Akastor ASA

OSE:AKAST

Earnings Call Transcript 2020-Q2

[Øyvind Paaske, Chief Financial Officer]

Good morning, and welcome to the presentation of Akastor's second quarter results for 2020. My name is Øyvind Paaske, I'm the CFO of Akastor and I'm here today with Karl Erik Kjelstad, CEO. We will take you through the presentation that has been uploaded to our web page this morning. The presentation will also be made available through our webcast solution. I would also like to inform you that our half year report with further details can be found online. Karl will now start by taking you through the main highlights of the quarter before I present the financial results. We will then end with a Q&A session. Please follow the instructions given by the moderator later. I will now leave the word for Karl for the business update. So please, Karl.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Øyvind. And good morning to everyone on this call. Thank you for listening to our second quarter earnings. This spring has, for sure, been different and challenging due to the global COVID-19 pandemic and also the oil price collapse. This creates uncertainty for the whole oil service sector, including our portfolio of companies. Due to this, as mentioned in our first quarter earnings call, the result of our companies in 2020 will be different than we planned for when we made the budget for 2020. However, we are pleased to see that in this challenging environment, the business of our portfolio companies demonstrate that they are quite robust, reflected by that all companies are delivering positive contribution in the second quarter and that, for example, MHWirth is delivering a solid quarter with an EBITDA of NOK 110 million. Further, MHWirth's service business, DLS, continues to serve its clients despite travel restrictions. And MHWirth are able to keep good progress in projects despite that most of MHWirth's engineers have been working from home most of the second quarter. AKOFS have had some COVID-19-related delays in the testing of the Seafarer for the Equinor project and also in Brazil, But all in all, manageable in close cooperation with our clients, or again have demonstrated its flexible cost base and delivered positive results despite a challenging market. However, the level of impact from the COVID-19 pandemic and oil price collapse will continue to create uncertainties for the remainder of 2020, and we expect also into 2021. The level of impact from the -- sorry, but first, let us start with some key numbers from our second quarter, Slide 3 in our presentation. Year-on-year, we saw some decline this quarter with a revenue decline of 4%, resulting in a revenue of NOK 1.3 billion with an EBITDA result of NOK 70 million, a decline of 38%. But if we adjust for a nonrecurring M&A-related product cost of NOK 43 million, year-on-year, EBITDA is on the same level as previous years. Our net interest-bearing debt increased with NOK 100 million to NOK 1.5 billion in this quarter, affected by conversion of receivable towards AKOFS Offshore into equity. Let's move to Slide 5. Our portfolio, there are no change in the last quarter. And let me then share some updates on our industrial holdings, but first, some update regarding impact on our business from the COVID-19, Slide 6. The COVID-19 situation have been challenging for all of our portfolio companies. But we have been able to manage it efficiently and keep operations going. Key priority has been to protect our people and to ensure that all portfolio companies have been able to serve its clients in a safe manner in a challenging situation. In fact, I'm impressed and proud on how our portfolio companies' organizations have been able to handle the COVID-19 situation and continue to serve all of our clients. However, we see that the COVID-19 pandemic is impacting the demand for our company services and products. As an example, MHWirth has seen a decline in product order intake, and the lockdown in Singapore, for example, have also been challenging for the newbuilding projects that takes place there. But MHWirth's financial performance in the quarter is, as mentioned, despite this, solid. In Brazil, the COVID-19 situation in the country is very challenging. And we have had COVID-19 outbreak on one of the vessels, the Wayfarer vessel, resulting in a disruption of operation and 17 days of off-hire in the quarter. However, AKOFS' COVID-19 outbreak response procedures has worked well, and AKOFS were able to swiftly change personnel and disinfect the vessel. We are also continuing to adjust the cost base in our portfolio companies through new market conditions. And currently, we have about 300 less full-time employees than we had before the COVID-19 outbreak. This is a reduction in the workforce about 15% in our portfolio companies. We will continue to adapt our business to the market going forward, and we expect, as mentioned, uncertainty to continue through 2020. Let's move to Slide 7. Our key assets continue to be MHWirth that for the first -- for the second quarter was 61% of our capital employed. Our strategy with regards to build a wider and bigger MHWirth remains, but as mentioned previously, for us to do cash acquisition in the current market is not very likely. For AKOFS Offshore, we are pleased with that all 3 vessels have contracts, and our key priority going forward is to maintain all vessels on contract. We continue to have a predictable 10% return of our preferred