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

Good morning, everybody. This is Catrien van Buttingha Wichers, Investor Relations. Thank you for dialing in to this call. We are here to talk about our Q3 trading update, a brief presentation from Mark Heine, CEO; and Barbara P. Geelen, CFO. And after about 15 minutes, there will be room for your questions. Mark, please go ahead.

Yes. Thank you, Catrien. Also very welcome from my side by this Q3 2023 trading update call. If we can go to the first slide. Highlights of the Q3 2023 performance. Obviously, we are excited that we can report another set of strong results with the revenue going up 32.6%. We are clearly successful in capturing the high client demand that we see, particularly in the energy markets. We also can state that we realized again a substantially higher revenue in renewables, which is offshore wind. And that is now representing 1/3 or more than 1/3 of the group revenue year-to-date. The world needs energy. It needs actually affordable energy, and then there is also the strong wish in the large part of the world to go green and to be cleaner on the energy side. And this is what we also call the energy trilemma and that trilemma is also a dilemma, but that's the tension that we see obviously in the world right now. This also means that we expect further growth in the traditional energy, especially in the gas market, where Fugro Solutions, yes, continue to help our clients to operate safely and efficiently. The 12-month backlog continues to be robust with a 14.5% increase, and that is after obviously steep growth during the previous quarters. The margin continued to expand to 16% EBIT margin for this quarter, and that's driven by an outstanding performance, particularly in the Marine Site Characterization business. Operating cash flow was up by 95% and to EUR 135 million. Over the past years, we have successfully transformed the company into a diversified company with significant position in renewables and strongly improved results. And we believe that we are ready for the next phase, and we'll obviously, as you know, update the market on our strategy and midterm targets and our Capital Markets Day on the 14th of November this year. Today, we already communicated our intention to resume dividends with a payout of EUR 0.40 per share for 2023, and that's obviously subject to shareholder approval and Barbara will say a few more words about that later on. Next slide, please. So we communicated on our path to profitable growth strategy 5 years ago and of 2018, which included midterm targets, as you see them here on the board for our margin, EBIT margin, free cash flow and return on capital employed. And this latest set of results reconfirms that we are delivering on these targets and that we are ready for the next phase for our strategy and related midterm margins or targets and it's actually pleasing to see that we've managed to deliver this within the original time frame that we originally set in 2018, albeit the Covid years obviously delayed the execution of the strategy. But due to swift and firm action at the time, we have mitigated these effects significantly. And we managed to get back on track right now and anticipate to deliver on this in the original time frame 2023. Next slide, please. I always like to make our work more tangible with a few project examples. So the first one listed here on the left is the Thor wind project. Wind farm project for RWE, Fugro has been appointed for the preconstruction survey for Denmark's largest offshore wind development, and the data acquired will define actually all the cable routes and turbine locations. And this award builds on Fugro's prior involvement in this project. We have done multiple things there, including comprehensive geotechnical site investigation in 2022. And regarding offshore wind, it's maybe good to make a few general remarks there because despite the recent news flow around the delays in several offshore projects, we believe that we have not seen any immediate impact in our business right now as we are actually operating in a very early cycle moment of the whole lifetime of this development. And we expect the growth actually to continue -- it's what we see is actually a maturing of the market, which is quite normal for this fast-growing market at the moment. And with these high demand from all these governments, we believe that there is a lot still to do, and it's actually quite healthy that this is actually stabilizing a little bit and also logical that it consolidates somewhat. We feel that we will be supported by the wind power package that is this week -- earlier this week, launched by the EU, which is a reflection of the industry coming up with some advice to all these governments, European governments to solve a few issues. There was a list of 10 points that should be addressed to allow the industry to actually be able to deliver on all these high ambition there. We believe that the energy transition is anyway underway and will continue. And the world needs, yes, available energy and also affordable energy. So therefore, we also expect that further growth in the field of traditional energy will continue, especially in the gas market, where our solutions continue to enable our clients to operate safely and efficiently. So that on offshore wind, a totally different project is listed there as the second project is South Carolina road scanning project. It's a 5-year contract for pavement data collection and condition assessment services. And that's for the local government there the South Carolina Department of Transportation and we detect the small cracks in the Tarmac to help them also reduce the maintenance cost in the future for these roads. And then the third project there is the big bridge, the Manila bridge also called the Bataan-Cavite Bridge, and we're doing all the nearshore geotechnical work, yes, before the design can be made to actually get this whole project going. It's a major infrastructure program. You have to improve the road connectivity in the Philippines. And this is actually the third phase of site investigation that we get involved in, and the field work this time for this last phase is now planned to start next month in November. And then the last element mentioned there is actually referring to the first Middle East remotely operated subsea inspection. We have done that in other areas in the world, but recently, we have done the first one in the Middle East, and this is totally done out of a control center, remotely operated control center that we have in an onshore location operating this uncrewed vessel doing the inspection work offshore. And with that, I close this part of the presentation. I hand over to Barbara for some more details on the financials.

