the solutions, which will be detailed in a few minutes. But if you look at the whole year-to-date, you will see that all the divisions in Maritime are increasing their order backlog at the moment. So both subsea solutions vessel and the global customer support are increasing, with a better order backlog year-to-date.The balance sheet. If I should just pronounce it in one word, it will be strong. We enter into this year with NOK 3 billion at deposit and now ending up in the third quarter with also NOK 3 billion in deposits. And that's after paying out the dividend of approximately NOK 0.5 billion. We have a very good equity ratio. And the return on capital employed is still increasing, so 10.8% at the moment. The debt position, NOK 336 million, and then a very healthy maturity profile in terms of the bonds at the moment. So all in all, bring your attention to the orders and then the EBITDA slowly picking up. And as we have said before, the second quarter is a bit stronger normally than the first quarter.Then some more business details on the different contracts.

[Geir Haoy, President & CEO]

Thank you, Gyrid. Yes, so then maybe I continue with some more details on the business areas. As Jan Erik said in the beginning here, we will come back to a status update from the business areas, but that will be more on a general line. So we mentioned a good order intake. Of course, this is very important for us. We are taking positions in the integrated system area. I think that is confirmed by these major contracts that we concluded in third quarter with Awilco, Grimaldi and also the Offshore Heavy Transport. And this is comprehensive solutions from Kongsberg Maritime. And this is also order that is coming longer out in the period. So this is solid orders for us and important orders for us. In addition to that, we see also that marine robotics and also the fisheries continue to deliver on their order intakes. We also see that on the merchant side, on the bulk side, the LNG side and also the tanker container is also picking up contracting in -- particularly in China and Korea. We have talked about it earlier quarters also on the utilization. What we see is that the activities in the aftermarket is picking up. That is very important for us, the aftermarket, to continue to support our customer out there. And you see also slightly some more activities even in the offshore side. So all in all, a solid quarter, I think, for Kongsberg Maritime. And as Gyrid mentioned, we will still see -- we see variations between the quarters and especially on the order intake. It depends on what kind of product and contract mix we will get in the quarters.Kongsberg Defence & Aerospace, still very solid margins. And as I started saying, very important for us to conclude the CROWS follow-on contract. It has been a long journey, and we are very pleased with that. And it confirms our solid and leading positions in the RWS market, I would say. We have now delivered 12,500 RWS to U.S. And if you include the Stryker -- first Stryker program, we have delivered more than approximately 15,000.And I think when it comes to the Qatar opportunities that we have also talked about earlier, both on the air defense and also on the -- what it is called?

[Eirik Lie]

Vehicle program.

[Geir Haoy, President & CEO]

Vehicle program. Thank you, Eirik. The ongoing negotiations is going as planned. And we said last quarter that we expect the air defense to be concluded late 2018 and/or 2019. And also for the air defense, we expect hopefully that we can close that contract within first half of 2019. And I think Eirik will come back to that as well.If we look at the KDI. Kongsberg Digital, we are still working very hard to develop new digital solutions and particular then in the platform side but also on the Digital Twin side. And Hege will take us through that in a moment. We are also then very pleased with the order intake for KDI in this third quarter and, in particular, for the simulation side. We mentioned that in first and second quarter that it was lagging behind on the order intake for simulation. That has improved. And particularly, the Singapore simulation contract was important for us. But also, that we see there is more what we call bread-and-butter contract on the simulation is also coming in. So all in all, a solid quarter on the order intake in simulation.Patria is having an increase on the top line of almost 7% compared to Q3 in 2017. We still though see lack of orders in the land business, and that has also an impact of the -- on the bottom line. If we look at the other business areas in Patria, they are delivering as expected, both on the maintenance side and also on the systems side. So for Patria, all in all, are delivering as we expected. But of course, we are now increasing the focus on concluding contracts in the land business. That is important part of Patria as a group.By that, that was a very quick third quarter presentation. But we will come back to more details in the business areas. We can open up for some questions now for Gyrid and myself.