equity in Odfjell, and are pleased with that Odfjell maintains a strong order book and one of the most robust balance sheets in the drilling industry.NES Global Talent staffing business have a big exposure towards the oil and gas industry; it's about 80% of the revenue. And we, therefore, as expected, saw a lower activity for NES in the second quarter. Temporary staffing is the first to be hit when the market declines, but the positive flip side of that is that temporary staffing is also the first to increase when the market picks up again. Let me then share some reflections on our portfolio company and starting with MHWirth on Slide 8. All of MHWirth's 4 main business streams: projects; the service business, DLS; the products business; and the digital technology, were, to a different degree, affected by the COVID-19 pandemic. For the product business, the activity will, due to the existing order book, be good also through 2020, however, at the lower revenue level in the second half of this year based on the progress plans we have. MHWirth needs new orders in 2020 for keeping the activity level for the product business in 2021. We are focusing our effort on niche projects where there are some demand that is not linked to general drilling market. For the ongoing projects, we see that there is risks for that progress on project can be hampered by the COVID-19-related restrictions. I mentioned the lockdown in Singapore, for example. But the new building project in Keppel continues, and MHWirth's contract is, for the 2 new buildings there, are with the Keppel yard. And we expect that both rigs to be covered through. However, the lack of -- the current lack of an end customer for the first rig could affect the progress plan for that project. We saw a reduced order intake in the second quarter for our single equipment business. We expect the oil-related single-equipment product sales to be negatively affected also going forward, while we expect that oil -- non-oil-related products to be less impacted. DLS, our service business, is currently supporting the 47 rigs we have in operations in average in the quarter. And this is 4 rig less than we had in the first quarter, on average. Our total installed base remains the same as the first quarter, 83 rigs that has MHWirth equipment. The service business had a relatively high activity in this quarter, with the revenues from this segment more or less on the same level as we saw in the first quarter. We expect the service activity to be strong also in the third quarter, however, with increased risk related to the number of active units. Last but not least, our digital technology business continued to have a very high activity level in the quarter, focusing on delivering the order book, however, with a weak market affecting sales opportunities for new software packages. We also saw a suspension of 2 software packages that was in the order book from a U.S. client.Let us move to Slide 9 and some words about the other companies in our portfolio. AKOFS Offshore's Santos vessel in Brazil delivered solid operations in the quarter. We are very pleased with the revenue utilization of 99% of the Santos vessel in the second quarter. Aker Wayfarer had, as mentioned, reduced revenue due to the COVID-19 outbreak on board. That gave a utilization of 83%, caused by the 17 days downtime in June. Seafarer vessel continues to prepare for the 5-year contract with Equinor, with a planned commencement in August that have been affected by the COVID-19 delays. On a 100% basis, AKOFS Offshore delivered an EBITDA in the second quarter of NOK 83 million. AGR continued the positive trend, but was also affected by the COVID-19 situation. But we are happy to see that despite this, AGR is delivering a positive EBITDA of NOK 5 million from the revenue base of NOK 157 million, made possible by the flexible cost base and a prudent follow-up by the AGR management. Cool Sorption performance continues to be driven by the Njord project that was delivered in June, and activity level post the Njord project is more uncertain due to the current weak market. Our financial investment in Awilco saw a decline in the share value of 23% in the quarter, and the share price development will probably be dependent on the contract opportunities for the newbuilding program and the project execution of that program. The first rig was, as mentioned, the Nordic Winter, have been terminated by Awilco, and there is, up to now, an unresolved dispute between Awilco and Keppel. DOF Deepwater activity has been heavily affected by the turmoil in the market. And all the 5 anchor handlers that the company have is now at port. In this quarter, Akastor, we have been taking part in discussions with DOF Deepwater's creditors on a possible restructuring of DOF Deepwater. We expect these discussions to be concluded during the third quarter this year. NES Global Talent. As mentioned, reduced activity, but adapting to the new market is very well handled by the NES management. And we believe, in fact, that NES market position as the global leader of staffing to oil-related industries, in fact, will be strengthened in this market. Odfjell continues to demonstrate that it's a best company, and this is also reflected in the positive development in the share price in the second quarter that saw an uplift of 40% in the quarter -- 24%. Then Øyvind, could you please take us through more details regarding to our solid second quarter performance?

