Akastor ASA

OSE:AKAST

Earnings Call Transcript 2023-Q1

[Øyvind Paaske, executive]

Good afternoon, and welcome to the presentation of Akastor's first quarter results. My name is Oyvind Paaske, CFO, and I'm here as usual together with our CEO, Mr. Karl Erik Kjelstad. Also, we are happy to have with us also this time, HMH from Houston represented by Tom McGee, CFO; and David Bratton, SVP Finance.

As usual, Karl will start by taking you through some of the key highlights before the HMH team will present their quarter. I will then go through the Akastor consolidated financial before Karl will wrap it up. Towards then we'll open for questions through the webcast solution. Please post your questions as early as possible to make sure we receive them in time. I will then leave the word to Karl. Please, Karl?

[Karl Kjelstad, executive]

Thank you, Oyvind, and good afternoon or good morning to our team in Houston, and thanks to everyone for joining us. We are pleased with our first quarter results, and we remain optimistic on the outlook for 2023 despite the recent volatility in oil and gas prices. The markets are more and more shifting in favor of offshore markets where our portfolio companies have strong positions. As you see from the overview on Slide 2, the equity value of our cost for the end of first quarter was slightly above NOK 15 per share, and that is in line with the fourth quarter.

The key value indicator for our customer continues to be the value of each of the investments we hold with the majority of values and through joint ventures together with different partners. In the first quarter, an agreement to sell all shares in AGR was at to incur with ABL Group, and this transaction was closed now in April, and we now hold around 5% of ABL. The transaction was completed above book value and we generated an accounting gain of approximately NOK 100 million for Akastor. This will be booked in the second quarter. I will get back to some more details on the transaction later in this presentation.

HMH continues to be our most valuable investment. The book value of our shareholding in HMH is equal to slightly above 60% of our net capital employed and HMH had a value of close to NOK 3 billion for the end of the quarter, and that is the same as NOK 10.9 per cost of share. HMH delivered good revenue growth compared to the first quarter last year and a solid growth in order intake in the quarter, driven by service order with several large rig upgrade project booked. We expect that service activity will increase going forward, driven primarily by increase in rig activity.

For AKOFS Offshore, Santos commenced its new 3-year contract in the quarter after some delay related to deliveries from the sub-supplier of ROV system on border vessel. We continue to be very pleased with the NES Fircroft performance with a revenue growth by 16% year-on-year and delivering an EBITDA result of USD 27 million in the quarter, with a continued promising outlook for 2023, demonstrating NES Fircroft's attractive business model. Finally, the DRU arbitration process is on track, with arbitration hearings completed in the quarter and with an arbitration outcome expected in the second half of this year.

Let's then move to Slide 3 with some more information about the AGR transaction. As mentioned, the ABL transaction is now closed and we are now a shareholder in ABL. For cost, this journey started when we're in 2017, merger of 100% owned and rather small company, First Geo with AGR that at that time was in the hands of the banks, DNB and Nordea. From the outset, the, let's call it, 2017 version of AGR faced many challenges with loss-making regions and delivered weak results. Together with the AGR management, Akastor has successfully turned around AGR to be a profitable growth company that has been the basis for making this transaction happen.

We believe that the ABL Group represents an attractive investment opportunity, and we look forward to contribute to the development of ABL as a shareholder. In addition to our new shareholding in ABL, some of the assets that was previously hold through AGR will now remain with Akastor such as the shareholding in Maha Energy that is listed in Stockholm, Sweden, and also the ownership position in Føn Energy, the offshoring operation and service company. And the net cash position from the transaction was at closing approximately NOK 30 million. This transaction changes the Akastor portfolio somewhat as described in the next slide, Slide 4, where ABL, Maha and Føn will be come in as new financial investments.

And with that, I'm very pleased to introduce HMH, CFO and EVP, Thomas McGee, that will take us through the HMH first quarter earnings and key priorities going forward. So Tom, please, the word is yours.

