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Edited Transcript of AQUA.OL earnings conference call or presentation 28-Nov-19 7:00am GMT

Q3 2019 Aqualisbraemar ASA Earnings Call

ASKER Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Aqualisbraemar ASA earnings conference call or presentation Thursday, November 28, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Wells

AqualisBraemar ASA - CEO & Director of UK

* Kim Boman

AqualisBraemar ASA - CFO

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Presentation

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David Wells, AqualisBraemar ASA - CEO & Director of UK [1]

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Good morning, everybody. For those who don't know me, my name is David Wells. I'm the CEO of AqualisBraemar. I'm very pleased to be standing here again, giving Q3 results for 2019.

As usual, we'll adopt the same format where I will concentrate more on the operational issues, give some highlights, and I will be turning to my colleague, Kim Boman, our CFO, who will give some details on the finances.

So as you can imagine, Q3 has been an extremely busy quarter for us. We announced our merger with Braemar Technical Services at the end of Q2. And since that time, we've been very, very engaged in bringing the 2 companies together. And I'm sure you can imagine, there has been a huge amount of work to do that, to bring 2 cultures together, 2 sets of people together and to bring 2 office setups together.

We've made extremely good progress in that time. And I'll go into that in a bit more detail on the next slide to tell you where we've got to. Very pleasing, though. I think we're ahead of schedule, ahead of where we expected to be. I think that when we started this process, we knew what we wanted to achieve based on previous experience, and I think we've ticked a lot of those boxes and made significant progress.

One of the highlights of that is that we have again increased the cost synergies that we expect to bring out of the transaction to around about $2.5 million, which has increased from the $2 million we had expected at the end of Q2. That alone is very pleasing.

So as you can imagine, during this period, there's been a lot of inward-looking as our senior management have been very focused on bringing the 2 companies together and less focused on the market outside. But in spite of that, I'm really pleased to report revenues of USD 18 million for the quarter, which is almost identical with the Q3 of 2018 on a pro forma basis. So that has been really, really quite pleasing. We've also turned in an adjusted EBIT of $300,000, which is up on the pro forma for Q3 of 2018. And that -- at the same time, we have recognized some of the costs associated with the integration, which has resulted in a minor loss for the quarter.

We've had a very good results in Asia Pacific during the quarter, stronger than we probably expected, particularly in the offshore sector, which is good going forward and gives a bit more credibility to the thoughts that the market is slowly strengthening. And we've also had a very strong quarter once again from our offshore renewables section as that market continues to be on fire.

So in general, I think it's been a pretty solid performance in the quarter. And I'll move on and give a little bit more detail on what we have achieved in the integration and synergies.

So this is proceeding very much to plan at the moment. We have co-located all our main offices around the world and bringing all those people together. So from day 1, we've effectively started as one company and working together. I think during mergers, a lot of companies make the mistake of trying to stay in 2 separate offices and then we have 2 separate cultures of an us and them, but this has not happened to us. We brought our people together, and a lot of positivity from our staff.

What's been particularly pleasing is that we have some very, very good technical staff on both sides of the legacy companies, and it's a really positive kind of spirit which has developed between them. And we're already getting revenue synergies coming out of bringing those people together. And I'm absolutely confident going forward that, that will -- there'll be more and more revenue synergies as we mature together.

As I said just now, we believe that we will recognize cost synergies of around about $2.5 million during the course of bringing the companies together. And we've already realized an annual run rate of around about USD 1.9 million to start with. So really quite significant, and this should be very good for our trading results going forward.

We've had really positive feedback from the markets as a whole. We've had no pushback at all from clients and very good support from the insurance markets as well. And I have to say, once again, very good support from our staff. I think you're never quite sure how these things are going to go. Yes, 1 or 2 people we have lost during the first few weeks of the merger, but by and large, that's been very small, and we're very much on a heavy recruitment drive at the moment to start ramping up from the -- from A, from the losses; and B, because we believe we need more people to service the work that we're getting. So in general, a good -- I think we're ahead of the game, and I think things are looking good going forward.

