Akastor ASA

OSE:AKAST

Earnings Call Transcript 2020-Q3

[Øyvind Paaske, Chief Financial Officer]

Good morning, everyone, and welcome to the presentation of Akastor's third quarter results for 2020. My name is Oyvind Paaske. I'm the CFO of Akastor, and I'm here with Karl Erik Kjelstad, CEO. We will take you through the presentation that has been uploaded to our webpage and news web this morning. The presentation will also be made available through our webcast solution. Karl will start by taking you through the main highlights of the quarter, before I'll go through the financial results.After the financials, we will open for questions through the webcast solution. Please follow the instructions given by the moderator. I will now leave the road for Karl for the business update. So please, Karl.

[Karl Erik Kjelstad, Chief Executive Officer]

Thanks, Oyvind. Good morning to everyone on the call. Thank you for listening to this presentation of Akastor third quarter earnings.The third quarter was, as the second quarter, affected by the global COVID-19 pandemic and a continued high level of uncertainties in the oil and gas-related industries worldwide. However, we are pleased to see that in this challenging environment, the business of our portfolio companies continues to be quite robust, reflected by that all our industrials investments are delivering positive contributions also in the third quarter.MHWirth is delivering close to 10% EBITDA margin, the same level as in the second quarter despite of a lower revenue level. Further, MHWirth service business continued to serve its clients worldwide well despite travel restrictions and other COVID-19 related challenges. NES Global Talent merged with the competitor Fircroft, establishing an even stronger position in the market. We and the other NES Global Talent shareholders will together own 90% of the merged company, where Akastor's economic interest is about 15%.AKOFS Offshore. Third quarter was negatively impacted by what has proven to be a lengthy test program for the seafarer vessel during the whole third quarter. But October 16, the vessel finally commenced on the 5-year contract with Equinor, an important milestone for AKOFS Offshore. DDW Offshore, previously called DOF Deepwater, the announced restructuring is now completed. DDW Offshore will be consolidated into the Akastor group as a fully-owned subsidiary from the third quarter this year.Let me now take you through some of the key numbers from our third quarter earnings. Year-on-year, we saw a decline in our cost revenue of 35% and a decline of 26% compared with the second quarter this year, resulting in a revenue of NOK 926 million for the third quarter. For MHWirth, revenue decline was around 30%, resulting in a revenue of NOK 735 million and with an EBITDA margin, as mentioned, at the same level as in the second quarter, resulting in MHWirth EBITDA result of NOK 71 million.Akastor delivers a EBITDA result of NOK 66 million for the third quarter, somewhat lower than the EBITDA result of NOK 70 million in the second quarter. M&A cost in this quarter is on a normalized level compared with the extraordinary M&A cost of NOK 43 million we had in the second quarter. The outcome of the related not specified M&A project mentioned in the second quarter is still not concluded. Our net interest-bearing debt is more or less on the same level as the second quarter, NOK 1.5 billion.Let us then move over to Slide 4. We are quite enthusiastic about the combination of NES Global Talent and Fircroft, creating a clear market leader in the global engineering staffing services with a global market footprint into several industries worldwide. There are very strong synergies between these 2 companies, at least $20 million in cost synergies. And in addition, there also will be revenue synergies.As mentioned in earlier earnings calls, we believe that there is enhanced value to be harvested by continuing to consolidate this industry. The NES and Fircroft transaction is an important building block in our value creation plan for this company. We believe that both a future trade sale or also an IPO could, at the right time, be a feasible exit route for this investment.Slide 5. Our key objective for the DDW Offshore restructuring was to create a longer runway for our future realization of this legacy investment. The DOF part of the debt is now converted to equity, but at the same time, the banks have a potential to recoup some of the DOF