[Geir Haoy, President & CEO]

So then we will continue with some brief update from each of the business areas. We will start with Hege Skryseth. She will give us some updates on Kongsberg Digital, and Hege will actually focus very much on the Digital Twin opportunities. And then Eirik will continue on Kongsberg Defence & Aerospace and give us some highlights there on the -- and possibilities, opportunities in the defense area. And then we will end up with Egil on Kongsberg Maritime, which then take us through the situation in Kongsberg Maritime. And then when we have concluded these 3 business areas' presentations, then we will be available for Q&A after that, all of us. So Hege, floor is yours.

[Hege Skryseth, Executive VP & President of Kongsberg Digital]

Thank you, and good morning, everyone. Since we are not reporting numbers specifically on KDI, I'm going to present one of the key concepts that we are working on and give you some insight in how these potentially can transform the oil and gas industry and also other industries. So -- but just firstly, this is Kongsberg Digital at a glance. It's focusing on digital solutions towards the oil and gas industry, renewables and utilities. In both of the 2 first ones, we are focusing on Digital Twins. It's also, of course, maritime simulation. And as you heard, it was a very good quarter for them. It was not only the Singapore police contract, but we also signed a significant other contract that we are not able to announce. And then it's, of course, the maritime ecosystem with the digitalization and applications in that space, and the digital platform is the foundation for building all of these digital services.So Digital Twin, what is a Digital Twin? It is basically a virtual representation of physical assets or a process. And it actually gives you the advantage of being able to have visibility throughout everything that happens and also give you the ability to have insight across multiple disciplines and also across value chains because you are basically presenting information across multiple surfaces and displays, and I'm going to show you that. The other part is, of course, that you can also predict downturns in advance. You can predict faults in the system in advance. And you can have predictive measurements when it comes to make sure that you are not having downturns or any issues throughout your system.The other part is basically that you can optimize your structure. So that could be a production optimalization, but it could also be optimalization when it comes to reducing maintenance costs and others. So those are sort of the key advantages.So our focus in this area is what we called physics and data-driven, high-fidelity Digital Twins, which is a bit of a complex word. But basically, what we are doing is that we are having the real-time data flowing into the system. And we are structuring those data to ensure that these are able to reduce and monitor the whole system in real time. And then we are adding our simulators into the structure, so -- and our simulators is at the Stage 8. We are talking about K-Spice and LedaFlow. For those of you that are familiar with our products, they are at the performance level of sort of 98%-plus. So what they are doing is sort of replicating the whole system in real time with the real-time data flows. And why is that important? It's important because it enables the operator or whomever is looking into the data to actually do simulations based on different measurements that they want to adopt into the system. And they can see in advance how this is affecting the system. So just to give you some easier examples on that, that could be production optimalization. So what happens -- and we do see deviations in between various shifts on different platforms on the oil and gas side. So what happens if I try to increase my production with some 3,000, 5,000 barrels a day, how is that affecting the whole structure. That's one example of how you can work across this physics-based models and also the real-time models. And what we see also on the maintenance side is an opportunity to predict maintenance needs some 10 to 12 months ahead of them occurring. And of course, it's significant when it comes to reducing downtime in the structure, but it's also to make the whole value chain even more effective when it comes to also supply chain. And this we call the hybrid analytics part, and that's basically everyone has probably heard about advanced analytics at this stage. And what's hybrid analytics? It's sort of taking the best of 2 breeds, so it's taking the physics-based models with sensors and advanced sensors and simulations and blend that with real-time data.So just to give you a couple of examples. So I think that what this is about to do and what the industries are eager to accomplish in this area is that they would like to be able to have a full insight of the various processes without having to have expert teams working on them. So basically, this is tearing down the silos across multiple disciplines within the oil and gas companies and enable everything -- everyone to monitor in real time