[Tom McGee, executive]

Thank you. I think taking a step back and looking at Q1, we've got a lot of industry tailwinds behind us. And when you really compare Q1 of this year to Q1 of last year, as David will walk through the numbers in a minute. I think you see some pretty strong things that jump out and let you know that the business is definitely improving. You obviously have continued to see the active rig fleet grow. You've seen day rates and our customers continue to increase, and we think those are all positive signs. I think the good news this quarter is that, obviously, we had a book-to-bill that was greater than 1.

We had a great quarter. But we also got some orders related to SeaONYX controls, land BOPs in the Middle East, so we're getting new products that I won't say we haven't done before, but it's a pretty big deal for us. So we're really getting traction on a lot of things that we haven't gotten traction on. So it's a nice combination of really high-level base business growth on the aftermarket side of our installed base, along with some really exciting new orders. So we're really excited about the quarter.

EBITDA is up nearly 50% year-on-year comps. And obviously, as you remember, there was some noise in the middle of the year last year around the cancellation of the contract that our caster will let us disclose the details on. The good news about Q1 over Q1 is a pretty clean comparison. So you can really see the trends in our business. On the synergy cost plan, we continue to execute on that. I think that from a public reporting readiness project standpoint, we're on track. I think the ERP implementation - in the grand scheme of ERP implementations, it's only slightly delayed, but it is slightly delayed. And so I think it's going to be closer to Q4 before we can really turn everything on and say that our accounting policies are unified. We're under one ERP and are truly ready.

But we do continue to execute on that, and we do continue to drive cost out on the IT side, in particular, with our ERP implementation. When you look at cash flow, it's really a back-end loaded story. When David walks you through the credit slide, I think you'll see a draw on the revolver. I mean, we're drawing to build inventory. We're having to preposition inventory on some of the orders we talked about a few minutes ago. We're having to do it on some orders that we're about to get that we're excited about. Just to deal on the base aftermarket business, and then finally, GMGS project. I think what you'll see is this have a sharp reversal in the second half, particularly with some large payments coming on that project. So we're comfortable with where we are, but I just wanted to explain that trajectory.

And so with that, I'll let David walk you through the numbers.

[David Bratton, executive]

Thanks, Tom. I'll be on the total company results and then move into the segment details. Revenue for the quarter was $186 million, up 33% year-over-year, driven by GMGS project, services output and rig upgrades, down 5% quarter-on-quarter, driven by higher 4Q '22 services output as a result of the buildup from the 3Q '22 ERP implementation. Adjusted EBITDA in the quarter was $19 million, up 49% year-over-year, driven by spares and upgrade orders within our Aftermarket Services division and down 35% quarter-on-quarter, driven by lower service volume. Adjusted EBITDA rate was 10.2% in the quarter. Orders for the quarter were $199 million, up 20% year-on-year, driven by aftermarket services, SeaONYX control enhancements and digital technology orders in the quarter.

Orders were up 9% quarter-on-quarter, driven by aftermarket services with offset by lower equipment orders in the quarter. We can see and experience strong growth in our aftermarket orders in the fourth consecutive quarter, highlighting the rebound in the offshore industry with higher crude prices and higher day rates from our customers. Finally, on cash flow. Free cash flow in the quarter was negative $14 million, driven by our strategic inventory plan and payments related to ERP implementation. Cash flow is expected to improve in the second half of the year on the back of project deliveries. We ended the quarter with $37 million in cash and cash equivalents on hand.

Moving to the next page, I'll walk you through the segment results in more detail. In aftermarket services, revenue was $123 million in the quarter, up 30% year-on-year, but down 12% quarter-on-quarter due to higher 4Q '22 service output as a result of the buildup from 3Q '22 ERP implementation and a [indiscernible]of performance bonuses received in 4Q '22. Aftermarket order intake was $162 million in the quarter, up 25% year-over-year and up 20% quarter-on-quarter, driven by increased rig year activity. And projects, product and other revenue in the quarter was $62 million, up 38% quarter-over-quarter, driven by GMGS project revenue and activity in the Middle East and North America.

