Akastor ASA

OSE:AKAST

Earnings Call Transcript 2019-Q4

[Leif Hejø Borge, Chief Financial Officer]

Good morning, and welcome to the fourth quarter earnings call of Akastor. My name is Leif Borge. Together with me, I have the CEO, Karl Erik Kjelstad; and Oyvind Paaske, who will assume the position as CFO as of 1st of March.First, Karl Erik will go through the fourth quarter highlights and share his view on the status of the company. So please, Karl.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you for the introduction, Leif, and good morning to everyone on the call, and thank you for listening in to our fourth quarter presentation.Let us start with some key numbers for the quarter on Slide 3. Growth continues also in this quarter with a year-on-year revenue growth of 43%, up to NOK 1.6 billion. And this is as normal, so to say, without AKOFS Offshore, that is not consolidated into our numbers, but AKOFS Offshore is delivering a revenue of NOK 306 million in the fourth quarter. We have a strong EBITDA result growth, up year-on-year with 144%, up to NOK 153 million. Also this, excluding AKOFS Offshore number, AKOFS Offshore is delivering NOK 145 million in EBITDA in the quarter.Also in this quarter, the main reason for the growth is a higher activity level for MHWirth and good performance, particularly within our service and our product sales business, despite a still challenging drilling market. And this is proving the robustness of the MHWirth business model.Our net interest-bearing debt added on NOK 692 million. This is down with NOK 430 million in the quarter due to reduced working capital and that AKOFS Seafarer that was based on a nonrecourse bank financing.Let us move to next slide, Slide 5 in the package. Our portfolio is unchanged in this quarter and continues to be a combination of industrial and financial investments. Note that this is the last quarter where Step Oiltools will be reported separately. From next quarter, Step Oiltools will be a part of MHWirth. I will revert to that later in the presentation. Slide 6. We have 4 key investments in our portfolio. It's MHWirth and our 3 shareholdings in AKOFS Offshore, in Odfjell Drilling and in NES Global Talent. For MHWirth, the key drivers for growth and profitability is the increased demand for rigs in operation that generates both service income and product sales revenue. We are pleased with the development of the MHWirth business, and we see that the service business is truly captive. And this, in combination with the potential we have with MHWirth when new building market returns, is promising.Moving to AKOFS Offshore, which is about 21% of our capital employed, AKOFS is well positioned in the subsea and well international market in Brazil and in Norway. For 2020, we have a very operational focus for AKOFS, aiming to secure a new contract for Santos plus the completion of the existing contract later this year, and last, but not least, to secure a successful start-up of the 5-years contract that AKOFS have with Equinor.Our preferred shares in Odfjell yields 10% annual return. And in addition, we have further upside through the warrant structure. The upside is related to the performance of the Odfjell shares, and we are pleased to see that Odfjell was the best-performing drilling share in 2019. And we continue to really like Odfjell based on its excellent units, strong contract coverage and very solid operations.NES Global Talent is continuing to grow and is delivering on its growth strategy. In 2019, we saw that the acquisitions that was added on in 2018 started to give positive contribution to the growth, and we are confident that there are further value-enhancing potential in our shareholding for NES Global Talent going forward.Then moving to Slide 7 with some key highlights for MHWirth in the fourth quarter. As mentioned, the MHWirth revenue is a combination of after-sale sales, that is more than 50% of the revenue, and product sales.With regards to the project portfolio, the drilling package for the 2 fixed platform, Mariner and West White Rose, are now in the final phase of delivery. The main part of the project backlog after the completion of the Mariner and the West White Rose will be the 2 state-of-the-art semisubmersible new buildings that Awilco is building at Keppel FELS in Singapore.Further, the remaining so-called Sete rigs, that was constructed for -- or planned to be constructed for the Brazilian waters, have been suspended since 2015. We are now hopeful that 2 of these units might come into operation for Petrobras. And this will, of course, be positive for our after-sales business. The market for the new building business for MHWirth remains challenging with a few niche projects in the market, but it remains to be seen a real upturn in the real -- in the newbuilding market. When it comes to the product sales, we continue to see a positive development, with a growth of more than 90% compared with 2018. Also increased activity for our non-oil business, such as slurry pumps for the mining industry and also for the piletop drillers that we are delivering to the construction industries in '19. And actually, this accounted for 40% of our product sales in the year.The life cycle business or the after-sale business is continuing to grow, a growth with 6% in the quarter. And this business is, of course, dependent on that we have MHWirth rigs in operation or that we have rigs that is preparing for operations. We are, therefore, pleased to see that in the quarter 11 rigs with MHWirth equipment of 10 new contracts. And that we had in average 53 rigs in operation in the fourth quarter.Last, not least, our digital technology business continued to see strong interest for our DEAL digital platform, and we have now installed this on 8 rigs in operation plus we have 6 systems in deliveries phase.Let's then move to Slide 8 and spend some words on why we now have decided to integrate Step Oiltools into MHWirth from the first quarter of 2020. As some of you might recall, Step Oiltools have previously actually been a part of MHWirth, but was separated out as a stand-alone business unit in 2014 when wanted to streamline the focus of MHWirth. As a part of the strategy, it concluded downturn that started in industry in 2014. Today, we see substantial synergies between MHWirth and Step Oiltools, both in terms of cost and revenues, and this is especially due to MHWirth new onshore strategy, where we see that MHWirth can take advantage of Step Oiltools' distribution network, cost sales opportunities and also market insight.Slide 9, some words about the other companies in our portfolio. AKOFS Offshore had, in the fourth quarter, good revenue utilization for both vessels operating in Brazil. And as mentioned already, key focus now is to ensure successful start-up of the Equinor contract. And in addition, prolonged work for Skandi Santos in Brazil, when the 10-years contract with Petrobras is ending. Aker Wayfarer is continuing delivering stable and good operations. AGR, Step Oiltools and Cool Sorption all contributed with a positive development in the year and with a positive result in this quarter.Slide 10. Let me try to run off with some reflections about '19, that is behind us, and 2020, that is in front of us. For the portfolio companies in -- 2019 has been a positive development. We have had strong growth in MHWirth, strengthened the management in the company, established a new growth strategy for MHWirth going forward and also see that our strategy for digital solutions are starting to pay off. AKOFS Offshore continued to deliver good services in '19 and to prepare well for the Equinor contract. NES continued to grow, and also the smaller companies in our portfolio had positive development in '19.When it comes to transactions in '19, it was somewhat slow year with 2 transactions, the Bronco acquisition to strengthen MHWirth onshore capabilities and also the merger between AGR and First Geo. For 2020, we have 3 simple priorities. It's to -- firstly, to continue to pursue growth, both organically and structurally, for all of our companies in the portfolio. Secondly, is to continue to work together with our companies to secure excellent operations. And last subject that is financial viable, return surplus capital from the divestments to our shareholders.So with those words, I would like, for the very, very last time, give the word to Leif Borge that will take us through the quarter results. So Leif, please, the word is yours.

