Akastor ASA

OSE:AKAST

Earnings Call Transcript 2018-Q2

[Leif Hejø Borge, Chief Financial Officer]

Good morning, and welcome to this presentation of the second quarter result of Akastor.First, our CEO, Karl Erik Kjelstad, will go through the highlights of the quarter. And then I, who are CFO, Leif Borge, will go through the numbers in more details.So please, Karl, go ahead.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Leif.First, please note that AKOFS Offshore is treated differently in this report, compared with previous quarters, due to the new ownership structure of AKOFS Offshore, but anyhow, good morning to everyone.And this has been an eventful quarter for Akastor with important strategic milestones such as the contract for MHWirth with Keppel for the Awilco project; the 5-year contract with Equinor for AKOFS Offshore; the signing of definitive agreements with Mitsui and MOL for co-ownership of AKOFS Offshore; and last but not least, the finalization of the Odfjell transaction. So all these 4 milestones are -- have been very important for us, and we are glad they all now are formally in place.We continued to see positive development for our portfolio companies with a revenue growth of 25%, year-on-year basis; and with an EBITDA from the continuing operations of NOK 78 million. Our portfolio companies continued to see challenging markets. However, we are able to deliver a stable margin level for MHWirth with a margin of 10%. AKOFS Offshore delivered a strong revenue utilization based on good performance both for Santos and Wayfarer in Brazil in this quarter. And also, the remaining portfolio companies delivers decent results.Our bank debt has increased with NOK 480 million this quarter and is in the second quarter NOK 1.3 billion due to the investment in Odfjell. However, our bank debt will be reduced with around NOK 1.2 billion when we formally close the transactions with Mitsui and MOL regarding AKOFS Offshore. We have a strong order intake in this quarter. It's NOK 4.6 billion based on mainly the MHWirth contract with Keppel for the Awilco new building project and the 5-year contract with Equinor for AKOFS. Both these awards was very strategically important to secure and will be an important foundation for the further development of both MHWirth and AKOFS Offshore, respectively.Let's move to the portfolio highlights on Slide 3. Leif will revert to more details when it comes to the portfolio companies in the financial section, but let me make some comments to the companies in our portfolio.For MHWirth, we see some signs of market recovery, but it is still limited to some few niches such as the harsh environments sector. The number of rigs in operation with MHWirth topside is stable and is also in this quarter 52 rigs in operation. And this is also reflected in the stable service revenue for MHWirth. For AKOFS, we are pleased as management, with a 5-year contract with Equinor. And AKOFS Offshore is now well [ underway ] with executing the necessary preparation for the contract startup in 2020. And these preparations includes project-specific investments such as CapEx investments in the riserless intervention system, a required modification of the vessel to meet the NORSOK standard in the North Sea, the execution of the 5-year SPS for the vessel and also operational preparation costs.So the key focus for AKOFS going forward will be, in addition to the safe and high performance of the operations in Brazil, to successfully prepare and commence operation for Equinor in 2020.For the other portfolio companies, we are delivering, as I mentioned, decent results, but I would especially like to also this quarter mention the positive development of NES Global Talent, who show -- continued to show strong performance and growth and where we saw the total number of contractors continue to increase. And this have given a full effect of the earnout structure that was a part of the sale of Advantage to NES, resulting in a 2% increase in our economic interest of -- in NES Global Talent. So with these words, I will pass the word to Leif, who will go more into details when it comes to the financial numbers.So Leif, please?

