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Edited Transcript of DOF.OL earnings conference call or presentation 23-May-19 6:30am GMT

Q1 2019 Dof ASA Earnings Call

STOREBØ May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Dof ASA earnings conference call or presentation Thursday, May 23, 2019 at 6:30:00am 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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Okay. Can we start? So welcome to the quarter 1 presentation for DOF. And a nice picture at least on the front page with the latest addition to the fleet, Skandi Recife, that was delivered and now on the way to Petrobras on a long-term contract from mid-February.

So that is the end of a very long, but positive newbuilding program for PLSV so we're on 8-year contracts in Brazil at good margins. So happy with that. And I think it's the first time in my history at DOF of, how many years is it, around a bit more than 20 years that we have not had any vessels under construction. So I guess I think that reflects how difficult the market has been the last few years. And -- so that's how it is, but at least a very good boat (inaudible) and performing well so far.

Highlights, we call it highlights. I don't know if highlights is the exact right wording for all the quantity. But the first quarter numbers, NOK 541 million in EBITDA on -- is according to our own expectations. Of course, our expectations are not very high and -- but at least we are meeting our own expectations, which, of course, is okay. So we started according to plans in the year.

On the market side, the news we all read in the press and see that, of course, the PSV market in the North Sea is good. And we also see, of course, that prices are ticking up, other prices on the globe as well. So that is looking promising and good rate levels. Of course, it will take time before we are able to move the whole fleet -- or PSV fleet to new earnings as you have contracts and so on, but gradually, of course, if that market continues, we will improve the earnings. So internally, on our own expectations for '19 for our PSV fleet, of course, we have adjusted that upwards. So that's good.

What is not that good is the anchor handling market, and I'll start with that because we -- all of you read a lot about the North Sea spot market, and of course, it's up and down and up and down. It's because the average was a very nice month in March than -- but before that, it was not that good. So it is impossible to predict how that market will continue.

We -- internationally, of course, it's -- we see it -- the bids we are doing and the agreements we are entering into, of course, it's not the right levels that you need. So of course, it's still very challenging in the anchor handling market.

And what we see, of course, is that demand is increasing a bit in some places, and so we have been able to take a few boats all through lay-up in the quarter. But it's not that big move in rates compared to what you see on the PSV side.

And of course, it's hard to predict, especially the North Sea market is extremely difficult. I see some analysts are positive on the market, I would assume. I don't know, of course, that we really hope for but -- so let's see, but we see on, too, on business. Globally, it's still low rates, perhaps a small movement up, but it was not enough to make it sustainable longer term.

But it might be -- it has to start with some increased utilization. So the positive is that, of course, that we have had a couple of boats out of lay-up and into work.

On the IRM market, it's -- it is -- it's heavy competition in the North Sea, and so it is still an oversupply on the IRM market in most segment -- areas. And suppose, we have been struggling with the utilization and then, of course, as a result of that earnings in quarter 1, and we see we have -- we would have hoped to have a better backlog in some regions for the remainder of the year.

So in December, I think on the IRM side is that, yes, the activity is picking up a bit but it's still too -- it's still an oversupply that makes it -- it will take more time before that market is coming back. It might be, of course, that we are just extra -- we are always a bit extra depressed after quarter 1. It's always tough ride for that type of business but it is -- it looks challenging.

And then we have, let's say, we have a new atmosphere or surroundings or climate on the banking side. Of course, we have had very -- all balloons. If you take away, of course, the DOF (inaudible) we have restructured the debt, DOF Subsea and Norskan, of course, have both paid normal amortization, of course. And -- but we have experienced in the last -- I would say, last month or so that some banks are much more reluctant to support refi financing of the OSV space. We see a few banks stating that they want out of the sector, and of course, that makes it challenging for us on some renewals.

So what we see is that the risk has increased for us and that we are, let's say, close to not being able to do rollovers and such then be in the risk of coming into breach of our covenants.

So -- and of course -- so that's the summary of page -- the first page here.

On the contract side, I don't go through it all. I'm very happy with the 13 months contract for the Skandi Rio in Brazil, it's with Total. And the vessel has been idle from mid-January until now, so of course, it's very good to get that back in work. And of course, it's also very good to see that we -- that the international players are taking boats in Brazil. So it is a trend we expect to continue.

Then other, of course, we probably mentioned that earlier, the 3 RSV contracts in Brazil. They have been now mobilizing, and we expect them to go on the way then mid-June on average. So a few weeks more before they are on the way to Petrobras. So of course, also that will help, of course, on the earnings in second half compared to first half.

