Fugro N.V. (FUR) Earnings Call Transcript & Summary

Good morning. Thank you for dialing in to the trading update webcast of Fugro. I'm here with Mark Heine, CEO; Barbara Geelen, CFO, Fugro. They have a presentation short. One will last about 20 minutes or so. Afterwards, they will be able to answer your questions. I'd like to hand over to Mark now.

Yes. Good morning, everyone. Thank you, Catrien. I'm pleased to report some solid set of results for the third quarter. And we have to see that in the volatile times that we continue to experience strong top line growth, in particular for offshore winter solutions. The EBIT margin continues also our upward trajectory. It improves in all the regions, all the business lines. Through improved pricing of our solutions, we are mitigating also the impact of the unprecedented inflation and supply chain pressures. We generated a free cash flow of EUR 70 million. And with our solutions for the energy transition, climate change adaptation, sustainable infrastructure, we're well placed to capitalize on the strength of our end markets. Our 12 months backlog is up by 33.9%, and the clients are seeking to secure capacity also beyond the coming 12 months. Overall, we're making good progress on our path to profitable growth strategy, supported by our future-proof balance sheet after the refinancing we did in July, we are back on track to deliver or we are on track to deliver on our midterm targets. Next slide, please. In 2022, the energy markets globally and specifically in Europe were impacted by several events. Most notably, the war in Ukraine, this has raised some serious concerns on the security of supply of Russian gas. And in addition, markets were impacted over the summer by extreme weather events and lack of hydropower due to heat waves and extreme dry periods actually across the globe. Also, various nuclear power plants in France in plant maintenance. And altogether, this caused an enormous hike in energy prices. You see that on the right side of the picture here what the consequences are and the hike in energy price and disruption of the value chain. And we're actually experiencing that all ourselves every day. There clearly is an urgent need to rebalance markets and rebuild spare capacity. Accelerated investments in energy transition will have to be combined with energy security, leading to an increased need to invest in traditional energy markets as well. And this is expected to boost LNG developments, which is already also what we experienced in our activities. In any case, whatever the macro scenario investments in the energy system will have to significantly increase over the coming years. Next slide, please. Now what does this mean for Fugro? Overall, we believe that our market outlook for the midterm is virtually unchanged compared to what we have presented before. We anticipate ongoing demand for Fugro solutions for the energy transition and climate change adaptation work. For the renewables market, you will not be surprised to see a strong increase in planned developments globally during the coming years. In the graph here, you see also a slight decrease in forecast for 2023 on the renewables side, which is relating to global supply chain issues. So there has been some postponements of some projects, and therefore, some adjustments in the expectation there. For oil and gas, we see a slight delay in the 2022 project FIDs, the Final Investment Decisions, but the growth going forward. For the coming years, it's expected that there will be a strong demand for gas and in particular, LNG, which will in turn trigger new projects. In infrastructure, we have seen a significant decrease in projections for the current year. However, the uncertainty of the Ukraine war, supplying chain pressures and potential COVID resurgence has impacted this market. But going forward, we expect a positive development, supported also by various government stimulus programs. For the water market, there is a slight increase in CapEx for infrastructure projects. This is supported by local initiatives for large-scale investments in this market. For instance, in the U.S. Next slide, please. We're talking specifically about the U.S. here a couple of examples how governmental stimulus programs are translating in real business for us. We're starting to receive task orders from the U.S. Federal government that are funded by the Infrastructure Investment and Jobs Act. We have been talking about that for a few years or for some time. And we have now seen that the several multiyear contracts that we have with the various government agencies, such as the National Oceanic and Atmospheric Administration, the NOAA. It's probably easier to say NOAA, and the U.S. geological service that we have these contracts ongoing, and there is a beneficiary advantage there of these funds for the next 5 years, and we see the first contracts coming out of those. In September, for instance, NOAA awarded Fugro Shoreline mapping project on the Gulf Coast. The project, which is located in the flood-prone state of Texas will support the coastal mapping program. Fugro will acquire elevation data, along with aerial imagery using multispectral imaging sensors that we use out of airplanes and helicopters. This project also involves Shoreline mapping. Some great examples there. As you know, I always like to talk about a few recent project awards wins that we have. Here a few are shown on the next slide. Within days of The hurricane Ian making landfall in Florida, we completed damage assessments in the 2 of the hardest hit communities. This will allow insurance companies to help their customers financially to recover from this catastrophic event as quickly as possible. Site investigation for Australia's first offshore wind development, Star of the South, this is near Melbourne. The project involves up to 200 turbines in the sea. Star of the South has been in development for several years and is in the feasibility phase of the environmental assessments that are now underway to support the planning and approval and the design process. Fugro will be engaged to undertake the geotechnical site investigation campaign covering 22 locations. And totally to the right, another example, Total Energy, Shell, Energie Baden [indiscernible] EBN, and also [ Karlsruhe ] formed the partnership to enable a large-scale CO2 reduction for industrial clusters. Under the name of [indiscernible], these parties will collaborate towards the development of a new CO2 transport infrastructure to enable offshore CO2 storage. And Fugro will perform a marine and land ground investigation to assist the front-end engineering. And with that, I will hand over to Barbara to talk about the finances.