So let's go back again to a little bit of what we do. We are consultants. We are very much focused on the -- on risk -- on mitigating risk and minimizing losses in the operations that we do on behalf of our clients. Also, we're very, very focused and increasingly focused on the offshore renewable sector. This is a market which is -- has a lot of interest now, not only in Europe from where it started, but also around the world. And I'll give a bit more detail going on. But we are very focused on risk as a consultancy, risk mitigation. And when accidents do happen and we're called in to assess those losses, we're very focused on minimizing losses and getting operations back to normal as quickly as possible with minimum damage to the environment.

Our global footprint has remained as we expected, 48 locations around the world in 33 countries. I think that's -- none of our competitors can compete to that. So that gives us a very, very sound footing on which to build. Since that time, we've actually added 2 more locations to the map. So I guess, it should really be 50, again, in 33 countries, so that is good.

And our splits of our revenue around the world. First of all, by business lines, around about half of our work comes from the oil and gas sector; about 1/4 comes from marine, that's bluewater shipping; and the remainder comes from offshore renewables and from loss-adjusting insurance markets.

I will just touch upon the renewables, 14% at the moment of the combined company. That's up from 12% last quarter. It is increasing quite rapidly. And there's more and more opportunities coming out of that market, which is excellent.

In terms of regional split, it's pretty much even across the world. Middle East is still our largest region, just ahead of Asia Pacific. And Middle East -- and Americas is probably slightly smaller as a whole, but nevertheless, quite significant for us.

So we follow a number of metrics in the market. Oil and gas being half our revenues, we do tend to follow the jack-up market because we work a lot in the shallow water. And as you can see on the left-hand of the graph there, the jack-up market is slowly improving. We passed the bottom, and quarter-by-quarter, there are more and more jack-ups going back to work, which is excellent for us because we're quite dominant in the jack-up removing market. And along with every jack-up, more assets go back to work as well, which gives us more opportunities elsewhere.

Even on the floater market, which we don't service that much because they tend to have marine crews and therefore don't need so much in the way of outside consultants, I think we can see that the market has stabilized and not falling any further. And I think the general consensus is we expect improvement going forward.

Conversely to that, offshore renewables is a market which is really on fire. If you look at the left-hand graph there, this is a project pipeline in terms of gigawatts, excluding China. 2019 has been a -- is a pretty significant year in the sense that we have a lot of Asia Pacific coming to the market here. But 2020, you can see there's a massive boost in terms of expectations, around about 13 gigawatts of renewable power coming to the market. And these are projects which are just kicking off. And most of these projects take between 12, 24 months, perhaps even 3 years to fruition. So the work we get now will keep us going for the next few years and we're really targeting the new opportunities that are coming forward.

The right-hand graph is also quite interesting because this gives the market share for the top 5 players. You can see going back in a few years, about 90% of the market was dominated by these top 5 developers. As time has gone on, there's more and more players coming to the market and their market share is reducing. So they now have around about half the market share, which means there's a lot more developers, a lot more utility companies, a lot more investors coming to the market, and that gives us many more opportunities.

Sticking on renewables. We have expanded our footprint further during the course of Q3. We have opened up or we have representation in 2 locations now in Australia, one in Perth where we already had an office and we now have representation in Melbourne. Australia has kicked off its first renewable wind farm, Star of the South, and we're hopeful that we'll get involved into that wind farm.

In addition, we've opened up an office in Edinburgh in U.K. because that is the home of the Scottish renewable industry and all the major clients are based in that location. And we have recruited a new manager to run that office. And even though he's only been on board for about 6 weeks, he's already started bringing work into the company, which is really -- which is quite impressive.

We are more and more focused in the renewable side on consultancy. So at the moment, we're very, very heavily involved in next leasing round, which is coming up shortly, helping a number of new players come to the market, where they're assessing the leases on offer. And we're giving various input and advice, covering a spectrum of different input so that they can -- to help them to really focus on what are the best leases as far as they're concerned. And we're hopeful that they'll win some of those bids and some of those new leases and lead on extra work for us going forward.

Those of you who've been following us for a while will remember that last year we started a rig inspection business. That is -- it was a bit slow to take off to start with, but it's already gaining traction at the moment, and we've won some quite nice work for some of the majors. But we've also just tied up a strategic alliance with a company called HOSE who are based in Aberdeen, who are very focused on well control inspection, an area where we're perhaps a little bit weak on ourselves. And conversely, they're a little bit weak on the sides of things where we're strong, so it's quite best combination. They come to the market with a lot of work, a lot of backlog already, which we'll help them service. And vice versa, we'll use their people to help us on the projects that we've won. So that's quite exciting. And I've got quite a lot of expectation from the rig inspection market.