And we mentioned -- I mentioned earlier some boats on the lay-up. Skandi Atlantic is one of the medium-sized anchor, and as we have had the lay-up in Singapore for a while. And now we have ordered 135 days contract in New Zealand commencing one of these days in Norway, and -- which is very positive, of course, that we get them back to work again. And of course, we have -- we are a bit optimistic that we will continue to trade off some leads after that contract. So it's -- so it is, as I said, it's not completely black currently in the market. There are signs of higher utilization and more activity, which is positive.

Also very happy with the Geoholm contract. We struggled a lot with last year in Norway and I think it was 10th of March, she went on this 2-year contract in the Red Sea, so -- which is positive.

In the Atlantic region, Skandi Vega with Statoil anchor handler, it's -- so they renewed the 6 -- the 3- to 6-month option they had on the boat on a frame agreement. Of course, the positive is that the utilization on the Skandi Vega has been much higher so far this year than it was last year. So I think -- which also, of course, is a positive. So that's what I was planning to say on the contract side.

Then this you have seen before, nothing really new on this. Still the same fleet. It was the biggest exposure for the group is subsea and anchor handling and then in 16 PSVs. So of course, we need earnings -- we need more earnings on the anchor handlers and PSV and IRM.

On the -- so the backlog, of course, is still high, NOK 20 billion, and we're on 3,500 employees. I guess most of you have seen this a lot of times before so I don't spend more time on that.

Then Hilde will do the numbers.

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Hilde Drønen, DOF ASA - CFO [2]

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Yes. Main highlights is that we had an operational EBITDA of NOK 541 million, which is more or less in line on first quarter 2018. This EBITDA is also impacted by the IFRS 16, which is approximately NOK 20 million.

Average utilization, 70% of the total fleet, so it's still high -- sorry, it's slightly lower than the previous quarter of 71%, 78% on the PSV segment and 68% on the anchor handler and 67% on the subsea and that includes our project fleet.

And you can see no change in split. The majority of our earnings and EBITDA comes from DOF Subsea. And if you split those number, it's NOK 365 million in EBITDA from DOF Subsea included in the consolidated accounts and NOK 176 million from DOF Supply and Norskan.

If you take the utilization on these 2 main subsidiaries, it's 68% on DOF Subsea and 71% on DOF Supply.

By year -- by end of this quarter, we had 3 vessels in lay-up and that's a reduction from 6 by end of the year. So we have actually taken out 3 vessels out of lay-up this quarter, which I will come back to.

Already mentioned by Mons, the variable -- there are variable utilization and earnings from the subsea IMR fleet and that mainly has impacted the Asia Pacific region and the Atlantic region. Stable in Brazil and North America.

We see improved markets from the PSV. However, this quarter, the result from the PSV is pretty weak mainly due to mobilization to new contract.

Variable utilization on the anchor handler fleet in the North Sea and stable in Brazil. However, we have actually -- if we see the utilization on the anchor handler compared to same quarter last year, previous year, it has increased. So we hope that, that is a positive sign, but still high uncertainty.

On the PLSVs, all newbuilds are delivered and in operation.

If you see the P&L, the total revenue is NOK 1.7 billion, approximately more or less in line on same quarter last year. We had a backlog of NOK 21 billion by year-end, and today, it's NOK 20 billion. And if you compare on what we have eaten from the backlog, it has -- we have actually built backlog this quarter.

NOK 541 million in EBITDA compared to NOK 520 million, and if we deduct from the hedge accounting from the Brazilian activity, it's NOK 496 million compared to NOK 479 million.

So what we have experienced, but not really impacted in the results on the PSV side, is that we have higher rates and utilization on the fleet, but based on the fact that we took out a vessel of lay-up, so we have none PSVs in lay-up, as we speak, that has impacted the numbers.

So we expect second quarter for this segment to be better than what we have seen in first quarter. And several -- again, several vessel in addition to that has mobilized the new contracts. For example, 2 vessels sailed from the North Sea to Guyana this quarter, and we have had some vessel prepared for 2 firm contracts in the North Sea -- 3 actually.

On the anchor handler side, 68% utilization. The variable earnings in the North Sea, that has not highly impacted our numbers because most of the anchor handlers that we have is vessels that we have under management, and we own a minority share in 1 vessel in addition to that.

If we look at the DOF Deepwater fleet, which we own 50%, which has impacted our numbers, we have taken 1 vessel out of lay-up in Asia Pacific due to a contract at the New Zealand. So that fleet has now 1 vessel in lay-up.

And Skandi Rio was -- has very low utilization this quarter and had 1 short-term contract in January but will, hopefully this month, start a contract in Brazil.

On the subsea, 67% utilization. Again, variable earnings in 2 other regions and stable in 2 others. Good performance from the PLSVs. And Skandi Olinda, which was delivered in January, went on hire mid-February so she has 1.5-month impact on our numbers. And 2 PLSVs in lay-up that is Skandi Niteroi and Skandi Vitoria. And as you saw in our press release yesterday, we are now mobilizing Skandi Niteroi for a contract in Brazil.

