Akastor ASA

OSE:AKAST

Earnings Call Transcript 2023-Q2

[Øyvind Paaske, executive]

Good afternoon, and welcome to the presentation of Akastor's Second Quarter Results. My name is Oyvind Paaske, CFO, and I'm here 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.

Karl will start by taking it a little bit -- take you through the key highlights before the HMH team will then take you through their quarter. I will then go through the customer consolidated financials before Karl will wrap it up.

Towards the end, we will open for questions through the webcast solution. Please note that questions can be posted at any time during the presentation. I will then leave the word to Karl.

[Karl Kjelstad, executive]

Thank you, Oyvind. Good afternoon and also good morning to our U.S. participants. And thank you everyone for joining us. We are quite pleased with our second quarter results, and we remain optimistic on the outlook for the remainder of 2023.

Let's move to Slide 2. As you see from this overview, the equity value of our Akastor for the end of second quarter was about NOK 15.7 per share. And this is slightly above the values in the first quarter.

As before, the key relevant value indicator for Akastor is not our EBITDA result or our net profit as some daily business papers for some reasons focus on, but the value of each of the investments we hold as most of our companies is joint ventures together with different partners.

In fact, our Akastor reported revenue and EBITDA results are of minor relevance since it represents less than 10% of our values. Key for understanding the value development for our Akastor's investments or our largest investment HMH and HMH results that is not consolidated into our numbers. And also, the focus on the development in Akastor's net capital employed that reflects the value development of our investments.

This is well understood by the analyst community, but it seems to be in less degree, to be understood by some of the business papers that we are pleased with cover us or quarterly earnings regularly. By that somewhat frustrated comment, I conclude what I can call the educational part of this presentation and revert to the second quarter results and relevant issues that has impact on the value development of our investments.

In the quarter, the sale of all of our shares in AGR to ABL Group was closed. Akastor now holds around 5% of ABL that is listed on Oslo Stock Exchange. The transaction was completed above book value and generated an accounting gain of approximately NOK 100 million that will be booked -- that was booked in the second quarter.

HMH continued to be our most valuable investment. The book value of our shareholding in HMH is equal to slightly above 65% of our total net capital employed and with a book value of about SEK 3 billion for the end of the quarter, corresponding to [ NOK 11.4 ] per Akastor share. In the quarter, HMH delivered a strong result with EBITDA increased year-over-year and compared to last quarter following increased service business. Also, the company saw continued order intake growth for the fifth consecutive quarter. We expect that the service activity to HMH will continue to increase going forward, driven by the same increase in rig activity.

For AKOFS Offshore, AKOFS Seafarer is delivering excellent operations following its planned Yards day in May, why Aker Wayfarer is preparing to commence its new 4-year contract with Petrobras and is currently doing the exact test for that job. In the quarter, the seller credit of $20 million towards Odfjell Drilling that was a part of the sale of the preference shares instrument in the fourth quarter last year for $95.2 million was settled and reduced the bank -- net bank debt in Akastor.

Following this, the [ warrant ] structure remains our only direct exposure towards Odfjell Drilling. We continue to be very pleased with the NES Fircroft and the performance of NES Fircroft. The company is delivering a strong revenue growth of 16% year-on-year and an EBITDA growth of 15%, resulting in an EBITDA of $30 million in the quarter, demonstrating NES Fircroft strong business model and the outlook for the business remains promising also going forward.

Finally, the [drew] arbitration process is well on track with arbitration outcome expected in the second half of this year. With that, I'm pleased to introduce HMH's CFO and EVP, Tom McGee, that will take us through HMH's second quarter earnings and key permitters going forward. So Tom, the floor is yours.

[Tom McGee, executive]

Thank you. Good morning, everyone. We had a good quarter. As you can see, we continue to experience growth in order intake. That's the fifth quarter. We've seen an increase in order intake. Obviously, we'll talk in more detail, that's largely aftermarket. Some of this activity is related to 2 key reactivations within the quarter, and we'll talk a little bit more about the impact of that.