Just moving around, this is an insurance claim that we got involved with. It's a RoRo ferry which -- RoRo car carrier, which sank off the East Coast of the States. Unfortunately, it's -- it had a fire before it went to drown and turned over. It's been quite a good job for us. But it's just an example of one of the losses that we get involved with. We are called out on a very regular basis. Our American office is actually doing extremely well on the insurance claims side.

So moving on, back to main statistics, KPIs. Our backlog, we have put here in Q3 where we stand, a little bit over $12 million. This is actually just a backlog from our offshore sector and our offshore renewables sector. We can't quantify quite so easily from our marine sector and our loss-adjusting sector because those are really call-out contracts and are not really numbers that we can put into backlog that easily, but the number has increased and we have won some quite significant work during the quarter. Not huge in terms of numbers, but increasing number of opportunities.

Staff have increased. So we now have about 420 staff on the books at the moment. Q3 traditionally is our weakest quarter during the course of the year with summer vacations. And also we closed down our operations offshore India during Q3, which generally tends to reduce the numbers of staff that we have on our books during that period, but Q4 tends to be a bit stronger. So numbers are good.

We're on a very strong recruitment drive at the moment because we've picked up quite a lot of extra work across the board in all 4 sectors. And so I'm hopeful during the course of 2020, our numbers will go up. And these are technical staff we're bringing on board. We're not bringing on any admin at all. It's technical staff that are coming to the table.

Billing ratio. We're on denial about this one, whether we should keep this one as part of the presentation, but we have done so. It's not quite apples-to-apples here. We've tried to bring in the utilizations that have come from Braemar Technical Services. They measure their stats slightly differently to ours. They bring their holidays and things into their -- into their utilization, so numbers tend to be a bit lower. But we put them as is at the moment here. The numbers actually, if we did like-for-like, would be slightly increased on that. Their utilizations have traditionally been slightly lower than the legacy Aqualis, but I think that going forward, those numbers we should be expecting to increase, but we put it here because we didn't want to hide the numbers from you.

So with that, I'm going to pass you across to Kim Boman who will give you some detail on numbers.

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Kim Boman, AqualisBraemar ASA - CFO [2]

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Thanks, David.

To list the comparison of our performance, we have prepared pro forma figures for our aggregated revenues as well as for adjusted EBIT. We have -- we are pleased that we've been able to maintain revenues despite being in the midst of an integration, also that we maintained the profitability. In fact, it's slightly up from Q3 '18 and roughly on the same level as last quarter. What's most pleasing is the fact that we've been able to realize synergies much quicker than anticipated and also that we have increased the size of potential synergies. And what excites me the most is the potential I see to further improve this business.

What we have today is world-class technical staff, but we don't have the systems in place to support that. With the combined entity now having different systems in place, we need to integrate, align the systems, but also we need to invest in technology, which will allow us to work more efficiently together. It will allow us to automate processes. We currently have a lot of manual processes, but with the enlarged size of the group and with the technology that are available and we are now deploying, it will allow us to reduce the admin time. It will allow us to a better and quicker feedback to clients. And we will be able to provide better management information. So this is something that will allow us, both the former Aqualis and the former BTS, to run operations better.

And the process to deploy this technology, make the changes in the systems, is ongoing. We have a good progress. We expect to finalize this process by the end of next summer or mid next summer. And the benefits of this will be -- gradually come into play as we go forward from now.

If you look on our regional revenues, these are not -- the historical figures are not pro forma-adjusted, so it's not apple-to-apple, but what we can see is that the revenues in the Middle East are down, which they normally are. It's a seasonal slowdown as expected.

Far East has been doing well, good performance and driven by -- as David said, by offshore as well as offshore renewables. We see great growth potential for renewables in the Far East, a lot of opportunities to grow and expand and with good margins.

In Americas, the figures have been weak, mainly because we have had some unexpected staff who have left, but we are recruiting and we have recruited. So -- and we have taken measures to mitigate, and we expect the performance in the Americas to improve going forward.

