Akastor ASA (OTCPK:AKKVF) Q1 2020 Earnings Conference Call April 28, 2020 2:00 AM ET
Øyvind Paaske – CFO
Karl Kjelstad – CEO
Good morning, everyone, and welcome to the presentation of Akastor’s First Quarter Results for 2020. My name is Øyvind Paaske. I’m the CFO of Akastor. I will now give the word to Karl Kjelstad to go through the highlights for the quarter. Please, Karl?
Thank you, Oyvind, and good morning to everyone on the call. And thank you for listening into this presentation of Akastor’s first quarter earnings for 2020. Since we presented our fourth quarter results in February, the world has faced unprecedented challenges caused by the COVID-19 pandemic. For our portfolio companies, the result of this is that 2020 will be different than what we anticipated when plans and budgets were put in place for 2019. But we also expect that earnings for 2020 will demonstrate the robustness of our industrial holdings.
Therefore, today, in addition to reflect over the first quarter results, that is mainly our pre-COVID results, we will also share with you some of our assessment of the implications of the COVID-19 pandemic for our industrial holdings and investments and also what actions we are taking to mitigate the situation. But first, let us start with some key numbers for our first quarter. Year-on-year growth continues also in this quarter with revenue growth of 33% that results in a revenue of NOK1.4 billion with an EBITDA result of NOK137 million. That is up year-on-year with 49%. Our debt increases with close to NOK700 million due to increased working capital for MHWirth and FX effects on the U.S. part of our debt.
Let us move to Slide 5. Our portfolio is unchanged except what we mentioned last quarter that Step Oiltools now is a part of MHWirth, and you cannot see it on this slide anymore. Let us then take some update on our industrial holdings. But first, let us talk some more about the COVID-19 effects.
Slide 6. The COVID-19 pandemic is impacting our operations. For example, it is challenging for MHWirth to move service personnel for service task on rigs due to travel restrictions and quarantine requirements. However, we are able to assist clients by new models and new methods. For example, we are using video cameras to inspect equipment and to assist clients in modifying the equipment. Also, the extensive use of sensors on our equipment is giving us valuable information and data that we can use to evaluate different actions that needs to be taken in the service business. For, due to the COVID-19 situation, we also potentially can see delays in some projects due to partial lockdown.
For example, we see this in the yard in Singapore now that has restrictions on work due to the COVID-19 situation. Such delays will again potentially also give knock-on effects on project cash flows and potentially also cause increase in our working capital in projects. We have already done mitigations in order to cut costs and protect cash, such as permanent and temporary layoffs. Currently, it’s about 130 people that is permanent or temporary laid off in our portfolio companies. And we are also implementing other measures as reduced CapEx, salary freeze, cancellation of bonus programs and a reduction in spending where we can find spending reduction potential. We have also put in place road maps for different scenarios that we foresee in the coming two years so we can react quickly and also adjust our business accordingly.
Let us move to Slide 7. Our key asset continued to be MHWirth. That now in the first quarter was about 62% of our working capital. And as you recall, our strategy with MHWirth is, in the next three to five years, to build a wider and bigger MHWirth, aiming for an IPO. This is still our firm target, but you will very unlikely see us doing cash acquisitions in the near future in order to build a wider and bigger MHWirth.
For AKOFS Offshore, we are pleased that all three vessels signed contracts, and our key priority going forward is to maintain all vessels on contract. We have a predictable 10% return on our preferred equity in Odfjell and are very pleased that Odfjell maintains a strong order book and one of the most robust balance sheets in the industry. And it has global talent staffing business, have a big exposure towards the oil and gas industry. It’s about 80%, but also a growing non-oil and gas business. However, we expect the NES Global Talent business to be affected by some lower activity in the oil and gas part of the business going forward. How much remains to be seen.
Let us move to Slide 8, and let me share with you some reflection on MHWirth business in the quarter. As you might recall, MHWirth have four main business streams: it’s the Projects business, that is, new buildings projects, execution of them; it’s a service business that we call DLS; it’s the Products, that is, product — sale of single equipment; and then last but not least, the Digital Technology business. For the Projects business, the activity level will, due to the existing order book, be quite good throughout 2020. But when it comes to 2021, we need to secure new orders to maintain the activity for our Projects business going forward.