what's happening on the field. And it's also the fact that you can then test run different machine learnings' algorithms on your simulation environments, so -- before you adopt them into the structure and into the system.And then you can perform different what-if analysis. So as I mentioned, what if I want to increase my production on the platform with 5,000 barrels a day, how would that impact the whole structure? And where is sort of the cost-benefit curve when it comes to how much I should increase and how the development of costs is developing?When it comes to production optimalization, what we see is quite a significant variance in between different shifts and control room settings at operators. And there's an opportunity there to, of course, adopt the best practice. But you can also adopt the best practice in a different way. You can actually implement a machine learning algorithm that not only adopts the best practice but also challenging the best practice. So that's something that we're working on. And of course, the last one I've already mentioned when it comes to predictive maintenance. And all of these things, why is they so important? Because there's, of course, significant cost savings across all of these various parameters. But in combination, it can increase automation of an operation, and it can also, in some instances, actually do the operation fully autonomous from a remote center offshore.So here's just one example of how we can share information across various disciplines. So what you see here is that you see the different details on what's happening on the facility in different views. And what you also integrate here is all the information from the different assets and all the different processes. So you are actually digitalizing the PDFs as of today into the 3D models but also in the reporting view. So -- and of course, this is closely connected to the ERP systems, for instance, like the SAP systems.So here's another example where you see this is about. And what we see here is that we have an issue with the gas lift valve. So what you see is that the target is 50%, but the estimate now is that it's only flowing by 10%. So what do we need to do with that? And then the recommendation comes up for -- within the SAP system that we need to exchange the gas lift valve to actually get this up and running again. So here, you see the connection to the ERP system directly with also purchase orders, et cetera. And then you can also monitor towards the vendors the life expectancy of a spare part like this is way longer than we expect with this one, and you can do reclamations, et cetera.So this is a McKinsey slide. And it might seem like it's gigantic numbers, but this is also something that's coming back from the operators after studies and projects that we have done together with them, that they do believe that they can save costs in the size of what we are showing here. So that's -- basically, on the CapEx side, it's 30% cost, but it's also reduced in time, and that's time to first oil. And the reason for that is, basically, that they also want to apply the Digital Twin functionality in the early field development. So we are using all of the data that you have from historical fields into the decision point on how to construct the field. And they are also looking into, of course, the opportunity to simplify the EPC structure that's connected to this. Still in the early days, but it's, of course, also connected to the fact that if you are able to increase automation and also remotely operates or autonomously operate the field, you can create more subsea on a stick type of solutions without living quarters and all of the extra costs that you have as of today and also then have manning onshore.When it comes to operations and maintenance, there are also some significant numbers. And I think that, for instance, Equinor is saying that they believe that they can save some 50% on the OpEx side when implementing this technology. It will take some time, of course, because we are building functionality gradually over time. So a very exciting concept. So we believe that in the future, we will see more and more oil and gas operations operated from remote operating centers onshore. We are working in multiple projects as of now with large operators, both Norwegians but also international ones. And we are looking into both fully autonomous operated field, where you have a closed loop with the automation system that, for instance, KM delivers, but we are vendor neutral when it comes to that. And it's also, of course, the ability to construct differently and reduce costs within that perspective. And then we are looking into the maintenance side, which is significant and, of course, to prevent any downturn of the field.So hopefully, that gave you a peek into what we are working on, on Digital Twin. We're working not only on the oil and gas operations but also on wind turbines and wind farms, which we see this drive significant effects. And as I mentioned, we are working in different projects, both in Norway and internationally. And please have a look at this.[Presentation]

