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Edited Transcript of AKA.OL earnings conference call or presentation 29-Oct-19 7:00am GMT

Q3 2019 Akastor ASA Earnings Call

Lysaker Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Akastor ASA earnings conference call or presentation Tuesday, October 29, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Karl Erik Kjelstad

Akastor ASA - CEO

* Leif Hejø Borge

Akastor ASA - CFO

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Conference Call Participants

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* Chr. Frederik H. Lunde

Carnegie Investment Bank AB, Research Division - Head of Research of Norway, Head of Energy & Utility, and Financial Analyst

* Haakon Amundsen

ABG Sundal Collier Holding ASA, Research Division - Lead Analyst

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Presentation

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Leif Hejø Borge, Akastor ASA - CFO [1]

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Good morning to this third quarter presentation of Akastor. My name is Leif Borge. I'm the CFO of Akastor. And with me, I have Karl Erik Kjelstad, our CEO.

Reference is made to the quarterly presentation that was released this morning. You'll find it on our website. We will refer to the presentation, so please make sure you have it in front of you.

Then I'll leave the word to Karl Erik.

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Karl Erik Kjelstad, Akastor ASA - CEO [2]

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Thank you, Leif, and good morning to everyone in the call. Thank you for listening in. Let's start on Slide #3 with some key numbers for the third quarter: a strong quarter with a year-on-year revenue growth of 50%, with revenue of NOK 1.4 billion. A strong EBITDA growth, up year-on-year with 53% to NOK 133 million.

I will refer to more specifics with regards to the key drivers for this growth, but the main reason is higher activity level for MHWirth, particularly within our Drilling Lifecycle Service business, which is really underlining the robustness of this business.

I'm also very pleased to announce that we, last week, entered into a nonrecourse bank financing of the AKOFS Seafarer project, providing capital release for Akastor since we have been financing this project up to now. You don't see many nonrecourse financing of offshore assets these days, so we are very pleased with these financing packages.

Let's move onto Slide #5. And in Slide #5, there are not any news. Our portfolio is unchanged in this quarter, and it continues to be a combination of industrial and financial investments.

Next slide, Slide 6. Our key mission in Akastor is to maximize the value of our portfolio companies, and thereby, the value of our share by distributing proceeds from divestments to our shareholders. We have 4 key investments in our portfolio that, together, compromise around 96% of our total capital employed: it's the 2 industrial investments, MHWirth and AKOFS Offshore; and it's the 2 financial investments, Odfjell Drilling and NES Global Talent.

For MHWirth, the key drivers for growth and profitability is increased demand for rigs in operation that generates both service and product sales revenue. As previously announced, we have launched a new strategy for MHWirth, targeting to grow the company both organically and through M&A, focusing on service, product sales and development of new solutions as we -- MHWirth successfully have done, for example, with their Digital Technologies division. What this means is that MHWirth will not be dependent on a new building boom to again rise in order to continue to grow the business.

Some words about AKOFS Offshore, which is about 19% of our capital employed. AKOFS is well positioned in the subsea and well intervention market in Brazil and Norway. 2020 will be an exciting year, where AKOFS Seafarer commence on its 5 years contract with Equinor. In addition, in 2020, Skandi Santos will complete its contract with Petrobras that started in 2020 (sic) [2015]. We are hopeful that Skandi Santos will continue to work in Brazil post the existing contract, but nothing is clarified in this regard yet. And therefore, all options are on the table with Santos post the existing contract.

Odfjell Drilling. Our preferred shares in Odfjell Drilling yields a stable 10% annual return, and in addition, we have a further upside through the warrants structure. As you know, this upside is related to the performance of the Odfjell shares, and we are very pleased to see that Odfjell is one of the best-performing shares in the drilling sector.

When it comes to NES Global Talent, they are really delivering on their growth journey, and we are very pleased with the development since we became a shareholder in 2017. Over 17% shareholding in NES is, for sure, worth more today than it was 2 years ago. And we are quite confident that there are a further value-enhancing potential for this investment going forward.

Then move to Slide 7. Let me comment on some key highlights for our biggest investment, MHWirth, in the third quarter. It is important to understand that MHWirth is much more than a drilling equipment provider. In fact, this is also reflected in our revenue mix, where more half of our sales come from the aftermarket services.

