Akastor ASA

OSE:AKAST

Earnings Call Transcript 2020-Q4

[Øyvind Paaske, Chief Financial Officer]

Good morning, and welcome to the presentation of Akastor's fourth quarter and full year results for 2020. My name is Øyvind Paaske, CFO; and I'm here with Karl Erik Kjelstad, our CEO. We will take you through the presentation that has been uploaded to our web page this morning. The presentation is also available through the webcast solution. Karl Erik will start by taking you through the main highlights of the quarter before I'll go through the financial results. After the financial section, we will open for questions through the webcast solution. Instructions will be given by the moderator. I will now leave the word to Karl for the business update. Please, Karl.

[Karl Erik Kjelstad, Chief Executive Officer]

Thank you, Øyvind. Good morning to everyone on the call, and thank you for listening in to this presentation of Akastor fourth quarter and full year 2020 earnings. We are pleased with our fourth quarter results with a strong free cash flow, combined with a decent margin level for our key portfolio companies, despite the challenges of the global pandemic.2020 was a challenging year for the oil service industry in general and also for Akastor portfolio of companies. Our key focus has been to ensure a safe operation in the COVID-19 environment, adjust our portfolio companies' cost base to secure positive financial results and protect cash flows despite the high level of uncertainties. 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 of our industrial investments are delivering positive contribution in 2020. MHWirth is delivering just about 10% EBITDA margin in 2020, only marginally lower than the last year despite a 15% lower revenue level compared with the '19.Key 2020 achievements. MHWirth service business continued to serve its clients well despite travel restriction and other COVID-related challenges. The number of rigs in operation have been robust post the first pandemic turmoil with 45 rigs in operation by the end of the year, a slight increase compared with the third quarter. Focus through 2020 has been on navigating MHWirth through the complex market situation. However, we have also spent quite some time evaluating different alternatives to transform and develop MHWirth further. Current business environment has affected progress. However, we continue to work on concrete alternatives and will inform the market as soon as we have the conclusion. AKOFS Offshore, all vessels are on contract by the end of 2020, giving a good visibility for '21 earnings and a good basis for further development of AKOFS Offshore. NES Fircroft merged with its main competitor, Fircroft, during 2020 and, by that, establishing an even stronger position in the global market for technical workforce provision. Akastor's economic interest in the merged company is about 15%. DDW Offshore, the restructuring was completed following DOF's exit as a co-owner, and that gives us a 3-years runway to enhance value of this legacy investment. AGR, despite the challenging market, delivered a decent NOK 31 million EBITDA result in 2020, secured by adjusting the cost base and also by developing new offerings to its clients. Let me now take you through some key numbers from our fourth quarter result on Slide 4. Akastor delivers a revenue of NOK 973 million in the fourth quarter, a decline on year-on-year of 37%. For MHWirth, the revenue increased somewhat compared with the third quarter, resulting in a revenue of NOK 818 million and with the MHWirth double-digit EBITDA margin of the quarter of 10.4%, somewhat higher than the third quarter, resulting in an MHWirth EBITDA result of NOK 85 million. Akastor delivers an EBITDA of NOK 57 million for the fourth quarter, somewhat lower than the EBITDA result of NOK 66 million in the third quarter, and this is primarily a result of the consolidation of DDW Offshore. Our net interest-bearing debt is somewhat lower than in the third quarter, ending at NOK 1.4 billion by the end of the fourth quarter. This is despite that we, in this quarter, for the first time, are consolidating the DDW Offshore net debt of NOK 426 million. So in other words, we are delivering a strong cash flow in the fourth quarter.Let me also mention that despite a muted newbuilding market, MHWirth was in the fourth quarter awarded contract for the delivery to GMGS, and final contract is expected to be formalized in the first quarter this year. Then let us move to some quarter updates on