Thanks, Mark. Good morning, everybody. Our third quarter revenue increased by 17.4%, which is in line with the first half of the year. We are seeing high client demand in energy and infrastructure, and in particular, offshore wind solutions. And on the left-hand side of this slide, you can also see the strength of our order book, which displays a 33.9% growth in our 12-month backlog and this clearly demonstrates the strength of our end markets. The EBITDA margin improved to 17.3% compared to 15.3% a year ago despite ongoing inflation and supply chain challenges. The improvement was broad-based and supported by all regions and business lines. To improve pricing of our solutions, we are mitigating the impact of higher cost levels for fuel, charters and third-party personnel. The EBIT amounted to 10.9% compared to 7.6% in the third quarter of last year. And as a result, $70 million of free cash flow and the recent refinancing, our net leverage has declined to 1x EBITDA. Next slide, please. In the graph on top, you can see that the revenue growth was strong, both in marine and land. The 13.4% marine revenue growth was driven by site characterization. And this was a combination of strong growth in 3 out of 4 regions, which was partly offset by a decline in Asia Pacific. This was due to the dry docking of a vessel and a delay in the startup of MSC projects, Marine site characterization projects in Korea due to permitting issues. The 28.2% increase in land was also mostly generated in site characterization, and it is a combination of infrastructure work and nearshore wind farm activities. And finally, there was a EUR 37 million currency impact on revenue, and this is mostly dollar -- U.S. dollar related. Now on the bottom half of the slide, you can see the EBIT development. Our margin improved in all regions and business lines to 10.9% overall. And in partnership with our clients, we are firmly focused on getting paid for the value that we add, resulting in improved pricing of our solutions and better terms and conditions. In the land-based activities, we realized further operational improvements, partially as a result of restructuring in multiple countries during the last couple of years. Next slide, please. Now let's talk about cash flow. I am pleased with the improved cash flow from operating activities before working capital, which increased by EUR 20 million year-on-year. And despite the strong top line growth, we managed to keep working capital under control. And at the end of September, working capital as a percentage of revenue amounted to 14.6x versus 15.7% in June of this year and a relatively low level of 13% for September last year. Capital expenditure was $12 million higher than during the comparable period last year, EUR 29 million compared to EUR 17 million. And this quarter, other investing cash flow amounted to EUR 50 million, which includes EUR 9 million from the EUR 25 million proceeds from the sale and leaseback of the Fugro Tax Center in the Netherlands. And as a result, free cash flow was slightly below the third quarter of last year. Now next slide, please. Let's look at our future proofed capital structure. It seems a while ago that in July, we completed a comprehensive refinancing of our balance sheet. And this has resulted in a number of things. We've extended our debt maturity profile by increasing the maturity of the bank facilities through 2025. We improved terms and conditions, which significantly reduced our cost of debt. We've demonstrated our firm commitment to sustainability through the integration of sustainability-linked KPIs. And of course, we delevered our balance sheet. And a couple of comments regarding our maturity profile on the top right-hand side. Following the put option of the convertible, we will repay EUR 49 million in November and this redemption will be funded from existing cash resources. The current leverage of 1 is the combination of increased operational performance of EUR 222 million, coming from EUR 157 million a year ago and the lower net debt. And as a result, we have significantly strengthened our financial position providing us the financial flexibility to execute our path to profitable growth. And with that, I would like to hand back to Mark for the outlook.

Thank you very much, Barbara. Yes, the outlook for 2022. Given the year-to-date realization and the strong backlog, Fugro expects to continue revenue growth and for the EBIT margin, Fugro confirms the full year outlook, continued expansion there. In addition, we have added now also free cash flow that is expected to be positive. We will continue to actively manage any impact of geopolitical uncertainties, inflationary and supply chain pressures and remain very focused on further margin expansion towards our midterm targets, 2023, 2024. These are an EBIT margin of 8% to 12% and a free cash flow of 4% to 7% of revenue. The main drivers for reaching these targets are higher pricing, increasing asset utilization, disciplined cost management, operational excellence and digital transformation. Full year CapEx is now estimated at around EUR 125 million. And this has been increased from the previous guidance of EUR 110 million for 2 reasons. General increasing cost and ongoing supply chain challenges. And also, we need to cater for the steeper growth and the future opportunities that we see. And with that, we close out our presentation and open up for questions.

