Akastor ASA

OSE:AKAST

Earnings Call Transcript 2021-Q2

[Oyvind Paaske, Chief Financial Officer]

Everyone, and welcome to the presentation of Akastor's second quarter results for 2021. My name is Oyvind Paaske, I'm the CFO of Akastor; and I'm here today with Karl Erik Kjelstad, our Group CEO.We will take you through the presentation that has been uploaded to our web page this morning. Karl will start by taking you through the main highlights before I'll go to financial results. After the financial section, we will open for questions through the webcast solution, where questions can be posted at any time during the presentation and preferably before we get to the Q&A session in order to make sure that we receive your postings in time.I will now leave the word to Karl for the business update. Please, Karl.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Oyvind, and good morning to everyone on the call, and thank you for listening to this presentation of Akastor second quarter earnings 2021.As for our second quarter report, please note that also this quarter, following the transaction we announced March 2 to combine MHWirth with Baker Hughes' Subsea Drilling division, Akastor's consolidated revenue and EBITDA continues to not include MHWirth financials. MHWirth is included in our P&L under discontinued operations.As mentioned, Oyvind will take you through the financial results in the latter part of this presentation, but let me first share some key developments for Akastor in the second quarter.Slide 4. There were no changes in our portfolio composition this -- in the second quarter.So let's move quickly on to Slide 5. In the second quarter, our #1 priority has been to ensure that the process to close the MHWirth transaction with Baker Hughes is on track and to prepare for the integration post closing. A key work stream has been to review and verify the synergy target that we communicated around $10 million when we announced the transaction.Based on the progress in integration planning, we are confident that we, on closing, can increase the synergy target compared with previous communicated figures. As the process is still ongoing, a reviewed synergy target will be communicated at the closing of the transaction.We expect closing to take place later -- late third quarter. However, exact timing is still difficult to predict due to certain competition approval processes ongoing and difficult to estimate as well as some uncertainty related to the ongoing carve-out process for the involved companies. But the progress is good, and we are confident that we will be able to close within the third quarter.Let us move on to some more insight to the performance of our portfolio companies in the second quarter. Let's start with MHWirth on Slide 6. MHWirth had a positive development compared with the first quarter. Rigs in operations with MHWirth topside equipment increased from 45 rigs on average in the first quarter to 48 rigs in operation in the second quarter. We see a good potential for a number of rigs in operation to continue to increase also in the second part this year.MHWirth saw an increased activity level across its business -- service business in the quarter, and we expect this development to continue also in the coming quarters and maintain our full year target of service revenue to be in line with the levels around what we delivered last year, however, still with some uncertainties related to possible continued effects of COVID-19, including travel restrictions and so on.The total number of offshore rigs with full topside package delivered by MHWirth was per the quarter 76 units, down from 80 in the first quarter, as 4 cold-stacked rigs were scrapped in the quarter. The product market continues to be muted, even if rig #2 at construction at Keppel FELS in Singapore was reactivated during the quarter. The product activity for the project business was low due to phasing.The award of the drilling equipment package to GMGS in China is expected to be converted to a formal contract within the third quarter. The project is, therefore, still not included in the order backlog for the second quarter despite that certain work on the product have already been initiated.MHWirth products business had a good order intake in the quarter, driven by increased activity, especially in the non-oil-related business. However, the revenue in the quarter was low since MHWirth entered into the second quarter with a low order backlog. The oil-related part of the product market is still affected by the low investment level by MHWirth's clients. Based on the good product order intake in the second quarter, combined with a very good pipeline of opportunities in the non-oil part of the product business, increased activity and thereby, revenue level is expected going forward.The MHWirth digital business had a continued high activity in the quarter, with delivery of several new systems and continues to see a positive momentum for