Increased EBITDA year-over-year. Let's kind of dive into this. A couple of points. One, you've heard us talk about prepositioning inventory, and you've seen a draw on our RCF to do that. We did preposition some inventories. Our customers were indicating a desire to increase their purchasing. That worked, and you saw the conversion this quarter, and so we feel quite good about that. When you lay this across last year's second quarter, remember that we had a Volaris project cancellation embedded in that quarter that produced an extraordinary gain. Our customer will not allow us to disclose the magnitude of that gain. But I would just say that we're comfortable saying we had very strong year-over-year growth between Q2 of this year and Q2 of last year.

Next I'll touch on just to open up a little bit on what happened this quarter, and it really is interesting. I mean we do have a forecast that we do have a budget we're doing at the beginning of the year, and we have a rolling forecast. And a month ago, this forecast was strong. And then 3 weeks ago, it got even stronger. And it just kind of spiraled into the end of the quarter. And what's interesting there is, obviously, with the prepositioning of inventory we're able to respond to increased customer purchasing, but there was a significant increase towards the end of the quarter in customer purchases, which I think really, from our core customers ties to restocking, potentially restocking and also reactivations.

When you see day rates climb over touch $500,000 a year, we do think we've seen a little bit of a maybe a change in mentality and a little more aggressive purchasing from our customers. That said, I do think some of that ordering towards the end of the quarter was a little bit -- I won't say one-off, but maybe will not repeat in the second quarter at that same level. I mean so I do think I would temper the optimism a little bit. But clearly, we did reach an inflection point. So we think the run rate we're at is higher than it has been and we caution you not to extrapolate in fully this quarter, but I would say we definitely hit an inflection point in this quarter, something changed, and we feel very optimistic. And I think when you look at the order rates and look at the implied revenue from a conversion there. You can do the math and see that we remain very optimistic on the aftermarket for the rest of the year.

You also saw a little bit of cost of that progress as well, and I think that will continue to make an impact on EBITDA in the second half of the year as we manage the cost more aggressively. And then finally, on the cash side and David will touch a little bit more on this, you do see us a little bit tied on that front given the build of inventory for after market but also given some of the project work that we've talked about, and we think that, that will resolve itself by the end of the year, we'll get some very large payments in the second half of the year. But that's that kind of explains the overall cash story. And we think it will start to align by the end of the year.

We continue to execute on the synergy plan was waived to the ERP implementation. I will caution you a little bit that when we go live on the other part of the ERP system, we will have some noise. It will probably be end of Q3, beginning of Q4, similar to what we had when we went live with the [PCS side] of things. So -- and those are opportunities where you may lose a little business. You may have some business pushed out. It gets to be pretty noisy. And so we would just guide you to expect some choppiness around that. It's going to be something that's too significant.

And second, finally, we talked about the cash flow, and then I'll just say that we're looking at a potential refinancing as we approach better results in strong markets. And potential for use of cash. So -- but that -- I will wrap it up and turn it over to David to talk through some of the details on the numbers.

[David Bratton, executive]

Thanks, Tom. On the next page, we'll go through the total company results and then move into the segment details. Revenue for the quarter was $189 million, up 4% year-over-year and 2% quarter-over-quarter, driven by increase in spare and overhaul repairs, partially offset with the decrease in projects due to a non-repeat of last year's project cancellation fees. Adjusted EBITDA in the quarter was $34 million, up 8% year-over-year, driven by aftermarket services, partially offset by non-repeat of last year's project cancelation fee and up 78% quarter-over-quarter, driven by services increased order trend.

Adjusted EBITDA rate was 17.9% in the quarter. Orders for the quarter were $222 million, up 30% year-over-year and up 11% quarter-over-quarter driven by aftermarket services strength following an increase in offshore rig count and recertification activities. We continue to experience strong growth in our aftermarket orders, or in the continued strength in the offshore market.

Finally, on cash flow. Free cash flow in the quarter was negative $1 million, driven by increase in project-related working capital, partially offset by improved collections. Cash flow is expected to improve in the second half of the year on the back of project deliveries. We ended the quarter with $43 million cash and cash equivalents on hand.