We are focusing our efforts on niche projects where we see some demand that is not linked to the general drilling market. For the ongoing project, we also see a risk that progress on project can be somewhat hampered by the COVID-19-related restrictions, as I mentioned in the beginning of today’s presentation. We saw a reduction in our single equipment business during the quarter, but we continue to see a good momentum for the non-oil-related products. We expect the oil-related products business to be negatively affected by the COVID situation in the coming quarters.
DLS, our service business that supports over 51 rigs that we had in operation in the quarter, had a high activity. We actually, at the end of the quarter, saw some hoarding of spare parts due to the COVID-19 situation, where clients feared that supply chain should be blocked. Due to the travel restrictions, we saw a decline in service revenue in the latter part of the quarter. We also saw that two rigs with MHWirth equipment, the Valaris 6002 and the pull-up unit, both were scrapped in the quarter. And MHWirth now have an installed base of 83 rigs, where 51 was active in the quarter, and we expect this to be stable through the second quarter.
Digital Technology continued to have a high activity delivering on secured projects, and we continued to see a demand for this technology. We just recently secured a study for upgrade of a fixed platform in the North Sea, that potentially also will give new contracts for the Digital Technology business. Let me also, this time, share with you some thoughts about the non-oil part of the MHWirth business.
Let’s move to Slide 9. MHWirth non-oil products are based on technology that we are using for our core drilling business equipment for the oil and gas business. In 2019, this business was about NOK300 million in revenue. That means about 40% of our single equipment sales. We have 3 main product groups in the non-oil business for MHWirth. It’s the pile top drillers that is about 1/3 of the non-oil business, where we have installed about 300 units. Traditionally, this, the pile top drillers has mostly been used in Asia for building constructions. But they are, to an increased extent, also used in other applications, like, for example, fundamentals for windmills. This is a niche market where we see potential for growth going forward.
Second product group is what we call the heavy duty slurry pumps for the mining industry based on the same technology as we use for the slurry pumps for the oil and gas industry. We have seen a growth for deliveries, for instance, to the nickel mines as a part of the increased surge for nickel for batteries. This is a niche project in a very heavy-duty environment with a very captive service revenue for the installed base. We continue to see growth in this business going forward. Last is what we call our offshore mining equipment. This market has been a bit off and on, where we historically have delivered 9 systems for diamond mining.
However, we see an increased interest for subsea mining not only for diamonds, but also for methane hydrate for energy in areas like Japan and also for manganese nodules mining. The timing for when these markets will be mature is difficult to predict, but these are markets we are following very closely.
Let’s move to Slide 10. Another business in MHWirth that I would like to mention is our engineering service business. That has been a part of MHWirth for a long time, but it has previously been a division within MHWirth, and we have now restructured this business to a separate company with its own brand, Frontica Engineering. Some of you might recall the Frontica brand because we kept that brand when we sold the Frontica Business Solutions back in 2016, and we are now reusing it.
The timing of the launch in the midst of the COVID-19 dynamics could have been better, but the company are a complete engineering house with capabilities through the complete engineering value chain, with deep experience and knowledge, both in concept studies, feed details, detailed engineering and also site/engineering support. So we look forward to follow the development of Frontica Engineering going forward.
Let me close with some words about our other holdings on Slide 11. AKOFS Offshore vessels in Brazil delivered solid operations in the first quarter. We are pleased that we have secured work for the Santos vessel to the end of November this year, however, on reduced rates if we compare with earlier years.
Seafarer continues to prepare for the five years contract with Equinor with a planned commencement ultimo second quarter. We have had some COVID-19-related challenges for this project, but it has so far been manageable. Late May, we expect all equipment to be installed on the vessel and thereafter start an extensive testing period before we are commencing in — on the contract by the end of the second quarter.