[Øyvind Paaske, Chief Financial Officer]

Thank you, Karl. I will then take you through the figures for the second quarter, starting at Slide 11. Given the circumstances, and as Karl has already mentioned, we are quite pleased with the activity level in the quarter. Total revenue declined by only 4% year-over-year, explained by slightly lower activity in MHWirth, however, demonstrating the robustness of the service business of that company. The EBITDA in the quarter was NOK 70 million, down from NOK 114 million in the second quarter last year. EBITDA in this quarter includes extraordinary M&A cost of NOK 43 million related to a specific ongoing process, and thus, underlying EBITDA for the quarter was NOK 113 million, in line with second quarter last year. Net financial items contributed positively this quarter with NOK 46 million, driven by positive FX effects related to our U.S. dollar debt. I will get back to the further details here on the next page. Net income in the quarter was positive NOK 16 million. Order intake in Q2 came in at NOK 1.2 billion, consisting mainly of service orders, giving a book-to-bill of only slightly below 1x recurring revenues in the quarter. I will then turn to Page 12 to look further into the details. MHWirth constituted around 80% of revenues in the quarter, a reduction of 3% year-over-year. AGR and Cool Sorption continued to contribute positively in the quarter despite the challenging market conditions. As you are aware, AKOFS Offshore is not consolidated into Akastor. However, the company delivered lower revenues than last year, partly due to the before-mentioned downtime on Wayfarer related to the COVID outbreak on board. Under net financial items, the preferred equity instrument in Odfjell Drilling contributed positively with NOK 90 million related to received dividends, of which half has cash effect. In the quarter, we have also had a positive effect on the warrant structure, with NOK 12 million after an updated valuation based on share price development in the quarter. We had a negative effect on the Awilco investment of NOK 4 million due to a decline in share price over the period. Our share of net profit in DOF Deepwater and AKOFS Offshore contributed negatively with NOK 4 million and NOK 23 million, respectively, driven by the operational results of the 2 companies. Net foreign exchange effects in the quarter was positive at NOK 63 million, primarily driven by effects related to our bank financing in U.S. dollars through the strengthening of the NOK in the quarter, partly mitigated by negative effects related to our U.S. dollar assets, NES and Odfjell. If we then turn to the next page, Slide 13, you can here see that our net bank debt decreased by NOK 42 million in the quarter. This movement included positive effects from FX of NOK 157 million. Net interest-bearing debt increased by NOK 100 million to NOK 1.5 billion, affected by a conversion of a portion of the outstanding receivable towards AKOFS to equity as part of a smaller refinancing of the company. This transaction did not have cash effect for Akastor. Cash flow from operations in the quarter was affected by a continued high level of working capital in MHWirth, specifically related to the Awilco projects. We expect this to reverse in Q3. On Slide 14, you see that MHWirth's share of total net capital employed continued to constitute around 60% of the total per end of the quarter. The booked value of AKOFS increased, with NOK 73 million during the quarter as a result of equity injections and conversion of receivables, as mentioned, as part of the refinancing. Book value of NES decreased with NOK 59 million compared to Q1, primarily driven by FX effects as this is a U.S. asset. The other segments here includes our provision related to DOF Deepwater, where Akastor guarantees for 50% of the debt in the company. This commitment was booked with a value of NOK 237 million per end of the quarter at same level as per Q1. This equals 50% of the negative equity value in the company, resulting from lower vessel values compared to the debt in DOF Deepwater. Per end of the quarter, the market valuation represented a discount to book values of around 70%, slightly decreased through Q2. If we then turn to Page 15, I will provide some further details on MHWirth. As mentioned, we are quite happy with the performance of MH in the quarter, given the circumstances and market climate. The decline in total revenues was 3% versus second quarter last year and 9% versus first quarter this year. Projects & Products accounted for NOK 493 million in the quarter or 47%. This segment thus recorded a decline of 8% compared to second quarter last year, driven by lower revenues from sale of single equipment. The difference versus first quarter this year was also a decline of 8%, but mainly a result of lower recorded project progress in line with the total progress plan. The service and digital business recorded revenues of NOK 559 million in Q2, on par with the same quarter last year, including lower revenues from Digital Technologies, mitigated by higher revenues than last year from traditional aftermarket services. Versus Q1 this year, revenues for Q2 for the service business represented a reduction of 10%, explained by lower activity in general and partly affected by travel restrictions, but mitigated with an active spare part and overall business, especially out of Norway, in the quarter. As Karl mentioned, the number of active units fell back with 4 rigs during the quarter, as certain contracts expired and were not renewed. Based on the current contract schedule of the fleet, this figure could fall back with a few units also in the second half of the year. However, based on the quality of the installed base, we do believe MH has a solid base for growth once the market stabilizes. The number of cold-stacked rigs remained stable at 16 units over the quarter. Going forward, and as mentioned also last quarter, project revenues will drop in the second half of this year as a result of phasing of the current backlog and low order intake within this segment in 2020. We also expect sales of our single equipment to go down in 2020 compared to last year on the back of the market conditions and order intake situation. MHWirth service business is dependent on long-term rig activity and more specifically, the number of active units with MHWirth drilling equipment package. As mentioned, we see a risk for further decline in the shorter term, however, with a solid base for growth once the market turns. Then over to AKOFS Offshore on Slide 16. Again, AKOFS is not consolidated into the Akastor's financials. However, the company delivered a revenue of NOK 201 million and an EBITDA of NOK 83 million in the quarter. This represented a revenue reduction of around 15% year-over-year, a result of adjusted terms on the Santos contract from March this year as well as utilization effect on Wayfarer in June following the mentioned outbreak of COVID-19 that led to 17 days of downtime in the quarter. Skandi Santos operated with 99% revenue utilization through the quarter. As also mentioned by Karl, Seafarer is currently at the yard undergoing its final preparation for the Equinor contract, which is now expected to commence in August, from which it will contribute positively to the AKOFS financials. I will then turn to Page 17. NES continues to be impacted negatively by the market turmoil, and as over the last couple of months, been experiencing a decline in number of contractors going through their books and thus a declining last 12 months run rate. On this basis, we do expect revenues and nominal EBITDA to come in at a lower level in 2020 than last year. However, NES has a flexible cost base, and we are happy to see that the company is able to maintain its margin levels, demonstrating the robustness of their service business model. Also, during the quarter, NES delivered solid cash flow through a collection of working capital, reducing net debt of the company. Per Q2, Akastor's ownership in NES has a book value of NOK 586 million, which is based on updated earnings estimates. Then over to Slide 18. Our other holdings include AGR and Cool Sorption. We are happy with the performance of AGR in the second quarter, which delivered positive contribution despite a significant reduction in activity and revenue. The company has and continue to have a strong focus on cost control and cash flow generation and restructured their operations in U.S. and U.K. during the quarter. AGR delivered revenues of NOK 157 million and an EBITDA of NOK 5 million in 2Q. Going forward, we expect the activity level to continue on a lower level than pre-COVID. Cool Sorption delivered a quarter in line with last year primarily driven by the Njord project delivered to Equinor in June. With that, we are through our Q2 presentation, and I will then hand it over to the operator of the call to facilitate the Q&A session. So please.