the specific companies, and that is starting on Slide 7. MHWirth's Projects business continued to execute on delivering the drilling packages to 2 harsh-environment rigs being built at Keppel FELS with 91% and 80% progress for the MHWirth scope in these projects. Further progress might be hampered by the ongoing dispute between Keppel FELS and our client, Awilco Drilling. The newbuilding market continues to be weak with only some few niche projects currently being pursued. The MHWirth Products business revenue increased somewhat in the fourth quarter compared with the third quarter. The product order intake continues to be affected by the challenging market, and backlog is currently on a low level compared with previous periods. However, non-oil-related product sales have been more resilient and constituted 69% of the single equipment sale in 2020, up from 40% in 2019. We continue to see a positive momentum for our Digital Technology solutions with a good pipeline and with 2 control system upgrades booked in the fourth quarter.DLS, the MHWirth service business, continues to provide a strong base for MHWirth and continue to demonstrate its robustness with the management of 45 active rigs at the end of the quarter, up from 44 rigs in the third quarter. We expect this level to stabilize or somewhat increase going forward. Further, it's worth mentioning that we saw that the DLS revenue for 2020 was on par with the '19 level despite fewer rigs in operation. This is highlighting the resilience of the DLS business and MHWirth's ability to serve its clients worldwide despite the COVID-19-related travel restrictions. Let's move to Slide 8, AKOFS Offshore. AKOFS Seafarer commenced operations with Equinor, October 16, and contributed with revenues in the fourth quarter. Utilization was somewhat affected by some start-up issues, but we had a good revenue utilization at the last part of the quarter. Santos and Wayfarer was affected with some downtime due to COVID-19 outbreak and also an engine failure. The Santos vessel entered in 2019 following the end of the 5 plus 5 contract that started in 2009, a 1-year contract with Petrobras that secured work for the vessel into November 2020. This contract was extended in the fourth quarter with 1 more year, securing work for the vessel into November 2021, albeit on a lower charter rate level, reflecting the current market. We are pleased with that AKOFS Offshore now have all 3 vessels on contract.We are also, as mentioned, pleased with AGR performance in 2020. And in the fourth quarter, they delivered NOK 4 million in EBITDA result and a strong order intake with a book-to-bill of 1.9x. Cool Sorption had a low activity in the quarter and needs to win new contracts to secure future performance.Our largest financial holding, Odfjell Drilling, traded well during the quarter and continues to build order backlog. Our preferred equity instrument in Odfjell delivers a steady yield for Akastor. NES Fircroft saw a positive turn in the market during the fourth quarter with a growth in a number of consultants after a period of decline following the COVID-19 outbreak in the first quarter. And we also start to see an increased demand of renewable -- in the renewable sector as NES Fircroft clients increase its activity in this sector. When it comes to DDW Offshore, we are focusing on securing new contracts for the 5 vessels in the fleet with some concrete opportunities being currently pursued. Let us then move to Slide 9, and let me conclude by summarizing some of the key value drivers for our main investments. MHWirth, priority this year is to get a conclusion on a transformative M&A project that we have been working on for some time. We will also focus on developing the company both organically by, for example, technology development like the digital solutions, combined with pursuing value-enhancing transactions. 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 its customers, also into new market segments, as well to continue to assess consolidation alternatives in order to enhance value. For 2021, we are somewhat optimistic that the global economy and the oil service sector will begin to recover from the impact of the global pandemic. Assuming a successful rollout of the vaccines around the world, we believe we will see an increased demand for our portfolio of company, products and services over the next 12 to 18 months. Then Øyvind, could you please take us through more details regarding our financial numbers in the fourth quarter, please?

