Aqualis ASA (ABL) Earnings Call Transcript & Summary

Good morning, everyone, and welcome. My name is Reuben Segal. I'm the Group CEO of ABL Group, and I'm delighted to be joined this morning by Stuart Jackson, the Group CFO, to run through our Q3 results. For people online, please be aware if you have any questions, please feel free to add them into the chat room, and we will get to them at the end of the presentation. So today, I'm going to take you through the top-level highlights. Stuart will then take you through the more detail of the financials, and then I will wrap up the presentation with the usual summary and outlook of operations. As usual, we draw your attention to the disclaimer at the front. These are our opinions. So please feel free to read this in your own time. So let's go into the actual results for Q3. So it was a mixed bag across the board, across all 4 segments. And we're going to give you some flavor behind each of the segments and some of the details behind the operations. As overall, I would say the numbers are not where we would like to be yet. We're working very hard in the background to improve them as we mentioned back in Q1. We're still a little bit disappointed with them, but at the same time, we're seeing some green shoots coming through. We're starting to see some positive activity across the renewable segment, in particular, and we're going to give you some of those details going through. We ended the quarter with revenues of $86.2 million, which is quite a significant increase over the previous quarter and also the same period last year. But this, however, is driven by the acquisition of Ross. Ross Offshore adds around about $17.8 million of revenues to the overall figure. So the revenue quarter-on-quarter and year-on-year is quite flat in terms of growth with most of the growth coming through AGR and Ross in particular. What we also saw is still a decreased utilization across OWC in the offshore wind sector, as we mentioned previously. But again, I'd like to draw your attention to the fact we are seeing some green shoots. We are starting to see some positivity and we look forward to that coming through next year as we discussed previously. In terms of EBIT, we ended the quarter with just over $3 million of EBIT, which is an EBIT margin of 3.4%. If you remember, we talked about guiding through the cycle of $6.5 million. So it's still not where we want to be. Hence, the reason for saying that the results are still not where we want them to be. We need to continue to work hard in the background to continue to improve our operations and go back to where we said we would be. Some of it is market driven, as we talked about, particularly in the offshore wind sector, where the market itself is still dragging itself behind, but starting to see improvement. We did, however, see some very positive results across AGR. The AGR segment standalone where we had some excellent results as did Longitude, where we started to see some good growth, good EBIT margin and continue to see a lot of good work in the background, winning new projects, good pipeline, et cetera. So there were some positives throughout the quarter. In terms of ABL, we're still quite flat. We're seeing a little bit of turmoil in the oil and gas sector, in particular, but still stable revenues and stable margin across the ABL segment. In terms of cash, we finished the quarter at $7.9 million of free cash which is a decrease over the previous quarter, but this is driven through the acquisition of Ross. So if you remember, when we acquired Ross, we also acquired the organization with a very good cash position. And this is the unwinding of that cash position throughout the quarter. So it's not anything particularly negative with the operations. It's more about the unwinding of Ross Offshore through the acquisition. We're also happy to announce that we closed the acquisition of Hidromod at the back end of Q3, and you will see those figures coming through in our Q4 accounts. It's not big numbers, but nevertheless, it continues to add to our top line and our bottom line, and we will report that in Q4. We're also happy to announce the Board agreed with the dividend of NOK 0.4, which will be paid out in November. So all in all, it was a mixed bag for Q3, some positives. There's still some weakness in some areas but we are starting to see some positive green shoots, particularly across the offshore wind segment. On that note, I'm going to hand you across to Stuart. He'll take you through more of the financials, and I will wrap up a little bit later.