[Hege Skryseth, Executive VP & President of Kongsberg Digital]

Thank you.

[Eirik Lie]

Good morning. There, it works. So I will give you an update of the Defence side of our business. And we're not going to detail on contracts, but give you a short overview of where we are today.This is probably a picture you have seen before and you are familiar with. We have 2,600 employees, and NOK 6.5 billion in revenue and NOK 10.5 billion in order backlog. And if you would look at the pictures there, you will recognize our main products, like missiles, like remote weapon stations, communications and space as well. And we also provide advanced system, complete solutions like Air Defence systems, and also com assistance, for instance, for submarines, and also, manufacturing or advanced materials like composites and titanium for F-35.In addition to these 6 divisions, we also have a 49.9% ownership in Patria, which is also highlighted at this level to show the importance of Patria for us.And I heard a question about Patria and contracts for the land system, so just a short comment to that, and that we are focused to get orders for the land business on the vehicle side. And in order to do that, we combined our strength. I would say that Kongsberg has a -- we have been in this business for long, and we have created both a political network and industrial setting around the world, so we are utilizing that, together with Patria, in order for us to be better positioned for the vehicle programs. So that was one aspect. One other aspect I want to bring up here is technology and cross-technology, if I could call it like that. We use very similar technology across the divisions, but not only that, also internally Kongsberg.So if you look, for instance, at the missile side, that's kind of when autonomy operations in that missile. And that very advanced autonomy technology is also utilized in the maritime operations, for instance, on the autonomous underwater vehicles, but also for autonomous ships. So there you see a link between the different business areas, so we'll both just say -- this was just an example, but that's important for Kongsberg.This slide is our, I would say, main strategy. On the left side, you will see what the call home market. And home market is most important market for us. It's not the biggest, but it's most important market because that's the place where we can introduce new products, enhance products and get Air Defence for the market. So we look at Norway as very important, but equally important, also Finland especially going forward.And then we have 2 main links to internationalize our business. One is the U.S. side, where we create U.S. alliances and utilize that to penetrate market in U.S., but also elsewhere in the world. And the other leg is the Northern Europe side, where there are many big programs going forward that we want to capture. It could be alone or it could be in combination with other companies, and that's -- those 2 legs we utilize as our driver for our export opportunities. And I would say that I think we are successful in this strategy. More than 75% of what we are doing are outside of Norway, so 75% is our export share.Here, we try to highlight something that we have not focused on before, not too much at least. If you look at that blue color, that's what I call the base of our Defence business. We don't talk too much about it, but the underlying business is growing. It's about 4.8% since 2008. And if you look at the top there, that's where we put the bigger contracts coming in. So that's kind of the setting we have. So we recognize CROWS II back in 2007 and the same program in 2008, and for instance, in Finland, 2009 going forward. And that's the blue color.And then we have talked very much about securing strategic positions, and that is extremely important for the defense side. We have worked for years to establish these positions. And you see a sample of them on the right side. Don't look at the timing because we have these positions today. What's important for us now is to make sure that we get contracts in -- underneath these positions. And if you look at what some of them, like the U.S. Navy for the NSM, we have already been -- we are in under contract to them now. We also get an agreement on the CROWS follow-on contract, so we are under contract there.The Norwegian-German program for submarines is very important for us. It enables us to create a long-term relationship with thyssenKrupp. We established a joint company, kta naval systems. And we will then be the exclusive combat system supplier for all future thyssenKrupp submarines. And right now, we are in proposal phases for several opportunities, but the most important one is the proposal phase for Norwegian-German submarines.And finally, I would say I'm really happy that we got the contract in U.S. for the U.S. Navy with the Naval Strike Missile. We've got the frame agreement 7 years. It's for the littoral combat ships and also future frigates. So this is going to be extremely important for us going forward. It's important for us also as a reference to our stay in international markets. And this, combined with German Navy selecting NSM as a standard missile, those 2 are extremely good references in the market.And if you look at -- it's always difficult to give predictions, but I can refer to what Raytheon states about the position we now have in U.S. for NSM, where they state that this opens up an opportunity for 7,000 missiles.Qatar, as Geir mentioned, Qatar, we have several opportunities in Qatar. These are 2 most important ones as of now. We have this major vehicle program in Qatar for the land forces, and we have an air defense program with NASAMS also. And this will be for their vehicle program, that's -- we have the same guiding as we have last quarter. And also for the air defense program, it's the same guiding as last quarter. And we are in negotiation phase right now for them.JSM, probably one of their most significant development programs ever in Kongsberg and in Norway. It's probably the largest one. We have actually now concluded the whole development phase of JSM. We had successful firings this year. And with that behind us, we are now entering what we call F-35 integration. So we have a complete missile, now we need to put it into the bomb bay of the F-35 and start testing there. And that's why we got contract for test missiles for JSM prior to summer time. That is then used for this very significant and important testing.If you look at the market for JSM, I think we are in a good position there. This missile is the only the long-range position strike missile that is being integrated into the bomb bay of F-35. For F-35, it is extremely important that you integrate things into the bomb bay, so we don't destroy the stealth of F-35. You can also put things along on the side, but that will destroy the stealth. So being able to put into the bomb bay is very important. And with the number of customers buying F-35 is going to increase, that opens up a really good market opportunity for us.Very short on the Air Defence. I mentioned Qatar. We have also been selected in Australia, 2 major opportunities. And this shows one of the paths that is important for us, creating U.S. alliances. We have been together with Raytheon in air defense for more than 20 years. And this shows that utilizing our strategy and focus networks. I would also highlight that NASAMS is continuously upgraded. And for the Norwegian Mobile Ground Based Air Defence system that we are in discussion with Norway right now. We have -- in that particular case, we will utilize another missile, the AMRAAM, so it shows how NASAMS can be adapted to different elements to be put into the architecture.So as a conclusion, I would say that we have a solid base growing. We have for many years worked to establish these as important strategic positions, we have established those. We have also shown that this is successful now. We are getting contracts. We got the U.S. Navy contracts. We got the CROWS. And we're going to continue what we are doing going forward.So I think that's it for me.