the software solution with a good pipeline of opportunities. In the quarter, 1 Deal system and 3 CADS system was delivered, and MHWirth has a good pipeline of growth opportunities within the software solution and control system upgrades.Let us move on to the other companies in the portfolio on Slide 7. AKOFS Offshore. Aker Wayfarer had a 13 days downtime due to COVID-19 outbreak on board in the quarter, and this resulted in a modest 85% revenue utilization for Aker Wayfarer in the quarter. Skandi Santos continues to deliver excellent operations with 100% revenue utilization in the quarter. And AKOFS Offshore is in a tendering process with Petrobras for a possible new 3 years contract for Skandi Santos that is expected to be clarified during the second half of this year. AKOFS Seafarer also delivered solid operation in the second quarter for its charter with Equinor, with a revenue utilization of 94% in the quarter.Further, we are pleased with AGR's continuous strong performance with an EBITDA in the quarter of NOK 8 million, driven by high activity, especially in the Norwegian consultancy business. AGR continues to invest for growth in its software business and acquired the rig scheduling software from Deloitte Digital in the quarter. The addition strengthens AGR's portfolio of software application and yields opportunities to roll out the rig scheduling software solution into AGR's existing portfolio of software.Cool Sorption saw an increased activity in the quarter and delivered a book-to-bill of 1.4 in the quarter.Our largest financial holdings, Odfjell Drilling, traded well during the quarter, with a positive share price development of around 17%. In the second quarter, Odfjell also secured an extension of multiple bank facilities that was originally during this year, increasing the visibility going forward, and the company also continues to build a solid order backlog. Our preferred equity instrument in Odfjell continues to deliver a steady yield for Akastor.NES Fircroft saw a continued growth in the number of contractors and increasing revenue run rate, which we expect will continue throughout the year and well into 2022.DDW Offshore's 2 bareboat charters with OceanPact in Brazil commenced in the quarter, contributing with a positive EBITDA result of NOK 41 million in the second quarter.Then to Slide 8. Let me summarize the key value drivers for our main investments. MHWirth, our key priority is to ensure a successful closing of the transaction with Baker Hughes and thereafter, push the JV to be IPO-able as soon as possible; AKOFS Offshore, maintain all vessels on contract, with a focus on securing high uptime and revenue utilization through safe and excellent operation combined with exploring strategic opportunities; Odfjell Drilling, maximize the return on investment and realize this investment at the right time; NES Fircroft, grow with customers, continue to expand into new market segments such as renewable sector as well to continue to assess consolidation alternatives in this sector in order to enhance value.For all of our portfolio companies, we continue to be cautiously optimistic for the second part of 2021, as the global economy and also the sector recover from the impact of the global pandemic. We believe we will see an increased demand for our portfolio companies' products and services over the next 12 to 18 months.Let me conclude by saying some words about our road map for realizing our investment and associated capital allocation priorities on Slide 9. The most near-term realization will most likely be our financial investment, as these are our most liquid holdings. The timing here will depend on the market dynamics. For our industrial holdings, we will work to find structural solutions that can apply a straight-out sale or other more creative structures, for example, mergers. Timing here, of course, also depends on the market situation, but ability to carry out value-enhancing transaction will also depend on more specific company factors, such as, for example, for AKOFS Offshore, the contract situation.For MHWirth, as mentioned before, our key priority is to do the separate listing of the company as soon as possible after the closing of the transaction.With regards to capital allocation, we need first to address our debt, however, with a clear ultimate goal of returning values to our shareholders. As an example, organization of our Odfjell investment and our shareholding in NES should, in combination with the proceeds we received as a part of the MHWirth transaction later this year, enable us to, for example, distribute our shareholding in MHWirth after an IPO directly to our shareholders, as an example.So our strategy remains the same, targeting to realize the value potential of our portfolio, optimize the timing in order to maximize value and return the capital to our shareholders.Then, Oyvind, could you please take us through more details regarding our financial numbers, please?

