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Edited Transcript of DOF.OL earnings conference call or presentation 28-Nov-19 7:30am GMT

Q3 2019 Dof ASA Earnings Call

STOREBØ Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Dof ASA earnings conference call or presentation Thursday, November 28, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hilde Drønen

DOF ASA - CFO

* Mons Svendal Aase

DOF ASA - CEO

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Presentation

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Mons Svendal Aase, DOF ASA - CEO [1]

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Good morning, and welcome to the third quarter presentation for DOF. And we start with some highlights in quarter 3.

Yes, here are the highlights. So it's the best EBITDA result we have had since second quarter 2016. So NOK 803 million in EBITDA. So of course, it's positive. And we have seen good utilization on -- in all segments. So it's been a good quarter. We had improved earnings on PSVs, on anchor handlers and also on the subsea fleet. And as you see, we have had, on average, above 80% utilization on the total fleet, including everything. So it's -- so we are fairly happy with the operations into the quarter. Could have been a bit better. We had to take a loss on a client in New Zealand on 2 boats. So we could have delivered NOK 825 million, if it wasn't for that loss we had to take. And all I'm saying that we are -- before, of course, is that we reached an agreement with First Reserve to buy the remaining shares in DOF Subsea and we now own 100% of DOF Subsea.

We are still working towards a solution on a long-term refinancing by the end of the year. So we have dialogues with all stakeholders and still believe it's possible to get that agreed before -- for end of year. Of course, it's still -- it's not guaranteed, but that is what we believe today.

On the contract side, we have focused a lot on covering the winter and been fairly good last few weeks and months to get the good backlog for the winter. So we see -- we -- for quarter 4, we have 81% backlog, which, I think, is probably the record high backlog number for any quarter in many, many years. So of course, that gives -- that's a good foundation to deliver a decent quarter 4.

So a few contracts worth mentioning, I don't want to go through them all, but, of course, the Feistein contract in -- with us in Australia was important one for us. It was the first long-term contract we ever had in my history and DOF with Esso. So that's something we're working for a long time. And of course, also rate-wise, it's the best PSV contract we have done in many years, and it's not far away, the earnings on this contract, compared to the contract we had when the downturn started in 2014. I'm not saying that that's the market reference, but when you have the right tool and right track record and you find the right client, at least it's your status, it's possible to do decent contracts.

We have order -- I'm very happy really these days with the recently announced contracts in DOF Subsea and APAC, the Skandi Hercules, a 100-day contract starting in December and, of course, covering the full first quarter at a very good rate. So it's another example where you have the -- when have a one-of-a-kind boat and you get the right opportunity, you get the good rate. So it's a very good rate that I'm very happy with. So it gives -- so APAC is very good backlog for quarter 1. Then we won a few contracts in West Africa, one in -- for Skansen in Ghana covering full winter and one for Seven in Angola covering full fourth quarter and, of course, a very important contract for -- on the subsea fleet and in the 2 latter quarters is part of our North Sea fleet, and to get a good backlog for them in quarter 4 and in quarter 1, of course, helps a lot.

So all in all, it's -- we look -- it looks like we -- we'll avoid too much bleeding, especially in quarter 1 and quarter 4. And then, of course, we have a few weeks and months before we have to do what we need to do to get to -- in quarter 1. But of course, 67% backlog gives us a very good starting point. So I hope we can get that a bit higher in the next few weeks. So some positive in the market, of course, and we have been in, let's say, on a good track the last few months. So I'm happy with the backlog. And of course, very happy also, of course, that we, I think, for the first time in a long time, we have been above 80% utilization and, of course, above 80% backlog for quarter 4, of course, is also -- I'm very happy with that.

So then next one, of course, you have seen before, it's showing the map and number of employees a bit up. And of course that is -- of course, it's a reflection that we have been more busy in quarter 3. And also, we have been fairly busy in October. So it reflects that the -- even high season and more so the increases, contractors that -- of course, if it slow down, we will reduce again.

Then, we have a few slides on ESG and of course, we -- for those of you that follow us closely, you see that we, once a year, issue sustainability report same time as we -- the annual report and the thickness of the sustainability report is at the same level as the annual report. And last year, of course, of the 100 larger listed companies in Oslo, we're #5 on reporting. So we've spent a lot of time and efforts on it and continue to do that. So a big drive in the organization to focus on this.