[Egil Haugsdal, Executive VP & President of Kongsberg Maritime]

Yes. Kongsberg Maritime is to have a broad portfolio of product within the maritime industry. We are very well-established within the merchant market. When it comes to oil, we are in all parts of the business, from seismic, offshore vessels, drilling, production, we are all in. The more difficult it is, the higher market shares we have. So we are really a high-end supplier. We typically deliver the intelligent part of the systems. Also worth mentioning, sand source and robotics is a quite significant part of our business. We have a unique leading products which is -- seems also to be a quite a growing market.I took this one explaining quite a long history of Kongsberg Maritime. I took over our peers on that. After 15 years, 15 years of growth, we really faced a very difficult market. On the top here, we were 50%, 60% exposed on the oil and gas offshore market. And we -- this market dropped. The market in newbuild really dropped from -- to 0. We've been able to increase the volume through Triangle integrated project to be able to focus on new areas in the market. And we have been able to maintain, I will say, a reasonable profit level even in a difficult market due to early adapts or adjustments to the real market. So I am pleased to see that we are at least flattening out here and that we have been able to do that in a timely manner.On the last year's Capital Market Day, our focusing on that fact that we were able to adapt to the market as is, it's always important to be in line with the market. It was a more difficult market, but we are able to make money and to take positions out from the existing market. We have been focusing on operational excellence, both internal in our own operations, but also in the market by offering new relevant solutions through our Triangle strategy, where we are offering more efficient operations and more integrated solutions, which is also increasing the operation excellence or efficiency for customers and also the safety. We have -- it's also important for us to positioning ourself for the future markets. We learn that about 2 billion people in the world has been exposed to YARA Birkeland, so I assume most of you have seen that before. And finally, we now also signed a contract and we are in process with this project. This is just an example, but it's a very important one. It's really putting us as #1 for autonomous ships in the future. But we are generally focusing on new technologies, hybrid solutions, more automatic solutions, more advanced solution, more integrated solution. And we see on these major programs that have been taking over the last quarter that is supporting this quite impressive order income for the third quarter. It's all new technology. All the main project is containing technology and new directions. So I feel that we can say that we are really taking the leading position into the future.A year ago, we started to explain the market this way on these 2 curves. It's illustrating that for special vessels, offshore vessels, it's quite a high variation from top to bottom in the market. The merchant market is also cyclic, but not as cyclic as the offshore market. We are moving around on these bubbles. Last year, we had a offshore market here in -- still on the way down. Our reading today is that it's picking up. We don't believe in the newbuild market for the next maybe 2 or 3 years, but it will come back to a better level, probably never to the level it used to be. I hope not because that was way too much. But it's picking up. And especially, on the operational side, as the oil company is increasing their operations, the activity is going up, which is supporting the global customer support part of our business. It will, of course, also be extremely important for the business like Rolls-Royce Marine (sic) [ Rolls-Royce Commercial Marine ].And I'll point on a few other markets that is a special interest for us. LNG, it's really picking up, and Kongsberg have significant technologies in these areas, so a very attractive market for us. And we have a extremely good market share in this market.Marine robotics, it's another area, really high-tech product. We have a leading position in the world. We're absolute #1. And we see that we are taking in quite a good order income also in this market. The merchant market is picking up. I would say it's still low, but it's clearly better than what it was last year.So fishery, another area which has been good for years, still very strong market and still a very important market for us. So all in all, I think we've been able to really implement the operational excellence. We are able to deliver and compete in the market, and the market is slowly picking up. Don't take this last quarter, as it's not picking up that much. That is a consequence of projects. And when we do project, it will be significant variations from month to month.I guess you would like me to say a few words about Rolls-Royce. I will. I start to become an expert on telling about this without really telling too much because it's very limited what we are allowed to say. I am doing this illustration of the Awilco Drilling rig. I think I shared this earlier. But when we -- our standard products for a drilling rig, which we