Akastor ASA (AKAST) Earnings Call Transcript & Summary

Good afternoon, and welcome to the presentation of Akastor's Fourth Quarter results. My name is Oyvind Paaske, CFO; and I'm here together with our CEO, Mr. Karl Erik Kjelstad. As usual, we're also glad to have with us HMH from Houston represented by Tom McGee and David Bratton, SVP Finance. Karl will start by presenting some key highlights before Tom and David will go through HMH. I will then present the consolidated financials before I turn it back to Karl. As usual, towards the end, we'll open for questions through the webcast solutions, where the questions can be posted at any time during the presentation. I will then leave the word to Karl. Please go ahead.

Thank you, Oyvind, and good afternoon, and good morning to our U.S. participants, and thank you to all of you for joining us here today. Let's start on Slide 2 with some key highlights for the fourth quarter. We are pleased to deliver another good quarter, marked by a solid performance and key milestone across the portfolio of companies. For HMH positive development in the quarter, and this is demonstrated by the reported EBITDA of USD 47 million in the quarter, up with $1 million from the previous quarter. For the year as a whole, the EBITDA is up 27% compared to 2023 with a full year EBITDA of USD 168 million. Further, we are pleased to see that HMH is delivering strong cash conversion in the period with a free cash flow of USD 44 million in the fourth quarter. The continued profitable growth for HMH continues to be an important foundation for a potential future liquidity event. HMH continues to keep its S-1 filing with SEC updated. Timing of a potential launch continue to be dependent on market conditions and sentiment. HMH is our most valuable investment. The book value of our shareholding in HMH remains around 70% of our total net capital employed with a book value of NOK 3.6 billion per the end of the quarter or NOK 13.1 per Akastor share. AKOFS Offshore delivered good operations in the quarter with high revenue utilization after a period with certain operational challenges and also some various maintenance stops in the operation. In the quarter, Equinor exercised the option to extend AKOFS' Seafarer contract with 3 years, with this option period expected to commence in the fourth quarter this year. This extension is increasing the AKOFS Offshore backlog with approximately $300 million. This is really a strong testimony to the AKOFS team for excellent and safe operations delivered to Equinor since the contract started back in 2020. Further on AKOFS Offshore, Akastor made a 2-step transaction with our Japanese partner in the quarter. Firstly, we acquired Mitsui's stake of 25% in AKOFS. And then this was followed by a sale of 8.3%of our stake in AKOFS to MOL. Both these transactions are now closed. We are happy with this transaction as we believe it's done on attractive terms, and it's further strengthened our collaboration with MOL, but I will revert with some more details on this transaction later in this presentation. Our book value of AKOFS was around NOK 0.5 million per quarter per Akastor share. And this is reduced from the third quarter driven by the negative net profit in AKOFS Offshore. Then DDW Offshore. DDW Offshore recorded a significant backlog increase in the quarter. And by the year-end 2024, the total DDW backlog was about USD 38 million. For March this year, all the 3 DDW Offshore vessels will be in operation in Australia, securing good visibility for the year and also a potential enabler for a more strategic process for DDW Offshore. The book value of our investment in DDW Offshore is NOK 1.5 million per Akastor share based on an average book value per vessel for about $11. Our total book equity value for the end of the period was around NOK 1 per share compared to the third quarter, NOK 21.4 per share. Akastor is continuing to be a solid financial state with a positive net cash position and no draw on corporate finance facilities. Let us move to Slide 3 and come back to the transaction mentioned regarding AKOFS Offshore. First, I would like to take this opportunity to thank Mitsui for their valuable collaboration since we came together in 2018. But Mitsui had or some time indicated an exit from their investment in AKOFS to a shift in Mitsui overall corporate strategy. Considering the current market dynamics, we found the timing attractive for increasing Akastor's investment in AKOFS and reached an agreement where AKOFS first, as mentioned, bought Mitsui interest. In parallel, we discussed with our co-owner MOL and after some discussions, Akastor as a second step, sold a proportionate part of the holding acquired to MOL. And the end result of this is that MOL and Akastor on a pro rata basis jointly assumed Mitsui's position in AKOFS Offshore. So Akastor increased equity stake from 50% to 66.7%, while MOL now holds the remaining 33%. This transaction also included Mitsui's entire exposure, covering equity, shareholder loans and certain guarantee commitments. The total purchase price was USD 22.5 million. Net purchase price for Akastor, including then the sale to MOL of their pro rata share was USD 14 million. This amount is payable through pre-installment this year. The transaction further strengthens our collaboration with MOL and also ensures a solid alignment between the owners of AKOFS Offshore. And this, I think, will be a strong foundation for further development of AKOFS Offshore going forward. So to summarize, the key rationale for this transaction is that we believe in an improved market going forward for both Subsea Well Intervention as well as Subsea Installation services with enhanced value for investment in AKOFS Offshore, making it attractive to increase our exposure in AKOFS Offshore. Let's move on to Slide 4, which outlines the updated ownership structure in more detail. After closing the transaction with MOL yesterday, the ownership is, as I mentioned, 66.7% to Akastor. Our shareholder loan position has increased by around USD 9 million compared to the figure included our net interest-bearing debt the fourth quarter. And this is reflecting our pro rata assumption of Mitsui loans. Akastor also holds 1/3 of the junior debt related to Santos, which has a total outstanding balance of $66 million at the end of 2024. This transaction will be reflected in our first quarter earnings for '25 with a net purchase price allocated between the shareholder loans towards AKOFS Offshore OS and equity. No value is expected to be assigned to the junior debt related to AKOFS Santos due to the assessment of the ring-fence structure. Per our shareholder agreement with [indiscernible] and continue to be accounted for using the equity method in Akastor. So that was a lot of airtime. But now we are ready to move on to our most valuable investment [indiscernible] ready to take the floor. Tom, the word is yours.

