Kongsberg Gruppen ASA

OSE:KOG

Earnings Call Transcript 2017-Q4

[Geir Haoy]

Good morning, everyone. Thank you for joining us this morning. Presenting the fourth quarter of 2017 and also the preliminary accounts for 2017. And today, I also have the pleasure of joining me our new CFO, which was presented the last quarter, Gyrid. So I'm very happy to have her with me today. We will do it in the normal way. I will start with some highlights, and then we will go through the financial status. I will do short business updates and briefly an outlook of the Kongsberg Group. It has been an exciting quarter for Kongsberg. We ended the year with a solid order intake, starting the fourth quarter with 2 important NASAMS contracts, one for Lithuania and the other one for Indonesia, very important contracts to get concluded for the defense area. We also got the contract on CROWS III program. This is for the Abrams Battle Tank low-profile version of the Remote Weapon Station, a very important contract for the Kongsberg Defence, and which I'm sure Gyrid will cover very well. We have a strong cash flow also in Q4. In general, I think we see the initiatives that we have gone through in 2017 are getting positive impact. We can see it now in the Q4. And the revenues in KM is stabilizing, and we also see slightly some improvement in the margin. All-in-all, it's important for us to deliver on the contract that we have, and all our major projects are on the plan across the group. And yesterday, also, our Board of Directors, they come up with a proposal of a dividends of NOK 3.75 for the 2017. And that will, of course, then be approved hopefully on the Annual General Assembly in 16th of May. If you look at the 2017 in overall, I think we can sum it up in 3 words. It's all about adapting Kongsberg and the group and the business areas through the market condition that we see now and that we believe going to be in the future; at the same time being able to deliver, as I say, on the project, current project that we have in the portfolio; and then also being able to continue innovate, create new solutions, take the lead in our niche areas, so that we are able to position for new contracts, both in the short as well as in the long term. I think we can -- looking at the 2017, I think we can say that we have succeeded in many of these areas. It has been extremely important for Kongsberg to adapt the whole group, both on the civilian side, but also on the defense side for the market condition that we see out there today. I'm also happy then to reiterate that in the Q4, as I say, we see some of these measures taken in 2017 are showing on the P&L and especially then on KM. By that, I think I will ask Gyrid to share some status on the financial part.