really have significant positions in the market, has been historical on dynamic positioning and automation. The value of a typical dipper system on a drilling rig is NOK 10 million and the automation is typical NOK 20 million, NOK 20 million plus. So a scope for us on a drilling rig has until this year been in the area of NOK 30 million, maybe up to NOK 40 million for a rig. This contract, we took on USD 18 billion -- sorry, million, which is about NOK 140 million. That is a consequence of our the Triangle projects where we do also the power part of it, the power management. So we are expanding the scope. If we also see this in context with the Rolls-Royce Commercial Marine, which have the engines and the propulsion and also, at least they could have also winches and other systems on this rig. The total scope that we can attack in the program like this in the future is in the level of NOK 300 million, NOK 400 million. It's illustrating how significant different company we will be in the future. And no, it won't be that many rigs as it used to be, but it will vary. We don't need that many rigs to make that significant business for us.A few comments on the Rolls-Royce. I need to pick up my notes here. That is, of course, the most important thing for us going forward. When you are in a global industry, the global footprint is extremely important. Kongsberg Maritime have 2 -- we are established in 58 offices in 22 countries. Rolls-Royce have 34 countries. And totally now, we will be in the area of 120 offices. So the global footprint we have is significant, and that is essential if we really want to be a global player in this market. The technological leadership that we will take is also of a great importance, both for ourself and also for the customers, as these systems in advanced vessels and rigs are typical very isolated system and -- of historical reason. By bringing in the total scope from bridge to propulsion that we will in this new company, we will be able to deliver a lot more advanced and integrated systems.I think I won't say anything wrong about the culture and how they run Rolls-Royce organization today, but we can very clearly see that they are not making a profit, which is very important when you do business. I think Kongsberg has proven that we are able to really adapt to the market, to do the necessary turnaround and to do them timely. And I think we will prove that we are also able to do that on behalf of Rolls-Royce. I saw from my notes here about that. We have a much more hands-on management, but my writing is not always that good, so that's why this morning it said handsome management. So I thought -- I said, "Okay with that."Now I think we've proven that we are able to change, and we will change that organization, and we will make this very healthy and a good organization for the future. We always respected Rolls-Royce a lot. They have been working in the same market as we have. They really have a top-quality products. They have -- it's substance. I've been around now, and I met a lot of people and I've seen a lot locations. There is really -- it's really product, it's really customers, and it's a very significant installed base. And as this oil and gas activity is picking up, to be there with the mechanical parts who is operating in saltwater, the after-sale business of Rolls-Royce will become extremely attractive, and we can see this changing as we speak.So we also have seen that the feedback and direction from the market, from employees, from customers is extremely positive. We could maybe have a concern about customers thinking that we are getting too dominant and too large in this business. That is what -- not what the feedback we have from the market. It's only positive, and we are really not very much overlapped between these companies. It's a complementary companies, and it will be a benefit, both for the employees and for the customers here.So it's about how capable we are on doing the turnaround. I'm very confident that we will do that. I hope we can do it fast. It will always take some time, so it's quite a complex organization, its size on this, but we will do it as fast as we can. The order BAT that we are doing is that the market will improve. We are not depending on really that the market should pick up significant, but only a slightly better market will help us. And I think that we can see signals in the market that the market is picking up. So I very strongly believe that we will prove this to be a very, very good move from us. And I look forward to tell you more about that next year. Thank you very much.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

Okay. Then I think our complete handsome -- very handsome management will go on stage and accept questions from all of you.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

Okay, we have one question from the web from [ Lars Molene Hansen ]. Can you elaborate a little more on the EBITDA margin? You report the level of 11%, and I have to go back to second quarter of 2016 and third quarter of 2014 to see similar levels. And the other part of the question, which is regarding guidings, it might be a little bit hard to elaborate on that, but can we expect an EBITDA margin in line with what you have reported for the third quarter going forward?