Thank you. I'll start by just saying I appreciate some patience. We're going to be not making any statements looking forward. There will be no statements about the future given current regulatory and legal restraints we need to operate under. So I appreciate your patience on that. I will keep you as much color as I can on '24 and talk to you about what the drillers have been saying along the year of 2024. So as Karl Erik said, we had a very strong top line performance and strong EBITDA performance. I encourage you to continue to think about our business on a Q4 versus Q4 basis, and a Q1 versus Q1 basis as we do have some bonus payments in Q4. Nonetheless, I mean, if you look at our performance, we continue to grow EBITDA and grow the bottom line. It was a great job by the team executing on that and continue to show that this business is growing. Look at the order rate, and David will touch on that in a minute, a little weak on the spare side, second half of the year, consistent with the drillers saying -- the drillers' public statements saying that they were very bullish long term, but had looked at a little white space where some of the contracts were rolling off and they're waiting on larger contracts. So when you hear the Valaris Transocean, Noble, Seadrill and others talk, they have various levels of rigs under contract. When some of those rigs are off contract, they stop spending on spares and they have all publicly stated that they continue to believe those rigs will come back on contract and they're rating on the right long-term agreements for that. So the flip side of that is that order and -- sorry, aftermarket services and repair continue to be good, and our product business continued to produce results on the order side. And that involves going in and taking share away from competitors on the land rig equipment side. And so that was good to see continued progress on that, and that's where we get our high-end, high-spec equipment onto rigs in the Middle East and Mexico and other places and continue to push acquisitions like DrillForm into those same markets, and we're making really good progress, and the team has been working hard at that. The cash flow generation, we really kind of heightened our focus on cash flow generation, particularly under the new structure. And so part of that last year was when you did see a little slowdown in spares, we had some inventory build. And so we really set our goal of reducing inventory, attacking AR, and that's stuff that was overdue and getting more aggressive with that. And then looking at payables and thinking about how to manage payables a little better. And I think we -- the team did a great job doing that, and we produced a very strong quarter. So that inventory reduction was key on that and as was people chasing AR. And so that balance sheet is something we're proud of. And then, of course, what's mentioned here in a minute that gave us the ability to -- this was disclosed to the Nordic Trustee to be able to pay down the revolver briefly to meet the clean down requirement on that. So that was good. If you look at the year and think about we established a joint venture in Saudi Arabia, we acquired DrillForm. We continue to integrate the business under HMH 2.0, where we finished putting the businesses together. And I think those -- that step really optimized the business for what it was at the end of '24 while preserving capability that we need to preserve. So I think we're quite happy with that. And we established and continue to improve on several growth initiatives in 2024, and that's continuing to grow the land aftermarket, continue to grow the land new equipment. continuing the digital upgrades for our customer and continuing to chase offshore equipment that's not necessarily our installed base in order to grow it. So those growth initiatives in 2024 were all important. So with that, I'll wrap it up and just say that very proud of the team's work and the execution this year and what was honestly had some challenges in the second half of the year. So I think we did a great job, and David can walk you through the highlights.

