Aqualis ASA (ABL) Earnings Call Transcript & Summary

Good morning, everybody. Welcome. My name is Reuben Segal. I'm the Group CEO of ABL Group, and I'm joined this morning by our CFO, Stuart Jackson. Today, we're going to give you our Q4 results and also a brief snapshot on how we performed during the whole of 2023. Like I said, I will start with the opening comments, a quick overview of how the quarter progressed, some of the positives that took place during the quarter as well as an overall snapshot of the whole of '23, which overall was an excellent year for ABL Group. Stuart will then take you through some of the more finer details of the financials, and then I will wrap up with an overlook on how we see things going forward. [Operator Instructions] As usual, we draw your attention to the disclaimer. A lot of words. Feel free to read this at any time. So let's jump into Q4. Overall, in our opinion, this was a very good, positive quarter. We had some humps and troughs throughout the quarter, particularly in the renewable side of the business, which we will talk about a little bit later. But overall, this was a very solid quarter. We came in with revenues of $67.7 million, which is an increase of 58% year-on-year. Of course, a lot of this total growth in the top line was due to the acquisition of AGR. But in spite of the acquisition, we also had organic growth across every single segment of the company within OWC, Longitude and ABL. So overall, it was a very strong and positive Q4. In terms of the EBIT, we came in, we closed the quarter with $5 million of EBIT. This represents a 40% increase year-on-year. So overall, it was a very, very solid performance for ABL Group. As we get towards the end of December, of course, we have the European, we have Christmas holidays, we have the New Year holidays kicking in, so we do have some seasonal variation, which we will talk about a little bit later. But overall, for us and for the whole organization, it was a very solid Q4. In terms of the margin, we came in at just over 7.4%, slightly down on the pro forma 2023 if you include AGR -- sorry, 2022, if you include AGR over a 12-month period, down from 7.7%. But overall, a very strong performance. You will see in the numbers a little bit later, we continue to grow the AGR side of the business. We have said in previous quarters that it's our intent to keep pushing AGR and keep driving up the margins of AGR, which you will see a little bit later when Stuart gives you the detail. However, this was offset by a weaker performance across OWC. This is due to seasonal variation and also the rapid growth. You will see when I show you the full year numbers, we have had excess -- really strong growth across the OWC sector. That, of course, had an impact in Christmas with the seasonal variation of holidays, but overall, still a profitable quarter for OWC. In terms of net cash, we closed the quarter at $17.2 million, a good increase over previous years and record operating cash flow. We paid out the dividend of $4 million, but in addition to that, the operational cash flow was record highs of $7.5 million. So a very, very strong cash position and record cash position at the end of the quarter. And as mentioned, we paid out the dividend. And this year, we are happy to announce semiannual dividend of NOK 0.4 going forward. So it just shows you our belief in the organization, our belief in the business and our belief in able to generate cash from the margins that we generate across the organization. If you take the year-on-year growth, taking a snapshot of how we operate with by month-by-month or quarter-by-quarter never shows you the true position. I always like to show this graph because it shows you the growth of the company over the last few years. We have said we want to grow. We have said that we want to acquire. We have said that we want to keep pushing top line to be able to keep growing the organization whilst maintaining and growing our EBIT margin, and we have continued to do this. We've taken the company to just over $250 million, pro forma $270 million if you take AGR over a 12-month period. Again, this is a very solid growth of over 50% year-on-year. Just because of buying an organization doesn't mean it all works. You buy an organization, you have to integrate it, you have to grow it, you have to build it. And we're able to do that during the course of 2023 with AGR. In terms of adjusted EBIT, we came in at just under $21 million, which again is a very strong growth over 2022. We're very proud and very happy with this result. Margin-wise, slightly down over previous year for two reasons, number one, the expanded growth of OWC had a knock-on effect with the EBIT margin, and AGR is a structurally different business than we're used to in ABL. I said Stuart will show you some of these numbers coming up in a moment. We acquired Delta Wind Partners, part of OWC; and we acquired AGR, part of ABL Group. And overall, both have been successful and both are now being integrated very well. And as you will see with AGR, in particular, those margins are now starting to creep up into the areas we would like them to be. We continue to be active in organic growth, example, AGR and DWP, and we will continue to be active going forward. And overall, we were able to pay out the dividend of NOK 0.7 during the course of the year. So it was a very, very strong performance as the year as a whole, and it ended up, in our opinion, a very solid Q4. At that point, I'm going to pass you across to Stuart, and he'll give you more details on Q4.