And we also have a few projects we are working on. Of course, for us it's -- the main focus, of course, is emissions and try to reduce fuel consumption, of course, and that is -- and you have to do your best on this. Of course, you have a competitive advantage compared to the competition in the market as well. So it's twofold. It's not only because you need to do it, but it will, of course, it gives you also advantages towards your clients. And a very interesting project we are doing now is the one on the ECOmeter, which is a software and it's -- and the ambition of that is if we succeed with this, we will reduce, well, depending on vessel type, the fuel consumption between 10% and 30% is the ambition on this. And the investment itself on a boat will be less than NOK 1 million. So it's a NOK 90 million project we do together with Kongsberg center for -- and a few orders and then we have got money from Innovation Norway to support. So I'm very optimistic on that. And it's an ECOmeter. It is like you have in your car. You see it's -- so it assists you in how to plan the consumption onboard a boat really. And also then looking forward. So that's -- and, of course, it means that if we can go to our clients with that, of course, it's a big sell for us.

Then we have -- of course, we have been early on shore power, on battery installations and also, of course, do have LNG vessels. And the one on the -- the first -- the SEEMP order, Maress, it's a software system where we also see that we are able to reduce consumption and emissions. We don't -- in this presentation, we don't often focus on this. But of course, it's important for you to know that we -- on reporting, we are among the best companies in Norway, independent on what they do. And of course, in Norway industry, I think we -- there is no doubt that DOF is market leader on reporting and also then, I think, we are in the forefront of driving the technology on this segment.

So -- and of course, when we talk about, let's say, the green side of DOF, of course, the award of the Tampen contract together with Kvaerner earlier this month was very important for us. So it's -- let's say, it's the first big floating windmill project, and we are going to install -- do the marine operation and tow out and install the foundations on the mills. And of course, it's -- of course, we see that as a growing market, and we think that's going to be a very interesting segment for us. And of course, we focus a lot on that side of the business. So we expect to win more contracts in that segment. And especially on these floaters, of course, we have a unique background for doing that with the fleet we have and the track record we have on mooring operations in the oil and gas. So very important win. And as I say, when we look at prospects in that market going forward, we think it's going to be fairly big business in the next 10 years.

Then we -- as I said, we bought the remainder of the shares in DOF Subsea and it's now owned 100%, and we paid, as you saw, NOK 20 million for 35%. And so we believe it's a good deal for us. And hopefully, we're going to make good money on that going forward. And if you look at DOF Subsea, of course, it's -- they had -- we had a good run in quarter 3, NOK 550 million in EBITDA for DOF Subsea on a stand-alone basis in quarter 3. And I think, that is -- what was that, Jan? It was the best number since in 2015. So it's -- let's hope that trend continues. And so I don't -- the rest of this, you can read yourself.

Then, Hilde will take you through the financial side, yes?

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Hilde Drønen, DOF ASA - CFO [2]

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A special quarter. Already mentioned by Mons that the operational performance is actually very good. It's the best performance since second quarter 2016. And if you take Q-on-Q, the comparable number is NOK 587 million for the same period last year. However, on the rest of the numbers, we -- due to the financial refinancing situation, we are currently working with, and that there are some uncertainty, we had to do some more conservative valuation of all our assets. Value in use has been thoroughly done on all the assets, all the tangible and intangible assets, and also on the deferred tax. So that has hit the numbers substantially this quarter, NOK 917 million in total impairment, of which NOK 209 million is on goodwill and NOK 709 million is on the vessels. We have also done some deferred -- impairment of deferred tax assets of a total NOK 763 million. The main portion of the deferred tax assets is actually the impact on unrealized currency on long-term debt, especially in our Brazilian activity.

And this third number is high number on unrealized loss on currency debt due to weak Norwegian kroner and Brazilian reals to U.S. dollar. And we have also released a hedge accounting position, has no impact on the equity, only on the financial result, and that is due to that we have some contract renewals in Brazil and we cannot document good enough the U.S. dollar portion on future contracts. So this is an accounting issues that we have done for this quarter. But all these things has highly impacted the result this quarter.

If you look at the operational EBITDA, it's good, and it's actually high utilization and good performance on all segments, 94% on the PSV, none vessels in lay-up, all has been in operation. And 75% in the anchor handler segment and especially good performance on the vessels working in the North Sea and stable utilization for our Brazilian fleet. And 81% on the Subsea, of which 86% on the project fleet. So that's substantially higher compared to first half. If you look on the -- if you split DOF Subsea and DOF Supply, you see that for third quarter, the portion of DOF Subsea represents 68% of our total EBITDA and rest of the business at 32%. By end of this quarter, we had 5 vessels out of 67 in lay-up. And if you look at the vessels on long-term charters, the utilization has been good.

If you look at the P&L, you see NOK 800 million compared to NOK 587 million. If you take year-to-date, it's NOK 2 billion. And I'm pretty sure that 2019 will be better than 2018. If you see the number in 2018, it was NOK 2.246 billion. Adjusted by hedge, it's NOK 759 million compared to NOK 535 million. And year-to-date, it's NOK 1.9 billion compared to NOK 1.6 billion.

And the impairment, I will come back to the various segments, but the main portions down here is on the Subsea assets. So in total NOK 917 million compared to NOK 124 million.

