Akastor ASA

OSE:AKAST

Earnings Call Transcript 2022-Q4

[Øyvind Paaske, executive]

Good afternoon, and welcome to the presentation of Akastor's fourth quarter results for 2022. My name is Oyvind Paaske, CFO, and I'm here together with our CEO, Mr. Karl Erik Kjelstad. We are happy to also this time have with us from Houston represented HMH by Tom McGee, CFO; and David Bratton, SVP Finance.

As usual, Karl will start by taking us through the key highlights before the HMH team will present there for quarter. I will then go through the caster consolidated financials before Karl wraps it up. Towards then, we will open for questions through the webcast solutions. Please note that questions can be posted at any time. and preferably as early as possible in order to make sure we see.

[Karl Kjelstad, executive]

Akastor's fourth quarter 2022 earnings. Let's move to Slide 2. The key value indicator for Akastor is the value of each of the investment we hold with the majority of these investments today being in joint ventures or together with different partners. The value of our investment third quarter is illustrated as usual on this slide by the net capital employed.

As you see from the overview on this slide, the equity value of Akastor by the end of the fourth quarter '22 was about NOK 15 per share, NOK 1 per share lower than the third quarter. And this is primarily driven by FX effects following a weaker U.S. dollar in the fourth quarter compared with the third quarter.

In the quarter, we realized the preference share part of our investment in Odfjell Drilling with a transaction value of $95 million, which of $20 million were settled as a seller credit. The proceeds from this transaction contributed to reduce our net interest-bearing debt from NOK 1.45 billion in the third quarter to NOK 553 million in the fourth quarter.

HMH continues to be our most valuable investment. The book value of our shareholding in HMH is equal to about 60% of our net capital employed and HMH had a value of about NOK 2.9 billion by the end of the quarter or about NOK 10.50 per Akastor share.

HMH delivered a strong revenue growth and order intake in the quarter, driven by increased service activity. We expect the service activity will continue to increase going forward. As HMH has strong momentum into 2023, driven primarily by increased rig activity. In the quarter, Alex Magic was appointed CEO, replacing Pete Miller that will continue as Chairman of the Board. Erik has a strong 35-year track record from the industry and was previously President of HMH Equipment Solutions and Service division.

For AKOFS Offshore, we are happy to see that Aker Wayfair contract in the quarter was extended to mid-April 2023. After that, Aker Wayfarer come will go to shipyard to prepare for the new 4-year contract with Petrobras that we expect will commence in the third quarter this year.

AKOFS Offshore delivered good operational performance for all vessels in operations in the quarter. We continue to be very pleased with the desire performance with the 2022 EBITDA result of USD 114 million and with a promising outlook for 2023, that really demonstrates NS FICO's attractive business model.

We are together with our co-owners considering potential listing of NS FICO's craft in Oslo, subject that the equity market offers attractive valuation of the company. In the quarter, we also signed a sales and purchase agreement for the sale of Kusoption to DKI International. Consumption was a part of your processing that we sold in 2016, but at that time, card out of the transaction. We are not pleased with that consumption will be part of TKI to have same business at cruise auction as its core business.

Finally, the DRU arbitration process is well on track with arbitration hearing starting the last week of this month, and we expect an award in the median time of this year.

With that, I'm pleased to introduce HMH's CFO, Thomas McGee, that will take us through the HMA fourth quarter earnings and key priorities going forward. So Tom, the floor is yours.

[Tom McGee, executive]

Thank you. Obviously, we had a great year. We're excited about our performance. A lot of things going right in the market for us. You've seen day rates continue to increase for our customers and seeing really attractive day rates in the $400,000-plus range. And so we view that as a huge positive. You continue to see rig reactivations and as we've talked publicly before. You're starting to see some of those conversations around cold stacked rigs. And that's something that 1.5 years ago, we would have said it wasn't going to happen, but we're seeing it. And so we think there's a very favorable backdrop to our business. And that's why you see our service orders up considerably, and you see our service revenue continue to grow, and we expect that growth to continue into this year and are very optimistic.

On the synergy plan side, the brilliant biggest milestone we had was to get getting off the Baker Hughes TSA, exited early on that. And really the hardest part of that, there are a lot of hard parts of that, and a lot of people worked extremely hard to make that happen. But really the most challenging aspect is standing up the ERP system independent of Baker Hughes. We did a fantastic job doing that, are really proud of our team. And now we're shifting to the ESS side and asking them to do the same thing. It's going to be a lot of work there, too. We expect that to be successful and that really ties into our IPO readiness. And that is a big component of being ready to list and look at public liquidity options is to continue to progress on unifying our company to 1 ERP system, unifying all the policies and being ready to report publicly. So we're very happy with that progress, and we know a lot of people have worked really hard to get us there.