Great. Thanks, Tom. I'll begin with the total company results and then move into the product line details. Revenue for the quarter was $232 million, up 11% year-on-year and up 10% quarter-on-quarter, driven by an increase in projects and products. Adjusted EBITDA in the quarter was $47 million, up 3% year-on-year and up 4% quarter-on-quarter, driven by an increase in repair activity and contract service agreement performance. Adjusted EBITDA rate was 20.4% in the quarter. Orders for the quarter were $211 million, up 7% year-on-year, driven by an increase in projects and up 9% quarter-on-quarter, driven by an increase in product demand, offset by a decrease in spare part orders. Finally, on cash flow, unlevered free cash flow in the quarter was positive $44 million, driven by significant improvement in working capital. We ended the quarter with $49 million in cash and cash equivalents on hand. Now I'll walk you through product line results in more detail. To note, HMH has realigned our product lines to adjust with S-1 filings. Spare parts, which includes replacement parts for installed equipment has now shifted to a distinct product line. In aftermarket service, revenue was $103 million in the quarter, up 9% year-on-year, driven by an increase in contract service agreements and digital technology volume, and up 23% quarter-on-quarter, driven by overhaul and repair activity. Aftermarket service order intake was $91 million in the quarter, up 17% year-on-year and up 32% quarter-on-quarter, driven by overhaul and recertification activity. Spares revenue was $56 million in the quarter, down 22% year-on-year and down 10% quarter-on-quarter, driven by reduced volume due to flat rig activity and restrained spending by customers. Spares order intake was $62 million in the quarter, down 16% year-on-year and down 8% quarter-on-quarter, following the trend of restrained spending by customers due to their concern about lower utilization or white space. In Projects, Product and Other, revenue in the quarter was $73 million, up 69% year-on-year, driven by increased product shipments and project milestones and up 13% quarter-on-quarter, driven by project activity. Lastly, moving to net interest-bearing debt. We ended the quarter with $49 million in cash and cash equivalents and a net debt of $166 million. As Tom previously mentioned, happy to note that we ended the quarter with $15 million draw on the RCF, but we did satisfy the RCF clean down requirement in January of 2025. Overall, proud of the team's performance this past year. And with that, I'll turn the call back over to Tom.

I think that wraps it up. Thank you, David and turn it back to Karl.