[Oyvind Paaske, Chief Financial Officer]

Thank you, Karl. I will present the figures for the quarter, starting then at Slide 11. Please note again that MHWirth is classified as held for sale and reported within discontinued operations. Financial figures for previous periods have been restated.With that in mind, in the second quarter, we saw an increase in consolidated revenues of 36% compared to the second quarter last year, primarily driven by DDW Offshore, which this quarter recorded revenues of NOK 65 million, including then the financial lease effects related to the agreements with OceanPact, where 2 vessels will be on bareboat contracts until 2023, following which the vessels will be taken over by OceanPact.The EBITDA in the quarter was NOK 45 million, up from negative NOK 39 million in the same quarter last year, driven by contribution from DDW Offshore as well as high M&A costs recorded last year. Net financial items contributed positively with NOK 12 million in the quarter. Profit from discontinued operations included then contribution from MHWirth, with a total net negative effect of NOK 9 million in Q2.Total backlog for end of the quarter was NOK 2.7 billion, including then MHWirth, that is around NOK 200 million up from last quarter. Please note that the previously announced Chinese projects, as Karl mentioned, where MHWirth was selected as a preferred supplier for the topside equipment, has not then been included in order intake yet but is expected to be signed in Q3.Net working capital, including MHWirth, was NOK 612 million per end of the quarter, on the same level as previous quarter and still significantly lower than last year and below normalized levels. The net capital -- working capital position of MHWirth is expected to remain low also at closing of transaction, which will imply a funding from Akastor to the new JV. We estimate this to around USD 20 million based on current levels, reducing the net proceeds from the transaction.Total working capital position of Akastor, excluding MHWirth, was NOK 353 million per Q2, including then the net value of the DRU positions of NOK 443 million, which is the projects that will be carved out of MHWirth and remain with Akastor also after closing.Then over to Slide 12 for some further breakdown of the financials. Revenues from AGR was up 13% compared to Q2 2020 and in line with last quarter, driven by continued high activity level within consultancy in Norway. In Q1 -- in Q2, sorry, AGR constituted 65% of total consolidated revenues. EBITDA was NOK 8 million in Q2.DDW Offshore, which is here included under other and contributed positively with NOK 41 million in EBITDA in Q2, including then the $5.9 million gain on the financial lease agreements related to the OceanPact arrangement.MHWirth and AKOFS Offshore is not consolidated in our financials, with MH reported under discontinued, whereas AKOFS is reported as a JV under net financials. MH reported revenues of NOK 685 million in the quarter, 35% lower than Q2 last year, driven by lower activity within projects. However, service revenues was in line with the level in Q2 last year, and total revenues was 16% up from Q1 this year.AKOFS delivered revenues of NOK 341 million in the quarter, 70% higher than last year, explained by the commencement of AKOFS Seafarer late last year. EBITDA ended at NOK 120 million. And during the quarter, AKOFS was affected by downtime following a COVID outbreak on Wayfarer, as mentioned by Karl.Under net financial items, the preferred equity instrument in Odfjell Drilling contributed positively with NOK 34 million, of which NOK 9 million has cash effect and NOK 11 million relates to a calculated increase in valuation of the warrant structure. NES contributed positively with NOK 19 million, in line with previous quarter. Net interest cost was NOK 24 million in Q2, also in line with Q1. AKOFS Offshore contributed negatively with NOK 19 million in the net financials, representing then, again, our 50% share of net profit in the period.If we then turn to Slide 13, you will see that our net bank debt increased by NOK 80 million during the quarter. Other cash flow here, as presented on this slide, includes the payment of the deferred settlement obligation related to the guaranteed preferred return of AKOFS Seafarer paid out in Q2.Of our total reported gross bank debt, DDW Offshore constituted NOK 450 million per end of Q2, while AGR debt was NOK 179 million. Both these arrangements will remain in place also after the closing of the MHWirth transaction.Per end of the quarter, our liquidity reserve through our undrawn credit facility was NOK 1.4 billion. This will be reduced after refinancing in connection with the closing of the MHWirth transaction. Going forward, cash proceeds from the MHWirth transaction will reduce net debt after closing. Net proceeds is still estimated to around $70 million to $75 million, net of adjustments and costs related to the mentioned working capital balance at closing as well as other certain specific elements. Based on that, we still estimate net bank debt, including DDW and AGR of around NOK 1.3 billion post closing, with NOK 0.8 billion draw on the NOK 1.25 billion corporate facilities, in line with guiding per last