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

Thank you. Good morning, everyone. Quite honored to release the fourth quarter. It's a very strong quarter for Kongsberg at the moment. But before we do that, I will bring your attention to the whole year of 2017. Kongsberg Maritime has been struggling with the top line since 2015, and we also see that in 2017 down by more than NOK 1 billion. So isolated for Kongsberg Maritime, down by almost 14%, but on the defense side we have delivered on par. So in total, for 2017, we have a top line down of 8.6%, bringing us up to the new orders, the new orders for the 2017. And it's quite satisfactory at the end of the year, increasing quite well at the end of 2017. And entering into 2018, we have a book-to-bill of 0.93. Then onto the profitability. Both for the third and the fourth quarter, we have seen an increase in the profitability of Kongsberg as a company. Bringing us up to the whole 2017, we ended up with a margin up to 8.8% from 7.7% last year. Very strong cash flow, as Geir mentioned. Both from operation are also from the customer, paid a lot from the last quarter according to contract. We ended at the end of 2017 by a balance of almost NOK 3 billion. I will come back to that. Looking more at a glance of the historical perspective, you can clearly see how Maritime have been struggling for the last year. But now, we have seen that the profitability is coming back, and we also see when we look into the profile. But both for the third and the fourth quarter, it's coming at the end of 2017. Also come back to the new orders that we will see peak in the fourth quarter this year. To bring you to the fourth quarter and dive more into what happens to the top line there. We see, again, that Kongsberg Maritime was down by almost 9% for the fourth quarter, but the defense part have delivered on par. So in total, we're down by almost 5% on the last quarter of 2017. But if we look into the different areas, we see that the Protech Systems delivered quite well on the Medium Caliber for the last quarter and especially in December. So combined with all the projects, delivering both on schedule and in -- both on schedule and as planned, we ended up by 5% in total. Also, I want to bring you to the profile of the seasoning. And what you can see is that for the fourth quarter, we are up. What we believe for the 2018, we will have almost the same profile for 2018 as we have for 2017 and also 2016. I also think it's quite interesting for you to see that the Kongsberg Maritime is delivering 50% of the revenue in the fourth quarter, but now the Defense side coming up delivering almost equal to Kongsberg Maritime. So we have 2 equal divisions almost delivering 50-50 on the top line in the fourth quarter. Bringing us now to the orders. Of course, finally, deliver on the defense orders, both for Lithuania and for Indonesia. NOK 1.6 billion of the NOK 5 billion in the fourth quarter is the NASAMS contract for those 2. That, again, you can see that we are now peaking, and we are changing in the fourth quarter of the backlog of all our orders. Diving a bit more into the backlog, you can see that Kongsberg Maritime, at the moment, in the fourth quarter have a book-to-bill of 0.9. But if you take the whole year, they have book-to-bill of 1. That's much better than they had when we entered into 2017. Looking into the defense side, you have a fourth quarter of a book-to-bill of 2.6, of course, of the 2 large orders. But on the defense side for the whole year, you have a book-to-bill of 0.85. So we still need to book some orders in the defense side to be -- to grow more for the next year. This one has been quite helpful for me entering into the company, how to monitor the new orders coming in to be able to calculate what we think about the future. Kongsberg Maritime have been through a reorganization through the last year, and we are now monitoring the different division in Kongsberg Maritime like this. Here, you can also see 27% of the new orders in Kongsberg Maritime is due to the global customer support or the aftermarket. Those are not part of the backlog order that we report. So then you will have a bit more information how this will develop. We will try to show you this chart every quarter going forward. You can also see on the defense side that we have split all the new orders into the different areas. And here you can see by the Integrated Defence Systems, you will find these 2 large orders from the fourth quarter. But you also see like for the missiles, it's quite small in terms of the total coming up as a huge possibility in the future. So it's easier for you to follow. And in the quarterly report, you will also have the revenue split up in a bit equal way, so it's easier to calculate. Bringing me up to the most positive part of this report. From the third quarter, we gained profitability back again, and we have increased that also in the fourth quarter. One quite impressing from the Kongsberg Maritime, that's now delivering 13% EBITDA margin and also a strong margin on the defense side of 14%. Here you can also see the split between Kongsberg Maritime and Defense, that they're almost equal on 50-50 gaining the profit in this quarter. Also, if you look at the seasonality, you will see that our variation between the different quarters. We also believe that there will be variations in 2018 in terms of the different products we have. Some do have more profitability than others, and that will reflect with variation between the different quarters also coming into 2018. But we still believe that we have a new level now that we are quite satisfied with. Bringing me over to Patria. In the third quarter, Kongsberg said that they believe that Patria will deliver better in the fourth quarter, catching up both in terms of revenue and in terms of profitability. What we see is that Patria now has growth by almost 13% in this quarter, and they're also delivering a quite strong fourth quarter. If you compare 2017 with 2016, you will see that they have quite -- there were quite extraordinary results in 2016 in terms of armored vehicles that we have not had in 2017, but starting 2018 by signing the contract with Hamina on the middle upgrade for those. We believe that there are huge possibilities also in the future for Patria to take more position on the mid-life upgrade and also service upgrades in all the defense areas that Patria is represented in. Cash flow, quite strong, ending up at the end of the year by almost NOK 3 billion. Funds from operation last quarter for NOK 459 million, and then a lot of payments or contract-related cash from customer coming in, in the fourth quarter. Some limited investments, and then ending up by almost NOK 3 billion at year-end. Even if we have paid a certificate loan or redeemed that one, we still have an equity ratio of more than 35% at the end of 2017, making us deliver an ROACE of 9.1% for the whole year of 2017. Almost no interest-bearing debt compared to EBITDA. I also made a profile of the debt maturity for you, so you are able to calculate and see how the position are in terms of the profile for our debt at the moment. 2016 and 2017 have been 2 years with a lot of restructuring for Kongsberg. In terms of debt, there have been a lot of special items, what you now can see as there have been a successful restructuring, all that. And the efficiency in all the projects have been able to lift the margin for the Kongsberg Group as a whole. So at the moment, in the fourth quarter, we only have restructuring costs of NOK 25 million. We will still report on this, but of course, the focus now will be to be even more efficient in the project that we are delivering and to gain even more orders going forward. That will be the focus. So hopefully, we will gain more focus, profit on that and not being focused on the restructuring for the Maritime sector. Dividend, very positive. For 2017, we have a dividend policy of 40% to 50%. But for 2017, the Board of Directors, yesterday, decided to propose to deliver more than 80% of the profit this year to the shareholders. And as you can see here, we're up from 2017, but we stated that we wanted to stay for the nominal figures equal to 2016. So still it's up from the dividend policy, but at least that's the suggestion for the moment. Business update, Geir?