Thank you, Reuben. Good morning. Good afternoon, everybody. Before I jump into the financials here, we are going to make certain changes the way we present our financial information. This is the end of the year, so coming to next year, we will make certain changes. One of those relates to Q4, so I'll run through how we made that adjustment in Q4, but we will come back with a reconciliation the way we're going to change things later on, and I'll deal with what these changes are at the end of the presentation. In terms of the snapshot, in terms of the financial position, in terms of split of revenue across the different aspects of the business, not a material change in terms of where we've been in previous quarters. Clearly, the focus more now is around where we are in terms of the EBIT margin as we go through. So the one change we've made in terms of presentation is in relation to AGR. As we fully integrated that business now, it's been carrying certain costs, which, for a comparable basis to the other segments we have in ABL, should really be carried as part of the corporate cost rather than AGR. So the impact of making that change for this quarter is around about 1% in terms of margin, and I'll come on to how that compares to the previous quarters that we've seen before. But on an overall terms, I think from an AGR perspective, very solid margin in terms of where we've been historically with this business. The ABL and the Longitude businesses, which through 2023 have been very -- showing very high margins. We do have the seasonal impact as we come into Q4. But also on the Longitude business, we've been running some very high-margin businesses through lump sum projects which have come to an end. We're still delivering 19% margin in Longitude. So year-on-year comparison to Q4 of 2022, that's comparable to 13%. So still a very strong performance from the Longitude business. Our corporate costs are running about 8.5%. And so as Reuben mentioned, we're at 7.4% for the group in terms of EBIT margin on an adjusted basis. Turning then to a bit more detail, sits behind those numbers. I guess a couple of things to draw out. Firstly, the OWC line. So now you see the quarter-on-quarter progression from a revenue perspective. So slightly down in Q4 in terms of underutilization of people but 33% up year-on-year compared to the same position back in Q4 of 2022. So a very solid performance in terms of growth which is where we've had to focus in respect to this business. At the margin level, as Reuben mentioned, we've had a pause. We've been talking about the pause in the offshore Renewables business for the last couple of quarters or so. So we've had an impact on our margins. We continue to invest in that business. We haven't changed, in any respect, our long-term outlook for the offshore market, offshore renewables market. So we still continue to invest in that business. As we've gone through Q4, we've had low utilization of our people during that business, and therefore, that impacts our margin. But that to me is part of the overall investment in this business for the long term. So no change in terms of our outlook going forward. And as Reuben mentioned, we're delivering 35% year-on-year growth from OWC and a margin over the year of 10.1% on an adjusted EBIT basis. And then finally, on this slide, AGR down at the bottom in terms of the margin. So as I mentioned, we've got about 1% positive increase as a result of the way we're recutting the numbers. So we're at 7.9% for the quarter. And comparable to Q2 and Q3, which are the quarters where we've had AGR within our business, we've gone from 3.9%, 6.1% and now 7.9%. So progressive improvement in performance for the AGR business under our ownership. In terms of the abbreviated statements, firstly, the income statement, as Reuben mentioned, 58% growth, both revenue level and operating cost level. Obviously, the inclusion of AGR is the key driver in that respect, but the underlying businesses do have year-on-year improvement in terms of organic growth within the business. Not much change in terms of the D&A side. So we're delivering a clean EBIT of $3.9 million compared to $2.5 million in the same quarter of last year. And that gets adjusted in terms of our share-based compensation, the amortization of PPA intangibles, M&A transactions, integration costs, et cetera, the way in which we get to adjusted EBIT, so we're