quarter.Then over to Slide 14. Total net capital employed per end of Q2 was more or less in line with last quarter, with MHWirth constituting around 53% of total. Again, MHWirth is classified as held for sale in our balance sheet per end of this quarter. Following closing expected to take place then in Q3, Akastor's value of this holding in the new JV will be reported as a financial investment, with net capital employed reflecting 50% of the book equity value of the new company.Then over to some further details on MHWirth on Slide 15. MHWirth delivered a good increase in revenues of 16% compared to Q1. That was driven by increased service activity. Revenue from DLS and Digital Technology was NOK 551 million or 80% of total revenues in MH in the period. The increase in service activity compared to last quarter was driven by higher offshore activity.Within the Projects & Products segment, activity remained at around same level as Q1 with total revenues of NOK 134 million in Q2, representing then 20% of total revenues or a decrease of 73% compared to last year. Revenue level here is still affected by low progress on the Keppel projects, where both units is in the late phase.Revenue for single equipment was also low in the quarter, driven by low starting backlog, however, with a solid order intake in the period of around NOK 300 million, driven by the non-oil markets. Based on current backlog, we expect contribution from Projects & Products to increase from current level over the next couple of quarters, illustrated then by the order intake in Q2 within single equipment as well as the Chinese CMGS (sic) [ GMGS ] project expected to be transformed to order intake in Q3.As Karl mentioned, the average number of active rigs in the quarter increased by 3 units compared to Q1. Based on the current contract schedule and option structure of the fleet, we believe the number of active units should increase further going forward.Total fleet size was down 4 units to 76 units in total, as Seadrill confirmed 4 units scrapped in the quarter. All of these 4 had previously been cold stacked, thus reducing the number of cold-stacked floaters to 10 units per end of Q2.EBITDA from MHWirth in the quarter was NOK 51 million, representing a margin of 7.4%, still affected by relatively low revenue level. And we do expect margins to increase as activity picks up going forward.Then over to AKOFS on the next slide. Revenues in the quarter was impacted by the 13 days off-hire for Wayfarer due to the mentioned COVID outbreak requiring the vessel to change crew and return to port. Besides this, both Wayfarer and Santos delivered very solid operational uptime, with Santos recording 100% revenue utilization; and Wayfarer, 85%, including then the mentioned downtime. Seafarer also delivered a solid quarter with a utilization of 94%, the best quarter recorded since commencement.Q2 financials included a cash reimbursement of around $4 million from the Norwegian NOx fund related to an investment in battery package on board Seafarer. Total revenues in the quarter ended at NOK 341 million, with an EBITDA of NOK 120 million. EBITDA margin in the quarter increased compared to the previous 2 quarters as a result of improved uptime. Q2 revenues represents a revenue increase of around 70% year-over-year, explained then by the commencement of Seafarer in Q4 last year.I will then turn to Slide 17. NES Fircroft continues its good momentum and is delivering growth month by month across most business segments and geographies. Pro forma last 12 months revenues for NES per May was down around 30% compared to 1 year ago; however, with an increasing revenue run rate and increased number of contractors, reaching more than 18,000 in Q2, a growth of around 9% over the last 3 months alone. Going forward, we expect NES to grow further, driven by increased global oil service activity as well as growth within renewables space.As mentioned also last time, NES Fircroft is targeting to expand its already significant business outside of oil and gas, with both organic and inorganic growth avenues being assessed. Integration is -- with Fircroft is going according to plan with the full effect of the cost synergies expected to be realized from next year.Then over to Page 18. Our other holdings include here AGR and Cool Sorption. AGR delivered revenues of NOK 178 million with an EBITDA of NOK 8 million. Consultancy continues to form the largest part of AGR, constituting around 80% of revenues year-to-date. The consultancy segment delivered growth also in Q2, again driven by the Norwegian markets. The activity is expected to continue at a high level also going forward.Activity in Cool Sorption continued to be relatively low in Q2; however, increased compared to previous quarter with a total revenue of NOK 21 million and an EBITDA of NOK 1 million booked in the quarter. Despite the book-to-bill of 1.4 in Q2, Cool Sorption has still had a low order backlog per end of the quarter, and the development forward is dependent on the ability to secure new projects.With that, we are through the presentation and will move over to the Q&A. We will take a short break in order for the listeners to provide their last questions and return in a minute's time or so.