Now I'll walk you through the segment results in more detail. In aftermarket -- [ $38 million ] in the quarter, up 35% year-over-year and up 12% quarter-over-quarter, driven by increased spare part output in the period. Aftermarket order intake was $158 million in the quarter, up 16% year-over-year, driven by rig reactivations and SPS orders been down 3% quarter-over-quarter, driven by non-repeat of large digital technology orders signed in the first quarter of '23.

In Projects product and other revenue in the quarter was $51 million, down 18% quarter-over-quarter driven by a phasing of the project progress.

Now moving on to net interest-bearing debt. We end the quarter with net debt of $175 million. Leverage in 2Q was below targeted capital structure at 1.6x and which allows us to stay within all covenant requirements for minimum liquidity, gearing ratio and interest coverage ratio. Current RCF draw relates to increased market activity as well as our GMGS project progression as we approach the end of the project fulfillment, we expect the RCF draw to decrease.

Overall, we're proud of the HMH's team's performance this past quarter, and we continue to be optimistic about the macro trends in the market. And with that, I'll turn the call back over to Tom.

[Tom McGee, executive]

Thank you. And just to touch on this real quickly. We're in dialogue with our banks regarding , as you can see, when things mature regarding extension of the RCF. And then looking at potential refinancing, I'll just make two just quick points. One is, obviously, we'd like to the reduce cost. And secondly, we'd like to increase flexibility. I think both are possible in today's market, so we'll be exploring that.

So with that, we're going to wrap it up. Again, we're very, very happy with the performance of our team on the aftermarket side. They did a great job getting ahead of the market and prepositioning inventory and drawing the RCF to do that and we delivered this quarter. We expect to see good results through the remainder of this year as our customer base continues to sign higher and higher day rate contracts. And if you look at the cash flow forecast coming out of our -- the equity analysts regarding our customers, they're quite healthy, and we're quite happy about had.

So thank you, and we'll turn it back over to the Akastor team.

[Øyvind Paaske, executive]

Thank you, Tom. I will then take you through the Akastor financials, starting at Slide 9 with our net capital employed. HMH, as already mentioned, remains our largest investment through Q2. We saw the carrying value of HMH increase, primarily driven then by FX effects as HMH is a U.S. dollar company. with 50% of book equity then translated into NOK in our Akastor accounts.

Our book value of AKOFS was reduced in the period, driven by net negative profit in the period, partly mitigated by FX effects and equity funding committed in the period. The negative net profit in Q2 was affected for AKOFS by Wayfarer being out of operations for most of the quarter. Negative bottom line is expected, however, also going forward as a result of current contracts and the capital structure of the company, as I also mentioned on the last call.

The net capital employed of NES, DRU and DDW increased through the quarter, primarily driven by U.S. dollar NOK fluctuations. Other net capital employed, as shown on this slide includes the value of our smaller financial investments, including now then also our investment in ABL Group. ABL had a carrying value of NOK 94 million per end of Q2. The other segment also includes pension accruals and various provisions related to previous transactions. The values within other decreased by NOK 62 million during the quarter, driven by an accrual related to equity funding of AKOFS carried out in July of approximately NOK 50 million required as a result of Wayfarer downtime in Q2.

If we then turn to the next slide for an overview of the net debt movement in the period. Net bank debt decreased by NOK 123 million in the quarter, driven by the settlement of the seller's credit towards outfit drilling in the period, partly offset by noncash FX effect related to our U.S. denominated debt as well as corporate cash flow in the period, which included a $26 million equity funding of AKOFS Offshore.

The reported total net bank debt per end of quarter was NOK 1.069 billion, which included then the net debt position within DDW Offshore of NOK 235 million per render period, in line with previous quarter. Net interest-bearing debt per end of the quarter was NOK 531 million, including then our interest-bearing positions toward AKOFS and HMH. Adjusted for the [oilfield] position, which was settled in the period, interest-bearing receivables were more or less in line with last quarter, with only smaller deviations as a result of [ PIK ] interest and the FX.

