Fugro Q3 2014 Trading And Strategy Update

Results significantly below expectations; full focus on restoring margin and cash

Leidschendam, The Netherlands
29 Oct 2014

Highlights1 Q3

  • Rapid deterioration of the oil and gas market.
  • Mid-single digit EBIT margin for the third quarter, which was slightly above the second quarter and significantly below the same quarter last year. The combined margin of the Geotechnical, Survey and Subsea Services divisions was in the low teens; continued losses in the Geoscience division.
  • Expected non-cash impairments and one-offs, in the range of EUR 200 - 250 million, mainly in the Geoscience division.
  • Growth in the backlog for the coming 12 months has flattened and stands at EUR 1,700 million, or 1% below last year at constant currencies.
  • Outlook 2014: due to deteriorated market conditions resulting in project delays, postponements, cancellations and price pressure in its oil gas and gas markets, Fugro expects to achieve a mid-single digit EBIT margin (excluding impairments and one-offs) for the combined Geotechnical, Survey and Subsea business in the second half of the year. For Seabed Geosolutions Fugro expects continued losses around the level of the first half of the year. For multi-client visibility is very low.
  • Due to the poor results and in order to strengthen the balance sheet, Fugro does not expect to pay a dividend over the year 2014.

     

Highlights strategy update and action plan

  • Compelling long-term potential but challenging mid-term market conditions
  • Geotechnical and Survey divisions continue to provide a sound core
  • Updated strategy ‘Building on Strength’ to restore margins, improve ROCE and sustain strong cash flow generation
    • improvement in EBIT margin by 5 – 6 % points over the next 2 years, with the majority of the improvement actions to be finalised in 2015
    • reduced expansion and replacement investments and M&A by EUR 125 - 225 million annually
    • EUR 50 – 100 million working capital improvement in 2015
  • Strategy adjusted to reflect new reality in the oil and gas market
  • For Subsea Services, focus increasingly on client opex and consider partnerships to build a global IRRM market leader
  • For Seabed Geosolutions, full focus is on the turn-around and exploring strategic alternatives
  • Fugro mid-term targets have been updated.

 

Paul van Riel, CEO:

This quarter we have been faced by a rapid deterioration of our oil and gas markets resulting in project delays, postponements and cancellations, as IOCs and large independents continue to cut back on investments, exacerbated by the significant drop in oil price. The poor results and the further weakening of the market outlook are triggering additional impairments.

We have stepped up our cost reduction and performance improvement initiatives to focus on restoring margin and cash flow. We are cutting back on capex and acquisitions and will improve working capital to ensure positive free cash flow. We expect no dividend payment over 2014.

We have reviewed our portfolio. The Geotechnical and Survey divisions continue to provide a sound core. We are transforming Subsea Services to focus on inspection, repair, replacement and maintenance (IRRM), and will consider partnerships to build a global opex focused IRRM leader. In Seabed Geosolutions full focus is on the turn around, while in parallel we will explore strategic alternatives.

I am confident we can weather this storm by our actions to align the organisation to the current oil and gas market reality. We anticipate a weak oil and gas market for some time while our infrastructure markets provide good opportunities. In the oil and gas market, rising depletion and demand growth will at some point bring reserve replacement back on the agenda. Fugro is well positioned for such a return due to the business improvements we are implementing and our strong leadership positions.

Q3 operational review
Revenue, excluding multi-client sales, increased by 4.2%, or 1.4% at constant currencies compared to the same quarter previous year. The EBIT margin for the quarter was mid-single digit, which was slightly above the second quarter, but significantly below the comparable period last year. The combined margin of Geotechnical, Survey and Subsea Services divisions was in the low teens; losses in the Geoscience division continued. The decline in the margin compared to the third quarter last year was caused by:

  • project delays, postponements, cuts in work scope for awarded projects and cancellations
  • price pressure and less high-end work, mainly in offshore geotechnical and geophysical surveys
  • low utilisation of ocean bottom nodes and project losses in the ocean bottom cable projects in Seabed Geosolutions
  • very low multi-client sales
In addition to the EUR 346.6 million non-cash impairments and one-off write-offs reported in the first half of the year, Fugro expects to book additional non-cash impairments and one-offs in the fourth quarter in the range of around EUR 200 - 250 million. This is a consequence of the lower than expected results and deteriorated market outlook. It is mainly related to the Geoscience division (both Seabed and the multi-client library). Furthermore it includes a partial write-down of the Synergy vessel and other write-downs.

Net debt to EBITDA was 2.9 per the end of the quarter, including uncalled bank guarantees and one-offs, or 2.4 excluding these guarantees and one-offs; compared to the covenant requirement of below 3. The fixed coverage ratio, for which the covenant requirement is above 2.5, was 2.8 at the end of the quarter, or 3.0 excluding one-offs. Liquidity and solvency remain strong. The solvency ratio stands at 47% per the end of the quarter.