debt through the agreed 50-50 profit split at realization of the assets. In the current market, it's hard to realize meaningful value for these vessels. But this specific part of the anchor handling market is possible to consolidate and the DDW Offshore assets are attractive, both in terms that they have a high-quality spec and that they have an attractive age profile.This makes us hopeful that we, in a more normalized market, should be able to realize these vessels at a more meaningful value than we see today. Yearly cost for the DDW Offshore in this -- in the case that all vessels remains in warm stacked layup is NOK 60 million. NOK 30 million is interest cost and NOK 30 million is annual layup costs.Slide 7. Our portfolio composition. This time, it is some updates on our portfolio composition slide. The new logo of the merged NES, Fircroft and the corresponding new economic interest for Akastor of 15%. And also the new DDW Offshore logo actually made by one of our team members, so very cost-efficient. With over 100% ownership of DDW Offshore that is effective from the fourth quarter.Let us move to Slide 8 with some more specifics on the MHWirth performance in the third quarter. MHWirth Product business continued to execute on delivering the drilling packages to the 2 harsh environment rigs currently being built at Keppel FELS, with a 86% and 76% progress for those 2 projects for the MHWirth scope. The newbuilding market continues to be weak with only some few niche project currently being pursued. For example, the publicly known Chinese research drilling project. The MHWirth Product business is booking revenues at the delivery, and it had few deliveries in the third quarter and thereby a low revenue level.This will however increase in the fourth quarter based on the current backlog. The Product order intake continues to be affected by the challenging market, and it is on the same level as the previous quarter. It is uncertain when the market improves. However, the non-oil-related product sales is somewhat stronger, but also with uncertainties related to timing of contracts. Digital Technologies saw a reactivation of 2 suspended deliveries of deal packages, demonstrating that the digital solution have a high priority with our clients also in a challenging market.MHWirth also booked 3 new rigs for our CAD software module in the quarter, and we also successfully completed a pilot project for the beAware software for active rigs in the quarter. That is down from 47 rigs in the second quarter, and we expect that this level to stabilize going forward.Let's move to Slide 9. We're happy for that AKOFS Offshore now have all 3 vessels on contract. And as mentioned, the final testing of the Seafarer vessel was lengthier than expected, but now the vessel is on contract, and I will say fully tested. The Santos vessel entered last year following the end of the 5 plus 5 year contract that started in 2009, a 1-year contract with Petrobras secured for the vessel into November 2020. We are hopeful that this contract will be extended 1 more year, albeit on a lower charter rate level due to the current market conditions.Odfjell continues with a positive development despite a challenging market and also Cool Sorption contributed positively in the quarter. Our largest financial holding investment Odfjell Drilling continues to secure a long-term order backlog.Let's move to Slide 9 -- 10, sorry. On this slide, you can see some of the main features of the AKOFS Seafarer project that is now completed. AKOFS Seafarer have, after the commencement, October 16, successfully executed its first well jobs in a very harsh weather, demonstrating unique capabilities of this service offering that this vessel provides.And then finally to Slide 11, and let me summarize the key value drivers for our main investments. MHWirth, continued to develop the company, both organically by, for example, technology development like digital solution, combined with pursuing value-enhancing transaction. AKOFS Offshore. Maintain all vessels on contract with a focus on securing high uptime through safe and excellent operations. Odfjell Drilling. Maximize the return on this investment and realize these investments at the right time.And finally, NES-Fircroft continue to pursue consolidation opportunities in the market and to develop the values in the new merged company.Then Oyvind, could you take us through more details with regards to our financial performance, please?