[Operator Instructions] Today's first question is coming from Luuk Van Beek.

I have 2 questions. First of all, you have a very strong growth in backlog, which is obviously positive, but can you indicate if you have any words about your ability to attract sufficient people and equipment to execute all of it? So how is the supply side looking? And the second question is on CapEx, which you increased this year. How should we look at CapEx for the coming years? So do you expect any step-up in CapEx to expand capacity and also to rejuvenate the fleet and lower the emissions profile.

Okay. Thank you, Luuk, for your questions. So maybe related to the first question, the backlog is indeed up with 33.9%, which is quite steep. I think it's important to realize that a large component of the backlog increase is also price. So it's not all volume and more work. So that is, I think, important to realize. I cannot be very exact about that because I don't have that split very exactly and that obviously differs across the world quite a bit. But it's important to realize that the pricing is a large component. Now if you talk about the supply. Obviously, that's a concern. Concern that everybody has in this current market environment to be able to find enough expertise and people to execute the work. And that is obviously also in Fugro the case. We are actually quite fortunate that we are able to attract good people. I think year-to-date, and I don't have the exact numbers, but roughly we have hired already 1,500-plus people year-to-date. So there's quite a lot. Obviously, there's also attrition. But it is indicating that we are able to attract people with expertise that we need. And a lot of the people there are operational people to complement the operations there. Obviously, on the equipment side, there will be a supply issue at some point in time, and we do see our assets being filled up quickly for the period to come, albeit I have to always say that before we get too enthusiastic right now about our results and the high backlogs, we are going into winter months. So it's also important to emphasize that Q4 and Q1 is an off-season where we will always have lower activity, and we should take that on board as well. You're very familiar with that, but it's, I think, important to emphasize that so we will continue to expand on our capabilities. We have been already working on that over the last couple of months. And you know about some of these things, for instance, the Fugro Quest, an additional vessel that we will have for next year, fully available to us, but there's also additional mobilizations that we have done in other regions to be able to serve the marine market, for instance. The second question around CapEx, maybe I hand over to Barbara for that one.

Yes. As we have indeed revised the amount from EUR 110 million to EUR 125 million. We have, as part of our midterm target guidance, we have indicated an amount of EUR 80 million to EUR 110 million through the years through the cycles than we have in the last years also spent less. So on balance, we are now indeed are going to spend a little bit more also in view of the reasons that Mark has given. Having said that, also, we have to indeed take a look at the growth and the required assets that will be needed to execute on further growth in the end markets. So we are looking into that at the moment, also as part of the next year [indiscernible] process. And that is what I could say about that. We do indeed clearly have been net Zero strategy road map. We do have vessels investments are required to also take benefit from the market developments. So we will be back on that at a later stage.

We'll now move over to Henk Veerman.

Three questions from my side, if I may. First one is on the margin development. In the first half of the year, Marine was lagging a bit, whereas Land stepped up in terms of margins quite steeply. Yes, you haven't disclosed margins per division, but can you give us any color on how that sort of developed into the third quarter? Do we still see the same trend? The second question is on working capital. You're obviously at very high levels versus last year. To what extent do you see normalization towards year-end -- where -- is it too early to tell like where you will end up? Or do you -- yes, to what extent do you expect a significant cash inflow into the fourth quarter? And then the third question is on the commentary in the press release where you say that in some areas, you see already clients looking ahead of the next 12 months, the booking capacity. And I was curious in which areas do you see that, where you really see people booking for 2024 and perhaps even beyond that.

Okay. Thank you, Henk, for these questions. So I will answer the question 1 and 3, and then I'll hand over with cash inflow to Barbara. So what we can say about the margin development, I think it's important to note that we see margin improvement in all regions and all business lines globally. So I think it's important to emphasize that for the third quarter. This is clearly visible in all the elements of the business. So that's what I can say about it because we don't release indeed the details there per region and per business line. So that gives some indication. Then on the -- your question number 3. You were asking about booking of assets further ahead. That is visible, obviously, primarily in the markets that are growing so steeply. And it's also something that we don't release in detail on a quarterly basis now, but we have already in the wording indicated that we see steeper growth on the renewable side. So that is the steep growth area, so offshore wind. And that's obviously also where our clients are concerned not to have capacity available and are thinking about [ lumber ] contracts as well. These contracts are also -- tend to become larger than what we have seen over the last couple of years. So they are pretty comprehensive if you look at what needs to be done in the early phases of these wind farm projects because, yes, all the locations require geotechnical and geophysical investigation. So there's quite a lot of work involved in the development of a wind farm, and therefore, it requires a capacity. That also means that these projects are a bit longer, sometimes running over a particular year. So we're going into '23 and '24, for instance. So then you see that clients actually now already are looking at, okay, how can we secure for the second half of '23, for instance, capacity and sometimes longer contracts also run into '24 for multiple months. So that's where we see this very clearly. It also means that obviously, as our assets are independent of our end markets that obviously other clients that are operating, for instance, more in the traditional energy fields and that might want to develop or have some surveys done in their fields, existing fields, for instance, then they need to step up and also book well in advance because assets will be scarce moving forward. And then for the last -- or the second question you had on the cash inflow, I hand over to Barbara.

