Akastor ASA

OSE:AKAST

Earnings Call Transcript 2019-Q2

[Leif Hejø Borge, Chief Financial Officer]

Good morning, and welcome to the Akastor second quarter presentation. My name is Leif Borge. I'm the CFO in Akastor. And together with me, I have Karl Erik Kjelstad, our CEO. We will refer to the second quarter presentation that was released this morning during our presentation. Then I give the word to Karl.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Leif, and a good summer morning to everyone on this call, and thank you for participating in this presentation of Akastor's second quarter results. Let us start with a look at the highlights for the second quarter, Slide #3 in the presentation. We saw a significant year-to-year growth in revenues of 49% with revenues of NOK 1.3 billion in the second quarter. Most of the growth comes from MHWirth, but the acquisition of AGR also impacted our revenues figures positively. The EBITDA of NOK 114 million in the second quarter was also mainly coming from MHWirth, which is delivering an EBITDA this quarter of NOK 109 million. As in previous quarters, AKOFS EBITDA is not included. However, on a 100% basis, AKOFS delivered NOK 104 million in EBITDA. The net interest-bearing debt increased in this quarter mainly due to the acquisition of Bronco of NOK 269 million and the external loans in AGR. This debt is, however, a nonrecourse debt to Akastor. And finally, we had an increase in the working capital due to higher activity levels in MHWirth on the service and single equipment activity. All in all, a decent second quarter result where we are particularly happy with the positive development at MHWirth in the single equipment and services continues and that we have strengthened MHWirth offering with acquisition of Bronco. Let us move down to slide Akastor portfolio composition. Just a reminder on our current investment portfolio where we actually see no change since first quarter since Bronco is a part of MHWirth. Let us then continue to Slide 6, portfolio highlights with some words about different portfolio companies' performance. With regards to MHWirth, the order intake in second quarter was solid with the second Awilco contract and also a good activity level in both single equipment and service business. Digital solutions with the DEAL digital platform was also contributing positively in this quarter. The newbuilding market is still limited, but there are some few niche projects out there. Timing on these projects are, however, uncertain. Our efforts to restructure MHWirth to be less dependent on newbuilding projects are paying off, and we will continue with this strategy. I will come back to the Bronco acquisition in a minute, but let us first spend some words on the other companies in our portfolio and let's start with AKOFS Offshore. That continued with very steady operation for the Wayfarer, but as been communicated in the first quarter, the overall performance in the second quarter was hampered with the lower utilization of Santos due to the engine maintenance program that was successfully executed in the second quarter. The Seafarer vessel upgrade project is well underway at the shipyard on the West Coast of Norway and AKOFS is preparing Seafarer for the Equinor contract that commence in the first half of next year. The external financing of the vessel is also progressing well, and the bank loan is expected to be drawn on in September this year. AGR, a slow start in the first quarter after the merger with First Geo, but we hope and believe that we will see positive numbers going forward. We see a good growth in the Norwegian market, while the other markets continued to have a slower recovery. This quarter Cool Sorption is also delivering a solid result as in the first quarter and that is impacted by one large project. NES Global Talent continued to develop positively, enforcing its global #1 position as staffing provider to the oil and gas sector. The strategy to expand the business into new markets and segments are also continuing. Step Oiltools had a steady performance and continue to see market recovery. Let us move to Slide 7 and share some more information about MHWirth recent acquisition of Bronco. As you might recall, in February this year, we announced a new leadership team in MHWirth with Pete Miller as the Chairman and Eirik Bergsvik as the CEO. Our strategic agenda is to develop what I would call a wider and deeper MHWirth, deeper by adding on products and technology that fits into our current offering and wider by targeting new market segments. The Bronco acquisition fits excellent into this strategy. It provides MHWirth with a presence in the U.S. and the global onshore market. It strengthens MHWirth aftersales offering. It delivers growth by leveraging Bronco offering into MHWirth existing customer base. And last but not least, we see also significant supply chain synergies with existing MHWirth offering. The acquisition also demonstrates the value we see in a new leadership team in MHWirth. The Bronco opportunity was identified by our new MHWirth team and we were able to have an exclusive M&A process with the Bronco owners resulting in a transaction. Let's move to Slide 8, Bronco Manufacturing in brief. We see the historical performance of Bronco demonstrating the robustness of its business model by delivering positive results through the downturn of our industry, and this is creating a solid platform for continuous growth. Also, as you see, Bronco is actually operating with a higher EBITDA margin than MHWirth. So with these words, I would like to leave the word to you, Leif, to go through the financial numbers more in detail.