[Geir Haoy]

Thank you, Gyrid. Very well. Then we go into some brief business update. I started with saying that Kongsberg Maritime has been through some quite challenging periods, restructuring the whole set of KM. I'm very pleased then to see that -- the focus going forward, and the margin is improving. And I believe that we are looking at -- going into 2018, we are more solid position for taking new opportunities in the Maritime sector going forward. We also see some slight improvement in the aftermarket that is not included in our backlog. Of course, the offshore downturn has impacted the aftermarket, but we see some lights in the tunnel also in that area. Kongsberg Maritime is a diversified company. We are involved in many areas. And I think we can also see that now that there is positive developments, especially we see that in the marine robotics and the water vehicle area. We see positive development in the research and the passenger ferries and also in the fishery area. In fact, we just signed or delivered -- signed a contract for agriculture boat, a fish craft boat or drum boat, where we delivered a DP, and that is the first time Kongsberg Maritime have ever done. On the Kongsberg Defence area, I'm also pleased to see that the merger of the Kongsberg Protech Systems and the Kongsberg Defence Systems in October is already settled in, and I see that we also have now joined the market forces. We started off with a good start of Q4 with signing the Lithuanian contract and the Indonesia contract for the NASAMS, and I think we are well positioned also for new opportunities also in the air defense area going forward. We have established the kta Naval Systems. That is the joint venture between Kongsberg, thyssen and Atlas. That is established in Kongsberg now. We are building up the organization. And I think we have reconfirmed and also strengthened our positioning for both short and long-term opportunities in, I would say, all our niches in the defense area. The JSM development is going as planned. That should be concluded this year. The F-35 ramp-up is also going on plan, and we released the contract this morning called for with Northrop Grumman and Marvin Engineering approximating NOK 330 million. This is for the Pylons and some other stuff, which is an important part. That is for the LRIP 11 and the LRIP 10. So the ramp-up of the F-35 is going as planned. And for the NASAMS, the air defense, I think we see the increased activities in these areas, and it was confirmed with the contract in Indonesia and Lithuania. On the picture on the left side here, that is firing from [indiscernible]. And I would like to take a short history look at how this become one of the most special air defense areas in that class. This started with the Norwegian Armed Forces. They then filed a need. And you know Norway, and you know the topography in Norway. That is quite demanding. And they addressed this need to the industry. And together with FFI, Raytheon and the Armed Forces, we started the development of what today is called NASAMS. Then in 1998, the first NASAMS systems was in fully operation. It was established or installed earlier, but fully operational was in 1998. And then, today, which is confirmed again with Indonesia and Lithuania, today, this is the most common air defense in NATO. And it has protected Washington, D.C. since -- the airspace since 2005. And I think that also gives kind of -- give the reference of the quality of these systems. So far, this is -- approximately lead to an export contract of NOK 15 billion, and this is only the start. So this is how the business model for the NASAMS, I would say. If you look at the submarine part and the position we are in with thyssenkrupp and Atlas today, this is the exactly the same position as we've all seen, I would say, with the NASAMS system. Today, after more than 40 years of developing Combat Management Systems, we are now in a position together with thyssenkrupp where we will develop the next Combat Management Systems for all the thyssenkrupp submarine going forward. Same with the experience of the Penguin Missiles. For those of you who remember that, that was even started before I was born. That was in 1960, I think. Today, we are currently on the Naval Strike Missiles, and I think we are in a very good position on the Naval Strike Missiles. As Gyrid shows us, it's not a big part of the order backlog today, but we are in very interesting positions. It is currently in use in Norway and Poland. Germany has selected NSM, and Malaysia has installed the fixture on their vessels. So in general, I think NASAMS, the NSM and the JSM represent significant opportunities in the next decades for Kongsberg. For the Remote Weapon Station, this was also started by a need of the Armed Forces in Norway. And today, 18 nations are using the Remote Weapon Station, is undisputed in the world, leading systems in the world. We have expanded our portfolio with the Medium Caliber. We just got a contract now on the Low Profile with the Abrams Battle Tank. And I believe that even though the order backlog is not that strong in Remote Weapon Station, I think we are in some extremely good positions for the future program also for the Remote Weapon Stations. So it's a kind of common business model for the defense area. It's a need and we have to develop, and then it's all about deliver and taking positions for the future. So this is -- we have to be patient when we are in the defense area, but it's a long-term business for Kongsberg. Okay. If you look at the outlook, I think for the group as a whole, I think we are in a good position going into 2018. Especially for the maritime and the civilian area, I think we are in a better position in 2018 than it was going into 2017. We see the effects already from the restructuring programs that we have done. And we will, of course, also continue to optimize our organization going forward. That also gives us good belief that we will see a strengthening of order intake for 2018, both for the civilian side, but especially for the defense area. Kongsberg Maritime, strong position. We have been able to, as I say, structure the organization, so that we have good opportunities in the growing markets. We are increasing our scopes, taking more integrated solutions, and we expect that the revenues will stabilize in 2018. Again, it was mentioned that we will see some fluctuation in the margin. That depends on the project mix that we are entering into. But all-in-all, I believe that we will see some improvement of the margins in 2018 compared to 2017. On the defense side, we are in strong positions. We have reconfirmed them in 2017. I believe that we will see increased order intake on the defense side. We have some challenge, too, on the Protech Systems side. We have a weaker backlog. But as I say, we are in good positions, and there is a lot of activities, market activities also in the Protech Systems area. Not mentioned so much about KDI, but KDI, Kongsberg Digital, they are very instrumental for -- in all the positions that we are taking, especially in the Kongsberg Maritime area on the new solutions there. Kongsberg Digital, they will continue to take positions in their core areas, which is oil and gas, maritime and wind energy. And we are investing. Also, in 2018, we will increase our investment in the new digital solutions for KDI. So all-in-all, quite positive outlook for 2018. There's going to be challenges in 2018 also, but we see a lot of opportunities for the group as a whole. By that, I think I'll invite Gyrid Ingerø to join me for some Q&A. Yes?

