Akastor ASA

OSE:AKAST

Earnings Call Transcript 2018-Q1

[Leif Hejø Borge, Former Chief Financial Officer]

Okay, Welcome to this first quarter presentation here in Fornebu. This morning, we have Karl Kjelstad, the new CEO; and, Leif Borge, CFO. So first, Karl Kjelstad will say a few words about the first quarter highlights. Please, Karl.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Leif, and good morning to everyone on the call.In the first quarter, our portfolio companies continued to meet challenging markets. However, we were able to deliver a decent first quarter result, with a 9% margin for MHWirth. In AKOFS, we saw a step-up of the revenue after the successful start-up of Wayfarer. And also, the remaining portfolio companies shows improved results.Our net bank debt is more or less in the same level as in the fourth quarter, and we have a liquidity reserve of NOK 1.6 billion. It was a good headroom for investing in our portfolio companies and also to pursue add-on investments.The Mitsui transaction will further strengthen our liquidity position.In the second quarter, we announced a contract with Keppel, MHWirth for full drilling package, but this is, therefore, not a part of the order intake in the first quarter. But still, we have a decent order intake that is more or less on the same level as the revenue in the first quarter.Let me move on to the third slide covering the portfolio highlights.For MHWirth, we see some signs of market recovery, but it is slow and it is in some few market niches. It is encouraging to see that our single equipment sale is improving, and also that DLS business continues to be a solid basis for our business.When it comes to AKOFS offshore service, we were very happy and pleased with the successful start-up of Wayfarer for the 5-year contract with Petrobras. We saw somewhat lower revenue utilization on Santos in the first quarter. And this is due to -- this is a revenue operational business, and there always are operational issues. But in the first quarter, it was somewhat worse than the normal. But we see that already now in April, we are back on track with the high performance with Santos.For the other portfolio companies, and then especially for NES Global Talent, we see a good development. NES shows a strong growth. And we saw in March, for the first time ever, that the global number of staffing personnel exceeded 8,000. The strongest growth we see in Americas and in Norway. And I believe this is other sign of start of a recovery, since temporary staffing is very often the preferred option when business starts to pick up again.Let us move to the M&A activity slide, Slide #4. The key theme for our M&A activity continue to be to develop our existing portfolio and also to capitalize on business opportunities that we see in and connected to our portfolio companies.In the first quarter, we made a financial investment in Awilco Drilling that we assess as an attractive investment on its own merits, but also an interesting investment based on that we over a long time have worked through MHWirth together with Awilco Drilling to develop this harsh environment ring. And by this Investment, we are supporting the first new building contract in this segment since the downturn in our market.The establishment of the joint venture for AKOFS Offshore with Mitsui is well underway, and we are aiming for a finalization of all agreements in the second quarter.After the first quarter, we have also made an investment in Odfjell Drilling that will enable Odfjell Drilling to expand its assets base. As with the Awilco investment, we believe that also this is an attractive investment on its own merits, but it's also -- but we see also a strategic value in this last investment, especially since we are part of the investment on launching development project together with Odfjell and Aker BP, aiming to develop the next generation high-performing drilling rig.And Leif, I leave it to you to go through the financial numbers and also give some more details on the preferred equity instrument that we have provided for Odfjell. Thanks.

[Leif Hejø Borge, Former Chief Financial Officer]