Thank you very much, Tom. I will then continue by taking you through the Akastor financials, starting at the slide showing our net capital employed. As Karl mentioned, HMH, of course, remains our largest investment with our net capital employed equal to 50% of the book equity value in HMH. The carrying value of this investment increased by NOK 208 million compared to Q3, driven by FX and a positive net profit in the period. The net capital employed of NES and DDW was also positively affected by FX, while the book equity value in AKOFS was reduced due to continued negative net profit. The net capital employed of AKOFS in our books as of Q4 was NOK 138 million, equal then to 50% of AKOFS's book equity value. It is worth noting that the junior debt related to Santos is recorded as debt in AKOFS accounts, reducing the book equity value by the full nominal amount of USD 66 million. The practical impact of this junior debt is, however, limited by the ring-fenced Santos financing structure. And we would expect that this debt situation related to Santos may be addressed as part of a potential future strategic process. The value of our listed holdings, which then include Odfjell Drilling, ABL Maha Energy and Awilco Drilling increased by NOK 13 million in the period. The negative value of other, which includes smaller financial investments, pension accruals and various provisions remained around the same level as per last quarter. In total, our total net capital employed increased by NOK 188 million in Q4, while equity value was up by NOK 275 million. Compared to the year-end last year or 2023, sorry, our net capital employed has increased by NOK 375 million, while equity has grown by approximately NOK 1.9 billion. As mentioned earlier, please note that our Q4 financials then reflect our ownership in AKOFS offshore as of December, which was 50%. The increase in holdings here will be accounted for in Q1 this year, as Karl mentioned. After closing and based on our Q4 balances, our shareholder loan position will increase by approximately USD 9 million, and the carrying value of our equity holding in AKOFS would increase by around USD 5 million. We do not anticipate any equity impact on the Akastor Group consolidated accounts as a result of the transaction. I'll then turn to the next page for an overview of our net debt movement in the quarter. In Q4, the total net cash position, including the cash held through a liquidity fund decreased somewhat due to corporate cash flow, partly mitigated by a positive cash flow in DDW Offshore. Including an FX effect of NOK 19 million in Q4 related to the DDW dollar term loan. Our total net bank debt came in at a net cash position of NOK 99 million per end of the period. This net cash position included a net debt position of NOK 283 million in DDW Offshore. We expect continued positive cash flow and reduced net debt for DDW Offshore moving forward, driven by the current backlog where all 3 vessels will be on contract from March 1 of this year. Including our interest-bearing positions towards AKOFS and HMH, our total net interest-bearing debt per end of the quarter came in at a net cash position of NOK 839 million. With our dollar loans towards HMH and AKOFS positively affected by FX. This compares to a net debt position of NOK 675 million per end of 2023, and as such an improvement of more than NOK 1.5 billion over the year. Then over to the overview of our external financing facilities. Our facilities remained as per end of Q3, with the only change being that the DDW Offshore term loan was reduced to $29 million following one installment paid during the period. Our corporate bank RCF remained undrawn and fully available. Per end of the year, our total available liquidity was NOK 763 million, including then the fund investment of NOK 376 million and NOK 44 million of cash held through DDW. Then our consolidated P&L. As always, bear in mind that our most of our holdings, including HMH and S and AKOFS are not consolidated and thus that the consolidated revenue and EBITDA represent a very minor part of our total investments. DDW Offshore delivered revenues of NOK 85 million in the quarter with 2 out of 3 vessels delivering full utilization, while the Skandi Peregrino vessel delivered only 5% utilization in the U.K. spot market. Revenues for DDW for the full year ended at NOK 278 million. EBITDA came in at NOK 44 million in Q4, up compared both to last quarter and year-on-year. as a result of improved utilization and positively affected by 2 specific one-off effects related to legacy insurance claim with a total of NOK 13 million positive in total. The full year EBITDA came in at NOK 91 million. Q1 for DDW will be affected by the mobilization of Peregrino to Australia ahead of then the contract commencement in March. Other income in Q4 came in at NOK 5 million with an EBITDA of negative NOK 21 million. And with that, consolidated revenues and EBITDA for the quarter came in at NOK 90 million and NOK 23 million, respectively. Total revenues for the year ended at NOK 922 million and EBITDA of NOK 648 million, both positively affected by the DRU arbitration award accounted for in the first half of the year. Then some more details on our net financials. With net financial items came in at a net positive NOK 163 million in the period. Financial investments contributed negatively by NOK 2 million, driven by a small adjustment to our valuation of NES. Our listed holdings delivered a positive effect of NOK 16 million, including dividends received in the period. The FX accounting effect in Q4 was positive by NOK 155 million and related to the strengthening of the dollar versus the NOK, which has affected on several of our holdings. Net interest contributed positively by NOK 6 million in the period. Our share of net profit from equity accounted investments contributed negatively by NOK 66 million, consisting mainly of our 50% share of net profit in HMH and AKOFS Offshore. AKOFS Offshore contributed negatively with NOK 102 million, driven by lower EBITDA, FX effects and continued high financing costs, including then the peak interest related to the Santos junior debt. HMH contributed positively by NOK 35 million. All in all, net profit came in at a positive NOK 150 million for Q4 and NOK 1.65 billion for the year. I will end there by noting that 2024 was a pivotal year for Akastor marked by solid earnings as well as a significant cash release, enabling a transition from net debt to a net cash position and with that enhanced financial flexibility. And with that, I'll pass the word back to Karl. Please go ahead.