Thank you, Reuben. Good morning, good afternoon, everybody. So in terms of the financials, firstly, our segmental review. So here, we have the usual spread in terms of our revenue, $86.2 million, as Reuben mentioned, it is the first time we've had Ross Offshore come in. So in terms of the overall spread, AGR is actually from a revenue perspective, the largest segment at present. In terms of our performance across the EBIT, we have the comparisons here on a pro forma basis, so taking in Ross Offshore's impacts back to Q3 of 2023. And you'll recall that Q3 2023 is the strongest quarter we've had in the history of ABL. So in that respect, AGR, the largest segment, also showing an increase on a pro forma basis in terms of the margin. We bought Ross Offshore in during the quarter, and that was actually a breakeven for the quarter. So the rest of the AGR business was outperforming. So very strong performance from that part of the business. In relation to Longitude and ABL, I think reasonably good, strong performance here. We are comparing back to those really good strong numbers we had in 2023 from a margin perspective. But at 17.5% and 21%, I think that's a good, strong performance. OWC, as we've talked about in the past, we have quarter-on-quarter a pause in that market. As Reuben mentioned, we're starting to see maybe the first green shoots of a recovery in that market. But from a performance point of view, we're not happy with this level of performance. So it's ongoing cost-cutting programs to make sure we can improve this margin. And then finally, in terms of the corporate costs sitting at 6.4% of revenue. If I compare that to where we're at our reported position 12 months ago, we're at 7%. So effectively bought the Ross Offshore business into the group without adding corporate costs through that process. Looking a bit more in terms of the detail. So sitting at $86.2 million in terms of overall revenue for the group, as I mentioned before, that growth of 23%, all of that's coming through Ross being added. So in terms of the underlying business, there's not a lot of growth happened over that 12-month period. I think more focused around what we have in terms of the adjusted EBIT margin for the different business segments. So this is where we see a very strong performance as we reported back 12 months ago, which is our point of comparison. This is on a reported basis rather than pro forma. In terms of the ABL business, we're sitting at 17.5%. So we've been there for the last few quarters compared to the very strong performance we had back in 12 months ago to nearly 22%. And I guess what we're seeing there is a bit of a slowing of decision-making or shorter-term contracts coming out in that market. So we have slightly lower utilization than we've had in strong markets. The AGR business, as I mentioned, good performance through the quarter. Longitude, we've always said this is a lumpy business. You see that in terms of the progression quarter-on-quarter. So we've had a good quarter through Q3 of 2024. That really depends on where they are in terms of the completion of their projects. And finally, on the OWC side. As I mentioned, we're at a negative margin during that period. We have, as we've mentioned before, been investing in the U.S. onshore technical due diligence side. So we've had about $0.5 million of cost to go through the business during Q3 of 2023 -- 2024 in relation to that. Looking then at the abbreviated financials. From the income perspective, a 23% growth in revenue, but 30% growth in terms of the operating costs. That's as expected. We're consolidating a structurally lower-margin business in Ross Offshore. So that leads to our EBIT being down at 2.5% compared to the very strong position that we had 12 months ago. In terms of other items, not a lot in terms of report here. We do have adjustments to the EBIT just in relation to the amortization and impairment of PPAs, which gives us a position at the end of the quarter of $3 million. So compared to $6.2 million, our best quarter ever, but up from the $2.8 million that we had in Q2. From a cash flow perspective, obviously, the largest changes, as Reuben mentioned, around working capital. So a large part of this is as we expected when we acquired Ross Offshore, we acquired substantial cash balances because they had prepayments on contracts. As we've gone through the execution of the contracts, we've had the outflow of the cash in terms of delivering those projects, but we're already holding the cash within the balance sheet itself. So $4.2 million of that change is in relation to just in terms of the prepayments of the acquired business we had with Ross Offshore. We've also had, towards the end of the period, the change in terms of FX position. The dollar has depreciated about 5% against other major currencies. That's led to a revaluation of our working capital balances, which has changed our working capital by about $2.4 million, although that started to go back up after the end of the quarter. In terms of other activities, our investing activities. Nothing really to report there any difference to what we've had in the past, just ongoing investments. Our financing activities are 2 elements. The first is that we repaid $3 million on the RCF during the quarter. And the second element is coming into the cash, we had $1.4 million -- sorry, $1.7 million of proceeds coming in from the exercise of options, which were sold during that period. After revaluations, we're at $22.5 million in terms of our gross cash position at the end of the period. And then from a balance sheet position, that $22.5 million comes down to $7.9 million in terms of our net cash position, so down from the $10.8 million at the end of the previous period. Not many changes in terms of the other balance sheet items. You'll recall that at Q2, we consolidated Ross from a balance sheet perspective and then we took in the P&L benefits for Q3 going forward. So this already had Ross in, in terms of the Q2 position. Finally, from a working capital position, just the ratio we look at on a quarterly basis. Here, we're showing our working capital ratio as 40% of our quarterly revenue. Just in the third quarter, we've shown that for 1 quarter, whereas all the others we show historically 2 quarters. Simply shown it's 1 quarter because we only have 1 quarter of Ross Offshore in that number. Our guidance for going forward will be probably to be in the range of 30% to 40% in terms of working capital ratio for the business in the future periods. Finally, for me, in terms of a dividend. As Reuben mentioned, the Board is progressing with NOK 0.4 per share dividend to be paid in November. You'll see on the right-hand side, the progression in relation to our dividend, we maintain a policy of generating cash in this business to give back to our shareholders, and that continues to be our driver. Our dividend has increased since we introduced dividends 4 years ago, twofold in terms of NOK per share. But given the acquisitions we've done and the issue of new shares, it's actually increased 3.2x in terms of the dollar amounts going back to shareholders. So our payment going out on the 27th of November will be for $4.8 million, on top of the $4.8 million that we paid back in June. And with that, I'll hand back to Reuben.