looking at $5 million of adjusted EBIT for the quarter compared to $3.5 million last year at a margin level at 7.4% compared to 8.2%. But as Reuben mentioned, on a pro forma basis, so including AGR, that's 7.4% compared to 7.7%. In terms of the cash flow statement, a pretty strong cash flow. The $7.5 million coming from operating cash flow is the strongest quarter we've ever had. So very positive. You'll see the largest change there would be in relation to the working capital. So we've had a reduction in days sales outstanding from OWC and ABL during the quarter, which has benefited us in that respect. I guess the other thing to highlight here would be the financing activities. So the $4 million dividend paid out within Q4 and then the other costs associated with debt and lease service going through in the quarter. So a net cash flow increase of $1.6 million and after FX adjustments that provides us with $28.2 million in terms of our cash at the end of the quarter. And then finally, on the balance sheet side. Net cash, so $28.2 million, the short-term borrowings of $10.9 million. We're seeing at $17.2 million in terms of net cash to up from $14.9 million. So a good solid position in that respect. We measure, as you see on the graph on the right-hand side, our working capital ratio. Just to remind you, this is our working capital position reflected against the last 2 quarters of revenue. So a decrease again with the working capital coming down to 46%. You see that Q4 tends to go down because, yes, we measure performance the end of Q4, and therefore, we expect a bit of an uptick as we come into Q1, but we're not changing anything in respect of our anticipation of around about 50% over the year as a good measure for our working capital ratio. And then finally, post quarter end, we've completed a refinancing. So we've repaid the term loan with Nordea. We replaced it with a revolving credit facility with HSBC of $30 million. So we have drawings to repay the Nordea facility in January, together with some other fees that were paid out at that time. And we, have, therefore, a significant increased liquidity position within the business. And that facility will run through to January of 2027. In relation to dividends, I mentioned NOK 0.4 is the proposal to go to the AGM later in the year. So this is an increase of NOK 0.05 per share. compared to the 2 half years in terms of payment. Converting that to dollar payments, that's going to be $4.8 million for the half year being paid out to shareholders. So continuation of the significant return of cash to shareholders when we have free cash available. And that follows on from the NOK 0.7 we paid through 2023, so $8 billion total going back to shareholders over that time. And then finally, before I hand back to Reuben, a few changes we're going to make in terms the way we present our numbers going forward. So there's nothing in terms of numbers here. We'll come back and provide you with the detail of that later on in terms of how we've [ recut ] this. Firstly, in terms of incentive payments, both on our short-term incentives and our long-term incentives. Those have historically been held within the corporate costs, and then they eventually get passed down into the business. Those are associated with employment of people. So my view is they should sit alongside where those people are employed. So they will become a part of the business segment costs going forward. We have introduced a long-term incentive plan. Historically, what we've done on long-term incentives, we've had stock options, which have been directly associated with the M&A activities. So when we bought companies, we've issued options at that time. And therefore, it's part of our adjusted EBIT. With long-term incentive plan on a recurring basis coming in, that will be part of our normal EBIT. So we won't be adjusting that going forward. There are certain cost recategorizations that we'll have, which won't be that significant. And then withholding tax in certain jurisdictions where we work, we have unrecoverable withholding tax. So to me, that is a direct cost of delivering the revenue. So that should be part of the margin of the business rather than sitting in our tax line. Well, we'll cover all of these in detail and provide you with a relevant reconciliations when we come into the Q1 numbers going forward. And with that, I'll pass back to Reuben.