Yes. Thanks, Oyvind. Let me run off this presentation with some ownership agenda reflections. Firstly, on Slide 17. We still have 9 investments of which for our liquid holdings as mentioned already, AKOFS Offshore from this quarter, that ownership has increased from 50% to 66.7%. So let's move on to Slide 18. And as mentioned, Tom has already covered most here. We, in Akastor, we see multiple avenues for growth for HMH in the coming years. and we will continue to develop the company and also explore strategic options. Also as mentioned, HMH is keeping its S-1 filing updated is such continuing to prepare for a potential listing. Timing is dependent on a lot of very factors and therefore, difficult to comment on this time. Slide 19, NES Fircroft. NES Fircroft continued to deliver growth in revenues and good results. The company is, as mentioned before, exit-ready and different alternatives are being explored, including a potential listing, Service also here that the equity market is offering attractive valuation for equality comp like NES. A key priority in addition to making this investment liquid for us is to continue the growth of the company, both organically and also through M&A to enhance value for the shareholders. Slide 20, covering AKOFS Offshore. In the fourth quarter, all the 3 AKOFS delivered good operations for clients. Aker Wayfarer delivered a revenue utilization of 93%, affected by 6 days planned maintenance stop. AKOFS Seafarer recorded 91% revenue utilization affected by periods with harsh weather conditions. AKOFS Santos delivered revenueization of 93%, which is significantly improved compared with the previous quarters. With this, total revenues of AKOFS ended up on USD 34 million and with an EBITDA of $8 million. Both somewhat down compared to previous quarters, driven by the lower utilization of wafer due to the management planned maintenance stop. We were very happy to see contract standard by 3 years during the quarter. And with this mentioned positive backlog effect of NOK 300 million, securing improved earnings and cash flow of AKOFS from commencement of the option plan in December this year. Then Slide 21, DDW Offshore. With the backlog secured in the fourth quarter, the 3 DDW vessels are all in contract in Australia now. This contract will deliver good growth in both revenue and EBITDA going forward. Our strategy for DDW Offshore is to maximize the value for our investment by leveraging strong market momentum and attractive day rates to drive solid cash flows. At the same time, we are assessing the second end market opportunities for a sale of these vessels and the backlog that we secured this quarter is strengthening DDW position and also support a potential strategic solution for our investment in DDW Offshore. So finally, at Slide 22, the key priorities for Akastor going forward. Our strategy continues to be to develop the companies in our portfolio and when the time is right and values our attractive, execute value-enhancing exits. We are currently in a net cash position with no draw on our corporate facilities, enabling us to time transaction when values are attractive, with the goal of returning proceeds to our shareholders. We are quite confident that we during 2025 will execute transactions that will enable us to start delivering on our ultimate goal to return proceeds from transactions to our shareholders. So with that, Oyvind, we are through the presentation, and we are moving into a Q&A session. And I guess we should pause for a minute or 2, so people have time to write down your questions.