Then over to the next slide for the external financing facility overview. The net draw on our corporate banking facilities was NOK 0.8 billion per end of June, down from Q1. There was no draw under the subordinated liquidity facility from Aker Holding per end of the quarter. The AGR loan was, as mentioned last quarter, fully settled upon closing of the AGR transaction in April. During Q2, we established a smaller asset financing facility with DNB with security in the ABL shares. This facility was drawn by NOK 45 million per end of Q2. Per end of the quarter, our undrawn corporate facilities was NOK 375 million. In addition, we had a cash position of NOK 244 million per end of quarter. This cash position was in July used to reduce the draw on our financing facilities. Please note that our facilities will be reduced by a total of USD 13 million in 3Q as a result of mandatory repayments on the DDW term loan and the corporate revolving facility following proceeds received from Odfjell late in Q2.

Our net leverage compared to our net capital employed continued to be low. However, Akastor depend on realization of assets to improve liquidity and reduce the refinancing risk in '24. There are ongoing processes on this basis, including then the drew arbitration and based on this, we still expect to reduce debt and increase liquidity in the second half of the year, and we'll plan our refinancing on this basis.

Then over to our consolidated P&L on this slide. As before, and as Karl has also been through, please bear in mind that near all of our holdings, then including HMH and AKOFS are not consolidated and thus our consolidated revenue and EBITDA represent a very minor part of our total investments.

With that in mind, DDW Offshore delivered revenues of NOK 52 million in the quarter increased compared to both last quarter and year-on-year driven by the utilization of the fleet. DDW delivered a positive EBITDA of NOK 14 million in Q2, significantly higher than 1 year ago due to the improved utilization. Other includes corporate costs in period with around NOK 5 million in cost related to the Drew arbitration. This decreased compared to last quarter, driven by the hearing conducted in Q1. With that, consolidated revenues and EBITDA came in at NOK 64 million and negative NOK 4 million, respectively.

Also worth mentioning profit from discontinued operations contributed positively with NOK 105 million in Q2 related primarily to the effects of the AGR sale.

Then over to the next slide for a closer look at our net financials. Net financial items came in at a net negative of NOK 4 million in the period. where the offer drilling contributed negatively about NOK 10 million, split then between positive NOK 5 million cash interest on the seller credit agreement until settlement and the negative noncash effect related to the warrant structure of NOK 12 million. Negative effect from other investments of NOK 22 million relates to share price development in our holdings in ABL, Maha Energy and the Awilco in the period.

Net foreign exchange effects were positive NOK 50 million in Q2, driven by the strengthening of the U.S. dollar NOK, which has positive accounting effects on our dollar holdings. Share of net profit from equity accounted investees contributed negatively with NOK 78 million, consisting then of our 50% share of net profit in HMH and AKOFS Offshore. Our cost contributed negatively with NOK 101 million lower than last year and previous quarter, driven again then by Wayfair being out of operation, while HMH delivered positively in the period.

With that, I'll pass the word over to Karl for the last section. Please Karl?

[Karl Kjelstad, executive]

Thank you, David. Let me one of this presentation with some ownership agenda refractions. First, a snapshot of our portfolio that now consists of investments in 8 companies in addition to our DRU claim. As mentioned, we closed [year gaps] action in the second quarter and no whole ownership in addition to [Abel] as well in Maha Energy and [Fon] Energy Services directed through Akastor.

Let's move to the next slide, HMH, where operational performance has been well covered by Tom's presentation. We in Akastor are excited for the outlook for the HMH business, and we believe the company is very well positioned to continue to take part in upturn driven by the increased focus on energy security worldwide demonstrated by the increased rig activity and rates for rigs.

As HMH owners of a key focus, together with our co-owner at Baker Hughes is to support the HMH management's efforts to grow the business both organically and through M&A. Akastor, together with Baker Hughes, are targeting to make our investment in HMH Liquid through an IPO as soon as the company is ready and equity market is offering interesting valuations. We plan to position HMH in the active market as a company with a track record of robust recurring revenue base delivering double-digit margins with increased dividend capacity and growth potential.