Growth in the backlog for the coming 12 months has flattened and stands at EUR 1,700 million or 1% below last year at constant currencies. Backlog for the remainder of 2014 is EUR 633 million.

For the third quarter review by division, see Appendix 1.

Updated strategy and action plan to improve margin and cash flow generation
Fugro’s updated strategy, ‘Building on Strength’, is fully focused on improving profitability, return on capital and cash flow generation, while protecting our strong leadership positions. The company has reviewed its portfolio given the current market environment. The Geotechnical and Survey divisions will continue to provide a sound core to the company. For the Subsea division, Fugro will consider strategic partnerships to build a global IRRM market leader. For Seabed Geosolutions, strategic alternatives are being reviewed in parallel to the implementation of the turn-around program.

To address this year’s unacceptable margin development, Fugro is further stepping up margin and cash flow generation improvement initiatives at both the group and divisional levels. While focusing on preserving our market share and leadership in the Geotechnical and Survey divisions, Fugro will:

  • Review options for underperforming or subscale businesses
  • Implement stepped-up performance improvement programmes across all divisions
  • Continue our efforts towards organisational simplification and standardisation
  • Focus on cash generation, by significantly scaling down investments and implementation of working capital improvement program.

     

In Geotechnical, Fugro will exit the well intervention market. Fugro will reduce the vessel fleet (short-term charters) and postpone fleet replacement investments. In addition, the offshore organisation will be realigned to current market conditions.

In Survey, Fugro has stepped-up the restructuring of the aerial mapping business to become an asset light geospatial solution provider by outsourcing aircraft operations. Fugro is also substantially reducing vessel fleet expansion and renewal plans.

In Subsea Services, the implementation of the performance improvement programme will be continued, next to increased focus on opex oriented IRRM (inspection, repair, replacement and maintenance), including the exploration of partnerships. 

In Seabed Geosolutions, a significant restructuring is being carried out to transform the business into an efficient fully modular model, significantly reducing the risk of underutilisation. Further strong emphasis is being put on improving execution of current long term projects. In parallel, strategic alternatives will be explored.  

In the Fugro organisation continued good progress is being made with its strategic development. The implementation of the cross-divisional regional organisation is almost complete. Progress is being made with building a strong support organisation, including finance & control, HR, R&D, IT, legal and HSSE. Fugro has identified quality improvements and efficiency gains that will be realised through further simplifying its organisation. Within the finance function, business controls are being improved and IT systems upgraded. Initiatives and actions to strengthen the organisation have been reprioritised to bring full focus on margin improvement.

Updated mid-term targets
The ongoing action plans are anticipated to generate:

  • improvement in EBIT margin by 5 – 6 % points over the next 2 years, with the majority of the improvement actions to be finalised in 2015
  • reduced expansion and replacement investments and M&A by EUR 125 - 225 million annually
  • EUR 50 – 100 million working capital improvement in 2015

Fugro has updated its mid-term targets. The targets for 2017 (excluding multi-client) are:

EBIT margin for the group

8 12%

  • Geotechnical onshore

8 – 11%

  • Geotechnical offshore

11 – 15%

  • Survey division

12 – 15%

  • Subsea division

6 – 9%

  • Seabed Geosolutions

5 – 10%

Return on Capital Employed2 for the group

8 – 12%

 

The lower end of the range is based on the current challenging market conditions; the higher end of the range assumes a market improvement.

Outlook 2014
Due to deteriorated market conditions resulting in project delays, postponements, cancellations and price pressure in its oil gas and gas markets, Fugro expects to achieve a mid-single digit EBIT margin  (excluding impairments and one-offs) for the combined Geotechnical, Survey and Subsea business in the second half of 2014 (excluding impairments). For Seabed Geosolutions Fugro expects continued losses around the level of the first half of the year. For multi-client visibility is very low.

Dividend
Due to the poor results and in order to strengthen the balance sheet, Fugro does not expect to pay a dividend over the year 2014.

 

Capital Markets Day
Starting at 10:30 o’clock UK time / 11.30 CET, Fugro will host a Capital Markets Day in London, where management will present its strategy update and a comprehensive action plan to improve margins and cash flow. The presentation can be followed through a video webcast accessible via www.fugro.com.



1 All results unaudited.

2 Capital employed in respect of the ROCE calculation is defined as average total equity plus net interest bearing debt. ROCE is defined as NOPAT as a percentage of a three points average capital employed. The three points consist of the last three reporting periods. The vendor loan related to the divestment of the majority of the Geosciences business and the Seabed warrant are excluded.

For more information

Media

Rob Luijnenburg
media@fugro.com
+31 70 31 11 129

Investors

Catrien van Buttingha Wichers
c.vanbuttingha@fugro.com
+31 70 31 15 335

 

Share this page

Sign up for email updates

Email updates