Aqualis ASA (ABL) Earnings Call Transcript & Summary

Good morning, everybody. My name is David Wells. I'm the CEO of AqualisBraemar. I'm pleased to be giving you our quarterly presentation once again. I apologize that this is a prerecorded presentation. Due to the effects of COVID, I'm unable to travel across to Norway to give the presentation live as we normally do. And therefore, as a result of that, our normal Q&A session following the presentation will not be available. So I encourage you to reach out to ourselves after the presentation if you have any clarifications that you seek or any more information that you might wish. We'll follow the normal format. I will now talk about the highlights, and our CFO will talk about the financial numbers separately. And I'm pleased on this occasion to introduce our new CFO, Dean Zuzic, who will -- who has joined us recently. He comes with a wealth of experience from the Scandinavian markets and elsewhere. And he'll give a little bit of introduction about himself before he gives his talk. So moving to Slide 3. I'd just like to remind you all of our disclaimer because there are some forward-looking statements within our presentation. Moving to Slide 4. Very pleased to report an increase in our revenues over the same quarter of last year to USD 18.4 million in spite of a difficult market and with a fantastic continued growth in our renewables arm of over 100% from Q3 of 2019. From these, we drove an EBIT of USD 0.5 million and adjusted EBIT of USD 0.6 million, both significant increases on the same quarter of 2019. Q3 for us is exposed to seasonal weaknesses, partly COVID related but mainly driven by the effects of the Southwest monsoon offshore India. Travel restrictions related to COVID have impacted particularly in the Middle East and, to some extent, Asia Pacific. But our positive bottom line results showed our flexible business model in terms of staffing, really allows us to adapt to circumstances very quickly. During the quarter, we made significant progress with cash collection, a prime focus for us these days, ending the quarter with a cash balance of USD 14.1 million and a record operating cash flow of $3.4 million. It's a good achievement and just where we want it to go. I'm pleased to announce our intention, therefore, to pay a second dividend in 2020, which will be distributed in November, and Dean will give more details later on when he gives the financial data. So all in all, a very positive quarter given the current circumstances. Moving to Slide 5. COVID, of course, has been an nuisance to us and to everybody else, and it continues to be, mainly, as far as we're concerned, related to travel restrictions and the need to work from home. There are positives. Our footprint gives us a competitive advantage. We have more or less managers to service all our instructions with respect to site visits and have been able to take advantage of some government-sponsored relief programs. The negative is a limited travel, which has meant lower utilizations in some hub locations. However, on the positive side, again, on the staff and client front, we continue to make significant efforts to comply with safety protocols and to increase efficiencies internally. I'm pleased to say, I'm not aware of any COVID-related instance to our staff. Moving to Slide 6. So for those of you who don't know us, we focus on the provision of high-end consultancy to the energy, shipping and insurance markets. Our focus is largely upon reduction of risk. Main scopes of work focus on project consulting, which tend to be longer term, larger projects; on accident prevention, where we tend to ensure compliance with industry standards, such as acting in the capacity of marine warranty surveyor; and finally, on incident management, where we're called out to survey, inspect damaged assets and the best -- and act in the best interest of our clients. Moving to Slide 7. Our business is split into 4 main business lines, which we monitor separately. Firstly, on the renewables front, we tend to provide independent engineering and consultancy services to the offshore wind industry. On the oil and gas front, we're very much focused on risk mitigation. We provide engineering and consultancy services to the market as a whole. On the shipping front, we provide worldwide emergency, call out responses and undertake surveys of fixed assets and vessels for the insurance markets and vessel owners. And finally, on the adjusting where we work for the insurance market, we provide loss adjusting and dispute resolution services to those markets. Moving to Slide 8. We have a simple but ambitious strategic vision. Our focus is increasingly driven by our involvement in the energy transition. We have a stated strategy to have 50% of our renewable -- of our revenues driven by renewables and other ESG services by 2025. Our focus is, therefore, on rapidly growing our involvement in the renewables-related consultancy both organically and through targeted M&A. On the more traditional markets, we're focusing on leveraging our #1 position and increasing our efficiencies internally and profitability with the ultimate aim of both passing dividends back to our shareholders and using excess cash to grow our company and increase shareholder value. Moving to 9. We ended the quarter with 465 full-time equivalent employees. That's an increase of nearly 4% over Q2. So even in this difficult market, we're continuing to expand. We're currently servicing the