[Øyvind Paaske, Chief Financial Officer]

Sure. Thank you, Karl. I will present the figures for the fourth quarter, starting then at Slide 11. Please note that as from Q4, as Karl mentioned, following the closing of the DDW transaction in October 2020, DDW Offshore is now consolidated into our P&L and balance sheet as a fully owned subsidiary. I will get back to more on the details regarding effects of this later. In the fourth quarter, we saw a decline of 35% of revenues compared to fourth quarter 2019, primarily driven by lower revenues within projects and single equipment sale in MHWirth. The EBITDA in the quarter was NOK 57 million, down from NOK 153 million in the same quarter 2019, primarily, again, a result of lower activity in MHWirth. Net financial items contributed negatively with NOK 33 million in the quarter. I will get back to the details here on the next page. For the full year 2020, revenues ended at NOK 4.6 billion, down from NOK 5.4 billion in 2019. EBITDA for the year ended at NOK 331 million, down from NOK 492 million in 2019. Both effects primarily a result of lower activity in MHWirth following the special market situation affecting 2020. Total backlog per end of quarter was NOK 2.4 billion, around NOK 800 million lower than last year due to delivery of ongoing projects through 2020, without any significant new business having been booked within this segment in 2020. Please note that announced Chinese projects where MHWirth has been selected as preferred supplier for the topside equipment has not been included as order intake in Q4 as MHWirth is engaged in final contract negotiations with expected completion later this quarter, which should then transform this contract into order intake. Net working capital was reduced by NOK 504 million in the quarter, driven by reduced working capital in MHWirth related to the ongoing Keppel projects where 3 large milestone payments were received in Q4. Net working capital level per end of 2020, it is at a historically very low level, and we expect this to increase somewhat through the first half of 2021. I will then turn over to Slide 12 for some further details. Revenues from MHWirth was down 33% compared to Q4 2019, again, a result of lower revenues from Projects and Products. We will get back to more details here later in the presentation. AGR delivered -- also delivered lower revenues compared to the same quarter in 2019. However, revenues increased compared to Q3, and we are pleased to see that activity seems to be picking up. DDW Offshore is included here under Other and contributed negatively with NOK 11 million on EBITDA in Q4 as vessels -- all vessels remained stacked through the quarter. We are targeting to improve contribution from DDW going forward through a reduction of cost as well as increased fleet utilization.As you are aware, AKOFS Offshore is not consolidated into our financials, but 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 expiry of her long-term contract in March 2020, partly mitigated by the commencement of Seafarer on its 5-year contract with Equinor in October, however, at a somewhat low utilization in Q4. Under net financial items, the preferred equity instrument in Odfjell Drilling contributed positively with NOK 42 million, of which NOK 9 million has cash effect and NOK 16 million relates to the increase in valuation of the warrant structure. NES contributes positively with NOK 19 million in the quarter, driven by booking of interest on our preferred equity holding in the company. Further, we had a positive effect on the Awilco investment of NOK 6 million due to an increase in share price.Net interest cost was NOK 24 million in Q4, somewhat increased compared to previous quarter, primarily driven by the consolidation of DDW Offshore. Net foreign exchange effect in the quarter was positive with NOK 72 million, driven by effects related to our bank financing in U.S. dollars through the strengthening of the NOK through Q4, partly mitigated by negative effects related to our U.S. dollar assets in primarily NES and Odfjell.DDW Offshore contributed negatively with NOK 60 million under net financials. This relates primarily to an adjustment of vessel values recognized prior to closing, with then 50% of effect included as a cost of share of net loss from the JV. Going forward, we will not have any effects of DDW Offshore under net financials, except for then, of course, interest cost. AKOFS Offshore contributed negatively with NOK 51 million in the quarter or 50% share of net profit in the period. I will then turn to Slide 13, and you will see that our net bank debt was reduced by NOK 141 million during the quarter. This, despite the fact that in Q4, the debt of DDW Offshore was consolidated into our balance sheet, increasing net debt by NOK 457 million per closing. Per end of the quarter, the net bank debt of DDW was NOK 426 million, reduced somewhat, primarily a result of FX. Operating cash flow was strong in the quarter, driven by the release of working capital and, as mentioned, due to 3 large milestone payments received on the second Keppel unit. As mentioned before, we expect this to increase somewhat over the next couple of quarters. Other effects in the quarter included a positive FX effect of NOK 228 million related to our debt in U.S. dollars. Our main RCF facility expires per end of December this year and is thus classified as current debt per Q4. Noncurrent bank debt shown on this slide thus equals the gross debt in DDW Offshore. Per end of the quarter, our liquidity reserve through our undrawn credit facility was NOK 1.7 billion, increased through Q4 as a result of the operational cash flow. Then over to Slide 14. Since Q3, the net capital employed of MH is reduced somewhat due to reduction in working capital. The value in NOK of the investment in NES and Odfjell has been affected by a lower U.S. dollar-NOK rate. We have per Q4 split out DDW Offshore in this graph as DDW is now consolidated as a fully owned subsidiary. The net book value of DDW per Q4 was NOK 165 million. This includes vessel values of NOK 359 million, netted within a provision of NOK 185 million related to the profit split obligation towards banks. The DDW fleet per Q4 was recorded at fair value, which on the acquisition date was estimated to $43 million based on an internal assessment. As part of the purchase agreement, Akastor must dispose of the vessels in 2023, and 50% of the disposal value will be paid to the banks. A provision of $21 million was recognized accordingly, representing then 50% of the estimated fleet value. Going forward, in accordance with IFRS, vessel value will be depreciated over the remaining lifetime, while the profit split provision will increase with discounting effect, assuming realization of vessels in 2023. The net debt per end of Q4 for DDW was, as mentioned, NOK 