On the next page, we'll move to net interest-bearing debt. We ended the quarter with net debt of $169 million and leverage in the first quarter was below targeted capital structure at 1.6x, which allows us to stay within all covenant requirements for minimum liquidity, gearing ratio and interest coverage ratio. Overall, we're very pleased with the team's performance in the first quarter and to the start of 2023.

And with that, I'll turn that back over to Tom.

[Tom McGee, executive]

Thanks. Just to wrap up. Again, for the rest of the year, I think we continue to be very optimistic on the base service side. Obviously, the project orders, some of the things we talked about, they're going to be a little choppier and a little less predictable and can create some chunky results. But I mean, the base aftermarket business remains extremely strong, and we continue to have very good expectations for the remainder of the year. When you think about areas of focus for growth for us. Obviously, the Middle East is a big area of focus. We've got a team getting ready to head there to explore opportunities next week and the week after. That continues to be a highlight.

And obviously, strengthening our land offering. We make some good land products. I'm not saying we don't do some of that today, we do, and we're competitive in certain markets. But that continues to be a high -- both organic and inorganic growth focus in terms of enhancing that and also continuing to look at other services and products that we can provide our customers in the offshore space and how we can increase our share of wallet across the board. And we've really -- our management team has done a fantastic job of challenging the sales force to get creative and aggressive here now that we're in growth mode. And I think you're seeing some of that already in the results. So we continue to be very happy with where we are. And again, we reiterate the message strong quarter, strong year and we're in growth mode. Thank you very much.

[Øyvind Paaske, executive]

Thank you very much, Tom. I will then take you through the financial update, starting at Slide 11. This time, I'll start with some comments regarding our net capital employed and the changes in period. As Karl mentioned, HMH, of course, continues to be our largest investment. In Q1, we saw a positive effect on our net capital employed, driven then primarily by FX effects as HMH has U.S. dollar as its functional currency, with then 50% of book equity translated to NOK in our accounts. Our value of AKOFS Offshore, where we also take in 50% of the company's book equity value was reduced in period driven by a negative net profit in the quarter.

Negative net profit is expected also going forward for AKOFS as a result of the current contracts and capital structure. Then see of NES increased through the quarter, primarily then driven by the U.S. dollar NOK rate. Other net capital employed includes various provisions related to previous transactions as well as certain smaller investments. The values within other decreased by NOK 115 million in Q1, driven by the inclusion of AGR's net debt within this category. As AGR per end of period was reported as held for sale and that does no longer consolidated in our total net debt. Total net value of AGR per Q1 included under other here was NOK 118 million per Q1 close. This position will then be replaced by ABL shares, the carved-out holdings, as mentioned by Karl earlier, and cash them in our Q2 reporting with an estimated accounting gain of approximately NOK 100 million.

Let's then turn to the next slide for the debt movements in the period. You'll see that our bank debt decreased by NOK 28 million during the quarter driven by FX effects and deconsolidation of AGR's net debt. The reported net bank debt of NOK 1.2 billion per end of Q1 excludes then net debt in AGR and is as such, comparable will have this will look going forward after closing that occurred then in April. Out of our total reported net bank debt of NOK 1.2 billion. DDW Offshore constituted NOK 228 million per end of Q1, in line with the previous quarter.

Net interest-bearing debt per end of quarter was NOK 475 million, including then our net interest-bearing positions towards AKOFS, HMH and Odfjell Drilling. Total interest-bearing receivables are more or less in line with Q4 with smaller changes than as a result of peak interest and FX rates. On the next slide, you'll see the overview of our external financing facilities. The draw on our corporate banking facilities was NOK 0.94 billion per end of March. It was not draw under the subordinated liquidity facility from Aker holding per end of the quarter.