Thanks, Mark. Just like Mark, I am excited to present this set of results. And on this slide and some of these items as I have already been showed by Mark, but it shows the highlights of our trading update. And just a couple of brief comments here. Across the globe, we are successfully capturing high client demand for our solutions, most notable in renewable and oil and gas. And as we have said before, for us, it's not about the growth in itself. It's important that we also expand our EBIT margins. And I'm pleased to report on that today that again, we have been able to progress this further. On EBIT and EBITDA and driven by a significantly higher EBITDA, operating cash before changes in working capital increased by 95%. This was offset by higher working capital as a result of this very steep revenue growth, resulting in a free cash flow in line with last year. Next slide, please. This slide clearly shows our margin expansion trajectory. Overall, we have reported a steady year-on-year improvement over the last 4 years and in particular, in this year. And looking at 2023, all regions contributed. In particular, the Americas and Europe Africa. Overall, better contracting conditions, high activity levels, and good project execution led to a very strong performance, especially in the Marine site characterization. And as a result, year-to-date, our EBIT margin was 11.5%, and 9.9% on a last 12 months basis. Next slide, please. In the graph on the top, you can see that the revenue increase was driven by Marine in all regions. Revenue was up by 47%, and the steep increase was the result of, on the one hand, better pricing. And on the other hand, an increase in the number of paid vessel days enabled also by a larger geotechnical fleet. Overall, the utilization of Fugro's owned and long-term charter vessels was 75%. Revenue and land was in line with last year due to some local subdued markets in several geographies around the world. On the bottom half of the slide, you can see the development of EBIT. All regions reported higher margins as a result of top line growth in combination with operational efficiencies. And driven by an outstanding performance in the Marine site characterization the EBIT margin amounted to 16% compared to 10.9% in the third quarter of last year. In our land business, EBIT margin declined mainly as a result of lower revenue and local circumstances, as just mentioned. Next slide, please. Driven by a significantly higher EBITDA, as I just mentioned, operating cash flow before changes in working capital increased from EUR 69 million to EUR 135 million. And this increase was offset by higher working capital as a result of high revenue growth. At the end of September, working capital as a percentage of revenue amounted to 15.6% compared to 14.6% for September last year. And we expect a partial unwind of this working capital position in the fourth quarter, in line with previous years. Overall, free cash flow amounted to EUR 67 million, in line with last year. Then next slide, please. Year-to-date, CapEx increased slightly, and this was mainly due to the delivery of the first of the 2 Geotechnical vessels planned for this year. We are currently in the process of converting this vessel to Fugro Resilience, and she is planned to be available for geotechnical work early next year. And I will get back to the Scout and Voyager when presenting the next slide. For the full year, CapEx is estimated at around EUR 200 million, which is below the previous guidance of EUR 200 million to EUR 225 million. And this includes the acquisition of the [ Fugro-Resolve], but not the conversion of the vessel as this will shift to 2024 as we will only take her in later this month, early next month. Next slide, please. So as a result of our strong performance, the net leverage has come down to 0.7x as you can see in the chart on the right hand. And therefore, after careful consideration, we have come to the conclusion that we will take early delivery of the Scout and Voyager instead of extending the financing arrangement because this results in a further reduction of gross debt and financing costs. And our current performance and liquidity position allow us to take this step now. And additionally, this action is also a cleanup of the balance sheet. The cash consideration, net of the deposits and prepayments will be EUR 39 million, and this will be financed from existing cash resources. Now moving on to dividend. For full year 2023, Fugro intends to resume dividends with a payout or $0.40 per share, subject to shareholder approval. And in conjunction with benefiting from further opportunities in the market, Fugro will amend its dividend policy to 25% to 45% of net results. And more details on capital allocation will be shared at the upcoming Capital Markets Day on the 14th of November. Next slide, please. Then that leaves the outlook for the full year, we foresee an ongoing strong revenue growth, as we said for the full year. The EBIT margin and return on capital employed to be within the midterm target range and new midterm targets will be communicated again on the 14th of November, put that in your calendar and a positive free cash flow. Thank you very much.