If you look at depreciation and impairment, you can see that the -- it is a reduction and what we experienced is that the fair market value of our total fleet has more or less stabilized, and we have also seen that on the PSV segment, the values is slightly up. So hopefully, we touch the bottom by year-end, and we see some changes going forward.

On the financials, not much to say. Increased financial costs, that's mainly due to that we have higher debt because we took delivery of our vessel. But no other major changes, and no big changes on unrealized gain/loss on financial instruments on long-term debt.

If you -- here you see the number on the PSV. So it's negative and that's, again, due to the mobilization, which we have done this quarter and that has impacted our costs. But going forward, we are actually positive to the segment.

If you look at the anchor handler, it's no big difference compared to first quarter 2018, and the drop is mainly due to lower utilization of 1 vessel in Brazil.

On the subsea, it's slightly higher, and of course, partly impacted by more PLSVs in -- on contract and in operation.

If we look at the balance sheet and if we compare the balance by year-end, the main difference is that we took delivery of Skandi Olinda this year and that has impacted the long-term assets. And we also have this famous IFRS 16, which is a lot of work for the group and all this work impacted the balance sheet with -- it grossed up with NOK 500 million. So it's not much if you take the total [banish] of NOK 32 billion.

If you look at the cash flow, the operating cash flow reduced by interest is NOK 43 million compared to NOK 207 million. Investments done and that's, of course, mainly the newbuild delivered, it's NOK 900 million compared to NOK 117 million. And finance activity is positive by NOK 520 million compared to NOK 500 million.

So -- and you see the impact on debt. Debt has increased, and -- mainly due to a new loan drawn on the Skandi Olinda.

Normal amortization this quarter has been NOK 532 million, and we have grossed up the balance sheet by this IFRS 16 scheme of NOK 418 million. So our interest-bearing debt has actually increased by NOK 580 million due to that all lease contract has to be classified as interest-bearing debt.

If you look at the short-term debt of NOK 4.3 billion, we have a bond that is due this year. We have a amortization the next 12 months of approximately NOK 2 billion and balloons of NOK 1.3 billion and the others are credit facilities and this famous IFRS 16 scheme.

If you look at our key figures and this is the group numbers from '13 to -- in the last 12 rolling months, you see that on revenue it's more or less at the same level. If you look at EBITDA, it's slightly up. And if you look at the backlog, it's actually slightly down, but no big differences.

If you look at our debt maturity profile, we have split it in DOF and DOF Subsea. So if we first go to this cake here, you see how we are funded and that's export credit facilities, banks and it's bonds. And as already mentioned by Mons, which is a new situation for us is that we have experienced that a few banks here are reluctant to do regular rollover. And the balloons that we have, which is due in 2019, it's approximately NOK 900 million in DOF Subsea first half and second half this year and Norskan of NOK 460 million. Both these subsidiaries has paid normal installments through the downturn and to do regular rollover, that's part of our normal activity.

So if we have banks not willing to do rollover, that means very challenging liquidity situation for us because if we are going to repay, I'm not saying this full amount, but if we are going to pay balloons when they are due in full, that's extremely challenging for us and that is why we are stating that if this happens, we are in breach of covenants, on the liquidity covenants.

And again, this is actually a surprise for us and it's a new situation, and for 25 years, we have had very strong and good relations with our bank and still believe that we have a very good group of banks to support our activity. And it's obvious that we need supportive banks because this is a heavy-leveraged business. It's expensive assets. And based on the fact that several believe that we are -- we see a recovery coming, I don't understand the timing why this should be a problem at all. But we are -- we have to state the facts in our report, so that is why we have done that.

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Mons Svendal Aase, DOF ASA - CEO [3]

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I think as Hilde said is that, of course, it's important to emphasize that, of course, most of our banks are very supportive. And as Hilde said, of course, we -- when we -- which is normal in the banking business and is that -- when you have a rollover on a loan that somebody has had for many years and they have got interest and installments according to plan is that the normal is to roll over with the same amount.

And of course, in a challenging market environment, it's, of course, I would say almost impossible for us to start to repay balloons or part of balloons because that can get effects that we don't foresee.

So that's just a comment. I think it's important to emphasize that I would say almost all of our banks are very supportive and helpful, but you have a few that has communicated that they want out of it. And of course, then they are more difficult to handle that than we have seen up until very recent.

If you look at the outlook, I think we said when we presented quarter 4 '18 that we expected an EBITDA to be slightly better in '19. And as we said at the start, the quarter 1 is according to our expectations, so we still believe that the EBITDA operational in '19 will be slightly better than '18.