But with regards to the product portfolio, the drilling packages for the 2 fixed platforms, Mariner and West White Rose, are now in the final phase of delivery. Further, MHWirth has 2 Awilco Drilling rig contracts that will set a new standard for efficient drilling in harsh environments. MHWirth has started to deliver the equipment for the first rig, while rig number 2 is in the start-up phase. First rig will be ready for operation in 2021, and we believe it will be very well positioned for work due to its high in-built efficiency but also due to its low carbon footprint that really are setting a new standard for the industry. To illustrate this, Awilco is estimating a saving on fuel consumptions and CO taxes that is corresponding to about $10,000 to $40,000 per day compared with other rigs.

The last rigs in the backlog are the so-called 4 Sete drillships that we have in Brazil, and that has been suspended since 2015. This month, it was announced that 2 of these 4 Sete drillships with MHWirth equipment might commence operation for Petrobras. Before they can commence operation, construction and completion of these 2 drilling ships must be restarted and completed. And this will, of course, be a positive -- will be positive for MHWirth.

The market outlook for newbuilds for the rig sector remains challenging although we see there are some few niche projects in the markets. However, we expect that there will be opportunities for upgrade of existing rigs driven by increased focus on digital and automated drilling solutions, and that warm stacked rigs eventually will come back to operations.

Product sales continues to develop positively. We have seen more than a doubling of sales compared with similar period last year. And in this segment, we also have increased activity for nonoil business, such as other slurry pumps for the mining industry and also for our piletop drillers for the constructions industry like fundaments for windmills.

MHWirth's lifecycle service business, DLS, continues to deliver strong results even though the number of active rigs have just increased from 50 rigs in operation in 2018 to 53 rigs in operation year-to-date.

The aftermarket business is a captive business that has proven to be robust through the downturn. This quarter, we saw an increased volume related to rig SPS, Special Periodic Survey. That means full overhaul that takes place every fifth year for most of the rigs. We expect this high activity level also to continue into the fourth quarter.

Last, Digital Technologies, a new business unit within MHWirth that has seen rapid increase the last period. It's increased demand for the DEAL digital platform, and it's scaling up to meet the demand from clients. Year-to-date, MHWirth has signed contracts for 11 drilling units, receiving good feedback on the open digital environment that unlocks customers' performance. The DEAL system, and DEAL, by the way, is short for drilling, equipment, automation, layer, is a sense, an operation system that, among other, enables installation of different software application on a rig, delivering enhanced efficiency.

As mentioned earlier, we are spending a lot of time together with MHWirth management team evaluating different options for expanding our business into onshore drilling. This might involve M&A, and we saw that before the summer with the Bronco acquisition, but it also includes taking existing MHWirth technology and solutions into onshore market. That could be, for example, the DEAL digital platform.

Then let us move to Slide 8 and say some words about our other investments. As mentioned, we are in exciting phase of AKOFS Offshore preparing for the start-up of the 5 years Equinor contract next year.

We are also very pleased in the quarter to see that the technical issues we had for Santos in the 2 previous quarters now have been solved. And Santos are back to normal, delivering very good operations with a high revenue utilization. Aker Wayfarer is continuing to deliver stable and good operations.

When it comes to our investments in AGR, Cool Sorption and Step Oiltools, all of them are contributing with positive results in this quarter.

So with this, I will leave the word to you, Leif. And could you please take us through more details regard to our third quarter results? Thank you.

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Leif Hejø Borge, Akastor ASA - CFO [3]

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Thank you, Karl. As already mentioned, revenue has increased around 50% year-on-year to NOK 1.4 billion in the third quarter. I'm now at Slide 10 in our presentation. The acquisitions of AGR and Bronco earlier this year explains 20% of the growth, while the remaining comes from organic growth in MHWirth. Year-to-date, revenues have grown with 40% to NOK 3.8 billion, of which the 2 acquisitions explains 12% of the growth.

The EBITDA in the third quarter ended on NOK 133 million, of which the effect of IFRS 16 represents NOK 31 million. Net financial items were negative with NOK 77 million in the quarter, but only NOK 20 million of this had cash effect. With these numbers, net profit ended on minus NOK 9 million in the quarter.