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

I would love to answer that one. But at this quarter, I'm not allowed to guide anything, so please look back and look into the different quarters that we have reported earlier. And then you can see that we slowly are picking up the trend during the year.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

And can you also then elaborate a little bit around the margin in the third quarter?

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Yes. If you look at the margin in the third quarter, we delivered isolated 11% compared to third quarter last year, that was 8.4%. But then you have to take into consideration that we, last year, the third quarter, booked NOK 90 million in restructuring costs. And in this quarter, we have taken NOK 25 million in implementation cost -- integration cost to the Rolls-Royce acquisition that we are looking forward to close next year.

[Eivind Sars Veddeng, Analyst]

Eivind Veddeng, DNB Markets. I was wondering if you can elaborate a bit more on what you said about closing new contracts in Patria, if you can be a bit more specific on your plans to increase the level of activity there going forward.

[Geir Haoy, President & CEO]

We are, of course, working and pursuing opportunities in the land business. And I cannot comment on specific, but there is opportunities out there. And Patria is now gearing up their focus on closing contracts for the land business. We are lagging behind on the order intake on that particular segment, and we are focusing now very much on the opportunities out there, so increasing our focus to see what kind of opportunities we have to close contracts.

[Unknown Analyst]

As we all know, it's some issues going on called the Brexit and the trade -- general trade war developing. Is it possible to give any comments regarding how that possibly will impact KONGSBERG?

[Geir Haoy, President & CEO]

Yes. Of course, both Brexit and other trade issues is a concern also for us. It's difficult to say exactly what because we don't know the end of the story of Brexit, so -- but this is, of course, something that we follow very closely. When it comes to trade -- kind of trade issues between, especially China and U.S., of course, that is not positive for the global trade at all. So hopefully -- today, we don't see any particular impact on that. But of course, if this is escalating, that will not be good for the global trade, either for Kongsberg Group, I would say.

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Okay, save the questions for the business update.

[Geir Haoy, President & CEO]

Okay, then what we will do now is that we give you 3, 4 minutes to fill up your cup, and then we come back again, and then we start for the business updates.[Break]

[Christopher Møllerløkken, Research Analyst]

Christopher Møllerløkken from Carnegie. Since you announced the acquisition of Rolls-Royce Commercial Marine this summer, would you say that the markets within Maritime has developed as expected, worse or better? And the second question would be, you did a quite thorough due diligence before you made the decision of acquiring this business. But since then, has your impression of the business you are about to acquire improved or worsened?

[Egil Haugsdal, Executive VP & President of Kongsberg Maritime]

I like your questions. The market has improved, not reflected in the third quarter order income, but because it's quite a number of significant project there. But there is underlying improvement in the market. And as you -- of course, we meet a lot of other companies operating in the same market. And in general, the market is improving more or less all over. So yes. But be careful, no, it's not significant, but it's not going down. It flatted out, and now we can see a very, very careful improvement in the market. And then your second question, there is 2 things that I'm looking for. One is that it's real products, it's real people, it's real organization, and it's a broad number of significant customers here. And when we go out and visit people and locations, we can see that there is a substance here. It's a lot of good thing. And the other part of this is that we can see a number of thing that could be improved and quite significant. So I think here, when we see something that is not maybe as we would like to have it, I consider that also to be good news because then we know that we are able to improve it. And yes, the numbers is quite scary. But there is really no reason why they should not make money, especially the aftersales market is a very attractive market for those products.