Thank you, Karl. We will be back shortly.

Thank you. We have received quite a few different questions on the same topic. So I think I'll start with noting that it's difficult, as Tom mentioned, to say anything specific around the U.S. IPO process for HMH, but I'll pass the first question over to you, Karl, for some more general consideration. How does the current market climate affect the U.S. IPO process for HMH?

Yes, as management due to some specific U.S. legal restriction, we cannot comment on the IPO process specifically. But we have previously announced that HMH has filed -- publicly filed actually a registration statement with the Security and Exchange Commission relating to a proposed IPO. And as I also said, we are actively maintaining this filing and updating it, but we are not able to comment further on timing at this time. However, as we also mentioned, Akastor's primary goal is to make all of our investments liquid and facilitating such a process for all of our investments. As a more -- maybe a more general comment, it's worthwhile noting that the also sector has faced some quite challenging conditions over the past 6 months, also affecting secondaries and IPO sentiment. But we see certain encouraging signs of improvement, such as, for example, the very successful Flowco IPO, and also more recent commentary and also market reaction on recent earnings reports from, for example, key peers for HMH.

Thank you, Karl. Then I'll direct one question to Tom. And I know again, that it's limited how much you can comment on forward-looking, but still, you might have some reflections on this time. Could you please elaborate a bit on which direct effects HMHs from the current market softness and how you are adapting the company?

I think we can talk about '24 in that regard. And so when you look historically on '24, our completion of integration of the 2 businesses combined with a little bit of slowdown in spares ordering, the business at the end of '24 is sized correctly for that market as it existed in the second half of '24. And again, if you listen to the drillers, and I would -- if you think about the drillers that I mentioned, talking about their long-term prospects. I think they were very well telegraphed at the fall conferences that they were just seeing some rigs that they were laying down and waiting on long-term contracts. So I think if you look at the business, '24, it was sized directly, and that's why we had the performance we had -- and we made sure in 2024, we preserve future capability to meet whatever it will come. So hopefully, that gives you enough color. I think that's about all I can say.

Thanks, Tom. Then one question again to you, Karl, which I know you mentioned during the presentation, but maybe you can elaborate a little bit, how do you view potential distributions in light of the current net cash position?

Yes. As I mentioned, we are in a position now where we do not have any debt on Akastor corporate, and we are, in fact, in a net cash position, as you say. But for the fourth quarter, the assessment may continue to be that distribution are not deemed, what you say, prudent based on commitments, and we have an uncertainty related to the timing of future realizations. Also taking into account, for example, the mentioned AKOFS transaction that we have been thoroughly true in this presentation. However, we continually assess this and especially in connections with potential realizations. The clear intention is to distribute proceeds from realization to our shareholders. And we are not only hope, we also, as I said, quite confident that in 2025, we should be able to do so. So just keep following us.

And on that note, I guess, a little bit in light of the recent transaction, what is the plan with AKOFS going forward?

Yes. So we have enhanced our investment in AKOFS because we strongly believe that there is upside potential in the AKOFS business going forward. As I mentioned, we see interesting opportunities, both in the well intervention business, but also in more subsea installation business for the company. The transaction is, in a way, simplifying the ownership structure and also aligning the ownership together with -- between Akastor and all, who share the common vision for the company going forward. So currently, the company is still affected by what I call legacy contract that was taken in a market where the strategy was to stay in the game. But as those legacy contracts are ending and we are replacing them with contracts more -- in a more healthy market, that we think that will be positive for earnings and also for the valuation for the company. So due to that, the ownership horizon for AKOFS Offshore is somewhat longer than for some of our other investments. Yes, I think I stop there.

Thank you, Karl. And thank you all. I think we are through. And I would then like to thank you all for your attention and welcome you back to our presentation of the first quarter results on April 30 this year. So thank you very much.