If you look at the financial cost, you see that the interest -- the payable interest is NOK 329 million compared to NOK 292 million. So it's slightly higher and it's NOK 952 million compared to NOK 791 million in the first quarter. Main reason for increased interest costs, that's -- it's FX and it's higher debt because we had 1 vessel delivered in January this year.

If you take unrealized currency loss, it's NOK 944 million, of which approximately NOK 500 million is release of hedge accounting. Again, it's an accounting we have done. It has no impact on the equity. But the rest of close to NOK 400 million is unrealized loss on currency on U.S. dollar debt in DOF Subsea and Norskan. And then having a negative number of NOK 1.9 billion and negative tax, that's due to impairment of tax assets in the period.

If you look at the segments, so -- here, you can see that EBITDA on the PSVs is slightly better than third quarter 2018. As we speak, we have none vessels in the spot market. All vessels are firm. However, we have had a few vessels in the spot market parts of the quarter. By end of the quarter, all vessels were working firm. If you look on the anchor handler fleet, it's NOK 140 million compared to NOK 110 million. And again, we have seen better performance and earnings on the fleet in the North Sea and stable utilization on the Brazilian fleet.

And here, you have DOF Subsea, which is the Subsea segment with NOK 583 million compared to NOK 392 million. This doesn't only account DOF Subsea. We have some subsea assets in DOF ASA as well. But all in all, you see that from the subsea segment, you see that the performance is much better compared to same quarter last year. So in total, NOK 759 million compared to NOK 535 million.

And the other important number here is the impairment. Here, you see a smaller impairment on the PSV fleet compared to last quarter, substantially higher on the anchor handler and on the subsea assets. So again, due to financial uncertainty, we had to do a more conservative approach on the value in use of all the assets. And so that has impacted the numbers. And if you see on this segment, you see that the Subsea part is the main portion of our EBITDA.

And on the balance, no major impacts on the tangible assets and goodwill. That's mainly impairment and write-downs, all newbuilds are delivered. If you see on the operational cash flow, if you look at the changes in the cash this period, we had an operating cash flow of NOK 386 million compared to NOK 117 million last year. We had investments of NOK 95 million compared to NOK 119 million. And on the financing, it was negative NOK 341 million compared to NOK 312 million. And of course, the most negative on the balance sheet is the equity, which has been reduced from NOK 5.6 billion last quarter to NOK 3.5 billion, and that is highly impacted by impairments done in the quarter and also unrealized currency loss on long-term debt.

On -- if you take short-term debt, what has happened there is that we have an amortization of NOK 570 million and new loans drawn of NOK 305 million and reclassification on loan to current to NOK 555 million. So that's changes in noncurrent liabilities. If you take current short-term debt, which is the number of NOK 5.287 billion, that is a bond loan of NOK 467 million. It's the next 12 months amortization, which is above NOK 2 billion. It's balloons of NOK 1.8 billion and is a revolving credit facilities of NOK 650 million and orders, which is short-term interest payments.

And if you take the historical performance of the group, of course, it's good to see that the EBITDA is increasing and also the margin. However, it's negative on the equity, which is going down due to impairments and unrealized impacts. And long-term debt has increased from NOK 18 billion to NOK 19 billion, and that includes 1 newbuild delivered in January this year. Net interest-bearing debt of NOK 22.4 billion.

If you take the key financials, you see the revenue is going up. This is a 12 months rolling revenue. You see the same on the EBITDA, 12 months rolling EBITDA is going up. And the firm backlog is slightly down. So this is comparable numbers from 2013 until the last 12 months.

If you look at the debt maturity profile, what you see here that is DOF excluding DOF Subsea. And the dark blue, that's normal amortization. And the blue -- light blue is balloons. What you have here is maturity of the DOF Rederi facility. The same on DOF Subsea, here, you have bank debt, you have balloons, and you have bond debt, which is the light gray.

We have secured a short-term solution extension on 3 balloons until end of the year. However, we have ongoing discussions on deferral of installments in DOF Subsea. Due to the situation we are in, we have to treat everybody equally. So that's why we have to have this sold in addition to extension of the 3 balloons, which is in place. However, a long-term solution is necessary to keep this as a going concern. And the Board and management have stated in the financial report that they do believe that, that is obtainable before end of the year.

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Mons Svendal Aase, DOF ASA - CEO [3]

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So we are done on outlook. And if you look at -- so if you look at the winter, which normally is the most challenging time of the year for us, as I mentioned, we have 81% backlog for quarter 4 and 67% backlog for quarter 1.