Our corporate bank facilities originally matured in the first quarter of this year but was during Q1, extended by 1 year and now mature in Q1 2024. In addition, the Aker facility was increased by NOK 200 million to NOK 450 million in the period. Maturity of the DDW term loan was also extended in Q1 and now matures together with the corporate facilities in Q1 '24. The AGR loan was, as mentioned, treated as discontinued per Q1 and fully repaid upon the closing in April and has thus been removed from this overview.

Per end of the first quarter, our undrawn corporate credit facilities was NOK 450 million, increased compared to Q4 as a result of the increase of the Aker facility in the period. As mentioned previously, Akastor is an investment company with limited upstream cash flow from its portfolio and thus, depend on realization of assets to reduce debt and improve liquidity. With the increase of the Aker facility, we had sufficient liquidity reserve over the short to medium term. Asset realizations are, however, still key to us to ensure longer-term liquidity and reduce refinancing risk in 2024.

Then to our consolidated P&L, as before, please bear in mind that most of our holdings, including the HMH knockoffs are not consolidated in our accounts. And thus, our revenue and EBITDA only include a very minor part of our customers' total investments. Also, AGR was in Q1 then presented as discontinued operations and no longer included in revenue and EBITDA. DDW Offshore delivered revenues of NOK 46 million in the quarter on the same level as last quarter and increased year-on-year, driven by utilization of the fleet. DDW delivered a positive EBITDA of NOK 13 million in Q1, significantly higher than 1 year ago as a result of the improved utilization. Other includes corporate cost in period, which included around NOK 20 million in costs related to the DRU process. This increased compared to last quarter driven by the hearing conducted in the period. Other also included a smaller gain related to the sale of consortium that closed in Q1. With that, consolidated revenues and EBITDA came in at NOK 68 million and negative NOK 17 million, respectively.

On this slide, you'll see a further look at the lines below EBIT. Net financial items came in at a net positive of NOK 87 million in the period. Odfjell Drilling contributed positively with NOK 10 million split then between interest on the seller credit arrangement and a noncash accounting effect related to the warrant structure. Net foreign exchange effects were positive NOK 69 million in Q1, driven by the strengthening of the U.S. dollar versus the NOK, which has then positive accounting effect on our dollar holdings. Share of net profit from equity accounted investees presented now on a separate line, contributed negatively NOK 94 million, consisting then of 50% share of net profits in HMH and AKOFS Offshore. Our cost contributed negatively NOK 59 million, while HMH contributed negatively with NOK 35 million. Just a note to end this from Q2 and forward, potential valuation changes related to the ABL shares received as part of the AGR transaction will then be included within our net financials.

With that, I'm through the financial update. I will pass the word back to Karl for the next session. Please Karl?

[Karl Kjelstad, executive]

Thank you for that, Oyvind. Let me run off this presentation, as usual, with some ownership agenda reflections. Let's move to Slide 17, HMH, with operational performance already been well covered by Tom. We are happy with the outlook for the HBH business, and we believe the company is well-positioned to take part in the current term, driven by increased rig activity. As HMH owners of a key focus is to support the HMH management team in ongoing integration work, including utilization of both cost and revenue synergies. In addition, we also supported to the management's efforts to grow the company both organically and through M&A. Akastor together with [indiscernible] and HMH management are preparing this investment to be liquid through an IPO as soon as the company is ready and the equity market is offering interesting valuation for our HMH investment.

Then to AKOFS on Slide 18. The key focus for AKOFS going forward is to continue to deliver high-quality operations with high revenue utilization. AKOFS delivered good operational performance on Wayfarer and Seafarer also in the first quarter with revenue utilization of 99% and 87%, respectively. Seafarer utilization was affected by waiting on weather with a technical uptime of 97%. Santos, as mentioned on the last call, certain issues related to the sub supplier that delayed commencement to March 10. And Santos does book lower revenue and earnings in the period.