Let's then move to Slide 11 in the presentation. I will come back to the numbers of the portfolio companies to the left in the slide. But with regards to the financial items, you see that net contribution from the financial assets portfolio were negative with NOK 10 million in the quarter. The Awilco shares had a negative effect of NOK 37 million due to the drop in the share price of Awilco Drilling, while DOF Deepwater had negative effect of NOK 31 million, mainly due to currency effect on the U.S. dollar loans in the company and depreciations of the vessels.

The only item with cash effect was the interest on the preferred equity in Odfjell Drilling of NOK 9 million, of course, a positive effect. The U.S. dollar increased quite much relative to Norwegian crown during the third quarter. Accounting-wise, this gave a negative effect of some NOK 37 million. However, the asset values of the investments in NES Global Talent and Odfjell Drilling increased accordingly as these are U.S.-based assets.

Then Slide 12. The net interest-bearing debt increased from around NOK 900 million in the second quarter to NOK 1.1 billion in third quarter. Roughly NOK 100 million of this is currency effect on our loans, due to the fact that the U.S. dollar strengthened during the quarter relative to Norwegian crown and that a major part of our gross debt is in U.S. dollar.

Cash flow from operations was positive with NOK 124 million. But investments of some NOK 22 million and settlement payments on the MPO arbitration award explains the increase in net debt.

In October, we finally closed the Seafarer financing, which is a nonrecourse financing of the CapEx, and all other expenses necessary to make the vessel ready for operation on the 5-year contract with Equinor. The total loan will amount to around NOK 800 million when the vessel is delivered in operation.

A consequence of this is that a major part of the funding from AKOFS 2 to AKOFS Offshore, which is NOK 634 million as we can see on Slide 12, a major part of this was repaid in October. However, around NOK 200 million of the loans to AKOFS Offshore will remain also after 2019. A part of this, USD 8.5 million is a working capital loan to AKOFS Seafarer, which will be repaid after the initial 5-year contract. Our JV partner, Mitsui, has injected a similar amount.

Then let's move onto Slide 13. This shows the book values of the main assets in our portfolio. Karl has already been through this. Based on the share price of NOK 11 yesterday, Akastor is then priced with a discount of around 33%, of course, relative to book values.

Then let's have a look at the numbers of the portfolio companies, starting with MHWirth on Slide 14. MHWirth has delivered a strong growth in revenues the last 2 years. Actually, the run rate revenues back in 2017 were around NOK 2.5 billion. And as we can see from the figures today, it's more than NOK 4 billion. Year-on-year, revenues grew with 48% in the third quarter, of which, 8% comes from the acquisition of Bronco. Thus, the organic growth in MHWirth was 40% year-on-year or more or less the same when you look at the year-to-date numbers.

The growth comes from both sales of new equipment projects and Drilling Lifecycle Services. Projects and products have grown with around 50%. Actually, revenue from sale of single equipment has more than doubled, but projects have also shown some growth. The last can be explained by relatively high revenue from the first Awilco project now in the third quarter.

When it comes to Drilling Lifecycle Services and Digital Technologies, the growth was 46% year-on-year. Revenues from Bronco that was acquired in June is included in this segment, and thus, explains some of the growth. The growth can partially be explained by some growth in the number of active rigs with MHWirth equipment onboard. As we can see from the graph, this has grown from 50 units in 2018 to 53 units now in Q3. However, the growth can also be explained by the new segment, Digital Technologies, and relatively high activity on 1 rig which is currently being upgraded.

The EBITDA of NOK 133 million in MHWirth gives a margin of 11.9%. This includes the effects from IFRS 16 of NOK 19 million.

Then let's move onto AKOFS Offshore, Slide 15. After 2 challenging quarters with low revenue utilization on the Santos vessel, third quarter was back on what we hope will be more normal going forward. Both vessels in operations, Santos and Wayfarer, had high revenue utilization of around 95%. This gave total revenue of NOK 295 million with a strong EBITDA of NOK 175 million. The third vessel, Seafarer, is currently being upgraded for a 5-year contract with Equinor with expected commencement in the first half of 2020. And as already mentioned, the financing for Seafarer was completed in October.