world with 51 offices in 33 countries, the same as last quarter. Our global footprint is extensive and unmatched by our competitors, which gives us significant advantage in these COVID-restricted travel times. Moving to Slide 10. On the left side here, you'll see our trailing 12 months revenues, driven by oil and gas continued to decrease to less than 50%, whereas renewables steadily increases. We measure renewables as a stand-alone. Looking on the right-hand pie chart, we can see that renewables now represents our third largest region, if we were using regions as a terminology. Turning to Slide 11. This slide shows the track of our renewable revenues. It remains spectacular, and the upward trend continues, reaching 21% in Q3. The quarter was especially busy with offshore site [ tenancies ] during the summer months, which is additional time for these operations in the Northern latitude, thereby creating a bit of a spike in revenues. And we would expect to see some reductions going into the winter. However, we continue to win some good-sized contracts, which involve larger elements of desktop work and significant backlog. So I think from this, you can see whilst we have an ambitious target of 50% of our revenues to be driven by this business stream, we're very pleased with progress and feel confident we can reach this goal. Turning to Slide 12. So why are we so confident in the offshore wind market? As indicated in last presentation, the investment decisions in offshore wind in the first half of 2020 alone have amounted to USD 35 billion, which is more than the entirety of 2019 in itself, which was a record year. The pipeline of projects is tremendous. In addition, looking at the right-hand side, the market has changed. It's no longer dominated by the top players. The top 3 developers used to have 70% of the market not too many years ago. This is no longer the case. More and more new players and often small players are coming into the market. This will drive growth in the consulting market to an even higher pace, which gives us confidence for long-term horizons. Slide 13. In 2020, we've opened 3 new offices in Poland, Japan and South Korea. Each is being managed by knowledgeable nationals who are well-experienced renewable consultants. Despite COVID, each has made successful starts. In Poland, we've been appointed as owner's engineer and technical adviser of one of the largest round 1 projects. In Japan, we've already undertaken a number of niche consultancy scopes and are actively bidding in bigger projects. And in South Korea, we've been heavily involved in Lidar deployments, which is effectively the collection of metadata offshore, and we'll shortly be appointed as owner's engineer on a major contract. We're delighted with this progress, and it shows the benefits of early entry into these new markets. In 2021, we expect to increase our footprint further. The growth in this industry -- moving to next slide, Slide 14. The growth in this industry throws up new opportunities. At the moment, we're very focused on infrastructure opportunities. Port facilities in many of these new countries and in many regions, even in the more mature countries, need investment and adaptation to make them suitable for the offshore wind industry to handle their logistical requirements. We're making strenuous efforts to involve our ports and harbors team into active involvement in this area and provide the benefits of our experience to our plants in advance of the construction phases, particularly in the U.K. and on the East Coast of the USA. Turn to Slide 15. On the offshore oil and gas front, we continue to watch the industry metrics with interest. Given our strong position within jackup rig moving, these graphs form a particular interest. [ Oil cos ] have severely cut back on E&P spending for 2020 and into 2021. However, the trends on the right are perhaps indicating a flattening out in demand and even some pointers towards stabilization. It's possibly too early to tell, but we hope this to be the case. Moving to Slide 16. So with regards to the specific work that we've been doing during the course of this quarter, we've been heavily involved in some decommissioning work. On this particular project, we're working for Chevron in Thailand for the removal of 7 wellhead platforms. The top sides were separately lifted off earlier and taken to shipyard facilities. And in this phase, the jackets were removed by lifting and taken to a nearby site, each was laid on the seabed to form future subsea reefs. For this project, we were representing underwriters as marine warranty surveyors. Slide 17. Similarly, in the North Sea, we were retained by Chrysaor as client representatives for the removal of several platform structures, which involve full recovery and transportation back to shore-based facilities for disposal. So as we can see, the industry is starting to get active in this particular area. Slide 18. On the marine front, we were pleased to be retained by the Royal Navy National Museum in U.K. for the movement of the last-surviving World War II tank landing craft to a final exhibition location near Portsmouth. This was a 5 million pound restoration project. At AqualisBraemar, we're very proud to be involved as a marine warranty surveyor for such a high-profile project to save the heritage of that area for future generations. Moving to Slide 19. We've been loss adjusting. We've selected 2 smaller scopes of work to showcase what we've been doing. The first