AGR continued the positive trend from the fourth quarter and delivered EBITDA of NOK 17 million revenue — from a revenue of NOK 217 million in the quarter, and this is mainly driven by good performance from the consulting business. However, we believe that the consulting business will be negatively affected by the COVID-19 and the market turmoil going forward. Cool Sorption performance was driven by the [Nord] project, and we expect the activity level to be lower in the coming quarters after the Nord project has been completed.
Our financial investment in drilling saw a decline in the share price in the quarter due to the current market turmoil for the drillers. DOF Deepwater will also be negatively affected due to the market turmoil, and we expect a lower activity for DOF Deepwater going forward. And as mentioned also, finally, NES Global Talent, we have year-on-year growth, but we expect a decline during 2020 due to the market.
Let me close to say that despite the uncertain outlook for our portfolio companies due to the COVID-19 and oil price turmoil, we expect positive earnings for 2020, but on a lower run rate than the last — but on a lower run rate the next three quarters, proving the robustness of our business in our portfolio companies.
Then I would like to leave the word to Øyvind Paaske, who will take you through more details regarding our financial numbers. Øyvind, please?
Thank you, Karl. I will then take you through the figures starting at Slide 13. As Karl mentioned, our revenue growth was 33% year-over-year, partly explained by AGR and Bronco accounting for roughly 2/3 of that growth. The EBITDA in the quarter was NOK 137 million, up from NOK 92 million in the first quarter last year. Net financial items contributed negatively with NOK 393 million in the quarter, driven by mark-to-market effects on financial investments as well as a negative FX effect. I will get back to the details here on the next page.
Net income in the quarter was negative NOK 407 million, of which NOK 116 million related to discontinued items. The effect from discontinued items is a noncash effect stemming from adjustments of settlement obligations from previous divestments, including a write-down of a contingent consideration as well as an adjustment of the provision related to the guaranteed preferred return from Seafarer.
I will then turn to Slide 14 to look more into the details. Please note that Step Offshore is now included in the MHWirth financials for this quarter with historical figures having been restated on that basis. MHWirth constituted around 80% of our revenues in the quarter with the growth for the company of 20% year-over-year. AGR and Cool Sorption also contributed positively in the quarter, with especially AGR delivering solid results.
As you are aware, AKOFS Offshore is not consolidated in our financials. However, the company delivered a strong quarter, driven by high operational uptime with growth compared to first quarter last year. If you look at the financial items, we see that this was heavily affected by the market turmoil in the quarter. We have in Q1 booked a negative result related to the Odfjell Drilling impacted by an updated valuation of the warrant structure with a negative mark-to-market of NOK71 million. In the net figure of NOK51 million, we had a positive effect of NOK20 million related to the received dividends, of which half is a cash effect.
We also had a negative effect on the Awilco investment of NOK32 million due to a negative mark-to-market on the shares held in the company. Our holding in NES Global Talent is valued based on the market approach using near-term estimates for earnings. And due to the reduced expectations for earnings in the shorter term, valuation here has been reduced with a net effect of NOK104 million in this quarter. However, on a kroner basis, valuation of NES remains at par with Q4 due to the strengthening of the U.S. dollar versus the Norwegian krone.
Our share of profit in DOF Deepwater contributed negatively with NOK71 million, driven by negative FX effects for the company during the quarter as the majority of the financing in DOF Deepwater is in U.S. dollars. Net foreign exchange effects in the quarter was negative with NOK109 million, primarily driven by our bank financing in U.S. dollars, however, partly mitigated by positive effects from NES and Odfjell. Please note here that only FX effects related to NES and only partially Odfjell is taken over the P&L.
The remaining positive FX effect from our U.S. dollar-based assets is booked directly towards equity. If we then look at Slide 15, you will see that our net bank debt increased by NOK744 million in the quarter, of which NOK331 million related to noncash FX effect included in the graph under other. Of the same reasons, net interest-bearing debt increased with NOK696 million. Negative cash flow from operations of NOK 338 million in the quarter relates to an increase in working capital in MHWirth, driven by the Projects business after a very low net working capital balance per end of last quarter.