[Operator]

[Operator Instructions] And we have our first question from Mr. Lunde from Carnegie.

[Chr. Frederik H. Lunde]

Yes. Just a question on the M&A process. Has this been ongoing for some time? Did it start and end this quarter? Is it completely dead? Are you looking to buy and sell? Can you give any sort of flavor on this line?

[Karl Erik Kjelstad, Chief Executive Officer]

We are very cautious about commenting on ongoing M&A projects. And the reason why we had to wait to mention it this quarter is due to accounting rules. We had to book the cost. But what I can say is that it's ongoing M&A project, and that's all I can say.

[Operator]

[Operator Instructions] Our next question is coming from [ Amundsen ] from ABG.

[Haakon Amundsen, Lead Analyst]

Haakon from ABG. Yes, Haakon from ABG. I was going to ask the same as Frederik. But maybe you can give some more color on the refinancing of AKOFS, please?

[Øyvind Paaske, Chief Financial Officer]

Yes. So as you know, we have had a historical receivable towards AKOFS for some time. During the second quarter, we, together with the owners, decided to inject some cash, and we contributed with a conversion of our receivable, thus strengthening the equity in AKOFS. We converted around USD 13 million. And our part owner -- other partner contributed with the same then in cash, so in order to align our holding. That's basically the basis, injecting some cash into AKOFS Offshore.

[Haakon Amundsen, Lead Analyst]

All right. And just finally, do you expect to have some extraordinary charges in the coming quarters from capacity reductions in MHWirth? Or how should we think about the cost reduction that may be necessary there?

[Øyvind Paaske, Chief Financial Officer]

Yes. We have not had any specific nonrecurring costs related to COVID and restructuring of the business in MH so far, primarily driven by the fact that our layoffs so far has been mostly temporary. Then of course, we have to assess that continuously, and there could be restructuring costs if the situation remains and activity level stays low for a long time. However, we do hope that we will be able to use the mechanisms in place to ensure flexibility also going forward.

[Operator]

[Operator Instructions] As there are no more questions, I will hand it back to the speakers.

[Øyvind Paaske, Chief Financial Officer]

Thank you. I would like -- then like to thank you all for your attention, and we wish you a good summer, and welcome back for our presentation of the third quarter results on October 30. So thank you very much, and have a good summer.