[Hans-Erik Jacobsen]

Hans-Erik Jacobsen, Nordea. We're getting closer to JSM entering the market. Could you give us some guidance on interest from clients with regard to sales when the product is finished?

[Geir Haoy]

I think we can say that in all the -- that Australia joined the development program on the JSM. That shows an interest, I would say. I think it's too early to say specific, but there is a lot of interest. I can assure you about that. And that is the only fifth generation missile, which is -- can go into the bomb bay of the F-35. So yes, there is not many options out there if they're going to have that capacity. So it's difficult to say or -- but there is a lot of interest.

[Hans-Erik Jacobsen]

But the market potential that you communicated earlier, that still stays?

[Geir Haoy]

That still stays.

[Kenneth Sivertsen, Research Analyst]

Kenneth Sivertsen, Pareto. Just to follow up on the question on the JSM. From an operational stand, what kind of milestone do you have left before it's already developed, if you can, the missile?

[Geir Haoy]

The program for the JSM development is to be concluded this year, 2018.

[Kenneth Sivertsen, Research Analyst]

Okay. Perfect. So then the missile is actually ready for a bay? I saw some test launches from the aircraft earlier last year and ...

[Geir Haoy]

Last year, yes. That's correct. So the program is to be concluded, the development of the JSM to be concluded this year.

[Kenneth Sivertsen, Research Analyst]

Okay. And over to the Maritime. I think you were pretty clear on the margin outlook for Kongsberg Maritime depending on the products you're entering during the year. But still you have done a tremendous job on the cost side. And I would guess that all other equal, you should actually -- you should be fairly confident that you achieve a double-digit close to more than 10% margin based on what you have done and delivered in Q3 and also Q4 now. So...