We expect the working capital to go down through the year. The timing here depends on exactly when specific milestones are reached within the projects. I will then jump to Page 16, and you’ll see that MHWirth’s share of our total net capital employed now includes, by the way, Step Offshore, was around 60% of total net capital employed per end of the quarter. It is worth noting that a significant part of our customers’ assets are positively affected by stronger U.S. dollars as both AKOFS, NES and Odfjell are U.S. dollar-based assets. This is also the reason why we have a significant part of our financing in U.S. dollars. Per end of the quarter, the market valuation represented a discount to book values of around 75%, which has increased through the quarter due to the decline in share price.
Then if we turn to Page 17, I will provide some further details on MHWirth. Q1 was a relatively good quarter for MHWirth with a total growth in revenue of 20% year-over-year. Projects and Products, now including Step, accounted for NOK 534 million, 46% of revenue in the quarter. This represents a growth of 13% compared to first quarter last year. The service and digital business grew by 27% compared to last year to NOK 620 million, partly driven by Bronco, which constitutes around 40% of the growth year-over-year for that division. The number of active units with MH equipment fell back with two rigs during the quarter as certain contracts expired as expected late Q4 or early this year.
Regarding development of the total fleet, as Karl mentioned, two rigs were scrapped in the quarter. In addition, 1 rig has been taken out of the review as that has been suspended and inactive for a long period, and the total fleet of MH thus sits at 83 units per end of Q1.
Going forward, we expect Projects revenues to drop as a result of the phasing of the current backlog. Also, there is, of course, an increased uncertainty in the market at this point that most probably will affect all parts of the MH business. We expect sale of single equipment to go down in 2020 compared to 2019 related to the development in the market as we see it.
Non-oil business, which, as Karl mentioned, accounted for roughly 40%, NOK 300 million in 2019, is expected to be less affected. MHWirth service business is heavily depending on the rig activity, and the future here is, of course, also more uncertain. At this point, however, it is worth noting the fact that MH has a large portion of its fixed platforms engaged in oil production among its installed base as well as a relatively solid contract coverage for its installed floater base through this year provides a good base for that business.
I will then jump to AKOFS Offshore on Slide 18. AKOFS is not consolidated into our financials. The company delivered a revenue of NOK 304 million and an EBITDA of NOK 175 million in the quarter. This represents a growth of 18% year-over-year and was a result of higher utilization compared to last year. The Skandi Santos continues on its current contract with Petrobras until end of November this year, however, at adjusted terms from mid-March. Based on this, we expect revenues in next quarter for AKOFS to drop back.
As previously mentioned, Seafarer is currently at yard being upgraded for the Equinor contract with the expected commencement late Q2, from which it will contribute positively to the AKOFS financials. The risk for potential delay of the Seafarer upgrade program has increased due to the current COVID-19 situation. However, the company is taking all actions possible to mitigate such effects.
On the next page, Slide 19, we see that NES continues to grow on a year-over-year basis. However, going forward, we expect revenues and earnings also from NES to be affected by the current market turmoil. As mentioned, we have, thus, during the quarter, adjusted our valuation of NES holding as a direct result of reduced short-term estimates used in valuation of this asset.
If we then lastly look at Page 20, our other holdings, this segment now includes AGR and Cool Sorption. AGR delivered a strong quarter and showed further improvement from last quarter with revenues of NOK217 million and an EBITDA of NOK17 million. The strong performance here mainly related to high activity within consultancy in Norway as well as a good activity on certain specific well management projects in APAC and also specific projects in the U.S. Going forward, we also here do expect activity level to drop as a result of the current turbulence within the oil markets. Cool Sorption delivered a lower quarter than last year primarily driven by a gradual ramp down of one of the large projects Karl mentioned, which is now in its final phase of delivery.
With that, we are through our Q1 presentation, and I will hand it over to the operator of the call to facilitate the Q&A session.
Okay. With that, we thank you for your participation and look forward to the next quarterly presentation on July 16 for the Q2. Thank you very much.