[Leif Hejø Borge, Chief Financial Officer]

Thank you, Karl. And let's then have a look at Slide 10 in the presentation. As already mentioned, revenues are up 49% from second quarter last year. Most of the growth comes from MHWirth, but revenue growth from AGR that was included in the second quarter explains around NOK 100 million of the revenue growth. Year-to-date, revenues have grown with 35%. Of the EBITDA of NOK 114 million, NOK 30 million comes from the effect of the new leasing standard in IFRS 16. Remember that revenues and EBITDA in AKOFS Offshore is not included in these figures. Financial items of NOK 53 million negatively are heavily impacted by valuation issues in the financial portfolio. I will come back to that on the next slide. The net profit from continuing operations ended with these numbers on minus NOK 38 million. Net profit from discontinued operations was negative with NOK 40 million in the quarter. This includes a positive effect from a settlement related to the MPO arbitration award that was announced earlier this year but a negative effect on reassessment of the provision for preferred equity to our joint venture partner in AKOFS Offshore. Moving on to Slide 11. When it comes to financial items at the right in this slide, you see that contribution from financial investments were negative with NOK 31 million. Our 50% share of the net result of AKOFS and DOF Deepwater was negative with NOK 54 million. For AKOFS Offshore, the operational result was weak in the quarter, but the negative result is, of course, also impacted by depreciation and financial cost on Seafarer in the period when the vessel is still not in operation. This will change when the vessel start operation in the first half next year. For DOF Deepwater, the net result is impacted by further impairment of the 5 vessels in the company. The negative result in Awilco is simply that the share price in the company dropped in the quarter. The only item under financial investments with cash effect was the cash interest of NOK 8 million from Odfjell Drilling. As you can see in Slide 12, the net debt position of Akastor increased to NOK 898 million during the quarter, which is up NOK 608 million from the first quarter. Of this, the Bronco acquisition explains NOK 270 million; and the AGR acquisition, NOK 120 million. The effect of NOK 120 million from the AGR acquisition is the net effect of taking in the external loans in AGR of NOK 154 million and the cash in AGR at the time of the acquisition of NOK 34 million. With regards to the bank loans, the nominal value of these loans are actually NOK 180 million. However, these are given in favorable conditions, thus, the fair market value of the loans has been set to NOK 154 million. Also, worth mentioning is that AGR also has a loan from Akastor of NOK 90 million, which was the consideration from taking over First Geo. This is pari passu with the bank loans, which means that Akastor will receive cash from AGR when the banks receive cash. And the loans are non-recourse. That's not guaranteed by Akastor. Cash flow from operations was negative with NOK 143 million in the second quarter mainly due to increase in working capital in MHWirth. The working capital in MHWirth increased with NOK 365 million in the quarter, however, around NOK 130 million of this is simply the working capital taken in from the Bronco acquisition, thus, having not any cash effect as such. The remaining growth can be explained by growth in services and single equipment that ties up more working capital and projects as well as normal fluctuations in the working capital of the projects where the working capital will fluctuate more depending on the milestone payments of the projects. Then let's move on to Slide 13. As before, most of the values in Akastor relates to MHWirth, AKOFS Offshore, the Odfjell Drilling preferred equity and the shares in NES Global Talent. Then let's have a look at the portfolio companies, starting with MHWirth at Slide 14. Total revenues in MHWirth grew with 49% to NOK 1 billion. Revenues from projects and products increased with 89% from last year. Actually, most of this growth comes from single equipment and not projects. Service revenues grew with 26% from last year even though the number of active rigs with MHWirth equipment onboard has only increased slightly. The growth reflects more revenues from digital technology, which is installation of MHWirth digital platform DEAL and software applications as well as somewhat higher service activity in general. The EBITDA increased to NOK 109 million including IFRS 16 effects of NOK 18 million. Bronco was consolidated from 1st of June. The revenue contribution included in the mentioned numbers was NOK 19 million, while the EBITDA contribution in June was NOK 4 million. But as the numbers also include transaction cost of NOK 5 million from that acquisition, the net effect of Bronco was actually negative with NOK 1 million