As we talked about it, we ended with a solid revenue number and solid EBITDA number that David will walk through. We also, earlier this year, completed a bond offering just after close, just before world got very challenging. Certainly, it looks better today than it was at times last year. So we're very proud of our team that executed on that.

When I look at 2023, anticipated significant growth in rig years, fueled by Brazil and Middle East. And I'll touch on the Middle East a little bit. I mean we obviously -- there's a lot of activity there, both on the jackup side and on the land rig side. And so it's a high priority for us, and we're going to be looking strategically at what we can do to better position both our equipment portfolio, the products that we provide and also what we can do on the ground there potentially. So we've got a lot of activity there that we're looking at and seeing how we can strengthen our position there.

Again, we're optimistic. We'll continue to deliver on our synergy cost plan and get our ERP system completed and get stood up, and I think it's an exciting time for us, and we continue to see great tailwinds from the industry.

So from that, we'll dig into the numbers on the next page, and David will walk you through some of that.

[Unknown Executive]

Great. Thanks, Tom. I'll begin with the total company results and then move into segment details. Revenue for the quarter was $196 million, up 20% year-over-year, driven by strong fourth quarter activities related to our products and services. We continue to experience strong growth in our aftermarket order in the fourth quarter, highly in the rebound in the offshore industry from higher crude prices and higher day rates from our customers.

Adjusted EBITDA in the quarter was $29 million, down 8% year-over-year but up 4% on a quarter-over-quarter basis due to increased services volume partially offset by inflation, increased labor costs and a nonrepeat of the final project termination fees received in the third quarter of '22. Adjusted EBITDA rate was 14.8% in the quarter.

Orders for the quarter were $183 million, down 8% year-over-year driven by non-repeat of a large project order in '21, but up 6% on the quarter. With increased service orders as we caught out from ERP implementation-related delays in the third quarter.

Finally, on cash flow. Free cash flow in the quarter was negative $2 million driven by strategic inventory plan, which included a $19 million increase in inventory to prepare for higher 2023 volumes and a delayed by customers for milestone payments. We ended the quarter with $47 million in cash and cash equivalents on hand.

Now if we move to the next page, I'll walk you through segment details. In Aftermarket Services, revenue was $140 million in the quarter, up 26% year-on-year and up 31% quarter-on-quarter as output increased based on past order intake trends. Aftermarket order intake was $136 million in the quarter, up 27% year-over-year and up 31% quarter-over-quarter, driven by increased rig activity and a catch-up in orders that pushed from the third quarter due to ERP implementation delays.

In Projects Product and other revenue in the quarter was $55 million, up 3% quarter-over-quarter, driven by an increase in product and offshore equipment in the fourth quarter of '22.

Moving now to net interest-bearing debt. We ended the quarter with net debt of $150 million. Leverage in the fourth quarter was below targeted capital structure at 1.5x, which allows us to stay within all covenant requirements for minimum liquidity and gearing ratio and interest coverage ratio. Overall, we're very pleased with the team's performance in the fourth quarter and for the full year 2022.

And with that, I'll turn the call back over to Tom.

[Tom McGee, executive]

Right. Thank you to wrap up. As we've mentioned several times, good market tailwinds, and we feel really good about the 2023 year. As we talked about before, we're sort of exiting this integration complexity mode and getting into growth mode. So it's exciting time for us. And I think you'll hear more from us this year on some growth strategy and hopefully some execution on that strategy. So it's -- for us, it's time to kind of move to the next phase, and we've done a lot of the heavy lifting, and it's time to get out there, get aggressive and grow the business.

So thank you for your time. We'll hand it back to the Akastor team.

[Øyvind Paaske, executive]

Thank you, Tom. I will then take you through the Akastor financials, starting then at this slide with the highlights. As before, please bear in mind that many of our holdings, including the HMH and AKOFS are not consolidated into our group financials. And as such, our consolidated revenue and EBITDA only include a very minor part of our Akastor's investments.

With that in mind, AGR delivered yet another strong quarter in Q4 with positive year-on-year growth for both revenue and EBITDA. Total revenues for AGR ended at NOK 204 million with an EBITDA of NOK 17 million. For the year, AGR ended at an EBITDA of NOK 81 million, which included then a positive NOK 21 million accounting effect related to the creation of Fun Energy Services completed in Q1.

DDW Offshore included under Other on this slide, delivered revenues of NOK 46 million in the quarter increased both year-on-year and quarter-on-quarter, driven by utilization of the fleet. DDW delivered a positive EBITDA of NOK 12 million this quarter. For the full year, DDW's EBITDA came in at a positive NOK 7 million after a slow first half of the year.