Finally, the small portfolio companies on Slide 16. AGR had revenues of NOK 167 million with a small positive EBITDA of NOK 1 million. Operations in Norway are going quite well with strong growth in the consultancy part of the business, while several of the international operations are subscale and thus loss-making.

With regards to Step Oiltools, revenues were somewhat lower in the third quarter than the previous quarter with an EBITDA of NOK 3 million, which gives a margin of 5%. This is a bit lumpy business, so the result will fluctuate a bit from quarter-to-quarter also going forward.

Cool Sorption had revenues of NOK 60 million (sic - see slide 16, "NOK 69 million") in the quarter, a lot of it coming from one big project. The EBITDA in the quarter ended on NOK 2 million.

So that concludes our presentation. We have time to some questions. So operator, could you please help us with facilitating the Q&A session?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question from Haakon Amundsen.

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Haakon Amundsen, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [2]

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Haakon Amundsen from ABG. Two questions for me, please. First on MH, it looks like there is quite a bit of moving parts on the revenues as we go into 2020. Could you give some more color on what you expect in terms of revenues and margins in 2020, please?

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Leif Hejø Borge, Akastor ASA - CFO [3]

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Well, I mean we have not guided on specific on numbers going forward. But when you look at -- but what you can see then from our presentation today, we have tried to split the revenues on the 4 underlying segments to give some more visibility on what drives revenues and earnings going forward.

With regards to the project business, most likely, that will be relatively flat going into next year. It will be the 2 Awilco projects that generates revenue while the Husky and the Mariner projects are going to be completed. With regards to single equipment and with regards to the drilling lifecycle business, there is a positive underlying trend very much driven by more rigs in operation and also driven by the clients. Some clients upgrading all rigs with new technology. As it looks today, with regards to expectation in the market, we hope and believe that we will see that trend also going forward into next year.

With regards to the margin, as you know, the EBITDA margin have been in the range, I would say, 8% to 11% over the last 12 months, which is actually relatively high. It's an 11.9% margin that we have now in the third quarter is actually more or less in line with what we delivered back in the good years in '13 and '14. We hope that the continuous growth in the service part of the business will have also a positive effect on the margins long term. Also, we think it's possible to grow the business without taking on a lot of indirect costs. So as I said, that means that long term, we have an ambition to deliver a margin higher than the third quarter. Whether we are able to that already in 2020 is too early to say.

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Haakon Amundsen, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [4]

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All right. That's useful. Also, just a question on AKOFS Offshore where you've closed financing. And also you mentioned in the slide material that you're exploring strategic initiatives. I just wondered if you can give some color on how we should think about that.

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Karl Erik Kjelstad, Akastor ASA - CEO [5]

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I think for AKOFS Offshore, our key focus for 2020 is to get it successfully into the operations with Equinor and also the renewal of Santos contract. And I think those things needs to be in place if we have -- or to find a good structural solution for the company.

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Operator [6]

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We'll take our next question from Frederik Lunde.

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Chr. Frederik H. Lunde, Carnegie Investment Bank AB, Research Division - Head of Research of Norway, Head of Energy & Utility, and Financial Analyst [7]

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I was just curious in terms of the M&A market overall. You've been -- you were very active a couple of years ago and then it's been very quiet. As you see next year, are you dependent on the change in the market environment to close new transactions? Or is it more contingent on the operational milestones in the various companies in your portfolio?

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Karl Erik Kjelstad, Akastor ASA - CEO [8]

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When it comes to AKOFS, I mentioned that we have some operational achievements that we would like to get in place before we are pursuing any active structural opportunities. And for MHWirth, it's more the other side. We are looking at buying companies that can build a stronger and deeper MHWirth. And in fact, there we see there are interesting opportunities based on the market environment we are in now. So we are actively pursuing different options there, and of course, doing it in a disciplined way. It's always a risk when you are doing M&A. So...

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Leif Hejø Borge, Akastor ASA - CFO [9]

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Okay. Any further questions?

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Operator [10]

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(Operator Instructions) And no further question at this time. I'd like to turn the conference back to the speaker for any additional or closing remarks.

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Leif Hejø Borge, Akastor ASA - CFO [11]

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Well then, I would like to thank you all for participating. And of course, hope that you will all participate when we release our fourth quarter numbers, which will happen on the 13th of February. So have a nice day all of you. Thank you.