[Leif Hejø Borge, Chief Financial Officer]

Thank you, Karl.Then I refer to Slide 4 in our presentation.As already mentioned by Karl, as a consequence of the transaction selling 50% of the shares in AKOFS offshore to Mitsui, AKOFS Offshore has been reclassified as discontinued operation in the second quarter. This means that we are booking the net result of AKOFS on one line at the bottom of the P&L. Most of the minus NOK 372 million result from discontinuing operation has to do with AKOFS Offshore. When the transaction is completed, which we expect will happen in the third quarter, we will start to book our 50% shareholding according to the equity method, which means that we book 50% of the net result of AKOFS Offshore in one line most likely under EBITDA. One thing to be aware of is the treatment of Avium Subsea. This is the company owning the Santos vessel, which already today is owned 50% by Akastor and 50% by Mitsui. Avium Subsea will be owned 100% by AKOFS Offshore going forward, as all shares in the company will be transferred to AKOFS as part of the transaction. However, in historical accounts, the net result of Avium will still be reported as normal EBITDA due to the fact that our shareholding does not change as a result of this transaction. We own 50% today, and we own 50% after the transaction. The net result was NOK 8 million in the second quarter numbers. So these means that, of the AKOFS result in the second quarter, NOK 8 million is reported as ordinary EBITDA. And the remaining NOK 115 million is reported under discontinued operations.Going forward, we also -- we are also going to continue to report AKOFS Offshore as a separate segment on a 100% basis even though we do not consolidate the numbers into the group accounts of Akastor. We do this because our 50% ownership position will continue to be an important part of the Akastor portfolio and because we will continue to be heavily involved in the operations of the company. And we like to make sure that investors, analysts and others have insight in the business of AKOFS Offshore.Then to the numbers.And as we can see, revenues in the second quarter ended on NOK 873 million, up some 25% from last year. As already mentioned, these are the numbers excluding AKOFS Offshore. If you include AKOFS Offshore, the revenues would have been NOK 1.153 billion, which is up 32% from last year. Thus, both MHWirth and AKOFS Offshore delivered a quite strong revenue growth in the quarter.EBITDA ended on NOK 78 million. Last year numbers includes restructuring cost of NOK 52 million in MHWirth, so it does not really make any sense to compare.Net financial items were positive at NOK 103 million in this quarter. Remember that the financial lease of Wayfarer is not consolidated anymore but is included in discontinued operations. Thus, the positive financial result can be explained by the fee of USD 5.7 million from the Odfjell pref equity deal as well as interest for 1 month on the investment. Going forward, we are going to book the 10% interest on the USD 75 million investment, which gives around 15 million of interest per quarter going forward then.Then secondly, the share price of Awilco Drilling has developed positively, which gives an unrealized gain of around NOK 26 million, plus NOK 4 million of dividends in the quarter. Thirdly, we had positive foreign exchange effects of around NOK 30 million mainly linked to the financial investment in NES Global Talent and Odfjell Drilling. Interest on bank loans was NOK 18 million in the quarter.Based on these figures, the net profit from continuing operations was positive at NOK 121 million in the quarter.As already mentioned, the net negative result of NOK 372 million from discontinued operations mainly comes from AKOFS Offshore. NOK 322 million of this negative result comes from an impairment of the AKOFS Seafarer vessel.In June, AKOFS signed the 5 years contract with Equinor for well-intervention services in the North Sea. This was, of course, positive news. A long-term contract with Equinor is a good basis for getting in place long-term financing of the vessel, which will finance the necessary investments in the vessel in order to operate in the North Sea, in order to perform riserless well intervention and other investments in order to prepare the vessel for operations. However, the consequence of the contract is also that we have to restate the value of the vessel. It has now been reduced to around USD 175 million, [ which entry ran ] impairment of around USD 40 million or NOK 322 million.The rest of the negative result in discontinued operation comes from negative ordinary result of AKOFS Offshore. This is negative mainly due to the fact that AKOFS Seafarer is stacked. Even though the stacking costs are limited, the vessel has a quite high depreciation. A consequence of the impairment is, of course, also that future