Aqualis ASA (ABL) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the ABL Group Q3 results. My name is Reuben Segal, I'm the Group CEO, and I'm joined this morning by Stuart Jackson, our Group CFO. Today, we're going to take you through the Q3 overall results. I'm going to give you a short overview of the highlights of the quarter. Stuart will give you more details on the actual numbers and some of the information behind the numbers. And then I will round up with an operational update and an outlook on how we see the rest of 2023 and going into 2024. [Operator Instructions] As always, we draw your attention to the disclaimer. Please feel free to read this in your own convenience. So we're going to jump into the Q3 results. It's an honor and a privilege to be here this morning to give these results. These are the best results in the history of ABL Group. We reported a revenue of just over $70 million for the quarter. This is an increase of 60% year-on-year. Apart from the acquisition of AGR, which is the main driver behind the increase in revenue, we also had a very strong organic growth of over 11%. If you look at the breakdown of this growth, this predominantly comes from OWC, which we reported an annual growth of just under 40%. So a very, very good performance in the Q3 top line revenue. This translated also into an excellent EBIT for the quarter. We reported an EBIT of $6.8 million, which is an increase of 70% year-on-year. This is predominantly driven by the acquisition of AGR. But in addition to that, it is also a 25% -- over 25% increase over Q2. This is not only due to the strong performance of ABL's sector, which is predominantly oil and gas and also the acquisition of AGR, but every single division of ABL Group grew from Q2 to Q3. That's OWC, Longitude, ABL and AGR. There is an improvement across the board and Stuart will go into more details of this as we go forward. Not only was it a very strong performance, which equated to 9.7% EBIT margin, but this is an increase of -- from 9% over Q3 2022 and an increase from 8% pro forma if you include AGR into the equation. So very, very strong bottom line performance as well as the top line. For people that have been following ABL Group over the years, you will also know this is the first time in the company's history that Q3 has outperformed Q2. So an excellent quarter all around. In terms of our net cash position, we closed the quarter just shy of $15 million, which is an increase over Q2. And this is predominantly through good cash flow from operations of $3 million, which was offset by $3.4 million due to the acquisition of Delta Wind Partners, DWP, and our other loan repayment and financing responsibilities during the quarter. As I mentioned, Delta Wind Partners was also closed. It is our second acquisition of the year, and in the future, you will see DWP as part of the OWC figures going forward. Finally, I'm very happy to announce that the Board has approved a semiannual dividend of NOK 0.35 and this dividend will be paid in November of this year. So all in all, it was an excellent quarter and excellent financial performance for the organization. And I would like to take this opportunity to thank our colleagues and our staff for their very, very hard work they put in during the quarter to produce these results. I'm now going to pass you across to Stuart, and he will take you through more details of these results. Stuart?