If you look at the PSV fleet, we -- for the rest of the year, we have 100% backlog and then for quarter 1, all boats apart from 1 is sold, is on -- have contracts for quarter 1. So we have 1 boat that can be exposed to the North Sea spot market towards the end of the year or early in January. So that's -- I'm very happy with the chartering team that did that. And course of, then, we have -- after quarter 1, we have, of course, boats coming off. And of course, that is the plan that we want to be exposed and allowed to do new contracts in the spring that are ordered during the winter. So -- but that means that the PSV fleet will have quite a different start to 2020 than we had last year, of course, and of course, better also quarter 4 than we had.

On the anchor handling side, it's also -- the spot market has been better in -- so far in quarter 2. It has been decent utilization. And of course, rate levels not where we want them to be but a bit better than last year. But it was still -- the spot market, of course, is still from being sustainable. I think if you look at average year earning for last North Sea boat in the spot market where we've done a frame agreements, of course, you -- it's not big money on top of the OpEx side. I think you probably see people reporting anything from close to NOK 0 or then NOK 50,000 to NOK 100,000 a boat. So that's where we are. So of course, the -- we need that market to improve further.

For us, we have a decent backlog in -- very good backlog in quarter 4. And then, of course, we saw that Equinor, they have had the frame agreement on Skandi Vega, where they have guaranteed a minimum number of days and then -- but now during the winter now, we changed that to full-utilization contract. And I think that reflects a bit on the market that, especially for the large anchor handlers, the supply side is shrinking and the activity picking up a bit again. And of course, next year, we are -- I wouldn't call it excited, but we are a bit, let's say, curious on how that market is going to play next year when -- and then I'm talking about vessels during pre-lay and about 300-ton bollard pull. We see that 2 of Solstad's boats are going to South Africa for most of the year next year. And of course, that leaves a very limited number of boats about 300-ton in the North Sea. So we are -- it's now not any much high and -- but the stomach feeling tells me that it's reason to be a bit more optimistic on 2020 for the large anchor handlers than what we have seen in 2019. And of course, it's needed, it's needed.

For us, of course, on the anchor handling side, the main challenge next year is in Brazil. We have had all the big boats in Norskan on long-term contracts, and towards end of the year, the first of these boats come -- the firm contract ends and has to be renewed. So that's where, I think, the main risk for us is next year, is in Brazil and what we are able to achieve on renewal of this boat. And then we have 1 boat coming off in the spring. So that's where we see, let's say, the main risk on the fleet.

On the Subsea side, it's a mixed bag. I would say, the North Sea is almost dud this winter. It's -- the activity is very low one. And of course, part of our North Sea fleet is parked for the winter, and we are not alone on that.

So -- but then, for the spring season in North Sea, the feedback I get is that it looks like it's going to be a bit more activity and also it could be a reason to be -- to think that the pricing will go up a bit. So -- but the winter is going to be tough for us. Of course, we see that they have succeeded to get a few of the North Sea boats to West Africa in the winter. We have had a good second half in U.S. and looks also with recent release on the Neptune the other day and on Geosea. And -- so it looks like the start of 2020 in U.S. or -- it's not only U.S., of course, it's Trinidad, it's Guyana, then the Canada, but the North America, as we define that region, will also get a good start on 2020.

I mentioned Asia, where we did a few deals. Also, we see we're going to have some idle time now in -- especially in December, but then from January onwards, it looks okay. So it's a mixed bag. And the market is still, on the Subsea IRM side, is still difficult. But of course, looking at the earnings in quarter 3 and also on the backlog for quarter 4 and the bookings we have started to do for quarter 1, of course, it can indicate that we -- the worst is behind us. But of course, it's too early to conclude on that, but I'm personally a bit more optimistic than I have been in a long time.

So all in all, for the remainder of the year, we -- it's easy, of course, to conclude that 2019 will be substantially better and -- than '18 on operational EBITDA. And I guess, it's easy to see when you compare what we have delivered in the first 3 quarters with what we delivered in full year in '18 that, that will happen. And how much better remains to be seen. We have -- we -- as I said, we have done October and October was this month. And the slowdown is November and December. So we are talking several hundred million NOK EBITDA in '19 compared to '18.

Backlog for the next 12 months, 61%. And it's a good start. And of course, we are looking hard to continue to build that. So of course, the dream is to continue above 80% utilization. And of course, then we know the numbers will not be that bad. As I say, my main worry for '20 is on -- let's say, on the contracts side, is Brazil on the anchor handlers. Because we have -- we don't have any reference. We haven't done any big anchor handlers in Brazil for 4 years, I think. So it's difficult to predict the outcome of that.

As Hilde said, we -- on the financial -- on the -- of course, there is -- we are in the process, in a discussion with all stakeholders and as we write in the report, we do believe it's possible to get debt in place before end of the year. But of course, there are still a few issues that is not solved, so we can't guarantee it, but the progress is positive. And of course, we believe it's -- the solution we discussed is best for all involved. So let's see, but we hope to conclude by end of the year.

So that was the presentation.