[Leif Hejø Borge, Chief Financial Officer]

Thank you, Karl. Please move on to Slide 12 in the presentation. Financial highlights. Well, revenues in the fourth quarter ended on NOK 1.6 billion compared with NOK 1.1 billion last year. Part of the growth is the result of the AGR and Bronco acquisition, but even more of the growth comes from organic growth in MHWirth. EBITDA of NOK 153 million includes effects from IFRS 16 of NOK 29 million, still a very good improvement from NOK 63 million in EBITDA 1 year ago. Net profit for the quarter was NOK 20 million, including a loss from discontinued operations of NOK 13 million.For the total year, revenues increased with 41% from NOK 3.8 billion to -- in 2018 to NOK 5.4 billion in 2019. Around NOK 500 million or 1/3 of the revenue growth comes from the acquisitions of AGR and Bronco, while the remaining growth comes from MHWirth organically. The EBITDA ended on NOK 492 million, including effects from IFRS of NOK 116 million. Thus, the EBITDA margin for the group was 9.2% for the total year. Net profit for 2019 ended on NOK 5 million negative, of which NOK 48 million positive result from continuing operations and NOK 54 million loss from discontinued operations.Then let's move on to Slide 13. As we can see from the left part of the slide, MHWirth is, by far, the most important contributor to the group EBITDA, NOK 476 million of the total EBITDA or NOK 492 million in 2019 comes from MHWirth. In any case, very positive that all of the 3 smaller portfolio companies, AGR, Step Oiltools and Cool Sorption, contributed with positive results in 2019. As you may recall, all of these were actually loss-making companies a couple of years ago. After the divestment of 50% of the shares in AKOFS Offshore in September 2018, we are not consolidating the company anymore. However, as you can see from the table, EBITDA in AKOFS Offshore increased from NOK 471 million in '18 to NOK 560 million in 2019.The right part of the slide shows the contribution from the financial investments in the portfolio. The preferred equity and warrant structure in Odfjell had a positive result of NOK 43 million in the quarter, reflecting a positive share price development in the quarter. For the total year, the result was positive with NOK 134 million. Our shares in Awilco increased NOK 1 million in value in the quarter, but negative NOK 39 million for the total year, reflecting the share price development of Awilco Drilling.Our 17% shareholding in NES Global Talent had a positive result effect of NOK 21 million in the quarter. While for the total year, the effect was NOK 89 million, reflecting the positive development in the company during 2019.Our 50% shareholding in DOF Deepwater had a negative effect of NOK 59 million in the quarter, explained by impairment of receivables and vessels in the company in the quarter. For the total year, DOF Deepwater had negative result of NOK 124 million, representing 50% of the net loss in the company.Finally, our 50% shareholding in AKOFS Offshore had a negative effect of NOK 3 million in the quarter and NOK 35 million for the year. This will, of course, improve during 2020 when Seafarer gets into operation. Remember that most of these items are pure valuation effects. Cash effect are mainly coming from interest on external borrowings, NOK 67 million for the total year in cost, and the interest income from the preferred equity to Odfjell, which amounts to around NOK 36 million per year.Then let's move to Slide 14. Net bank debt was reduced during fourth quarter for NOK 1.8 billion to NOK 893 million, partially explained by AKOFS Offshore repaying around NOK 443 million of its loans to Akastor and the Seafarer vessel following a separate financing for the vessel was established. Secondly, cash flow from operations was positive with NOK 519 million, explained by relatively strong EBITDA and reduced working capital in MHWirth. The working capital in MHWirth will fluctuate somewhat driven by payments on the projects. In the fourth quarter, MHWirth received several big payments in -- on project. But of course, over