Thank you, Reuben. Before I jump into the financial statements, just a quick review in terms of the segments and therefore what's driving our results. So this is across ABL, AGR, OWC and Longitude. From a revenue perspective, in Q3, there's not a material change from where we were in Q2 in terms of the split across those businesses. There are changes, as Reuben has highlighted at the adjusted EBIT margin level with all of the segments showing improvement. So we still have very strong performance from ABL and Longitude, which are up 2 percentage points compared to Q2. So we're repeating this type of strong performance we saw in Q2. We have an improvement in OWC. You'll recall that what we're doing is driving growth in OWC, as you've seen in terms of the revenue growth. That comes at a bit of expense in terms of margin where we've seen a 2% increase in the margin at OWC in the last quarter. And then AGR, which is a very different type of business, so we shouldn't expect the same type of margins. This has had an improvement from 3% to 4.3% in Q3. So a step forward in the AGR business. That is after adjusting for some integration costs that we had in Australia. From that operating performance, we've had 7.9% going out of the business in terms of our corporate costs compared to 8.2% in the second quarter. And that drives our EBITDA margin -- EBIT margin of 9.7% over the quarter. In terms of the more detailed analysis, Reuben has already mentioned that we've seen an improvement both at a revenue and an EBIT level and an EBIT margin level across the business. And this just provides the detail in that respect. You see from a revenue perspective, obviously, AGR coming into the business for a full quarter. But also OWC from a growth perspective, showing a 39% growth year-on-year, which is very similar to the level of growth that we had in quarter 2, although we wouldn't expect that growth to continue on a permanent basis. In terms of our EBIT margin, we're at $5.5 million across the group before making adjustments to the EBIT, which are predominantly around our integration costs, our share-based compensation, et cetera. And that drives our $6.8 million of EBIT margin for the group, which derives the 9.7% EBIT margin percentage that we have across the group. Looking in little more detail in terms of the income statement. Key features here. You'll see that whilst we're increasing 60% on our revenue, we're 67% on the costs, so a higher level of cost. That's simply because of the difference we have in terms of the type of business that AGR is. It's a lower-margin business, and therefore, it carries more cost for the revenue that comes in. From a depreciation and amortization perspective, we reflect in here $0.2 million, that's a charge we have on AGR integration costs. This is where we have been pushing the integration, bringing the Add Energy, the AGR and the ABL businesses into one office, and therefore, terminated other leases. We've had a positive impact in terms of FX movements during the period, but this is an unrealized valuation of instruments, which are denominated in nonfunctional currencies and not a cash impact. Overall, as I said, $6.8 million in terms of EBIT and a 9.7% EBIT margin to increase year-on-year and an increase over the second quarter. Turning then to the cash flow. And after adjustment for our noncash items, I'll highlight the working capital changes that we have. So an increase in the working capital over the period, simply explained by an increase in the days sales outstanding in OWC. We had a very large contract, which was a very good payer, which we completed. And we replaced that with another very large contract, but with a slower payer and we're just seeing that effect work or go through the working capital line at present. In terms of cash flow from operations, as Reuben mentioned, we generated $3.1 million. And in terms of utilization of that cash, investing activities of $1.7 million, which is predominantly the $1.1 million in cash that was paid to acquire Delta Wind Partners. And then from a financing activity, our regular debt service and lease service payments together with $800,000 of debt repayments during the period. And after revaluation of our cash for FX movements, we're ending the period at $25.9 million in terms of our cash position, which if you then deduct our borrowings of $11 million gets us to $14.9 million of net cash sitting on the balance sheet at the end of the third quarter. From a working capital perspective, you see a continued reduction in the graph here in terms of our working capital ratio. Just to remind you, this is that -- looking back over the last 6 months of revenue relative to the working capital position we have at the end of the period. The change here, as we highlighted in Q2, is we now have 6 months of AGR revenue coming in. So as expected, we've dropped just below the 50% level going forward. I mentioned before, from an EBIT perspective, AGR is a different type of business. It's also a different type of business in terms of it's less capital intensive. So when you start to look at our return on capital employed, which we provide in the details of the release, you'll see that we are increasing our return on capital employed. And actually, at the end of the third quarter, we have one of the highest levels we've had in the company in terms of return on capital employed. From a debt perspective, we have the maturity of the term loan coming up at the end of the year, and we're well advanced in terms of discussions with HSBC for a replacement facility, which will be put in place in the coming weeks. And then, finally, in terms of position for the end of the quarter, as Reuben mentioned, we are making a dividend payment of NOK 0.35 per share, which will be paid on or about the 20th of November. This will be treated, for tax purposes, as a repayment of paid-in capital. In terms of total returns to shareholders during the year, in 2023, therefore, that takes the payments up to NOK 0.7 per share, a total payment of $8 million. Slightly different -- higher payment in the first half simply because of FX translation from NOK to U.S. dollar. And with that, I'll hand back to Reuben to take us through the business outlook and business activities.