And as we mentioned also in quarter 1 was that, I guess, we normally give a number, a range, and this year, we haven't done that. And of course, that is partly because the uncertainty is high, so -- and it still is. So we still have -- we have, as we say, 64% backlog for the remainder of the year and -- but of course, that means that there is still quite some uncertainty on the last 34%, so that's why we are not more precise and we say we expected '19 to be better than '18.

And of course, backlog of 64%, a lot of our peers and competitors would be willing to kill for that. I suppose the system is working. We are -- so of course, on -- perhaps it's wrong to say that's why we have given the news we have given today. I think I have to say I'm proud of a lot -- the people we have in DOF and the system. It's -- we are seeing that we are all doing contracts globally in this quarter with the New Zealand contracts, the Brazil contracts. So it is working, and we are able to keep the boats going.

And this morning, I was thinking how many of the people in the industry have 4 or 5 medium-sized anchor handlers as we have in DOF Deepwater working in the market. It's not many. So I think we still are, as we said before, we are close to being best-in-class when it comes to operations and client relationship. But of course, when you are in the special observation class, it's still a challenge.

But -- and as we say, we have 16 PSVs and that market looks good. And both on term and in the spot, it's promising. And of course, we expect to enjoy that a bit during summer, so we -- in the PSV side, we expect to make more money going forward. Of course, it is not like that, that you take all 16 from a bad rate to a good rate in 1 day, so it will take gradually -- it will take time gradually, but we have a few boats at the moment that are exposed to the uptick and gradually that will improve. So I think the PSV market will continue on this level, and it is good. And of course, we also see now that we have a few bids around the globe and that where we are bidding North Sea based on it, so it might be that we also see demand for North Sea tonnage going out of all of North Sea.

On the anchor handling side, as I said, it's -- on the one hand, you can say that the utilization is coming up. We mentioned Rio being idle almost through the half -- first half, on new contract we mentioned. Skandi Atlantic has been in lay-up for a couple of years now going on a contract. And so of course, that is positive. So the demand is increasing, but of course, the rate levels are not where they need to be. Skandi Atlantic, I think we have around, roughly speaking -- on this contract, we have around, let's say, USD 5,000 or USD 6,000 a day in EBITDA on that contract. Of course, it's much better than being in lay-up, but of course it's not good enough for what we need.

And then, of course, you struggle, of course, with -- to get high enough utilization. So we had 68% roughly in first quarter, and of course, it is -- there is a way to go before you can say that anchor handling market is on the same level as you see the PSV market being. But small sign of improvement, but we cannot say today when we can stand here and say that we are really happy with the anchor handling market. But the utilization is improving and it will improve hopefully going forward as well. But how quickly, and of course, when it will really impact the earnings in a positive way is uncertain.

In the subsea IRM segment, of course, there are still a few interesting bids and some long-term opportunities that we are working on. So I was very happy last -- start of the year when we got the Vega, Geoholm and Skandi Neptune on term work. So of course, I hope that it should be possible to do that with both two also later in the year, but we are struggling with on the -- in the project market to a get high enough utilization.

So we see that as we write in the report, we have had both Geosea and Geograph idle in the whole first quarter, and of course, then you don't make money. They are going out now both of them, but of course, the margin on those jobs are not fantastic.

And then in APAC, we have expensive vessels, Singapore and Hercules, where we also have been struggling with utilization. So I guess, probably on those 2 boats we have had an average utilization not much higher than 50%.

So that is the challenge we see, and we might be lucky, but we might be unlucky so it's -- the uncertainty is high. And so, of course, there is also a way to go on the IRM side before we can say that, that is where it needs to be.

So -- and then we are back again to refinancing of the bank balloons. And of course, a challenging market in combination then with higher risk on refinance balloons is not a positive development. So we have -- we are where we are and we have -- it's more described in the quarterly report. And we are not in breach of any covenants, as we speak, but we are saying that it's likely -- or at least not unlikely that we will be in breach due to a rollover that we have not been able to land.

So we have -- of course, we'll have a dialogue with all involved parties and hopefully, we will try to fix that. But of course, there is no guarantees that, that will be possible to do.

So as we say, it's -- we have been -- up until now we have been able to in Norskan and DOF Subsea pay all our installments and the banks has -- all banks has been supportive and balloons have been rolled over and refinanced. And as we say now recently, it's a new situation where we get -- have not been able to -- so it's a tougher climate for refinancing and that's why we are -- had to notify the market about that it -- what is likely to happen.

So let's say, we have to do some work, and of course, we'll update the market as this moves along. It's, as we say, it's fairly new to us and that's why we don't have all the answers today. But we will do all our best to solve it and we'll, of course, keep the market updated on how it develops. So I think that was what we plan to say today.

So thank you very much.