Thanks, Mark. Yes, on the working capital, you asked about the normalization towards the year-end. We have seen given the seasonality in the business, an unwind in previous years of working capital. You can also see that in the presentation I have given. Now clearly, with the revenue growth more capital gets locked up in working capital. So as a percentage, the absolute number also goes up. And if you think about the DRO, Days of Revenue Outstanding, as the unbilled component and the build component that if you compare that to last year, we're now at 91 days. This is something that continues clearly to have our attention to make sure that we bring it down before year-end. So we will try to do that. Having said that, also in the revenue outlook and the backlog we have to execute. So we have to really remain very focused on it on decreasing the working capital, even though I'm not unhappy how we've managed it today given the growth that we've been dealing with. So that's clearly, again, attention and the unwind, I expect some unwinding towards year-end absolutely, but the extent to which will also be determined by the revenue growth that we will be able to show in Q4.

We'll now move to Thijs Berkelder.

Yes. First question on Q3. Can you maybe give us a rough estimate on what percentage of cost inflation has been offset by your price mitigation measures. Is that 70% or so or maybe more? Second question is on the outlook for Q4. Looking at a very strong order backlog for Q4, can we expect Q4 revenues despite being the lower season to be higher than in Q3? And can you explain whether the Korea project is now scheduled for 2023?

First and foremost, cost inflation. It is difficult to give you a percentage there. I think what we have said in the press release is that we have largely mitigated the effect of the high inflation and the supply chain pressures that we experienced and the longer lead times on certain things as well. So those kind of things are largely mitigated, but you have to realize that we're also executing still in Q3 some projects that were tendered before. For instance, the Ukraine war started because we always tendered for the next season. So also end of last year, we were already tendering for the high season this year in 2022, which means that some of the projects are being executed with the price setting that we had in the previous year or at least anticipated for 2022 at that moment in time. So how many of those projects compared to the new work that we have brought in, I cannot give you a percentage, but that's why we said largely mitigated, but it is affected somewhat by projects that were tendered earlier. And we're obviously running out of that, and that means that we are more up to date, but this is also very important to realize this is a continuous effort. So it will not stop because, yes, inflation is still high. And we -- and nobody knows what will happen with that. So we continuously follow that very carefully and make sure that the pricing that we sent into our bids for the upcoming period are reflecting that and also the bid validity that we use is certainly shortened to be only valid for a much shorter period just to cover for the potential change there. Now we do have larger contracts that are sometimes running longer, as we spoke about before, because that's your next question, no doubt about it. And there, we have escalation fees in there that we also can yes, basically mitigate further price increases moving forward. Then you specifically ask about the outlook and the order book of Q4, which is a good try, but we're obviously not going to give you any very specific guidance on the revenues there. I think it's important, and that's why I made that comment that everybody takes note of the fact before we all get too enthusiastic that Q4 and Q1 are off seasons and winter months and always behave differently than what we have seen in the high season. And that is -- I think you can see what normally -- the normal patterns are in previous years, even if you go back to a more successful years of Fugro in the past. So there's always a change there. And then particularly on the Korea project, I might have spoken about earlier today that is delayed. We saw some permitting issues. I think it's scheduled now for '23, but I haven't got all the details on there, but it will continue. These projects are absolutely scheduled to continue. We see and have seen over time, Obviously, the uptake in the Americas following Europe, but now you also very clearly see higher activity coming in, in Asia Pacific for wind projects and many other projects. So it is really in that sequence.

Okay. And additional question, not so much related with Q2 results, but with your strengthening of the balance sheet. What is needed for you to reintroduce dividends or dividend payments?

Barbara you want to answer that one? .