in the second quarter figures. The underlying EBITDA margin adjusted for IFRS 16 and the transaction costs from Bronco was just below 10%, somewhat better than in the previous 2 quarters. Moving on to AKOFS Offshore, Slide 15. As in the first quarter, Skandi Santos had a weak quarter. This can be explained by further operational problems in April with low revenue utilization. In addition to that, AKOFS, in order to avoid further problems, decided to move forward a planned engine overhaul to June. Thus, also in June, the revenue utilization was low. The vessel is now back in ordinary operations, so let's hope 3 quarter will be better. Elsewise, there is not much news to report from AKOFS. Wayfarer had another good quarter with high revenue utilization. And the Seafarer preparation for the 5-year contract starting next year is going according to plan. With regards to NES Global Talent, I'm now at Slide 16. The company continues to perform well. As you can see from the graphs, revenues have grown and are now at a run rate annual level of more than USD 1.5 billion. The growth has come from both acquisitions as well as organically. This is a typical 5% to 6% EBITDA margin business, and the company has net interest-bearing debt of between USD 250 million and USD 300 million. And as of now, Akastor owns around 17% of the company. So then you can make your own assessment of the value of our shareholding. Moving on to AGR, Slide 17. The historical numbers shown on this slide are the numbers of First Geo, while the Q2 numbers are the numbers for the new entity including First Geo and the old AGR. As you can see, the revenue level is around NOK 150 million per quarter. The negative EBITDA of NOK 1 million in the second quarter was somewhat disappointing. However, this includes a mixed bag with Norway and Australia delivering positive results, while U.K. and Americas are delivering negative results. Our focus is, of course, to take out some synergies from the merger and ensure that we are making money in all markets and business segments going forward. Then finally, Other Holdings, Slide 18, now only contains Step Oiltools and Cool Sorption. Step Oiltools had a quite good quarter with an EBITDA of NOK 12 million. The results are fluctuating a bit quarter-by-quarter, so you should not expect this to be the run rate level going forward. Cool Sorption delivered another good quarter with an EBITDA of NOK 5 million. And as in previous quarters, there is one project causing the strong performance in 2019. With that, I'll leave the word back to Karl Erik Kjelstad.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Leif. Just before we open the Q&A session, I would just like to share some reflection what I consider to be the main value drivers for Akastor and what we, therefore, are focusing on going forward. Firstly, MHWirth is for sure the asset in Akastor portfolio with the highest value potential. In fact, [ earlier ] we communicated our strategy for MHWirth aiming to develop and grow the company with a goal to make it what I would call IPO-able within the next 3 to 5 years. The Bronco acquisition is a demonstration of this strategy being implemented. However, we will continue to be disciplined when it comes to M&A. The different opportunities have to be both strategically and financially viable. Further, we will continue to focus on organic growth in MHWirth both on top line and margins. Actually, the company now has an annual run rate revenues of around NOK 4 billion and an EBITDA margin of around 10%, and it's still a potential to improve both of these. Secondly, for all of our portfolio companies, we strongly believe that operational excellence is the prerequisite for creating value-enhancing M&A. Therefore, we will continue to focus on cost optimization, product execution and also innovation to make our companies more valuable day by day. Thirdly, historically, we have been able to create value through M&A projects and done mainly through divestments. Focus going forward will be add-on investments in existing portfolio companies and, of course, to achieve good pricing whenever we are selling assets. Last but not least, we will focus on capital optimization and capital discipline. But this has to be a balance between having what I would call firepower for attractive M&A opportunities versus, for example, using excess liquidity to pay dividend to our shareholders. Thank you for listening. And operator, we are then ready for the Q&A session.

[Operator]

[Operator Instructions] It appears there are no further questions at this time. I'd like to turn the conference back to the speaker for any additional or closing remarks. Thank you.

[Leif Hejø Borge, Chief Financial Officer]

Okay. Well then, we thank you all for your participation. We wish you all a very nice summer vacation. And I hope you will all listen in when we are presenting our third quarter numbers in October. Thank you very much.