We continue to be somewhat concerned by the performance from the ROV subcontractor, and AKOFS management is following this closely to ensure that the ROE performance is not hampering operations going forward. Wayfarer went off its previous contract with Petrobras on April 18 and will be out of operation through the second quarter, preparing for a new contract expected to commence late in the third quarter. Regarding our ownership strategy, all AKOFS have long-term contracts, and this is an important prerequisite for exploring different structural solutions for the company, including potential combinations AKOFS and other players in the industry.

Slide 19, NES Fircroft. NES Fircroft is the global leader within its niche. As mentioned, the company continued to deliver growth, and we are pleased to see that the growth in the last 12 months are strong also in the non-oil sectors, and the company continued to focus on the non-oil business as exampled with the acquisition of Evolve Science in Australia in the quarter and also the acquisition of polarities in Japan that was announced April 19. NES Fircroft is what we call exit-ready and also IPO-ready and different alternatives are being explored, including a listing of the company.

Finally, let us look at Slide 20. We continue to believe that the realization of our financial investments, such our shareholding in NES Fircroft will probably come first. We also expect to monetize our solid credit in Odfjell Drilling of $20 million in 2023. And DRU is, as mentioned on the legal track with arbitration hearing completed, and we expect a final arbitration outcome here in the second part of the year. And with that and also with HMH, as mentioned, the plan is to make that investment liquid as soon as the market is offering attractive valuations.

So with that, we are through this presentation, and we will move on to the Q&A sessions. There are some questions already in on the chat here, but we will wait for a minute or 2 to hold everyone that want to provide questions to have an opportunity to do that. So thank you, then we will pause.

[Øyvind Paaske, executive]

Okay. We'll start with a couple of questions to the HMH team. First one from Peter Ron. Hi team HMH. With regards to the aftermarket services, can you please remind me, is there any seasonality to this seeing that the figures were down quarter-on-quarter? The question, Tom, is basically why are you down quarter-on-quarter?

[Tom McGee, executive]

Yes, I was sitting there and we finished and realized I didn't say that. We do see 2 elements of seasonality. One, there is high seasonality in Q4, which we talked about in the last quarterly call where we get some annual -- they are repeating. The size may vary, but we get them every year. We get some annual payments. And so we end up with a seasonally high Q4 and we historically have a seasonally low Q1, which is why I would emphasize the Q1 to Q1 comparison. I think it's a very clean comparison and it shows a 50% growth in EBITDA year-over-year. So while you did see a decline when you adjust for seasonality, you wouldn't see that. And I think that's -- we probably should have clarified that before.

[Øyvind Paaske, executive]

Thanks, Tom. Then following up with the second question from Martin [indiscernible]. Could you please elaborate on the order intake situation so far in Q2 2023?

[Tom McGee, executive]

I mean I don't think - we haven't even finished a month yet. So I don't think we have a good view other than anecdotally, I would continue to say that we expect strong orders for the rest of the year. So I don't think Q1 directionally is an aberration or anything if that's what the question is really asking. Those rigs are working. We're getting reactivations continue to flow through. Yes, and we're starting to run into a wall of research on some products sometime over the next 24 months. And so no, we do not think it's an aberration. But we don't have a good idea of what Q2 will be at this point.

[Øyvind Paaske, executive]

Great. Then a question from Mr. Haakon Amundsen from ABG. Given the current progress of reorg and timing of cash flow in HMH, is the potential listing more likely to happen in 2024? Maybe I'll pass that over to you, Karl, for some comments.

[Karl Kjelstad, executive]

Yes. I think the time of the listing is depending, as I mentioned, of 2 things. One is that the company is ready and also that the market sentiment is offering attractive valuation of the company. And our job together with HMH management is to make sure that we are ready. So when the market is a place we like it to be that we can use that opportunity. But I think it's a fair comment to say that, that may be more likely in '24 than in '23.

[Øyvind Paaske, executive]

Great. So with that, I think we are through all the questions we have received. So with that, I'll just like to thank you all for your attention and welcome you all back for our presentation of the second quarter results then on July 13. Thank you very much.