Okay. With that, we open up for questions.

[Operator Instructions] We'll take our first question from Luuk Van Beek at Degroof Petercam.

Well, first of all, a question about the organic growth, which was very healthy in Q3. Can you give a rough indication how it was split between volume and pricing?

Thanks, Luuk, for the question. So we do not have those exact figures for the total group. But we do have an indication of that. And in the past, you might recall us stating that we felt that half was related to price and half to volume. Over the last period of time, we believe that it shifted a bit more towards price. So it tilts more to potentially, yes, 60-40 or in that range, and that is not very exact and not the same for every area of the business.

That's helpful. And I have a question about the vessel utilization of 75%. It is a bit lower than in Q3 and below the optimal level of high 70s that you mentioned earlier. Well, activity levels were very high. So can you explain what is funding you from realizing higher facial utilization and how you look at, say, optimal levels going forward?

Yes. So I think it's always important to understand very well what we're looking at and what we're talking about because we guide for, yes, probably an ideal vessel utilization in the ideal situation probably in the high 70s, as you say, 78 or something like that. I mentioned in the past as well, that is for the average for the total fleet, so in every area of the world. Whereas at the same time, you will see in busy areas that vessel utilization could be in the high 90s or close to full-time use, which is quite common in the quarter -- in the third quarter. What we have to realize that this is also containing obviously the general moments where we have to do some maintenance and also related to that is maybe one or 2 vessels that might be just on the wrong side of the world and it doesn't have any work or do not have any work or have a delayed project that they can't start up. We also always face difficulties with 1 or 2 vessels around the world. With maybe temporary breakdowns. So then the utilization goes down for the total group and that effect is quite intense for the total number, so to say. So we believe that 75% is a very solid utilization. Is it possible to get some more? Yes, it's possible, then everything needs to go well with the whole fleet in every area of the world. And that is probably more an exception that happens then that it happens all the time. The 75% is now applicable on a larger fleet. So we do have additional capacity, and that's also why you see more vessel base more turnover generated in the Marine Site Characterization business.

And my final question for now is on land where you mentioned that a couple of geographies where were more challenging. Can you give an outlook for those geographies? Do you see any signs of improvement there? And also, are you satisfied with your current positions? Or do you think that you need to readjust your network to ultimately position it for the future?

Yes. Thanks for that question as well. Yes, so just to be probably brief and mention a few examples, obviously, very close to home here in the Netherlands. We have the problems with the nitrogen situation which affects the whole building industry and the infrastructure development. And that also affects our business in Fugro. Other examples are, for instance, to mention another one, Hong Kong, the government is postponing some projects. So also there, the economy slows down a little bit. it's more postponement than things won't happen. But all these kind of things cause if you have that in a number of countries that the growth is limited or nonexistent right now in land -- and I think it's also important to emphasize that the growth is not the most important thing for us. It's actually the return of that land business. And we're well positioned in many countries and some other areas, we would like to further expand and build ourselves a stronger portfolio of services. And we'll obviously provide more information on that in the Capital Markets Day where we want to go.

We will take our next question from Thijs Berkelder at BHF. Please go ahead.

Congratulations with very strong performance in the past quarter. First question on the dividend. Can you tell us whether it will be a cash dividend or a choice dividend?

Yes. We'll keep the choice dividend, Thijs.

Okay. next question on the outlook still for 2023. Is it logical that we can expect a higher EBIT margin in Q4 than in Q4 last year?

Well, we have been a little bit careful and very specific about not guiding too much on the fourth quarter. And you know that very well following Fugro for many years. This can be varying quite a bit in the last few weeks of the year. Actually, it sounds a bit silly, but it's a quarter, obviously affected by seasonality in general, but especially in the last couple of weeks of the year by the weather, and that can actually have quite an impact on the total quarter performance. Now having said that, you know what we have done over the last couple of years in the fourth quarter. And you have also seen what we have done in the earlier quarters in the year. I think it's logical to expect that we can improve in all the quarters how much is difficult to say so that's what I can say about it.