involved major pedestal crane failure on-boarded jackup in the Middle East, where we're appointed to adjust the loss. Subsequent to this, we were asked to perform damage surveys on behalf of the P&I Club, which allowed us to link up the scope of work in-house between different departments, demonstrating the benefits to clients of appointing a larger company. On the right-hand side, we were appointed to cover a loss involving the storage of bulk products. This comes about through our efforts to widen the industrial focus of our adjustors away from upstream and downstream and into new areas. It demonstrates our ability to work in new markets, particularly important when traditional markets are in recession. Moving to Slide 20. So back to our stats for Q3. Backlog has significantly improved during the quarter. This is particularly pleasing for a company that specializes in the provision of call-out services. These numbers are limited to the offshore and renewable sectors but does not cover shipping or the insurance markets. So we ended the quarter with USD 28.3 million of backlog. The significant growth comes from some new wins in our rig inspection service, both in Europe, Asia Pacific and Americas, which is also developing a very active pipeline of opportunities. The remainder comes mainly from new wins in our renewables arm in both Asia Pacific and Europe. Again, our pipeline opportunities also grows here. I should add that we only add to backlog numbers when we can quantify revenues. Given that we service a lot of master service agreements on both rig moving and marine warranty call-outs and all of our loss-mitigation business, these numbers are very positive. Moving to Slide 21. On the staff front, we continue to expand. Employees on a full-time equivalent basis continued to grow, up nearly 4% this quarter, following a 3% growth in Q2, and we continue to ensure that we maintain our flexible cost base to reduce our subcontractors. This model has served us well through the unexpected slowdown related to COVID and lets us react quickly to movements up or down in the market. With that and turning to the next slide, I'd like to hand you over to Dean for the financial numbers.

Thank you, David. My name is Dean Zuzic. This is my first quarterly presentation for AqualisBraemar. I joined the company on September 1. Just to give you a quick introduction to myself, I have 20-plus years of experience in CFO roles, both in listed companies and in privately owned companies in Norway, and I have a history working for several consultancy firms. So I would claim that I know the business and the business drivers well. So much about me. So if we continue the presentation and move on to Slide 23. We are very satisfied to deliver a continued strong performance in spite of the challenging COVID conditions that we were facing this quarter. We delivered an increase in revenues of $400,000 from '18 in the third quarter of last year, seasonally weaker than in Q2, but this is a normal seasonal pattern in Q3. Worth mentioning here is also that this is the first quarter where we do have comparable figures following the merger that was completed last year in the third quarter. Looking at EBIT figures, we can also show an improvement of $300,000 compared to the third quarter of 2019. This is a result of our continued focus on strict cost management, implementing synergy initiatives following the merger and taking out scale. We expect this to continue going forward, given that we now have the whole company on 1 ERP system, which will make it possible for us to enable further standardization and automation of processes to drive efficiencies and improved cost management. If we go to Page 24, we are very pleased, as David already mentioned, to be able to show a significant growth in our renewables business. We have a growth of 105% in revenues this year compared to the Q3 of 2019 and somewhat lower revenues in the Middle East and in Asia Pacific, both compared to last year. And this, as David already has mentioned, is a result of seasonality is one thing. But comparing quarter 2 -- I mean, quarter, we are slightly affected by the COVID pandemic and the travel restrictions imposed on us. In addition to that, I can say that the monsoon season in India this year, combined with COVID, has resulted in a very challenging situation, and that explains the reduction in revenues in Q3 in the Middle East. If we look at the segment EBIT figures. There, we can -- in spite of lower revenues, we see a significant improvement in Asia Pacific. We see a slight decrease in the Middle East, but -- which I already mentioned caused by the combination of COVID and by travel restrictions imposed on us, especially Saudi Arabia, which is a very important market for us was basically closed for our consultants in the third quarter. This has now opened up, and we expect results in the Middle East region to improve going forward. When we look at renewables, I think it's worth mentioning that we have an EBIT margin of 9%. We also managed to open 3 new offices in Q3. And investments in growth are being booked as -- I mean, costs. We do not book them on the balance sheet, but they're taken over the P&L. Taking that into consideration, we are extremely satisfied with the EBIT results that the renewables business is delivering in this quarter. If we move on to Page 25, top line figures, I won't read the whole table, but I'll just drive you through the most important items here. Revenue of $18.4 