Akastor ASA

OSE:AKAST

Earnings Call Transcript 2017-Q4

[Leif Hejø Borge, Chief Financial Officer]

Good morning, and welcome to this fourth quarter presentation for Akastor. My name is Leif Borge. I'm the CFO of Akastor. I'm pleased to introduce our new CEO, Karl Erik Kjelstad, here today. He will comment on the fourth quarter numbers and the status of the company in general, while I will go more into the details on the numbers. And finally, we will also have a Q&A session. So please, Karl Erik?

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Leif, and good morning to everyone. 2017 has been another challenging year for our industry in general, and it was also the case for the Akastor portfolio companies. However, during the second half of 2017, there's been some indication of improvement with increased oil price. Some oil companies indicate higher CapEx levels going forward. And we also have seen a higher tender activity in general. The order intake and also results for Akastor in the fourth quarter show some indication of improvement. At the same time, I would like to stress that there's still a lot of overcapacity in the drilling market and also in the subsea installation and well intervention market. In 2017, we delivered on 2 very important operational targets. The Aker Wayfarer vessel was, by year-end, ready to commence on the 5-year term contract with Petrobras; and MHWirth secured the first complete drilling package for newbuilding project, the so-called Husky project.Further, we delivered on 2 important strategic projects. We completed the sales of KOP Surface Products with a cash consideration of $114 million; and we also entered into an MoU with Mitsui with regards to establishing a joint venture for AKOFS Offshore. We expect that final agreements to be signed well in the first quarter of 2018. And this transaction will, as we have communicated earlier, result in a net cash release to Akastor for about $142 million or 50% of the shares in AKOFS Offshore. As mentioned, Leif will cover the numbers in more detail, but we delivered in the fourth quarter NOK 167 million in EBITDA. We left 2017 with NOK 900 million in net bank debt. And we have a liquidity reserve of NOK 1.6 billion. This altogether provide us with a strong balance sheet with a financial flexibility going forward. Let me also add some comments to the portfolio highlights on Slide 3. MHWirth, the newbuilding market for drilling packages continue to be weak. There are some [ niche ] projects in the market, but it's difficult to predict when these projects can materialize, and it will only all be strong competitions on these projects.For DLS, our service business, this business is dependent on how many rigs with MHWirth equipment that is in operation. And it seems that the declining trend when it comes to number of rigs in operation have flattened out, and thereby, our DLS business have stabilized. Currently, we have 40 -- 53 rigs in operation that have MH drilling package. AKOFS Offshore. Key focus for AKOFS Offshore is to ensure safe and high performance on Skandi Santos and Aker Wayfarer vessels that both are in the contract with Petrobras. Santos had an excellent quarter within utilization, including bonuses of just about 100%. And Aker Wayfarer was in operation/preparation mode the whole quarter with reduced revenue. Further, AKOFS Offshore continue to market AKOFS Seafarer for new business, but currently, the situation is that the vessel is idle and in layoff mode. When it comes to other companies in our portfolio, I would like to mention 2 companies. We are happy that Step Oiltools has, in a challenging market, delivered a positive EBITDA and cash flow in 2017. This is an improvement from previous years. And it's also very inspiring to follow NES Global Talent that we own together with AEA Capital (sic) [ AEA Investors ] where we saw a real positive shift by the end of 2017. With these words, I'd like to leave the word to you, Leif, who will take us through the numbers more in detail. Thank you.

[Leif Hejø Borge, Chief Financial Officer]