time, this will level out.Net interest-bearing debt, where we include the loans given to AKOFS and Aker Pension Fund, was reduced from NOK 1.1 billion as of third quarter to NOK 692 million as at the year-end, thus down NOK 433 million.Then Slide 15, not much to comment on this slide. Just a reminder that most of the value of the Akastor portfolio relates to the 4 investments in MHWirth, AKOFS Offshore, NES Global Talent and Odfjell Drilling. These are book values and, thus, do not necessarily represent the fair market value of the investments. In any case, as of end of 2019, Akastor share price was around 62% of the book value of the group.Then let's have a look at the portfolio companies, starting with MHWirth, Slide 16. Revenues ended on NOK 1.2 billion in the fourth quarter, of which 40% from selling products and projects and 60% from drilling life cycle services and digital technologies. The EBITDA increased to NOK 146 million, including effects from IFRS 16 of NOK 16 million. The EBITDA margin, thus, ended on 12.6% or around 11% if you adjust for the IFRS 16 effects. This is the best nominal EBITDA in MHWirth since the last quarter of 2014 and an EBITDA margin on par with all-time high level back in 2012 and '13. So after 5 years of challenging markets in the offshore drilling market, I think we can conclude that the strategy of streamlining the company, adjusting capacity, focus on the installed base and existing customer portfolio and delivering new digital services for the installed base has been successful. The company has gone from a 70% product project business and 30% service business to a 40% product project business and 60% service business, delivering stable profits and cash flows.As you can see, the number of drilling rigs with MHWirth drilling packages in operations has been fairly stable. 52 as at the end of 2018, growing with 1 during the year to 53 in the fourth quarter. Thus, the growth in service revenue comes from new digital services, more reactivation and also more overhaul than previous quarters as well as, in general, more activity.Then let's move on to AKOFS Offshore, Slide 17. After a weak start of the year, revenue utilization of the Santos and Wayfarer vessels has been good in the second half of the year. Revenues of NOK 306 million in the fourth quarter was more or less in line with the previous quarter. The EBITDA ended on NOK 145 million, down from NOK 174 million in the third quarter. The reduction can be explained by somewhat higher cost, among others, on maintenance at the end of the year.With regards to NES Global Talent on Slide 18. The financial numbers are not public. However, as you can see from the graphs, revenues have grown substantially in 2019, partly explained by a couple of acquisitions, but also due to quite strong organic growth. Also, as you can see from the graph, net debt in the company has grown during 2019. Some of this is a result of the acquisitions, but the cash flow has been weak as working capital level has grown in line with the revenue growth of the company.Finally, other holdings, Slide 19. AGR had a very strong end of the year. Revenues growing to NOK 221 million in the fourth quarter with an EBITDA of NOK 12 million. Some of this, around NOK 3 million to NOK 4 million, can be explained by one-off effects, but still this was a promising end of the year. It is especially the activity in Norway that was high in the quarter.Cool Sorption had revenues of NOK 75 million with an EBITDA of NOK 2 million. Revenues will decline in the second quarter of 2020 when 1 big project has been delivered.Step Oiltools revenues of NOK 61 million and EBITDA of NOK 2 million was somewhat down from previous quarters, but we consider this as normal fluctuations from quarter-to-quarter. As are already mentioned by Karl, this is the last quarter you will see numbers from Step Oiltools as this business will be transferred into MHWirth as of 2020.So that concludes my presentation of the financial numbers. And we are then ready for the Q&A session. So please, operator, could you help us with facilitating the Q&As.