Great. Thank you, Stuart. Good. So I will just round up the presentation and give you a little bit of operational update. We talk about our head count and we've talked about the very strong growth, particularly across OWC sector over the last 12 months. Our head count now sits at just under 1,600 full-time equivalent employees, which is a quarterly increase of 1% and 3% in terms of permanent employees. So this continues to show the growth that we're having. This, of course, is predominantly driven by OWC. But as Stuart highlighted and I mentioned earlier, it is across all sectors of the organization that we continue to see this staff development. If you see the graph at the bottom as well, this just shows that both ABL and OWC are growing at a good pace and Longitude also. So even now with AGR coming into the equation, we have now integrated Add Energy into both AGR and ABL, we have seen strong organic growth across all divisions of the organization. As Stuart also mentioned, although we've been growing OWC at 40% annually, we expect to see a little bit of a cooldown of that growth going forward, but still growth nevertheless. And how does that translate into where the revenues are based? Overall, around about 2/3 of the revenues, pro forma $267 million in our oil and gas divisions, that is across Longitude, AGR and also ABL. 21% of the revenues continue to come through our Renewables division. And Maritime, we don't talk so much about Maritime, but it's performing very, very well. Very strong business, excellent margins and continued growth across the organization. In terms of the split, I think as Stuart showed you the slide just before, but in simplified terms, just under half the revenue is generated within ABL, which is showing very strong margins. AGR, just under 1/3 and we continue to grow AGR, both top line and bottom line. And the balance made up through OWC and Longitude. But how does -- how do we see things going forward? And how does that translate into our business? So of course, we've seen a very, very strong uptick in the renewables industry over the last few years. However, with some of the inflationary costs going on, interest rates across the globe, we are seeing a slight impact on what we would see in 2024. Some of the projects, which were signed back in 2020 and 2021 are today being impacted by these additional costs. We are seeing some projects being postponed. We are seeing some projects being pushed to the right. But overall, the outlook is strong. Overall, the outlook is positive going forward. In fact, if you see going forward, in Europe alone, the number of auctions that we expect to come online in 2024 is some of the highest the industry has ever seen. OWC in particular, operates in that sector. They operate at the pre-auction. We assist our clients with auctions. We assist them with permitting. So looking forward, it looks very positive. If you look at the ABL sector of the business where we do the marine warranty, it is about installation. And those are the projects we see going on today, which may have a slight bump in the road in 2024. But putting all that to one side and with what you see across the globe, whether that be in China to Korea all the way through to Europe, the outlook for renewables across the globe is positive. The long-term future of renewables is very positive, which where OWC and ABL predominantly are playing. In terms of the oil and gas side, we are seeing some excellent growth continuing across the globe. E&P spending, you've seen this graph last time, it continues to be strong. But in particular, on the rig count, we are seeing more and more rigs going under contract. In particular, jack-ups are showing an 8-year high of utilization and rigs under contract. ABL being a market leader in the oil and gas sector for rig moving and other related oil and gas consultancy activities, it is a great position for us to be. And it just shows that going into the end of 2023 and into 2024 and what we hear as well about the oil and gas industry, ABL is in an excellent position to continue taking more market share. So in summary, Q3 of '23 was the best quarter in the company's history. It has showed some of the strongest growth the company has ever seen. It is some of the highest margin -- sorry, some of the highest EBIT we have ever seen. Performance across each of the 4 segments of the business continues to grow, both top line and bottom line. We're seeing very robust markets going forward. We're seeing a robust long-term future for Renewables. We're seeing a very robust oil and gas resurgence during '23 and going into '24. And our Maritime sector is extremely stable, and we continue to be a market leader, not only in Maritime, but across all 3 parts of the business. Going forward, our capital efficiency continues to improve quarter after quarter. We mentioned -- Stuart mentioned about our return on capital. One of the reasons for the acquisition of AGR is to improve this return on capital. We are now at an all-time high of 21%, and we will continue to monitor this going forward and present this in the back of the appendix of the presentation. And we also mentioned we are happy to announce the semi-annual dividend of NOK 0.35, which will be paid out in the next few weeks. So a good return to our investors as well, which is important for the organization. And finally, and not least, we continue to look for acquisition opportunities. If the right company is out there, we will always look at that opportunity. I think if you look at the last 3 or 4 years with the acquisitions of BTS and with LOC, Add energy even, which I'm very happy to report continues to grow from strength to strength quarter-to-quarter and now with AGR, we have a good track record of finding the right acquisition, bringing them on board and growing ABL Group. And we will continue to do that across all parts of the company if the right opportunity comes along, and I will use the word if. We will only do what's right for the organization. So on that note, I'd once again like to thank everyone within ABL Group for an excellent quarter. Keep up the good work and let's take that into 2024. So on that note, we will close the presentation. And if anyone has any questions, we are happy to take them.

We have received some questions online, and it's still possible to submit questions. First one is from Lukas Daul at Arctic. How do you think the offshore wind slowdown in 2024 is affecting your activity levels relative to 2023?

So 2023 and even prior to '23, we've had very, very strong growth in head count. We saw an opportunity to grow our head count. We saw an opportunity to get in now where we have a chance to be able to embed our position for future years. What I don't expect is for us to see 40% annual growth next year. That would be too strong, I believe. But we will still see growth going forward. As I mentioned, if you look at the area where OWC focuses, they focus on pre -- before we install anything. When people want to do the audit to get permitting and the auction rounds, we see OWC at a very, very early stage. And we expect 2024 to be a record year, particularly across Europe. So the position is still very strong for OWC. We expect to see growth for OWC and the long-term future is very good. But only thing I would caution is I do not expect to see the 40% growth over 2024. A calmer, more controlled growth during next year.

Good. This next question is from [ Olaf Leiden ] and I guess it's for you, Stuart. The company has net cash. What can you say about dividend going forward?

Well, I think you should probably look at what we have in terms of the last comment here that we do have still an ambition to grow the company and grow the company through acquisition. But at the same time, we have maintained dividend payments and increased dividend payments. I don't have a forecast in terms of where that will go to for 2024, but I expect we will still maintain the history we've had on making sure when we have cash available, we return that to shareholders, balancing that with the opportunity we will have around acquisitions.

And we have another question from Lukas Daul. Regarding consolidation, what parts of the value chain would you like to strengthen or grow going forward?

I have to say we have opportunity across all 4 divisions of the company. AGR is the newest part of the organization in a new field of business, particularly on the consulting side, which was different than when we first started ABL Group. But we are looking for opportunities In Renewables right now with this potential blip in the road. What we may see are renewable companies at a more realistic price, so we will look at them. Right now, in oil and gas, there are opportunities out there. And of course, the margins within oil and gas are excellent. So if there's a chance for us to strengthen our oil and gas division or engineering division through Longitude, we will take that opportunity. So even in Maritime, if the right opportunity comes along within Maritime, we will look at that, too. So I wouldn't say we're particularly focused on 1 of the 4 divisions. But if the right opportunity comes along, whether or not it be in oil and gas or Renewables or even Maritime, we will look at all of them. And right now, with all businesses being the way they are, long-term potential growth for Renewables; certainly, the short-term outlook and midterm outlook of oil and gas, there's no reason for us not to look across all divisions.