depreciations will be reduced, so we expect a net result of AKOFS Offshore to be around breakeven in the quarters to come and then to improve when the Seafarer vessel gets into operations in 2020.Then let's move on to Slide 5. And as of the second quarter, the Akastor portfolio has a net capital employed of NOK 7.5 billion. MHWirth and AKOFS still represents a major part of this, in total around 80% of the value. With the investment in -- of USD 75 million in Odfjell Drilling preferred equity, the investment portfolio has, however, increased to around 20% of the total Akastor portfolio. These financial investments includes then the -- around NOK 600 million or USD 75 million in Odfjell Drilling. It includes NOK 120 million in shares in Awilco Drilling. This is the USD 10 million we invested in the first quarter. It includes around 400 million in shares in NES Global Talent. And finally, it also includes shares in the Aker pension fund.When we close the Mitsui transaction, we will receive close to NOK 1.2 billion in cash and deconsolidate the financial lease. Thus, the net debt position will be in the range NOK 100 million when the transaction is closed.Then Slide 6. Net bank debt increased with NOK 478 million in the second quarter. The investment in the preferred equity instrument in Odfjell Drilling had a cash effect of around NOK 600 million. And a stronger U.S. dollar relative to Norwegian crowns had an effect on the net debt position of around NOK 70 million, so the underlying cash flow generation was positive in the quarter with close to NOK 200 million. Roughly half of this was due to reduced working capital in MHWirth mainly due to customer payments on projects.Then Slide 7. MHWirth revenues in the quarter were NOK 681 million, which is up 24% from last year. Year-to-date revenues have grown with 20% to NOK 1.4 billion mainly due to growth in projects revenue and then especially the Husky project that was signed in the autumn of 2017. Around 60% of the revenue now -- in the first 6 months of the year comes from services. The remaining are then projects, products and engineering services.EBITDA of NOK 68 million gives a margin in the quarter of around 10%, so more or less in line with previous quarters.The working capital was reduced further with NOK 111 million in the second quarter mainly due to customer payments on projects.Strong order intake of NOK 1.5 billion in the quarter includes the drilling package to Awilco Drilling rig with a value of around USD 100 million. The order backlog in MHWirth was NOK 2.5 billion as at the end of June.Then moving on to Slide 8. Revenues in AKOFS Offshore increased to NOK 289 million in the quarter, while EBITDA increased to NOK 123 million. Both Santos and Wayfarer had high utilization and good performance in the quarter.As already mentioned several times and as announced in June, AKOFS Offshore then eventually signed a contract with Equinor for a 5 years contract, with 3 years options, to provide well intervention services on the Norwegian continental shelf; and with commencement of operation in the first half of 2020. The investments will have to be made in the vessel and the workover system, but this will be financed by external loans as the vessel is unleveraged today.Then Other Holdings, Slide #9. All of the small portfolio companies delivered positive results in the quarter. Step Oiltools had revenues of around NOK 60 million in second quarter, more or less in-line in previous quarters; and has delivered a small positive EBITDA the last quarters. Cool Sorption has increased revenues with 70% this year due to good order intake in the beginning of the year and had an EBITDA of NOK 3 million in the second quarter. And First Geo has a temporary higher revenue level due to certain contracts, which brings the EBITDA up to NOK 10 million this quarter.As already mentioned, the transaction fee and interest for the first month gave a positive effect on our financial items of NOK 47 million for the Odfjell Drilling preferred equity. And the shares in Awilco Drilling had a positive effect of NOK 30 million, for which NOK 4 million are dividends and the rest unrealized gains on the shares. The share price of Awilco Drilling has increased with more than 50% since we made the investment in March.So that concludes our presentation and we should be ready for receiving some questions, so operator, please help us with the Q&A section.

[Operator]

[Operator Instructions] It appears there are no questions in the queue today, sir.

[Leif Hejø Borge, Chief Financial Officer]

Okay, thank you very much. We take that as a signal that everything in the report, our presentation was crystal clear.So then thank you all for participating. We hope you will all participate when we present our third quarter numbers on 31st of October. And we'd also like to wish you all a very nice summer.