Yes. Thank you, Karl. I'm referring to Slide 4 in the presentation. As already mentioned, investment in Odfjell is in a preferred equity instrument. The intention in our dialogue with Odfjell has been to establish an instrument that qualifies for equity, but with planned repayment in 6 years after the first initial contract period of the rig. The amount to be invested now in the few weeks is USD 75 million. We will receive an upfront fee of 5.75 million to be paid in 12 months. And the preferred yield at 10% interest the first 6 years, of which 5% to be paid and 5% to be accumulated. And after 6 years, the interest will gradually increase up to a maximum of 15%, of which then 10% cash and 5% accumulated. Therefore, for the first 6 years, the instrument will yield between 11% and 12%, take the fee into account. Then a warranty structure will be put in place where we can receive up to 5.9 million shares in Odfjell free of charge, depending on how the share price in Odfjell develops over the next 6 years. There are 2 triggers. First of all, 1/6 of the shares can be distributed per year if the share price has increased with 20% per year or more. The results or catch-up effect, which, for example, means that if the share price has not passed this threshold of 20%, the first and second years, but passed it in the third year, then we will get 50% of the shares at that point in time.Secondly, in year 6, if not all of the warrants have been exercised by then, we will get shares depending on the share price 6 years after the loan agreement became effective.If the share price in Odfjell is NOK 36 or less at that point in time, we will get nothing. If the share price in Odfjell is NOK 107.5 or more, which represents a growth of 20% per year the next 6 years, then we will get all of the shares. And then it's linear in between. So if the share price is in the middle of NOK 36 and NOK 107, we will get 50% of the shares. The share price is, of course, also to be adjusted for any dividend payments, if any.Based on all of this, we expect to achieve a return on the pref equity instrument in a range of 15% to 20%, once again, totally dependent on the share price development in Odfjell during the next 6 years.Also, in case of a change from control in the company, the call premium repayment of the equity instrument will be triggered, but with a maximum call premium of 50%. And all of the warrants or all of the shares will be distributed immediately.Then let's move on to Slide 5 in the presentation and have a look at the financial numbers. The revenues in the first quarter was NOK 1.1 billion, which is 20% up compared to last year. Both MHWirth and AKOFS contributed to the growth. The EBITDA of NOK 140 million gives a margin of 12% in the quarter. Net financial items relates to Wayfarer lease of NOK 56 million, interest expenses of NOK 17 million, and further impairments of the DOF Deepwater vessels of around NOK 30 million, while the financial investments contributed positively with around NOK 13 million in the quarter.Net profit from discontinued operation relates to the earn-out on the shares in NES Global Talent, where we expect to increase our shareholding from 15% to 17% in the second quarter due to the earn-out that was put in place when we made a transaction last year.Then let's move on to Slide 6. The total capital employed in the quarter amounts to NOK 7.2 billion, of which 90% is tied up in MHWirth and AKOFS Offshore. The investment of NOK 625 million, as shown in the foil, relates to the shares in NES Global Talent of around NOK 400 million, the shares in Awilco Drilling, around NOK 90 million, based on the share price at the end of March, and shares in our pension fund of are around NOK 120 million.Then Slide 7. The net debt went down to around NOK 2.2 billion as of first quarter, of which net bank debt amounts to NOK 830 million. The cash flow was marginally negative caused by the investment in Awilco Drilling, but the debt was reduced due to currency effect, as some of the debt is in U.S. dollars, which weakened relative to Norwegian crowns during the quarter.We still have a solid liquidity reserve of NOK 1.6 billion, and we have a good headroom with regards to our financial covenants going forward.Then Slide 8. MHWirth delivered a decent quarter with revenues of NOK 731 million, up 17% versus first quarter 2017 and an EBITDA margin of 9%. Service revenues was around NOK 400 million in the quarter, which is quite stable compared to previous quarters. Thus, even though we see a gradually improvement in the offshore drilling market as such, number of rigs in operation and service revenues in MHWirth has yet to improve.The order intake of NOK 724 million gives a book-to-bill of around 1 in the quarter. But remember that this does not include the order intake from the Awilco Drilling contract, which comes in the second quarter, with an order value of around USD 100 million.Then Slide 9. So our AKOFS Offshore has shown gradually -- as you can see from the graphs in the slide, AKOFS Offshore has shown a gradual improvement the last 5 quarters. Revenues in the first quarter of NOK 262 million is up 41% since last year, of course, caused by Wayfarer commencing operations in Brazil.The EBITDA of NOK 86 million is substantially better than the same quarter last year. For the same reason, Wayfarer in to operation. While the result in the quarter was somewhat negative impacted by a somewhat lower revenue utilization on Santos in the quarter. The revenue utilization was around 90% in the quarter, while historically, Santos has delivered close to 100% revenue utilization. As already mentioned by Karl, we expect this to improve in the second quarter.Then Slide 10, with regards to the other portfolio companies in Akastor portfolio. Step Oiltools delivered revenues of NOK 53 million and an EBITDA of NOK 2 million in first quarter. The market for Step Oiltools is still weak, but at least, we see more stable activity and marginally positive result in cash from this business the last quarters.Cool Sorption had revenues of NOK 17 million, with a breakeven EBITDA. However, the company signed an important contract in the month -- in the quarter, so we expect positive results for this year.First Geo had revenues of NOK 32 million, with an EBITDA of NOK 3 million. Also, from First Geo, the activity has improved somewhat the last months. For this segment, other holdings, the order intake was quite strong with NOK 345 million in the quarter. This mainly relates to Step Oiltools and Cool Sorption and gives somewhat better visibility going forward than in previous quarters.Then I give the word back to Karl for some final remarks before we open up for the Q&A session.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Leif. I just wanted to close with some few words about Akastor as an investment company.Our focus going forward will continue to be to develop our portfolio companies, as we've done in the past, and has been the reason why we have been able to enhance value in our portfolio, both through transactions and also through improving results in the portfolio. So to optimize the cost base in the portfolio companies and simultaneously be able and prepared to take part in the future growth is a key for us.When it comes to our M&A agenda, it will continue to be to capitalize on our portfolio companies. That means add-on investments that can strengthen our portfolio companies. And also, it means investments in segments that we are familiar with based on our portfolio.In 2019, we are going to refinance our existing facilities. And in that, we will have a strong focus on getting in place with an optimal capital structure that will be aligned with our portfolio mix going forward.I think we are now ready for some Q&As. So could you please help with that?