Thank you, Karl, and let's move to Slide 4 in our presentation. As we have already seen, revenues in the fourth quarter ended on NOK 1.1 billion, down from NOK 1.3 billion in the fourth quarter last year. For the total year, revenues ended on NOK 4.3 billion compared with NOK 5 billion in 2016. The EBITDA are NOK 167 million, gives a margin of 15%. I will come back to the details later. With depreciations of NOK 154 million, the EBIT ended on NOK 11 million in the quarter. Financial items are negative NOK 221 million, includes NOK 17 million of interest and NOK 64 million in financial lease related to the Wayfarer vessel. On top of this, there are 2 material items in the fourth quarter that does not have any cash effect. One -- well, the first is a further impairment of the DOF Deepwater vessels of around NOK 60 million, representing our 50% shareholding. Secondly, we had foreign exchange losses of around NOK 80 million. The foreign exchange loss is a bit technical relating to the historical negative cash effects from rolling forward currency hedges for the Wayfarer vessel.We have now agreed with Ocean Yield to convert the total charter rate to U.S. dollars, reflecting that this is, in fact, a U.S. dollar business. Accounting-wise, however, when we make this change, we then have to write-off the balance sheet items of around NOK 80 million. These balance sheet items have been accumulated over several years, and the hedges in Norwegian krone have been rolled forward on negative spot rates. We had a total tax expense of NOK 146 million in the fourth quarter. This relates to impairment of deferred tax losses carryforward. Every year, we have to evaluate and document that future earnings can defend the tax positions. And this year, we had to reduce the book value of some positions, mainly in Brazil and the U.S. So all of this gives a net loss from continuing operations of NOK 355 million in the quarter and a net loss of NOK 380 million in total. For the total year, the net loss was NOK 58 million. Then let's move to Slide 5. Total capital employed was NOK 7.6 billion by the end of 2017. 92% of this is tied up in MHWirth and AKOFS Offshore. The investments of 550 -- sorry, NOK 547 million relates to the shares in NES Global Talent and the shares in Aker Pension Fund. As you can see from the numbers, the Akastor share is priced at 80% of book value as of today. Then Slide 6. Net debt level was somewhat negatively impacted by strengthening of the U.S. dollar relative to Norwegian krone during the fourth quarter. This is due to the fact that the financial lease of Wayfarer and some of the bank loans are in U.S. dollar. The cash flow was positive with NOK 126 million in the fourth quarter, but net debt increased with NOK 11 million. Thus, the foreign exchange translation effect of the U.S. dollar debt impacted the debt level with around NOK 137 million.The liquidity reserve remained at NOK 1.6 billion in the fourth quarter, leaving us with a strong balance sheet and some financial flexibility going forward. With regards to covenants, we are well above the nominal EBITDA level. Remember that the calculation of the covenant EBITDA excludes noncash flow items, like impairment of inventories as well as restructuring cost.Then let's have a look at the portfolio company, starting with MHWirth, that is Slide 7 in the presentation. Revenues in MHWirth of NOK 739 million was down from the third quarter. But in that quarter, we had extraordinary revenues from the cancellation of the 3 Jurong projects of NOK 500 million. Adjusted for this, revenues increased from around NOK 600 million to NOK 739 million in the fourth quarter. The DLS activity has been quite stable throughout 2017. And at the end of the year, 53 rigs with complete drilling package from MHWirth was in operation. The EBITDA of NOK 83 million gave a margin of 11% in the quarter. The order intake was stronger than in previous quarters, mainly due to the contract for a complete drilling package to the Husky Wood Group. MHWirth also signed a contract for DLS with Transocean for services on 10 semis and drillships the next 10 years. The contract commences in January 2018, but no revenue from this contract has been taken into the backlog. Moving on to AKOFS Offshore, Slide 8. Total revenues of NOK 213 million was slightly better than the third quarter, mainly due to exchange rates. Wayfarer started operation 1st of January 2018. Thus, in the fourth quarter, revenues was in line with previous quarters for the Wayfarer vessel. The EBITDA of NOK 80 million for AKOFS Offshore in the quarter reflects strong operations with very high uptime on Skandi Santos. Then Slide 9 in the presentation, Other Holdings. The 3 smaller portfolio companies, Step Oiltools, Cool Sorption and First Geo, delivered a positive EBITDA of NOK 2 million in the fourth quarter. The activity level has stabilized during 2017 for all the 3 companies. The provision for onerous leases was further reduced with NOK 24 million in the fourth quarter. This was caused by signing more contracts for subletting, especially in Stavanger, as well as lower cost than expected when returning 2 properties in Aberdeen to the landlord.So this concludes the financial year 2017. As mentioned by Karl, 2017 has been a challenging year, but with several positive achievements. Firstly, the service activity in MHWirth has stabilized during the year, and there are some signs of improved market at least in the harsh environment segment. Secondly, MHWirth signed its first drilling package in more than 3 years. Thirdly, we have adjusted the cost base in all of the portfolio companies to a level where it should be possible to earn money in all of them going forward. Fourthly, the Wayfarer vessel has eventually started operation in Brazil, 3 years after we signed the contract.Then we have also been able to reduce onerous lease provisions with more than NOK 50 million during 2017. This, of course, will impact future cash flows. And then we have also 2 important transactions in '17, of course, the divestment of KOP Surface Products that was completed in July, and the MoU with Mitsui for the AKOFS JV. And finally, we have reduced the net debt level with close to NOK 900 million in the second half of 2017, mostly due to the divestment of KOP, but we also had a positive cash flow from operations in the last quarter of '17. So that concludes our presentation, and we open up for questions. So operator, could you please help us with the Q&A session.