As a part of the IPO preparation, we will, as Tom mentioned, Akastor has the potential refinancing of the bond to reduce cost of capital and increased flexibility. We believe the company itself will be ready for a potential IPO in '24. But of course, it remains to be seen whether the equity market is offering attractive valuation for all service sector in general and for HMH specifically.

Let's move to the next slide. For AKOFS, the key focus is to deliver high-quality operations with high revenue utilization. Through the quarter, Seafarer Santos were on contract for the full payer, while Wayfarer ended its contract mid-April, and remain out of operation through most of the quarter. And while it was preparing for the new 4-year contract that we expect to commence in the third quarter.

As last year, AKOFS Seafarer was mobilized for coiled tubing operations in the period and delivered excellent operations post-mobilization. For the full quarter revenue utilization and [ 93% ] affected by 3 weeks yard stay with a contractual 80% utilization. Santos delivered utilization of 70% in the period affected by certain issues related to the ROV system of the commencement late first quarter this year.

With this, Total revenue for the first quarter -- for the second quarter for AKOFS added USD 28 million with an EBITDA of [ NOK 3 million ], both compared to the previous quarters as a result of Wayfarer being off hire between contracts. When it comes to our ownership strategy, all AKOFS as now have longer-term contracts, and this is an important prerequisite for exploring different structural solutions including potential structural combination between AKOFS and other players in the industry. Such opportunities are something to Akastor together with our co-owners are exploring.

Next slide. NES Fircroft. NES Fircroft is a clear global leader within niche. And as mentioned, the company continued to deliver very strong growth. We are pleased to see that the growth in the last 12 months are strong and also in the oil sectors as the company continued to focus on the non-oil business exemplified with the acquisition of Evolve Science in Australia in the quarter, which feed the EBITDA growth. We expect to see continued organic growth going forward as well as potential add-on on M&A in specific niches and areas globally. NES Fircroft is, as mentioned before, near being exit ready with different alternatives being explored, including a potential listing.

Then finally, next slide. We are pleased that we, in the quarter, completed the monetization of our investment in Odfjell Drilling. [Tru] is, as mentioned on a legal track, where we are waiting on an award from arbitration tribunal, and the outcome is, as mentioned expected this year. Going forward, we are targeting further realization of our holdings within our financial investments, such as monetizing our shareholding in NES Fircroft. For HMH, the target is, as mentioned, to do a separate listing of the company as soon as the company is ready and the equity market is attractive.

So with that, we are through the presentation. And before we issue all of our pleasant summer, we will open up for Q&A. Thank you.

[Øyvind Paaske, executive]

Yes. Thank you we'll work in just a few minutes. Okay. We'll start with a question to the HMH management from [ Mark Alsred in Nordea ]. What is your best estimate on timing of the bond refi? And do you currently consider private or public markets most attractive? So Tom, I'll let you.

[Tom McGee, executive]

So thank you. I would always -- I'd say for the answer to the track question is it depends. I think we're in the process of evaluating all alternatives. I mean is with our shareholder group and management team, we're consistently evaluating our -- we're always evaluating a variety of alternatives. So I think the timing depends on price and terms as the public to private market. I mean I think the private -- public market in Norway is where we are today. We understand it. We're experienced issuer and it's an advantage. There is a private market globally and in the U.S., that does provide an alternative. So I think at this point, we're evaluating alternatives and it will depend on pricing terms.

[Øyvind Paaske, executive]

Thanks, Tom. Then we have a second question from [ Frederic in After funds ]. Regarding AKOFS, are you currently engaged in strategic discussions regarding the company and its assets, Karl leave that for you to comment on.

[Karl Kjelstad, executive]

Yes. We like to comment on specific discussions when they are concluded, since M&A is a rather black and white subject. But we are actively exploring definite opportunities for the company, and I think I will leave it with that.

[Øyvind Paaske, executive]

Thank. With that, I think we are through. And it only remains to wish you all a good summer, and thank you for your attention. And we welcoming back our presentation of the third quarter results on October 26. Thank you very much.