Thank you, Stuart. So how do we see things going forward? During the course of the year, we continued the growth that we said we wanted to have. We continued the organic growth as well as growth through acquisition. We continue to increase our headcounts, both in terms of permanent and also in terms of using freelancers. During the course of the year and also within Q4, we continue to increase the headcount across all parts of the business, including OWC. We continue to look at OWC, the renewables industry, the oil and gas industry, longer term and not short term. In our opinion, the longer-term business within renewables is still very solid. The growth is obviously still there, and we want to continue to be able to take that growth going forward. Yes, it had an impact on our Q4 EBIT margin with lower utilization, but the market's still the same. Our long-term outlook for renewables is still very solid. And as a consequence, we continue to grow our headcount. If you look at each of the sectors, ABL, which slightly distorted with the -- we've now moved Add Energy asset integrity into ABL, which has a small impact on the headcount. But overall, we continue to increase our oil and gas headcount. We've continued to increase our renewables headcount, and we'll continue to increase our engineering headcount within Longitude, and the plan is to continue doing that going forward. If you look at how we see things -- or I'll go on to the slide, sorry, in a second, but if you see how it transpires, renewables is now 22% of our overall revenues within the company. I think it has gone from 20%, 21% and now up to 22% even after the integration acquisitions of AGR, and we continue to be very bullish in renewables and energy transition-related projects. Oil and gas still equates to about 2/3 of the overall organization, which relates to about 50% within ABL. ABL is also doing renewables as well as oil and gas. So AGR now accounts for 1/3 of our business or just below 1/3 of our business. The ABL, the largest and most profitable part of the business running at 50%, OWC at 15% and Longitude down at 4%. And the intent is to keep growing each and every one of these sectors going forward, renewables, oil and gas as well as AGR, OWC and Longitude. And if you look at how things transpired, this is a quick snapshot of how 2023 looks. So if I start from right to left here, if you look at what happened last year, we've increased the number of rig moves by over 100 rig moves year-on-year. Last year, it was just over 1,100. This year, just over 1,200. If you look at the number of clients, it is now an increase of also 100 . Last year was 1,200. This year, 1,300. So we continue to be very bullish in the way that we see the oil and gas sector going and how you see our results during the course of 2023. And if you look at the renewables industry as well, we had a slight change the way we calculate some of this. So the 285 is related to maybe we have 1, 2 or 3 projects on the same wind farm, whereas in the past, we said 1 project, 1 wind farm. But the better number to look at is the 251 gigawatts. Last year, this is about a 10% increase on the total gigawatts of what we worked on last year. So we continue that growth across the whole of the renewables industry. Irrespective of the humps and the bumps you've seen during 2023, we have continued to increase our overall business within the renewable space. And our performance in Maritime continues to be solid. We're a market leader. And we retain our position as a market leader doing over 2,400 instructions during the course of 2023. So overall, a very, very solid performance. And how does this transpire -- how do we see things going forward? We've shown this graph before. And I think what you've seen in some of our numbers in Q4, in particular, but also during the course of 2023, you did see this short pause in the renewables industry. You saw a pause, particularly out of Europe, where there has to be a realignment of the costs versus the revenues being generated in renewables. If you look at what happened in the U.K. recently, they have now increased the price for the new auctions by 66%. The same is going on in Germany. The same is going on in the U.S. It had no choice but to do this. So we have been watching this very, very closely, and we've continued that growth to be able to take it. If you look at where OWC plays in particular, we play right at the very beginning in the auction realms, and 2024 is expected to be record-breaking year for auctions, which is exactly where OWC is placed. So I realize there are some people will look at 2023, in particular Q4, and say the margin was low. You have to take a longer-term view. We take a longer-term view. We have a choice to acquire or we have a choice to grow organically, and we took the decision to grow organically. And if all these predictions are here go correct, we're in an excellent position in 2024 to take our market share and continue that growth story. If you look at the oil and gas sector as well, still very, very bullish. We are seeing huge amounts of potential still in the -- not only in the CapEx, but in the operational phase. You're now starting to see a lot of projects coming online, a lot of projects now starting to be built, Australia as an example. And ABL is in every one of the markets and doing very, very well. The rig count is at the highest it's been since 2014. And of course, this is a large part of the ABL business. So things for the oil and gas sector also look very, very bullish for the balance of -- for 2024 and beyond. So how does it look overall? For ABL Group, I'm going to talk about 2023 as an overall. 2023 was yet another very, very excellent performance for the group. We've continued to grow our oil and gas business. We've continued to outpace our renewables growth. At the cost of some of our EBIT, but we have always said that. We have always said that we are happy to give up some EBIT to grow the top line of our revenues and our renewable side of the business. We continue to do that. The long-term outlook for renewables is very strong, and we believe we're in the right place at the right time to take that market. Our position in oil and gas continues to be market leading, and we continue to drive our business and the margins across the oil and gas, where we've been very profitable during 2023. We continue to drive our capital efficiency. Our return on capital now, it sits just close to 18%, a further improvement over 2022, predominantly driven by the acquisition of AGR but also through capital efficiency and efficiency of the way we collect our money, our aging receivables and so on. So overall, as a performance as a business, it was an exceptional 2023. And going forward, we see no reason to change our outlook on both renewables and oil and gas. And finally, we talk about M&A. If the M&A opportunities are there, we are still looking. We want to continue to grow organically. We want to continue to grow through acquisition. We want to continue to build and grow ABL Group. So that's how we see things. Thank you very much always for your support. If we have any questions, we, myself and Stuart are happy to take them.