Thank you. Okay. So just to round up on the actual operations, and then we'll give you an update on how we see things going forward. Operationally, the biggest increase in headcount came through the acquisition of Ross Offshore, which has now gone into the AGR sector segment. So that has, of course, added a lot more headcount to the organization, but majority of that is within EGR. We do continue, however, to push through the oil and gas cycle. Although there is some turbulence in the oil and gas generally around the globe, we still see a very positive future for the oil and gas segment. We've continued to recruit across ABL. We've continued to grow ABL. We've continued to push harder into some of the areas such as rig moving such as marine warranty and so on. So we do continue to increase our headcount across the ABL segment. In terms of Longitude and AGR, that's been quite static, quite stable until we start winning more contracts coming through Longitude. But the biggest change is in OWC. As we've mentioned already, the offshore wind segment has gone through quite a difficult period over the last 12 months and will continue, we see for the next few months as well going into 2025. But as we also mentioned, we are starting to see good win rates. We're starting to see some good backlog. But we are starting to see some very good pipeline coming through the offshore wind segment. So for now, for us, it is more important to get OWC stabilized to get it under control, and that means reducing some headcount but also increasing headcount in our new segments such as onshore renewables. And I'll talk about the onshore side in a moment. So it's a mixed picture, but most of the growth comes from Ross Offshore. So we talked about the segments generally and particularly the offshore wind segment, where we've been very, very focused over the last few years. As we mentioned previously, we decided during this period, it was time to diversify a little bit so that we were not as focused on offshore wind and go more to onshore wind, onshore solar and other related renewable type of activities. In previous quarters, this is a number that we have shown this time around, around about 11% of all our revenues across OWC come from onshore activity. That during the quarter has increased to 17% of all billable hours now coming through onshore activity. And that's where you see this $0.5 million of investment. So we said last time we want to invest more in onshore. We have the opportunity and the ability to do it, particularly across technical due diligence area, and you've seen that in the numbers. Hence, OWC is negative position during the quarter, but that has already started to reap benefits, and we will continue to do that. But the long-term future of OWC and particularly the offshore wind segment is very strong. I was in Korea last week and they just announced new auctions across Korea. Germany has opened up. The U.K. has opened up and others are coming more on stream. So we are starting to see the shoots. I said, our win ratio and our win rates and our pipeline is much stronger today than we've seen over the last 12 months. So things are looking up, but it's still going to take time to come through the system. But the graphs that we show appear to follow the trends that we see through our billing and through our bidding. And if you look through the oil and gas cycle as well, this has been a little bit turbulent. You can see. And you can see that through other companies as well; we're not the only one feeling it. Our performance across ABL is still very strong. Our performance across oil and gas segment is very strong globally. But you're starting to see some bumps around in Saudi Arabia's recent removal of rigs. Pemex mentioned it the other day as well. Yet we're starting to see rig activity be moved to West Africa, we're starting to see it moving more into Asia. So what you're seeing is short to long-term contracts, more shorter-term contracts. And that turbulence is coming through, and you can see that across ABL. Although still very strong performance, running at 18% roughly EBIT margins, it's not where it was this time last year at 22%. But overall, the long-term future of oil and gas hasn't changed at least in the midterm as well. We're still seeing a lot of rig activity. We're still seeing a lot of E&P spending in the offshore segment. Note that this is the overall E&P spending for oil and gas, but we are more focused on the offshore side. So overall, still very positive strong activity across the oil and gas segment. So as a quick summary. It was an okay quarter. Our revenues were positive. There were good revenues, but most of the revenue increase came from the acquisition of Ross Offshore. But otherwise, the revenues remained stable. Our EBIT margin, although still at only $3 million, it was an increase over Q2. Actually, it's our first increase over the last 12 months. So we are starting to see some positive movement in the right direction. Offshore wind still remains very volatile, but we continue to get through that, and we're starting to see some good progress, while at the same time, cutting costs, reducing some headcount as well, and just becoming more efficient and nimble and ready for the next cycle of the offshore wind. We continue to push in our maritime sector. Maritime is still very stable, very active. We have a lot of activity across the globe, and that remains a very stable state. And in terms of our guidance, we haven't changed. We want to continue with 6.5% through the cycle. So as you know, we're at 3% at the moment, but the change is still the same, 6.5% through the cycle. That's our target going forward. In terms of dividend, we've just declared and announced the NOK 0.40. We're a dividend-paying company. We intend to continue to be a dividend-paying company. And I think this just shows the confidence in our ability to produce results and to give back to our investors. And finally, but not least, we always mentioned about M&A activity. With $3 million of EBIT, people say, can you still continue this? The answer is yes. We are still looking to continue to consolidate. We're still looking to look for opportunities to grow the company, but they need to be right. Any M&A activity has to fit in within the 4 segments of ABL Group or within ABL Group's philosophy of growth. So there are still good opportunities out there. Oil and gas is still a good opportunities. Even in renewable space, you're starting to see some activity. So overall, we will continue to consolidate. We will look for the right opportunity, but we'll only take those opportunities if they are right for ABL Group and ABL Group's growth story. So we're going to leave it at that. And if there's any questions, we're happy to take them.