Okay. Then on offshore wind you give us continuously optimistic outlook for the sector. Can you tell us whether you've seen any larger cancellations or delays of 3 growth projects in the past few weeks/months coming in, in offshore wind.

No. So there have been no delays in any project that directly affects any business that we already secured or that is now not happening or something that we were involved in already. And the reason for that is that -- we are a very early-stage involvement. And yes, some of the projects that we do actually not get to fruition at all. So -- but if clients want to make an economic assessment on how much the development actually for a particular area will cost, they need the basic site characterization information. So we also get involved in areas where potentially in the future, no development will take place. So that's good to realize that. But yes, what we have heard in the last few weeks over in a few projects in the U.S. and also in Europe. We already did the work there, and we are not directly involved in these particular projects. We also see in general that there is a lot of work out there and we were actually concerned over the last few years, even that the ambition of many governments were so high that the whole industry could not supply this demand. And in that aspect, we believe that it's a healthy situation and that it consolidates a little bit. It's also, I think, normal to see this in a maturing industry and market. A market that grew obviously, in a very short time frame, very fast, and it's logical that people start to take a little bit of a helicopter view in what should we develop and whatnot and how does it work in the current cost environment. So we are not surprised and we don't see this as a long-term down cycle. We see that as something that was going to happen probably anyway. And it will have an effect for sure. We do not see that having a major effect or a significant effect on the Fugro business moving forward. Also in the light of the fact that we can actually move our assets and people around quite easily to other projects as well. And we have said that also in the traditional energy market, potentially even inspection on existing infrastructure could easily be done with the same assets and people involved. So we can move our assets around and that helps also between various regions. And last but not least, it's also mentioned in the press release, we see that even Europe is listening very carefully to all the comments from the industry around offshore wind development. And obviously, the wind power package is an important one, as mentioned before, that supports the total industry moving forward. So we feel that, yes, there is impact on the industry for sure. We do not see a direct impact on our results right now and we also do not anticipate a significant effect there. But having said this, I think it's also moment maybe to say that we do have 2 project cancellations related to the Middle East disturbance that we see, obviously, in Israel at the moment. And then in the Gaza, we had 2 projects that were -- one was canceled and one was postponed. So that has an effect -- some effect in the fourth quarter. It's going to be in the [ sphere ] of millions on the turnover, but not a major overall effect or not a major effect in relation to the overall result of Fugro, but there will be an effect in the fourth quarter and the first quarter, as we can see right now.

Okay. For now, my final question is on the transaction on the Fugro Scout and Voyager. Can you maybe give an indication for what kind of savings this handover gives for potential net result 2024 and/or whether there may be extra CapEx needed for grade or maintenance of these vessels in 2024?

Yes, I can take this, Thjs. We will see -- I'm not going to go into the precise amount. We're not what I can tell you is that we're not going to have the interest that we will be paying on the financing arrangement going forward. We will also release the prepayments and the deposits so there is some interest on there as well. So this will have a positive impact as such. And on the conversion, as you asked the question, we are planning for both vessels to have a pretty extensive hybrid conversion and that will be taking place '24 and 25. We're planning that. Planning is now very important both from a shipyard perspective, long lead items perspective and equally from a business perspective. We're very busy in the market, as you can see. So timing there is something that we're still looking into. At the moment, we're not giving guidance on the cost of these conversions, but I can tell you they're quite expensive.

We will move on to our next question from Thomas Martin at BNP Paribas.

You've answered if you mind. But maybe following on from that last comment on the conversions. Can you tell us how many vessels you actually plan to start converting in 2024? I think you had one that you've been working on for a while, if I remember with planning and that of -- there's been yard activity yet. Is it just those 2 that you mentioned? Or are there other vessels going in 2024 for conversion?