Do we have any questions in the room?

Can you elaborate a bit on how you see margins in the OWC segment in 2024? Should we kind of expect kind of low single digit? Or should we expect them kind of in the 10% range like it has been in the previous quarter apart from this quarter?

So first of all, we're going to change the way we monitor the margin. Yes, we're going to show you the margin pre-group costs rather than post-group cost. So if you talk about pre-group costs, we would expect to be back in the double digit. I mean we've been operating there most of the year, and there's no reason for it not to stay there. If you talk about post-group costs, we've always been in the mid-single digits. What happened in December happens most Decembers. We used to have the same in oil and gas. People that monitor us over the years, we used to watch the same happen in July, August in oil and gas. A lot of our business happens in Europe. You have the North Sea, which shuts down. You have Christmas, which happens. I certainly wouldn't look at ABL or OWC business based on what happened in December. So overall, we see no difference in our business. The question is how much do we want to grow OWC? And our intent is to continue to grow it. We continue to grow, we believe, in double-digit growth during the course of next year and continue to push that margin. So I would look at the overall OWC, which is a very profitable year. If you take OWC overall, it was extremely profitable. It's just in December or Q4, it had that blip. So yes, the answer is pre-group costs, we will remain above that double digit. That is the plan.

And then on the M&A side, are you kind of looking at some large targets, like for instance, kind of AGR size? Or are you mainly looking at smaller targets?

No. No.

No?

We won't -- it has to be a strategic fit. It's not whether or not it's a 10 people. I mean DWP was 14 people, 13 people. AGR was relative including freelancers of 300 people. It has to fit with what we want to do. It could be that we buy a company that's just specific in 1 country. It could be that we look for a larger company over a global footprint. It has to fit with what we want to do. And we've been very good at that. I think AGR shows you bought a company based in Australia, based in the U.K. and Norway, and we've been able to take that margin up from 3% to, what, 6.9% already in the key space of 9 months. So it depends which -- what comes along. Beggars can't be choosers sometimes.

I think [ the other thing ] in terms of what we've done on the balance sheet, so putting in an RCF for a longer period of time just provides us with more liquidity in the business. So we'll be able to react a lot quicker to opportunities as they come up as well.

But one thing I want to say, we don't want to be reckless with it. We want to grow, but we don't want to be reckless. So I think we've been very good at doubling this company in a very structured, controlled manner. And that is important for us to do. Just because a large company comes along, we say, "Well, let's buy it." That's not the intent. It has to fit with what we want to do.

So we have a question online from Lukas Daul. With the auctioning activity increasing significantly, what is your revenue growth projection for OWC in 2024?

I'm not going to tell you what we think it will do next year. What I will say is that we want to continue growing double-digit in renewables. We've always said that, so there's no reason to believe differently. We have a longer-term outlook. It is not a quarter-on-quarter outlook for renewables. So the plan is to continue to grow the renewables at double digit. Whether or not that double-digit is 10 or 20 or 30, I'm not going to stand here and give you with a magic crystal ball. But what I will say is that we will continue to drive it very hard, with at least double-digit growth during the course of '24.

Any more questions in the room? Yes.

Could you say anything about increases prices? How do you manage? I assume cost inflation and wage inflation. Are you in a position to push it on to your customers?

Everybody in this company is instructed. You want pay rises, no problem. I want it back from our customers. So you have to drive. It's not like we just give our pay rises and thank you very much, all go home. We still have a business to run. We still have a return to our investors. So pay rises are there for inflation. We've been watching inflation. Not every country is running at the same levels of inflation. China is running at close to 0. Middle East is running at 4. So we have given pay rises in line with inflation. But at the same time, I expect that back from our clients. We're not a charity. We're a business. So we want to keep pushing that. Some of the longer-term projects you can't, maybe some of them are 12 months, and you have to wait for the contract to finish. Some of them have rate escalation in there, anyway, related to inflation. Some of them is just -- market is good, drive your prices. So we continue to do that. We have a nice flexible base using freelancers, permanent staff. UAE at the moment, of course, in the Middle East, is very strong oil and gas. U.K. sector is about to come very strong again with renewables. So we're able to drive that. Can't be reckless with it, but we can still drive it, and we do.