426 million, thus representing a total negative value of the DDW investment of NOK 261 million, slightly increased compared to the provision of NOK 239 million as booked per end of Q3. Total net interest-bearing debt was NOK 1.4 billion per end of Q4, of which then NOK 426 million relates to DDW and NOK 118 million represents the nonrecourse debt in AGR. Per end of quarter, the market valuation represents a discount to book values of around 50%, somewhat decreased through the quarter. If we then turn to Page 15, I will provide some further details on MHWirth. The increased revenues in MH in Q4 compared to Q3 was primarily driven by higher revenues from sale of single equipment with positive effect on Project and Products segments. Revenues within Projects, however, declined during the quarter as a result of revenue recognition related to the 2 Keppel FELS units, which is in the last phase of the project, and somewhat also affected by the suspension of Unit 2 in December. Total revenues from Projects & Products in Q4 accounted for NOK 269 million or 33% of total revenues in MH. Based on the current backlog, we expect contribution from the Projects & Products segment to decrease from Q4 level until new order intake is booked. Revenues from DLS and Digital Technologies came in at NOK 549 million in Q4 or 70 -- 67% of total revenues in MH, increased by 8% compared to last quarter, driven by increased service activity. Average numbers of rigs in the quarter increased by 1 unit compared to Q3. Based on the current contract schedule and option structure of the fleet, we believe that number of active units should and could further increase over the coming quarters. Total fleet size remained at 81 units per Q4, of which 15 floaters are classified as cold stacked. EBITDA from MHWirth in Q4 was NOK 85 million, representing then a margin of 10.4%. For the full year, MH revenues declined by 15% compared to 2019, explained again by lower activity in the Projects & Products segment. Revenues from DLS and Digital Technology remained relatively steady with only a 5% decline in total. We continue to be very content with the development of the service business, having proven to be resilient through a challenging year. EBITDA margin for 2020 ended at 10.7%, only marginally lower than '19 level, a result of increased service share of revenues as well as a flexible cost base.Through 2020, MH has been strongly affected by decline in oilfield activity with most significant effect on MH longer-cycle capital equipment business. Order backlog per end of quarter was NOK 1.8 billion, reduced then from NOK 2.1 billion last quarter. Out of the total backlog, around NOK 1 billion relates to suspended projects. Going forward, performance of MH will be affected by relatively low backlog within Projects & Products, and we thus expect a decline in activity level and contribution from this segment in Q1. Longer-term performance will depend on order intake within this area over the coming periods, and we still see a good potential for growth within single equipment on a medium-term basis with promising leads, especially in the onshore and non-oil markets. Then over to AKOFS Offshore on Slide 16. AKOFS is not consolidated into our financials, but we are happy to see Seafarer commencing its 5-year contract in Q4 and contributing to the AKOFS financials. Seafarer recorded a 62% revenue utilization in Q4 in total, affected by certain start-up issues in the first months. Utilization or technical utilization in December was, however, in the high 90s, and we are happy to see that the vessel is now functioning well and is receiving good feedback from the clients. Utilization from the vessels working in Brazil was affected by certain specific events during Q4. Wayfarer delivered 87% revenue utilization due to an 8-days downtime as a result of a COVID incident on board in October. Santos recorded 86% utilization in Q4 due to an engine-related incident, causing 14 days of downtime. Total revenues thus ended at NOK 288 million with an EBITDA of NOK 66 million. EBITDA margin is affected by lower utilization, especially then on Seafarer. Q4 revenues represents a reduction of around 7% year-over-year, primarily driven by the adjusted terms of the Santos contract from March this year and utilization effects mentioned before, mitigated then by Seafarer contribution.I will then turn to Slide 17. NES was merged with Fircroft during last quarter with the integration of the 2 businesses ongoing and according to plan. The total integration process is estimated to take around 12 months from closing. And as mentioned last time, there is a concrete plan in place to realize cost synergies in the range of $20 million per year. Based on the latest plans, the company believe this should be quite conservative. We are happy that the number of contractors going through the books of NES increased over the last quarter. The combined company had a total of 17,300 contractors per end of December. Pro forma last 12-months revenues for NES Fircroft per December was around -- down around 25% compared to 1 year ago, however, as mentioned, with the positive momentum seen over the last couple of months. We believe the stabilization of oil price as well as the strong competence base is increasingly gaining attention also within the renewable space and that this provides a very good and solid platform for growth going forward for NES. Then over to Page 18. Our other holdings, as shown on this slide, include AGR and Cool Sorption. AGR delivered revenues of NOK 138 million and an EBITDA of NOK 4 million in Q4. We're happy to see that AGR delivered increasing revenues in the quarter, driven primarily by an uptick in activity within the Norwegian consultancy business. Book-to-bill in this quarter was strong, as Karl mentioned, at 1.9x revenues, also driven by consultancy in Norway. Cool Sorption also delivered a neutral EBITDA in the quarter from a very small revenue, affected by reversal of some revenues booked in previous quarters affected -- related to the Njord project delivered early this year. The reversal did not have a margin effect as the revenue was booked with a similar cost component. The company still has limited order backlog within VRU projects, and contribution is thus expected to remain at the low level in the short to medium term. With that, we are through our Q4 presentation, and I will hand it over to the operator of the call to facilitate the Q&A session. So please, moderator?

[Operator]

[Operator Instructions] As there are no questions at this moment, I will hand it back to the speakers.

[Øyvind Paaske, Chief Financial Officer]

Okay. I would like then to thank you all for your attention, and we wish you all a good day, and welcome you back for our presentation of the first quarter results on April 29. Thank you very much.