[Geir Haoy]

As we said, I think it depends very much on the project mix, how you combine, what kind of integrated solution we are delivering. The second point is that the market is extremely tough out there. It's a price pressure. It's less fluid for everybody. And of course, the price competition is very, very tough. So that's why we are saying that it depends on that, and how we can integrate and what we are integrating that will affect the margin in Kongsberg Maritime. But looking at 2018, as a whole, we believe that we will see improvements in the margin compared to 2017.

[Ivar Andreas Lemmechen Gjul, Head of Research]

Ivar Andreas Gjul, Beringer Finance. Can you say a little bit about the revenue -- or expected revenue development within the 4 different segments within KM, and also in terms of is there any changes in terms of the demand dynamics from the oil and gas sector, given that the oil prices has come quite significantly up?

[Geir Haoy]

Did you ask about the different -- revenue split in the Maritime side or...

[Ivar Andreas Lemmechen Gjul, Head of Research]

Yes. Exactly, yes.

[Geir Haoy]

Okay. I can say maybe some few words about that. As I say, the oil and gas or the offshore side is, of course, still very weak, the traditional offshore. If you look at merchant side of Maritime, that we see a more normal fluctuation. There is some positive signs in some areas there, especially within -- not the LNG part of it, but the FSRU part and some movements on the gas side there. On the subsea side, we see some positive signals on -- or we see actually a growth market in the marine robotics and also on the fishery side. The fishery side is really an exciting market these days. And we also see, as I say, on the marine robotics, we see some growth opportunities. And yes, so offshore, still difficult; merchant, more normal fluctuation; subsea, the segments there, of course, subsea is also influenced on the offshore -- weak offshore aftermarket. But the normal offshore market in the subsea, we see more positive on the market's conditions.

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

I also see a quite stable aftermarket, which we opened up a bit more. We answered that, "Okay, between 25% and 30% on the backlog is the aftermarket, but that we are not reporting." So now we can follow that more specific also.

[Ivar Andreas Lemmechen Gjul, Head of Research]

That was my follow-up. Got it.

[Geir Haoy]

Yes. So as I said in the beginning, the aftermarket is -- we see kind of stable activities in the areas, which is not related to the offshore, but we also see some light in the tunnel on the offshore side. There is some activities. And also, we see some increased activities mentioned in the market on the MMO and the North Sea. So that is positive.

[Ivar Andreas Lemmechen Gjul, Head of Research]

But also on the aftersales part?

[Geir Haoy]

On the aftersales part. That is the -- yes. The MMO market, yes.

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

Yes. I think Hans-Erik has a question.

[Hans-Erik Jacobsen]

It's an internal question. It's from the webcast. Can you give some more flavor to the status of the Remote Tower project that you signed a couple of years back? And also a few words on the outlook on those kind of systems.

[Geir Haoy]

Yes. The Remote Tower, that is the contract we signed with NINOX for remote operation of the airports. The current status is that we have now currently hooked up one airport, the West airport, and it's remotely tested both from Molde. We have test facilities in Kongsberg. And we also have, as far as I know, I mean, we have also hooked up on the systems in their facilities here in Oslo actually. So that test and hook up with the first airport is currently ongoing, according to plan as far as I know. And then, of course, there is 15 airports or 14 more airport that's going to be hooked up throughout the project term. It's a very exciting project. We see a lot of interest in the -- I would say, for that kind of systems. But if we believe that oil and gas market is conservative, I can assure you that air traffic is also quite conservative. So there is a lot of requirements out there. We need specific certificates to go in -- or licenses to go in other areas. But I would say that in the longer -- a little bit longer term, this is a very exciting area for Kongsberg going forward.

[Hans-Erik Jacobsen]

There's one more question from the webcast, and that is for you Gyrid. It's related to the P&L. And you have a NOK 40 million impairment in the P&L. Can you say a few words about that?

[Gyrid Skalleberg Ingerø, CFO & Executive VP]

Yes. Of course. It's the year-end. And when it's the year-end, you just -- you do a housecleaning everywhere. So it's not one-offs. It's just -- adds up for a lot of small adjustments on the cleaning of that one. So no special items on that.Okay. Other questions?

[Geir Haoy]

Okay. Thank you very much for joining us this morning.