We have one question online. What kind of actions are you taking in order to get back to your 6.5% margin target?

Yes. So it's many actions across all parts of the segment. I mean if you look at AGR, AGR stand-alone had an excellent quarter. really solid quarter. But with the acquisition of Ross Offshore, it brought down that margin, and they've only just joined the company. This is the first time we've reported. So the first action is to get Ross to AGR level. That's one. In terms of Longitude, you've seen a much better improvement across Longitude. And with the contracts that they are winning and the backlog and the pipeline, that should continue throughout ABL is still a very solid performance. I mean, we're trying to compare ABL to Q3 last year, which is not totally comparing apples-to-apples. But ABL's performance is very strong. So to get back to the 6.5%, it's all through the OWC segment. We have to turn OWC from being a negative position with the recent investments that we've made, get them back into profit, getting them back making the revenues out of the onshore activity and get OWC back where it needs to be. But for that to happen, it also needs the market to continue that improvement. As I said, we've seen positive action through the U.K., from Germany. Now we're seeing it through Korea as well, Japan. So as long as that activity happens, OWC will eventually pick up. OWC will eventually start to win those projects, and we'll get back to the 6.5% where the company -- where we stated the company should be. So we're confident that, that will happen, but it will still take a few months for us to get there.

We can take some questions from the audience.

Just continuing on the 6.5% margin target, could you reach that with ABL margins at the current level, do you think? 17%, 18%?