Corporate costs in the quarter included around NOK 9 million in costs related to the DRU contracts on same level as per last quarter. We expect costs related to this case through the first half of 2023. With that, and including then a slight positive contribution also from consortion, our consolidated revenues and EBITDA for Q4 came in at NOK 283 million and $3 million, respectively. For the full year, revenues came in at just over NOK 1 billion, whilst EBITDA ended at a negative NOK 15 million -- sorry, NOK 10 million.

Then a few words on our JV holdings, shown here in NOK terms. As Tom and David has just been through, HMH delivered another good quarter with an adjusted EBITDA of the $29 million in the period, including adjustments for specific integration costs of around NOK 5 million.

Results and intake in the period driven by strong service activity. The full year adjusted EBITDA of HMH came in at $100 million, significantly up compared to 2021. AKOFS Offshore delivered solid operational results on the 2 vessels in operations through Q4. Total revenues for Q4 for AKOFS ended at USD 36 million in the quarter with an EBITDA of NOK 30 million, both in line with previous quarter. As mentioned last time, Skandi Santos went to dock in July in order to prepare for the new contract with Petrobras, which was expected to commence in December last year. Certain issues related to a subsupplier has ever delayed commencement with expected startup now later this month.

As soon as Santos commences its new contract the financial run rate of AKOFS will increase. The 2 other vessels will remain in normal operations on same contracts through this quarter after which Wayfair will demobilize as Carlos mentioned, in April and prepare for the new contract, which is expected then to commence within Q3 this year.

Then over to the next slide, for a further look at our consolidated P&L with a hair focus on our net financial items that came in at a negative NOK 299 million in the period. Under net financials in Q4, Odfjell Drilling contributed positively with NOK 22 million, mainly related to the peak dividend accumulated between Q3 and closing of the sale of those preference shares. In addition to a positive noncash effect of NOK 4 million related to valuation of the warrant structure, which also then had a positive impact in Q4.

Going forward, our net financial results will include interest from Odfjell related to the sellers credit arrangement, which has a 10% fixed interest rate payable on a quarterly basis.

NES contributed negatively with NOK 144 million in the quarter, of which NOK 120 million was related to valuation changes stemming from previous quarters, which was reclassified from equity to P&L in this quarter. This effect thus did not have any effect on equity or the NES net capital employed in Q4. The remaining effect on NES of then NOK 24 million related to a slight adjustment in valuation in Q4, primarily driven by an update related to assumed multiples used in our internal valuation.

Our total net debt employed related to the NES of NOK 636 million per end of Q4, implicitly assumes an EBITDA multiple of NES of approximately 6.5x 2022 earnings. This is lower than historical trading levels, so what we consider similar listed companies.

AKOFS Offshore contributed negatively with NOK 15 million, while HMH contributed positively with NOK 36 million, both then equal to 50% of net income in the period.

Net foreign exchange effects were negative with NOK 153 million in Q4 after a positive effect of NOK 137 million in Q3, driven by the strengthening of the NOK versus the USD during -- which then has a negative accounting effect related to our dollar holdings.

Let us then turn to the next slide for an overview of the debt movement in the period. You here see that our bank debt -- net bank debt decreased significantly through the quarter, driven then by the realization of the Odfjell preference shares, which closed in November last year. Our Q4, our net debt was NOK 1.2 billion, down from NOK 1.9 billion per Q3. Net interest-bearing debt decreased even further from NOK 1.5 billion for Q3 and to unmanned NOK 553 million per Q4 and now includes the Odfjell seller credit position.

Cash flow in Q4 included in addition to normal cash -- corporate cash flow payments of the guaranteed preferred return to Mitsui and MOL in connection with AKOFS Offshore divestment in 2018 and a funding of approximately $5 to AKOFS required in connection with the Santos yard stay, which is both included here under other in the graph, partly mitigated then by positive FX effects related to our U.S. dollar debt of NOK 124 million.

Of our total reported net bank debt of NOK 1.2 billion, DDW Offshore constituted NOK 226 million per end of period, while the net debt in AGR was NOK 136 million. The DDW debt was reduced through proceeds from the sale of Odfjell due to a mandatory prepayment clause in the DDW Bank agreement.

Then over to the next slide for an overview of our external financing facilities. With the effects mentioned, the draw on our corporate banking facilities decreased to NOK 0.85 billion per end of December. There was no draw on the liquidity facility from Aker Holding per end of fourth quarter.

Our corporate banking facilities originally matured in the first quarter of this year, that have during Q1 in '23, been extended by 1 year and now mature in Q1 2024. As a result of the Odfjell transaction and implication in the bank agreements, the corporate U.S. dollar facility was reduced from USD 89 million to USD 66 million through the quarter. As mentioned previously, parts of proceeds from Odfjell sales was used to repay the DDW debt, which was then reduced from USD 53 million to USD 27 million per end of Q4.