[Operator]

[Operator Instructions] We'll take our first question from the line of Haakon Amundsen.

[Haakon Amundsen, Lead Analyst]

Just a couple of questions on AKOFS. First of all, could you share some thoughts on how we should think about AKOFS in the longer term, whether you expect to remain an owner, a part-owner? And potentially, what could be the trigger for that to change? And secondly, if you could just give us some highlights on the accounting treatment on AKOFS when the deal is closed in Q1, please?

[Karl Erik Kjelstad, Chief Executive Officer]

Okay, thank you for that, Haakon. Let me take the first part. As indicated in the MoU, we will be a 50% owner of AKOFS when that transaction is completed. And we have a long-term view on that ownership and to develop AKOFS together with Mitsui going forward.

[Leif Hejø Borge, Chief Financial Officer]

Yes. With regards to accounting treatment, when the transaction is completed, we are going to de-consolidate AKOFS Offshore and only taking into account our 50% net profit of AKOFS, like we do with DOF Deepwater. But most likely, we are going to take that into the EBITDA numbers. In any case, we will continue to present some financial numbers for AKOFS Offshore even though they are not then consolidated in the accounts for investors to be able to follow and understand the financial performance of the company.

[Operator]

[Operator Instructions] It appears there are no questions at this time. I'd like to turn the conference back to you for any additional remarks. My apologies, there is one question in queue now. Tord Augestad, your line is open.

[Tord Aasen Augestad, Equity Analyst]

Could you give us some sort of guidance for 2018 on MH in terms of margin progression and backlog evolution throughout the year, please?

[Leif Hejø Borge, Chief Financial Officer]

Yes. Well, as you have seen from the numbers, we then strengthened the backlog in MHWirth in the fourth quarter. That was, of course, important due to the decline in backlog and that all backlog for projects were more or less close -- more or less delivered. And so with the Husky project in the backlog, we foresee a quite stable revenue development during 2018, of course, totally dependent on the success of -- in the new-build market going forward. With regards to the margins, we have now during 2017 delivered a margin of around 10% if you clean out the numbers for restructuring costs, for this inventory impairment, for the one-off effect from the cancellation of Jurong and so on. And that's actually more or less the margin level that we had when we go 3, 4 years back. However, the business mix is a total different one, with now the DLS business representing 60% or even closer to 70% if you adjust Jurong cancellation effect on the overall revenue, while in previous years, it was vice versa. My point is simply that the -- you may argue that MHWirth have been able to keep a margin even though that overall revenues have declined with 70% over 3 years, and the reason for that is cost cutting and it's a different business mix. We have not guided on margins in MHWirth going forward, but our ambition has been to adjust the cost base in MHWirth so that they will be able to earn a double-digit margin also on this lower revenue level. And whenever the newbuild market starts to improve again, that we can eventually also start to see a somewhat higher margin than the around 10% run rate that we had in '17. I think I'll leave it with that.

[Operator]

It appears there are no questions at this time. I'd like to hand the call back to you for any additional remarks.

[Leif Hejø Borge, Chief Financial Officer]

Yes, okay. Thank you very much for then participating in this call this morning. Then we are looking forward to meet you again on May 3 when we are presenting the first quarter numbers for 2018. Thank you.

[Operator]

That concludes today's conference. Thank you all for your participation. You may now disconnect.