million, as mentioned, compared to $18 million in the same quarter of last year. That gives us a year-to-date revenue of $57.5 million. The figures for last year are not comparable. They do not include -- as I said, do not include prior to the merger date. If we -- EBIT improvement, I already mentioned. We have $0.5 million of EBIT this quarter compared to a loss of $0.2 million last year. The adjusted figures are $100,000 higher, adjustments related to share-based compensation and to some minor costs that we had related to the ERP -- to the implementation of the new ERP system. The profit and loss before income tax of $400,000, which we consider strong and the bottom line of $200,000, very satisfied and a significant increase from the same quarter of last year. If we move on to Page 26, we can see that we have realized $2.4 million of the $2.8 million of announced synergies that are expected to be realized by mid-2021. Just to remind our listeners that haven't followed the company that long that we had original synergy estimates of USD 1.1 million. We are now expecting $2.8 million, as has been announced earlier. We have completed the ERP rollout, we -- in October 2020, with all of the Braemar entities now on board. And our ERP system will now enable us to continue to continue to drive efficiencies, robustness and improve especially our working capital management, which is something we have a very strong focus on going forward, and that will allow us to free up capital in addition to improving results. If we move on to Page 27. We have a very strong financial position, in our view. We continue freeing up working capital. We had $14.1 million in cash at the end of the quarter, which is up from $11 million at the end of Q2. For those that do not know us, let me mention one more time. We have no, I mean, financial debt. The debt on the balance sheet is just related to capitalized leases of $1.5 million due to the IFRS 16 standard. Net working capital of USD 23.9 million at the end of the quarter, which is down from EUR 26.3 million. We -- it's the fifth continuous quarter of us reducing working capital as a percentage of revenue. This is a high focus area, and we have a target of getting below 100% by the end of 2023 in terms of working capital tied in the, I mean, business. We have seen a nice reduction, as I said, 5 quarters in a row from 146% to 127% and are well on track to reach the below 100% working capital percentage over the next couple of years. We move on to Page 28, shows a strong cash generation during the quarter. We started the quarter with $11 million. We had an operational cash flow of $3.4 million, which is a combination of an EBITDA of $0.9 million and changes in working capital following the reduction in working capital rates by $2.5 million, a total of $3.4 million. Other minor adjustments bring us to a total of $14.1 million closing the quarter, which is the highest we've had this last year. If we move on to Page 29. And given nice cash flow generation during the quarter, the Board has resolved and declared an additional dividend of NOK 0.2 per share. The dividend will be paid out on or about the 10th November. We -- the X dividend date will be the 2nd of November record date this, I mean, November. This brings total dividend up to NOK 0.4 per share or a dividend yield of about 7%, which we are very satisfied to be able to repay to our shareholders. Worth mentioning here also that -- is that the distribution for tax purposes of the dividend will be considered a repayment of -- paid in capital. Total dividend payout, $3 million this year. And that brings me to the next page, and I'll give the presentation over to David again to run you through the outlook.

Good. Many thanks, Dean. So I'd like to conclude with the summary on Page 31. I guess the summary of it is that we had a very strong operational performance in the quarter within one with normal weak seasonality. We achieved a very strong record cash flow, putting us in a robust financial position. And we're, therefore, pleased given -- we are pleased with our results given the uncertainties related to COVID. Q4 is expected to show an increased activity and increased margins those -- and those already being delivered in certain regions. Renewables had a stellar month and a stellar quarter. We have 105% growth in year-on-year, and we're on track to meet our 2025 target of 50% revenue being driven by renewables. Offshore oil and gas activity is expected to be muted in the short term. But we do believe we're well placed to deal with this with our high subcontractor share, giving us good resilience to market weakness and also allows us to ramp up quickly to chase opportunities. As Dean has just given you some details on, we're happy to announce that despite the market weakness, another dividend of NOK 0.2 per share, bringing the total to NOK 0.4 for this year. Meaning we returned about $0.3 million of cash to our shareholders in 2020. To conclude, as ever, we'll continue to be active in consolidating the energy consultancy industry and to target expansion, particularly of our renewables arm. So I'd like to conclude with that. I thank you for listening. I once again remind you that because we can't take Q&A questions at the end of this presentation, please reach out to either Dean or myself if you wish any clarification or more information. And I thank you for listening and look forward to talking to you when we bring our Q4 results to the market. Thank you.