[Oyvind Paaske, Chief Financial Officer]

Okay. So we have one question from a viewer. Do you have any examples on how you are working on the green energy transition? How do you expect your portfolio to be in the future with respect to renewables? Karl, maybe you want to comment on that?

[Karl Erik Kjelstad, Chief Executive Officer]

Yes. All of our portfolio companies are working with renewable sector on how to develop products and services in that sector using the knowledge and technology that we already have combined with new technology.Let me take some examples. For MHWirth, we have a development work going on, both when it comes to wind -- offshore wind. For instance, we have the buoyancy technology that we have been used in the offshore rigs, that we have a product where you can reduce the cost with installation of floating units. We also have a mooring unit solution where we're using drilling technology. As you might know, it's suction anchors that is used today. And with using drilling technology, you can expand the Seafarer, where you actually can use the floating wind units. That is an interesting product where we have good dialogue different players. The challenge is, of course, that this floating offshore wind market, for instance, is a little bit -- it's not starting today. It's -- you will see it from 2025 and onwards.Another example is AGR. We have, in AGR, other business in well management, where we have been combining smaller drillers' need for rigs and by, in a way, being their drilling and well department. And we have a similar approach now under development for offshore wind, but we can offer operation and maintenance services through the same model, for example.So I can go through more examples, but all of our portfolio companies have an ESG agenda and developing products and services within that sector. And the energy transition will be a part of all the company's business going forward.

[Oyvind Paaske, Chief Financial Officer]

Thank you, Karl. We have another question regarding AGR. 80% of the revenues from consultancy, how come you don't deliver higher EBITDA than NOK 8 million?I can comment quickly on that. Consultancy is, of course, a very low margin business segment with contractors then going through books of AGR. It's traditionally not high margins within that business as, for instance, seen in NES, which is sort of the same -- within the same business. However, AGR is, of course, focusing to grow that business, and growth will, of course, mean better margins in total. Also, AGR is focusing on further growing their software business where the margin is different.

[Karl Erik Kjelstad, Chief Executive Officer]

If I might add on that, if you look historically on AGR business, the margin level has been higher, and that is coming from the business I mentioned in the previous question, the well management business. And that market is currently muted, so it's mainly the consulting business who is good. And when the market uptake is coming, it's the consulting business who get it first. So hopefully, the other part of the AGR business will also increase its revenue going forward and thereby contributing with a higher margin level for the business as a whole.

[Oyvind Paaske, Chief Financial Officer]

Yes. Then, we have one question regarding Skandi Santos and the tendering process. Could you please provide some color on your view of the tendering situation in Brazil?Karl, do you want to comment on that?

[Karl Erik Kjelstad, Chief Executive Officer]

Yes. The situation is that it's a very public tender process in Brazil. So we delivered -- or AKOFS Offshore delivered a tender, and then it was public -- the ranking of the tenders, where AKOFS Offshore has the best offer, to put it that way.What is going on now is technical discussions and commercial discussions as we speak. And when those discussions hopefully is concluded successfully, the next stage in the process is to get approval from the executive committee in Petrobras. The timing of that is somewhat unpredictable. It can take a month. It can take 4 months. The current charter is elapsing in November. So we will have a clarification on this before that for sure and hopefully within the third quarter.

[Oyvind Paaske, Chief Financial Officer]

Okay. I think then we are through the Q&A, and I would like to thank all of our -- all of you for your attention, and we wish you all a nice summer, and welcome you back for our presentation of the third quarter results on October 29. Thank you very much.