[Øyvind Paaske, Chief Financial Officer]

Yes, sure. Thank you, Karl. I will then take you through the figures for the first -- for the third quarter, starting at Slide 13. Please note that DDW Offshore per Q3 was still reported as a JV based on the legal ownership per the end of the quarter. From Q4, as Karl mentioned, following the closing of the transaction earlier this month, after which we own formally 100% of the shares in the company, DDW Offshore will be consolidated into Akastor's financials as subsidiary.In the third quarter, we experienced a decline in revenues of 35% compared to third quarter last year. That is driven by lower revenues in MHWirth following the phasing of ongoing projects as well as reduced activity in general due to the current market conditions. The service segment of MH is less affected with a smaller decline in revenues.The EBITDA in the quarter was, as Karl also has mentioned, NOK 66 million, down from NOK 133 million in the third quarter last year and is a result of the lower revenues. Net financial items contributed negatively with NOK 56 million in the quarter. I will get back to the details here on the next page.Net income ended at negative NOK 65 million. Order intake in the period was NOK 643 million, consisting mainly of service orders within MHWirth. Total backlog per end of quarter was NOK 2.5 billion, around NOK 800 million lower than last year due to delivery of the ongoing projects without any new significant business having been booked within this segment so far this year. Net working capital was reduced by NOK 83 million in the quarter, driven by reduced working capital in MH related to the Project business.I will then turn to Slide 14 to look more into the details. MH continued to constitute around 80% of our revenues in the quarter. Revenues from MHWirth was down 37% compared to last year, primarily a result of lower revenues from projects and products. AGR and Cool Sorption also delivered lower revenues than last year due to the current market condition, however, continued to contribute a positive EBITDA in the quarter.As you are aware, AKOFS Offshore is not consolidated. The company delivered lower revenues and EBITDA than last year, mainly a result of lower contribution from Santos as a result of the revised contract terms since the extension in March this year. Seafarer did not generate revenues in the quarter, but will contribute positively from Q4.Under net financial items, the preferred equity instrument in Odfjell Drilling contributed positively with NOK 24 million, of which around NOK 10 million has cash effect. NES contributed positively with NOK 20 million, a result of booking of interest on our preferred equity holding in the company. In the quarter, we also had a negative effect on the Awilco investment of NOK 3 million, driven by a decline in share price for that investment over the period and a net interest cost of NOK 19 million, in line with last year.Our share of net profit in the JVs, DDW and AKOFS Offshore contributed negatively with NOK 4 million and NOK 46 million, respectively, driven by the operational results of those 2 companies.If we then turn to Slide 15. You will see that our net bank debt remained stable through the quarter. Operating cash flow was positive and included release of around NOK 100 million of working capital in MHWirth, driven by payment of a -- the last large milestone on the first Keppel unit being delivered to the yard in Singapore. Based on progress plan, working capital is expected to further decrease over the next couple of quarters as payment milestone are reached and received, especially on the second Keppel unit.In fact, we have, after Q3 close, received additional payments from Keppel for 40% of the contract value of the second unit, thus improving working capital position considerably. Other cash flow in the quarter included lease payments as well as funding of AKOFS Offshore in connection with the delay of the Seafarer commencement. Per end of quarter, our liquidity reserve through our undrawn credit facility remained stable at around NOK 1.3 billion and provides a solid buffer also going forward.If we then turn to Slide 16. We see that MHWirth's share of total net capital employed continue to constitute around 60% of the total per end of the quarter. Book values per holding remained relatively stable over the quarter. Our NES holding is per Q3 valued based on the combination with Fircroft with effects on company financials and slightly reduced economic interest, but in total, without any significant implications to our book value. The other segment here includes the provision related to DDW Offshore, the guarantee as it stood per Q3. This commitment was booked with a value of NOK 239 million per end of quarter, at same level as per Q2 and equal then the 50% of the negative equity value in the company.From Q4, 50% of the debt booked in DDW as per Q3 will be consolidated into the cost of balance sheet, while asset values will be included at a 100% basis, however, with a 50% provision related to the profit split mechanism agreed with the banks. Assuming current book values of the vessels of around NOK 550 million, the equity effect for Akastor related to the consolidation of DDW itself will thus be near neutral. However, our reported net bank debt and total asset values will increase. Per end of the quarter, the value -- the market valuation represent a discount to book values of around 60%, somewhat decreased through the quarter.Then if we turn to Page 17, I will provide some further details on MHWirth. The activity drop in MH in Q3 was primarily driven by lower revenues from the Project and Product segments and is a result of revenue recognition related to the 2 Keppel FELS unit, which is lower in the latter phase of the project as well as volume on deliveries within single equipment in the quarter. Total revenues from Projects and Products in Q3 accounted for NOK 226 million or 31% of total revenues of the company, reduced from previous quarters.MHWirth is focusing strongly on building backlog within these segments going forward with a quite good pipeline of opportunities despite a challenging market, however, with more uncertainty related to timing than in a more balanced market. Service revenues came in at NOK 510 million in Q3 or 69% of total and remains relatively robust, with only a 9% reduction compared to Q2.The number of active rigs dropped by 3 units from Q2 as certain rigs went off contract as expected. Based on the current contract schedule and option structure of the MH fleet, we believe the number of active units could have reached its low point and expect the number to stabilize over the coming quarters. 