Yes. That is -- as you know, we've stated 2 components with regards to payment of dividend. One is the leverage being below 1.5x and the other one as it structurally allows us to pay dividend. And that is something that the first is we're below 1.5%. So that is that one. Second part of the equation is something that we're looking into. And we will look at deployment of capital. This is the capital allocation question, as I also mentioned in the last call, and that is what we will be reviewing.

[Operator Instructions] The next question is coming from Quirijn Mulder.

Quirijn from ING. My first question is about the FID market and FIDs. So Mark, do you see some delays here and there. Are there signals that it will be pick up that they will pick up in 2023? Is there a good reason for it? Or are there still delays until 2024. Is that somewhat slippage risk there? My second question about the fourth quarter. Is there anything you can say, if you look at last year fourth quarter, it was quite favorable, thanks to weather conditions. Is there anything to say about the, let me say, what's happening thus far in the fourth quarter? And then about Fugro Quest, I understand that it's probably at work now. And what was the CapEx for Fugro Quest in 2022 to give an idea about, let me say, the investments in that.

Thanks, Quirijn. I'm at least pleased that you're asking us about Fugro results and not something else. So thank you for that. And so question number one, the FIDs, obviously, I'm not in control of what kind of investment decisions the energy companies are taking. So we see quite a fluctuation in these reports coming out. So we run these reports every quarter, and I see some jumps up and down. And yes, it's something that I have experienced looking into this for the last couple of years, where when projects are delayed, they always move, yes, to the next year. So if you look at the restart database, you always see a bit of a jump next year because, yes, some clients are saying, well, that is delayed, that will be postponed. We are taking a decision next year. That in practice will also not happen. So you will always see changes there. Now if I look at, in general, what is happening specifically on the oil and gas project side, to give you a bit more color we saw some growth in the third quarter. As you might recall, what we have said for the first half of the year, there was a big step-up in Q1, but virtually no growth in the second quarter. In the third quarter, we see some growth, which is more high single-digit growth. So significantly less deep than what we overall show as revenue growth and then taking on board that some of the growth is also related to price. I think there is still limited growth in volume and activity on the oil and gas side. Where do we see that activity that is particularly coming in for the gas projects, but it is slow because -- and you hear that also from other peers in the industry. Everybody knows that this is coming up. Tender activity has moved up, but it takes time before these things really come to market and that you're executing work. So that's what I can say in general about the oil and gas market, I would say. So that gives you at least some color. If the FIDs will go up, I certainly think that in general, the market will have to invest significantly more to keep up a certain production level and also to move production obviously from Russia to other places to supply the required energy and to make sure that the security of energy and affordable energy is available. So that's what I can say there. If I go to question #2, you're asking --you try again to ask details about Q4. Yes, Q4 is always a bit of a question mark, especially because I cannot determine the weather. So you're absolutely right. Weather is a big influence to the final stretch of the year. If you have a bit better weather, then we can do a few more productive weeks. If not, then that won't happen. So that is always the complexity that we deal with in these winter months. I'm not going to give you more color on the exact number or what we expect for Q4. In general, I can say if you're busy in our Q3, and we have said that many years before as well, if you're busy in Q3, obviously, you start of Q4 is busy as well. So that gives you some indication. But then it is really about the latter part of Q4, how is November, December developing. And that also determines how your first Q1 will actually be. So that's all I can say. The Fugro Quest, we have spoken about that before, and we indicated when we increased the CapEx last time at mid-year and we added EUR 10 million. And I'm not going to give a very specific number on the Fugro Quest and how much we invest in it because I also see that as competitive information. So I'm not releasing that number, but we have said that we actually decided to overhaul that vessel much more significant than we initially planned. We decided to do more work on the drill rig set up, so to say, for the geotechnical drilling and want to have that vessel operational in the season next year. We are going through trials in November now. So in that sense, you're right, but it's not in production mode yet. So as soon as we've gone through the trials, then it can go into production.

Yes. Okay. Then my final question is about inflation. To what extent did the low oil price in the third quarter help you with -- to mitigate the inflation impact? .

Well, that is very limited, Quirijn, because obviously, we see fluctuations on the fuel prices. And as we have tried to actually move that risk away from us, we obviously share that risk now together with our clients. So we don't make additional money or so on fuel prices that might drop a little bit or increase. Obviously, we're still concerned about increasing fuel prices. Revenues are higher also simply because, yes, we have to charge higher fuel prices to our customers. Fuel prices have absolutely, and I said that, I think last time that they were close to double in some areas. And I can confirm that, that is the case when we look at the marine activities in Europe. Yes, we have had double the cost than maybe what we would normally have had, and we have largely mitigated that by charging it to the customers and to the projects. So we don't see then an immediate benefit, so to say, if the fuel price drops a little bit, that I wouldn't take on board.