The -- our reported figures shows an increase in revenues of 108%. This is entirely due to the acquisition. If you look on Aqualis stand-alone figures, they would be flat versus Q3 '18. And it's a uptick in offshore renewables and a slight decline in oil and gas. The results in the quarter have been impacted by transaction costs or integration costs of roughly $0.5 million, leading to an adjusted EBIT of $0.3 million.

If -- we have maintained a strong financial position. We have a cash of $10.7 million. We have no interest-bearing debt, except we have the leases.

The -- as we pointed out in Q2, one of our key focuses is to reduce the working capital. Our business is tying up too much working capital. And we have started and we are well underway on a working capital project. So the first phase includes analysis, identifying what are opportunities to reduce working capital; secondly, to optimize the workflows and processes based on the current systems; and thirdly, train staff and change the culture to always be -- so that cash collection is a central part throughout the organization. This is ongoing. We are making changes. We see that this has effects.

The second phase is related to systems. And that relates to our investments in technology and aligning the ERP systems. The systems we had in place today are not fit-for-purpose for the marine and adjusting business, which we took over. And the investments we are now making will allow us to invoice quicker, it will allow us to have better information at hand in terms of following up the outstanding invoices and it will allow us to automate processes. So these investments that we're now doing in systems, the second phase will take effect roughly from the summer next year.

The -- we expect most of the synergies and -- both in terms of the cost synergies and in terms of the working capital synergies to be fully taken once we have the system in place by next summer. And then obviously, we have 1 or 2 quarters to take full effect of it, but let's say by the end of next year, we should have full effect of cash releases and cost synergies. Also, to the way now we invest in technology by -- will allow us to share information over better across the group, which will drive and support the revenue synergies that we are anticipating.

Over the cycle, we are expecting a 5% revenue growth on an organic basis. We are looking at acquisitions continuously. We will make acquisitions to add to this growth. The EBITDA margin throughout the cycle, we expect to be roughly 10%. In 2019 second half and the start of 2020, we are in acquisition phase. So we do not expect to be in a position to realize those margins, but once we have the integration done and the markets -- in the current markets, we should be in a good position to realize the 10% margin.

With that, I'll leave the word to David.

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David Wells, AqualisBraemar ASA - CEO & Director of UK [3]

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Thanks, Kim. Thanks for those -- that input.

So just to finalize, I just want to focus on 4 main bullets that I feel that we are going to be focused on over the short term. We will continue with the integration. Kim has given you a bit more color on that, particularly the back-office. I think the front-office, we are pretty much there in terms of staff and getting together and revenue synergies and increasing our profile in the market. I think our business development is probably lead of all our competitors in the insurance markets in particular. But we'll be very focused on bringing this integration to completion and getting the cost synergies that we expect to drive out of that and to maintain the kind of support we're getting from our clients and for the market as a whole.

The second part, which I think is very important, is that we believe that the market is actually quite positive going forward in all sectors, not just in offshore renewables, which is very, very dominant at the moment in terms of growth, but we do think that we passed the bottom of oil and gas. We do see upside in those markets. We do see the shipping markets improving, the volumes of traffic increasing year-on-year. There's more bulk cargoes. There's more containers. There's more oils. There's more gas. There's more ships. More ships means more business for ourselves. So we're quite positive also on the shipping markets. And we do believe, at the moment, we're in quite a strong position to continue to gain market share from our competitors. So I think at the moment, going forward, we are quite positive in terms of where the markets might go, and we hope we can drive off of the back of that.

As Kim just said, capital efficiency is really, really top of the list for us and we're really, really focused on that at the moment. We -- on the back of our expectations for 2020, and hopefully improvement in our working capital efficiency, we are aiming to give -- to pay dividends back to investors during the course of 2020 if everything goes to plan. So that's really much -- a very much a big focus for ourselves. We value the support our shareholders have given us, and we want to return that loyalty to them.

And I think the bottom bullet there, market consolidation. We do expect further consolidation to happen in the market, not just necessarily just from us, but maybe from some other players, but there are opportunities out there. We will continue to assess them. We'll continue to monitor them. We do have a drive and ambition to still increase our size and to still increase our dominance in the market.

So we think going forward, 2020, we have expectations, and we hope we can realize them for ourselves and for our investors.

So thank you very much. That concludes our Q3 presentation.