So you increased prices through the year. It's not like from 1st of January. It's a...

You mean to our clients?

Yes.

Of course, during the whole year. We always use the airline industry yield management, yes? We are exactly the same. What we are today doesn't mean we'll be the same next week. Things happened during the course of the year. You've seen so much turmoil in the markets over the year. Some of it, we drive prices because we can because we're in a good market. Some of them is because we're going to be strategic. It's flexible. So that's why I said, when you see a snapshot of how well the company goes, OWC in particular, I know everyone is going to focus on Q4. I know everyone is going to focus on December. I know everyone's going to do that. It's our job to look at how things go going forward. How is the market looking for OWC in the next 3 years, the next 12 months? And we're good at that. And we've proven that over the years. Any more questions?

We have a couple more online from Martine Kverne at Nordea. First, on the OWC margin. Can we expect improvement already in the first half of 2024?

When you say improvement, the margin wasn't bad in OWC during 2023. I want to make that clear. I mean if you look at '22 versus '23 and you look at our margin in OWC with the 38% growth, I would say our margin wasn't bad in 2023. If you want to compare it to December '23, I will say we will have a better margin in Q1 and H1. If you watch everything that's going on globally and if you watch what happened in '23, we will follow that trend. So the margin will increase over what happened in December. It will be a positive margin going forward. And I said, we want to continue driving to double-digit margin. I don't want to say by 15th of February, it will be this, but the intent is to keep driving that margin to double-digit and beyond during the whole of 2023. But I would expect us to be stronger towards the back end of '23 than the front end of '23 -- sorry, 24.

Second question from Martina is, could you give some more color on the drop in margins for Longitude quarter-on-quarter? And what we can expect going into 2024 for Longitude?

Yes. Q2 and Q3 were some record margins ever seen in engineering across oil and gas industry. I think we were running at 30% margins in Longitude. In my 30 years of doing this, I've never seen 30% margins. So 30% to 19%. I think you have to look at 19% versus 13% the year before. It was a very strong Longitude overall for 2023, had a super year, and I don't necessarily see it as a drop. Yes, it went down in Q4 versus Q3 and Q2, but 13% was still very strong -- sorry, 19% was still very strong. But Longitude is performing very well. It's a small part of the business. But if you look at their outlook, they're mainly oil and gas, but also renewables. They're in the FPSO market. They're in new designs, hydrogen, energy transition. So I think overall, the outlook for Longitude going into '24 is excellent. Is it going to continue at 30%? Some of these big projects have ended and some new big projects are coming. So you're always going to get this little bit up and down. But if Longitude can continue running at 19%, 20% plus throughout the year, I'd be very happy with those margins. It's been a very well-performing business over the year.

And then we have one more question from [ Nils-Erik Olsson ]. Instead of acquisitions, would you consider buying back your own shares, especially with ABL trading at current level?

It's a good question, and we have debated it over and over again. I don't know, maybe this is more for Stuart than myself. I can give you my color, and maybe Stuart. First things first, we want to keep growing. So we want to acquire. And we have good funds ready to go and be bullish and acquire. If we don't acquire it, maybe we will do that. Maybe we give more, maybe we buy back. There's a lot of options available to us. First thing is to acquire, and we've built a war chest to acquire. I don't know if you want to say anything different on it.

Yes, I think it just comes down to capital allocation. So we feel we have the opportunities available to us through M&A, and that's where we want to apply those funds. That's the reason why we've increased liquidity across the group, so we can be a bit more nimble and react quickly to opportunities as they arise. But a company like ours is still sitting there with $30-odd million of cash and $20-odd million of additional liquidity. For the size of business, that's quite a lot. So we don't have those opportunities. Well, we have to make use of that cash. It will drop down to the next level in terms of capital allocation, and that will be looking at what we do in terms of returning money to shareholders.

Because I don't think our shares have been necessarily that liquid. So pulling them off the market may not necessarily be good for us even though they are too cheap right now. I hope that price will go in the right direction. But overall, I think we're in a good position to keep growing, and I'd rather use the money to grow at this moment in time. And I think there's good opportunities for us to do that during '24.

Any more questions in the room? We have no further questions online.

Great. All right. Well, as always, thank you very much for your support, and we look forward to seeing you again for our Q1 results. Thank you.