Well, it's -- some conversions are bigger than others, depending on what needs to be done on the back deck. What I can say is that the 2 vessels we purchased this year are being converted. So one is actually already in the shipyard for conversion. That was the first one, that is the resilient and resolved. That's the second vessel, which we will get delivered will be converted next year. And this is also one of the things we need to time this quite carefully. Also, what we're working on, if we have we have these long-term charters added to the fleet. For example, we have that with the Pacific Hornbill in Singapore with the HOS Browning last year with the [ Sea Gull ] this year. And these are all is about geotechnical vessels so they need drill towers on top of the vessels and the [ moon pool ]. And these are quite elaborate conversions. Having said that, a number of them have already been done very successfully now. But these are the ones, the Resilience, the Resolve and Scout and Voyager. Those are the big conversions.

And sorry, I probably wasn't clear in my question. Those are conversions, including from PSV to geotechnical. But specifically in terms of the net zero targets in greening the fleet, how many -- do you plan to convert in terms of fuel source?

Yes. So we are working on one methanol conversion at the moment. That's the vessel called the Pioneer. So that is -- that will have a full conversion on the Scout and Voyager, these will be hybrid conversions. They all are aligned with the net zero strategy, the methanol conversion and the -- being that mainstream or not yet mainstream, we are carefully planning for the net zero investments. Technology is not fully matured yet. Availability of methanol is not there. So we are making those investments. We're converting that. We have subsidies to partially fund those conversions. And we expect the technology also to mature, and we are contributing to actually also maturing that technology and our way to convert it. But it's early days, I would say. So I'm also looking at Mark here, which you cannot see, maybe he wants to add something.

No, I think it's important to take note of the fact as Barbara says that technology is not really mature yet for these kind of vessels to transform into a net zero solution that we're quite far away from that. The pioneer situation, as Barbara said, with subsidies is a pilot project. So we're really running that pilot to see how we can use methanol on these kind of vessels and then we need to monitor that for 1 or 2 years to see how that develops. And if we can then thereafter. So that's quite far in the future, start to transform other vessels in a similar fashion, but fuel needs to be available as well, affordable and available. And on the hybrid situation, yes, there's limited benefits of installing battery packs. It's not necessarily always economically viable and the reduction of CO2 emission is very limited. And therefore, we are experimenting with that as well on the Scout and a Voyager. Those will be the first hybrid conversions that we do, and that is to also build up experience on that front. But that will not be the solution in the future because it will only reduce maybe 10% the CO2 emissions, and that will differ vessel by vessel. So that is basically the situation.

Very clear. On offshore wind, could I just ask one a bit geographically focused, I guess. Lots of the recent news flow, not all of it, but a lot of the recent news flow has been in the U.S. You've spoken in broad terms about how you're very positive about the outlook for the future. But I just wondered specifically in that North American market, have you sensed any reduction in appetite to push ahead with projects there.

Yes. So I think it's good to mention and you probably picked up the news on the New York Bight project from CIP yesterday or day before yesterday with 4 gigawatts award to them on the East Coast of the U.S. So also there, things will continue maybe on different conditions than what the earlier fields were agreed on. And we have to realize that some of these operators need to secure licenses and then we'll define and decide in the years thereafter if they're really going to pursue with it because they're only pay a certain amount of fine if they don't go half with it. So in that sense, sometimes they take a little bit of risk and then they have the optionality in there. So that's also what we feel is probably normal and logical in a fast-growing and developing market. We do feel that maybe some of the discussions will have more impact maybe on the U.S. Having said that, I think it's positive to see the developments there in the U.S., again, with the announcement of CIP and we expect more to happen there. We're still very busy in that area as well. But yes, we do feel that also the Inflation Reduction Act is not working for everyone very well. So we hear mixed messages there. And I think it might take a little bit longer on the U.S. side to really get to fruition there.

Margins, if I could just go back to that, to clarify, I guess, third quarter very strong year-to-date, actually pretty strong as well, 11.5%. I'm not hearing any reason to think that what you've achieved this year isn't sustainable if operational execution remains good. I noticed your points probably about a couple of Middle East projects in the fourth quarter and the weather at year-end. But in broad terms, is there [indiscernible] not to interpret your recent delivery, combined with the fact that you said contract terms, I think they're still improving. Margins are going to continue to rise -- aren't they if operational execution remains good. Is there anything exceptional in there that I've overlooked.