[Eivind Sars Veddeng, Analyst]

Eivind Veddeng from DNB again. I have a one question for each part of the presentations. I don't know who wants to answer for KDI, but I'll ask anyway. And I'll start with that one. I think I've seen the slides on Digital Twins and the different simulators maybe 4 or 5 different companies across different organizations or industries. So I just wonder, what is the key proprietary or key selling point for Kongsberg when you try to enter these projects? Why wouldn't they be typically done in-house by the operator? That's the first question. And then on -- in Defence & Aerospace, the base, you said it was growing, I think you said 4.8% per year since 2008. Can you elaborate a bit on the different components in that base? And what is growing and what is not growing? And the [Audio Gap]

[Geir Haoy, President & CEO]

from a static Digital Twin. That means that we actually use real-time or near to real-time data into a dynamic simulation. That gives us some advantage, of course, where you can actually simulate on real data. And if you have a static simulator, then that's just another story. Then of course, the combination of what we call in Kongsberg called domain knowledge is also an advantage where you actually -- because what we are normally doing is that we are working the physical models. We know the processes in oil and gas operation. We also know the physical models in the maritime industry. Coming from a more kind of the artificial side, I would say the new technologies, without having the physics knowledge of the domain, then we will have some more challenges, I think. So that is maybe the big advantage from Kongsberg where we actually have the competence built up over years or decades of the physical processes. So dynamic and also the competence from the physics is probably what we see as a selling point.

[Eirik Lie]

And then back to your question related to defense and the base increase. I think without being too detailed, I would say that we are growing in all segments, as I showed you on another slide where we are working on. And in general, we are increasing our footprint around the world, and that creates both more aftersales, but also I would say that we get numerous of smaller contracts that is not really highlighted from us. So that's why we have the increase, steady increase in the base. But it's all related to the main segments we are working in.

[Egil Haugsdal, Executive VP & President of Kongsberg Maritime]

And my answer is yes. It is easier to turn around a software company than a hardware company, and it's more assets and production and so on. But in the modern way of doing this, and that is what also -- how Rolls-Royce Marine is doing, and on the defense side and also in maritime, you do typically the assembly and the critical processes on your product. But it's a very much make by strategy behind it, and there is some variations there. But yes, it's a different thing to -- and a bit slower to really make changes in the hardware or manufacturing business, yes.

[Knut Erik Løvstad, Equity Research Analyst]

Knut Erik Løvstad, Kepler Cheuvreux. I have a question on the capital structure. You have roughly NOK 300 million in net debt at the end of Q3. You are making an acquisition in excess of NOK 5 billion, but then you're raising the equity of roughly the same. So I guess the net debt is not going to change all that much following the acquisition. How do you see your capital structure or sort of an optimum capital structure going forward?

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

We're monitoring that quite totally now as we are going into the closing with Rolls-Royce Maritime. And as all of you, we are not able to have all the figures from Rolls-Royce Maritime, so we don't know exactly how they are developing. But it's a fact that they have a lot of losses over the last 3 years. So we will consider that if we are going to take some more debt in the future when we are acquiring them. So we haven't been guiding anything on that yet.

[Knut Erik Løvstad, Equity Research Analyst]

Because I suppose you don't have any sort of big CapEx programs going forward that will consume a lot of cash, so I guess most of your sort of development costs on the big defense contracts are sort of funded by clients, more or less. So you don't...

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Yes, that's correct. And we have no any huge plans of doing any large investments in terms of CapEx in the future either that we have announced.

[Knut Erik Løvstad, Equity Research Analyst]

So did you really need to raise NOK 5 billion then in new equity?

[Gyrid Skalleberg Ingerø, Group Executive VP & CFO]

Yes. That's a really good question, actually. And what we have been saying here around that is that when you a acquire company that's larger than you and that have that huge losses, we have decided that we will raise capital for the acquisition. And then we will take the losses over the operational results that we will have in the future. And if we will need more, then we will turn to debt and not to raise more capital.

[Geir Haoy, President & CEO]

Okay. It seems that we have answered the questions that you had. Then I would like to say thank you for joining us this morning. And we are definitely looking forward to come back, as Egil said, next year sometime for a more comprehensive Capital Market Day. So thank you for today.