[Leif Hejø Borge, Chief Financial Officer]

Operator on the conference call, are you there?

[Operator]

[Operator Instructions] [ Audio Gap ] from Carnegie.

[Chr. Frederik H. Lunde]

Just a question on NES Global Talent. I think there's been some expectations that we could see a divestment or a transaction evolving our company in the not-too-distant future. If you could give an update on the status there?

[Leif Hejø Borge, Chief Financial Officer]

I think we will update when there are something to communicate when it comes to transactions, in general. So -- but the company is doing well. We are owning the company together with AA Capital in New York. They have been owning it for a while. So the company is transaction-ready, so to say. But there's always a balance between what value potential you see going forward compared with what you can obtain of value by doing something now. So I think that's a small answer, Frederik.

[Chr. Frederik H. Lunde]

And if you were to monetize assets, be it the Odfjell exposure or NES or other assets, what will be your preferred use of proceeds?

[Leif Hejø Borge, Chief Financial Officer]

Of course, that would be a decision in the Board. But what we have said and also have said is that our aim is to have a financial structure that will enable us to distribute those proceeds to our shareholders.

[Operator]

[Operator Instructions] Looks like no further questions at this time, sir.

[Leif Hejø Borge, Chief Financial Officer]

Okay. Well, then I would like to thank you all for listening into this call. For me, personally, this is my last quarterly presentation after 16 years of quarterly presentations in Aker Yards, Aker Solutions and Akastor. I would like to thank all investors, analysts and other stakeholders for a good cooperation over these years. Going forward, I will follow Akastor as a shareholder, and I already look forward to the next quarterly presentation on the 28th of April. So thank you, and have a nice day.