Yes. So I think it's important and if you look back -- to look back at the previous years as well and what normally happens in the fourth quarter, and it has to do with the fact that seasonality kicks in. Normally, that means also that less clients are eager to do the work in the fourth quarter. So we are actually -- we have secured the work. So we have work -- so in that sense, that is positive, maybe more positive than some of the previous years where maybe some of the assets still needed a secure work. So I think we're quite confident that the work is out there. But in general, you see pricing going down a little bit in the fourth quarter because it's off season time, more the latter part of the fourth quarter. So that has an effect. And I would certainly suggest that you look back in the previous years, what the fourth quarter normally does. And as I just sai,d, also to [indiscernible], it's logical to assume that yes, we can improve ourselves throughout the whole year in that sense that every quarter is somewhat better than previous year. But we are careful because we do not know which site we will be on because, yes, the weather of the last few weeks will be very impactful on the overall results. If we can continue to work a bit longer, then that has a positive effect. And we have seen in previous announcements in previous years as well that if the weather is -- yes, not good for us, then it will also press the year results a bit down.

Okay. Sorry, understood, yes. I wasn't meaning just 4Q then, I was thinking sort of on a year-forward basis. Q3 margins are up, what, 4% year-on-year roughly. And yes, there's nothing exceptional in there. It's just good execution and good contracts.

Yes. I think it's probably good to emphasize here that the third quarter, and I think we even use the word exceptional in -- an exceptional growth in the third quarter. And why do we do that? Because it's a combination of yes, growth demand more work, but also a very strong execution. And I think that is helping us, and it all comes together in the third quarter. So I would not take that as the new normal. That's why we wrote it like that. Moving forward, we obviously feel that we have also, yes, fixed quite a few things and that we're now also performing out of all the regions in Marine Site Characterization, where we said in the previous calls and previous years, a couple of years ago, it was only one region. Then it was all the regions, but not site characterization. And this year's site characterization had to kick in all the regions as well, and that is actually happening right now. So we are firing on all the cylinders, also on marine site characterization, and that is, I think, very positive. That means we are at a new level. That doesn't mean that the third quarter performance is the new normal for, yes, let's say, normal high season work.

Okay. Great. Sorry, maybe one final one. Utilization, the market is growing, okay, 75%, maybe add a few percent headroom in Q3. But you're pretty busy. You've got the 2 PSV conversions coming in. Do you have the ability to continue meeting this growing demand. When do you think we need to further expand the fleet?

Yes. So obviously, that is the big question out there. I fully understand that. And the good thing is you only have to wait 2.5 weeks because then we have our Capital Markets Day, and we'll give some more insights into all the plans for the future.

We'll now move on to our next question from Quirijn Mulder at ING.

Yes. Good morning, everyone. So my congratulations on the results. And I would like to have a couple of questions. My first question is about working capital was quite large. Is that for a part related to -- for most related to the fact that you did a lot of work in the second part of the quarter. Is that the right conclusion or not?

There's a couple of reasons for the higher working capital is indeed a steep growth. And as I mentioned in some calls before, what we're seeing is a trend in the market is that we're really dealing with larger projects. And that means that the work takes longer but that also the milestone payments are and the milestones that you agree in the contract are stretched up but are also larger. And that in combination with the steep growth is eating up a lot of working capital. So around 75% of that is related to top line growth. The part that indeed, as you state, correctly, Quirijn, is we have done work in the second half of the quarter as well. And the unbilled portion in the working capital is actually quite large. And this is what we need to -- we need to make sure that we can build our customers and also get in time and that we expect to happen. And as I said, I expect to see a partially unwind of this position towards the year-end also in line with previous working capital developments.

Okay. No, that's fine. But let me say, in general, if the third quarter is so busy, then this has a good overflow in October. Can you confirm that? That, let me say, the activity ratio in October was already quite good.

Yes. No, that's correctly stated. But as you also heard Mark say weather in October, has -- the weather that we had in Q3 is not all continuing in October. So we'll have to see. It will be a combination of both. But the work is there. That is the right statement, yes.

Okay. Then on the, let me say, the lost orders due to the Middle East contentions. Who are these clients who are, let me say, cancellations or, let me say, postponing? What's behind that? Is that, let me say, for political reasons? Or is that for fear? Or is that -- can maybe Mark elaborate on that?

Yes. So one of the clients, I can say that the Chevron, and they basically canceled all the projects in the neighborhood.