2 units previously reported as cold stacked, the Noble Bully I and II has been confirmed scrapped during the quarter and thus reduces total fleet size to 81 units per end of Q3. Number of cold stacked floaters per end of quarter was 14.The EBITDA of MHWirth in Q3 was NOK 71 million, representing a margin of near 10%. We are, as Karl mentioned, happy to see that MH is able to maintain its margins despite a reduced revenue level. Order backlog in MHWirth per end of the quarter was NOK 2.1 billion, reduced from NOK 2.8 billion last year. Going forward, we do expect the service segment to continue to provide a solid base for the company with growth dependent on longer-term rig activity and more specifically, the number of active units with MHWirth equipment in the market.Based on the current fleet status, again, we see a stabilization of activity and good potential for growth longer term, however, without any significant market uptick expected in the very near term. Project revenues from current backlog will continue at a relatively low level compared to previous quarters as the Keppel projects are nearing completion and thus generates lower revenues. Single equipment sale is affected by the downturn and limited order intake within this segment this year, will affect revenues into next year. We do see potential for growth here on a medium-term basis with several promising leads, especially within the onshore and non-oil markets.Then over to AKOFS on Slide 18. AKOFS is again not consolidated into our financials. However, the company delivered solid utilization for its fleet in operation with 99% revenue utilization on Wayfarer, and 97% on Santos in Q3. Total revenues in the quarter ended at NOK 209 million with an EBITDA of NOK 90 million. This represents a revenue reduction of around 30% year-over-year, primarily driven by the adjusted terms on the Santos contracts from March this year. AKOFS Seafarer did not contribute during the quarter, but commenced the 5-year contract in October and will thus contribute positively to the AKOFS financials in Q4.I will then turn to Slide 19. As previously mentioned, NES was merged with Fircroft during the quarter to create a leading global technical workforce provider. The combined company had pro forma revenues in 2019 of USD 2.6 billion, with an adjusted EBITDA of around USD 100 million, however, of course, reduced this year due to the market downturn. As Karl mentioned, there is a concrete plan in place to realize cost synergies in the range of around USD 20 million per year over a relatively short period following the combination of the businesses, providing in itself a solid basis for the merger.NES continues to be affected by the market turmoil and has since April been experiencing a decline in the number of contractors, however, with a certain uptick in contract placements activities seen over the last month. Fircroft will contribute to the NES financials from October. NES continues to deliver solid cash flow through collection of working capital, thus reducing net debt.If we then go to Page 20. Our other holdings include AGR and Cool Sorption. AGR delivered revenues of NOK 125 million and an EBITDA of NOK 4 million in 3Q. We are happy with the performance of AGR also in the third quarter, delivering both positive EBITDA contribution and cash flow despite continued reduction in activity. This has been achieved through strict focus on cash collection and the effects of significant cost-cutting initiatives. The consultancy business remains the largest segment within AGR and is clearly affected by reduced spending of oil companies. However, the slight increase in requests seen into the fourth quarter.AGR [ Software ], I'd like to mention is a smaller segment in nominal terms, however, delivering recurring revenue at a good margin and with good growth potential. The software solutions of AGR is providing digital tools to streamline and standardize the well delivery process for oil companies through different software modules, focusing on time, cost and risk handling. The solutions are receiving good feedback and increasing attention in the market, and the software segment is an important focus area for AGR going forward.Cool Sorption delivered a positive EBITDA in the quarter, however, with a limited backlog post-delivery of the Nord project to Equinor early this year, and contribution is thus expected to be at a lower level going forward.With that, we are through our Q3 presentation, and I will hand it over to the operator of the call to facilitate the Q&A session.

[Operator]

[Operator Instructions] We do not seem to have any questions from the phone. I'll now give the word back to the speakers.

[Karl Erik Kjelstad, Chief Executive Officer]

Okay. Thank you, moderator. I would then like to thank you all for your attention, and we wish you a good day, and welcome you all back for our presentation of the fourth quarter results on February 11 next year. Thank you very much.