Per end of quarter, our undrawn corporate credit lines was NOK 0.3 billion increase compared to Q3 as a result of cash flow in the period, however, then partly mitigated by the reduction in facility size following the realization of Odfjell position.

As also mentioned in the previous quarterly presentation, our custody is today an investment company with limited upstream cash flow from our portfolio companies. It does continue to depend on realization of assets to reduce debt and improve liquidity, which was, of course, one of the main drivers behind the realization of the Odfjell shares. Going forward, we will continue to closely monitor the liquidity reserve and aim to further increase this through realization of assets. Depending on timing of the next realizations, and increase in financing facilities or alternative financing could still be required in the medium term.

And with that, I will pass the word over to Karl for the next session. So please, Karl.

[Karl Kjelstad, executive]

Thank you, Oyvind. Let me try to wrap up this presentation with some reflection around our ownership agenda for the different portfolio companies. First, on Slide 14, you see overview of the portfolio. And this has changed, as mentioned for the third quarter by the sale of the preference shares in Odfjell Drilling. However, Odfjell still present on the slide as we continue to own the warrant instrument in Odfjell also have exposure through Odfjell through the sale credit of $20 million.

Presumption is also present, but as mentioned, with an agreement to sell all shares and closing is expected to take place in this quarter.

Let's move to Slide 15. HMH, where operational performance has already been covered by Tom's presentation. We are happy with the outlook of HMH business, as mentioned, and we believe that the company is very well positioned to take part in the upturn driven by increased focus on energy security worldwide.

We see a strong growth in the coming years, driven by the higher activity and we believe that HMH has a strong position in Frontera we know they have a strong position in floaters. And as Tom mentioned, we are also working together with the company how we can strengthen the position in the Middle East, particularly within the jackups and the land rig segment.

Akastor, together with our co-owners, baker use under management, in HMH are still targeting to make this investment liquid through an IPO as soon as the company is ready, but also depending on that the equity market is offering interesting valuation of our HMH investment.

Let's move to Slide 16. For AKOFS, the key focus going forward is to deliver high-quality operation with high revenue utilization for all the 3 vessels. Our ownership strategy we have no important prerequisite in place that all the vessels have long-term contracts. And by that, we have a foundation for exploring different structural solutions for AKOFS Offshore going forward. And this is something we together with a co-owners will explore going forward.

And then NES Fircroft. NES Fircroft is the clear global leader within its niche. And as mentioned, the company continued to deliver strong growth, demonstrated about a 22% EBITDA increase of 46%. It's growing in the energy field. It's growing in the renewable field and also a new business are as life science, for example. NES Fircroft is what I would call exit-ready and different alternatives are being explored, including as mentioned earlier, a potential listing in Oslo this year.

Let's move to Slide 18. AGR continued with a high activity level with consultancy in the quarter, driven by the Norwegian market, particularly, but also with a strong market development for wealth management in Australia. Our ownership agenda for AGR is to continue to profitably grow the AGR business both organically and also explore M&A opportunities.

Then finally, let me wrap up with over short and medium-term priorities for Akastor. We continue to believe that the normalization of our financial investments such as shareholding in NES Fircroft will most probably come first and we also expect to monetize over sale credit in Odfjell Drilling in 2023. The DRU arbitration is as on a legal track with the hearing starting later this month and we expect, as I mentioned earlier, outcome of this to be ready before the summer.

For HMH, the target is to do a separate listing as soon as the company is ready and as mentioned, when the equity market is open for this type of IPO.

With that, I believe we are through the presentation. And we will move over to a Q&A session, and I believe we will pause for a minute or 2 in order to -- for you to provide questions. Thank you for your attention so far.

[Karl Kjelstad, executive]

Okay. Well, start -- we have received one question so far, so we'll start with that. It's a question from Holborn. How do you value the Odfjell warrants? Are they recognized in Q4.

I can take that myself. The valuation of the Odfjell warrant, which is still then part of Akastor, we have realized in Q4 only the preference shareholding in Odfjell. So we remain exposed to through the warrant structure as well as then the sellers credit. The valuation of the warrant structure is then based on an external analysis and it's basically based on a type of black schools methodology, valuing the warrant structure based on the specific instrument.

So it's included in our net capital employed under other with approximately NOK 34 million per Q4, around the same level as it was per Q3 then with a slight increase of NOK 4 million. So that's the only question we have received so far.

So with that, I think we are done through our quarterly presentation, and we welcome you all back for our presentation of the first quarter results on April 27. Thank you very much.