[Leif Hejø Borge, Former Chief Financial Officer]

Moderator, could you please help us with the Q&A session?

[Operator]

[Operator Instructions] We will take our first question from Frederik Lunde from Carnegie.

[Chr. Frederik H. Lunde]

Just a quick question on AKOFS, in terms of the financial impact of the downtime on Skandi Santos, and also, if there are extra costs relating to the start-up on the Wayfarer this quarter.

[Leif Hejø Borge, Former Chief Financial Officer]

Yes. As I mentioned in the presentation, the revenue at Skandi Santos was around 90%. If you compare to -- if you use a day rate of say around USD 200,000 over 90 days and compare it to 100% utilization, we talk about like USD 1.5 million to USD 2 million impact of a low revenue utilization compared to where it has been in the previous quarters.With regards to the start-up of Wayfarer, there has not been any start-up cost as such impacting the P&L. However, also for Wayfarer, the revenue utilization has been marginally below what we expect going forward. But as a matter of fact, it has been better than the expected, taking into account that when you start up a new vessel, normally, you have somewhat lower revenue utilization, indicating then, actually, the operational Wayfarer has been quite good. So those 2 are the things that can explain -- that totally, we'll see a somewhat better EBITDA in AKOFS in the quarters to come.

[Karl Erik Kjelstad, Chief Executive Officer]

Just on Santos, Frederik. It's also some of that -- you have a bonus scheme there. And if you're under certain utilization level like, for instance, this quarter, with 90% we also lose the bonus. If we are over a certain level, then we get the bonus. So in a way, you get the double negative effect when you are below that threshold. Normally, we are above that threshold.

[Chr. Frederik H. Lunde]

Okay. But there were no extra cost on the Santos related to downtime?

[Leif Hejø Borge, Former Chief Financial Officer]

No.

[Chr. Frederik H. Lunde]

Okay. And how do you see the opportunities for Seafarer? I think you said there has been some hopes on one particular long-term charter in the North Sea this year?

[Karl Erik Kjelstad, Chief Executive Officer]

Yes. I think it's like probably a secret that there is a charter out in the North Sea for long-term contract. We are participating in that competition. We are hopeful, but we don't know anything yet. And it's only gold medal that gives you any revenues. So if we get the silver medal it will be 0. So but we hope, roughly, we'll be successful in that.

[Chr. Frederik H. Lunde]

And do you expect any clarification before summer, or is it second half of the year?

[Karl Erik Kjelstad, Chief Executive Officer]

We hope it will be before the summer, but it's the client who decides the timeline.

[Operator]

[Operator Instructions] It appears there are no further questions, so I'd like to hand the call back over to you for any additional or closing remarks.

[Karl Erik Kjelstad, Chief Executive Officer]

Well, then we thank you all for attending this call this morning and look forward to talk to you again, if not earlier, in July when we present our second quarter figures. Thank you.

[Operator]

This concludes today's call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.