Yes. I mean 17%, 18% is not a bad margin at all. We're comparing it to last year's '22. And remember, we also made an adjustment with the taxes in there as well. So it's not totally like-for-like. But if ABL continue running at 18%, 19%, 20%, where we would like it to be, I mean, even ABL, we want to push. It's not like we're happy with it sitting at 17%, 18%. But ABL sitting at 17%, 18% is a very solid performance. So I don't want to take anything away from that. Longitude running at 20% as well is very solid. So the trick at the moment is to get Ross to AGR level and to get OWC back to where it used to be. And if you remember, they used to be running at double digit up to 15% EBIT margin. Do the numbers you get back to where you need to be. So I don't think there's any reason why we can't get there, but we need to renew the offshore wind to pick up, and we need offshore wind to get back to where it needs to be. And we're making the changes to be more agile, more nimble, reduce some of our costs as well within the OWC segment. And then once we see the upturn, which we're seeing, then we'll get back to where we need to be.

And then on OWC, revenue down 30% year-over-year. Is that just a market? Or have you lost the market share, would you say?

That's the market. We are still very strong in OWC. If you look at some of our competitors, you can see where they're going and what's happened. Some of them have been acquired recently. If you look, you will see that. OWC is not in that space. They have the powerhouse of ABL behind them to support them and grow OWC. And if you look at where we are, so Japan, seeing really good activity. Korea has just announced this week, new bids and new activity about to take place, and I think they have to do it before December. It's really quick activity in Korea. The U.K. segment has opened up quite dramatically with the last round, Germany is doing the same, but they just take a little bit of time to come through. So I think OWC as an overall, as long as it follows the market and we do what we do, we have a good market share. And if we can do more onshore activity, more in the CCUS space, more in the hydrogen, more in battery storage, more in solar, which is what we're seeing with the investments we're making, there's no reason for OWC not to get back to where it was.

Yes. And then on the margin side, is it mostly a question of utilization? Or rates to clients being reduced as well?

There's a little bit of rates. I mean, you push the rates, we try and win more work, so you reduce some rates sometimes to try and win work, particularly in offshore wind. But we're not seeing rate squeeze necessarily in other segments. It's utilization. Even in ABL, if you look at the utilization of ABL, it's gone down. You can say, well, why did you recruit more people? But we're not looking -- we're not doing what we're doing for the next 1 month, the next 1 quarter. We've been for the next 12 months. We do what we do for the long-term future of ABL in oil and gas and renewables and so on. So there is a squeeze on the utilization across ABL and particularly in OWC, it still really comes back to OWC. We have to get the utilizations up and they are going up. And if you look at the win rates and you look at the bidding and you look at the pipeline in particular, which we don't show, it's going where it needs to go. But these utilizations are down. It's not necessarily a rate issue. It's more about utilization. 1% utilization makes a huge difference to this company. But it is cleaning up a little bit in OWC as well, which is why we've taken action to reduce some costs, reduce some headcount and so on. So the first time we've seen reduction in headcount in OWC since we started the company, but it's the right action to take. Any more questions?

Two more questions online. Do you expect OWC to break even next quarter?

OWC would have broken even this quarter if we hadn't invested $0.5 million in doing onshore activity. So I don't want to sit here and say it will be breakeven next week or next month. We have taken a decision to invest in onshore renewables and other non-offshore wind activity. And we hope to see fruit of that. We're seeing fruit to that already. It's not that it's not already happening. We're seeing fruits already. But I don't want to tell you it will be back positive next week or next quarter. We always have Christmas holidays coming up, New Year holidays, Thanksgiving, and all the other holidays that come up. All I will say is that it's doing the right thing and it's going in the right direction. And if we had taken the decision not to invest, OWC will be positive today. But this is a strategic decision we took while we have the ability to do it. The market is there for us to do it. So that's why we want to continue that investment.

The next one here. Can you give us some more color on the margins in Longitude this quarter and the expectations going forward?

Yes. The Longitude as we discussed, is quite up and down, and it's only 3% or 4% of our overall revenues. They win a big contract, very high utilization and margins. They don't win a big contract, low utilization, lower margin. And it only takes 1 or 2 contracts to take that swing. They don't have the ability like ABL or AGR or others to take those humps and peaks out. What I will say is that they are winning good work. They continue to perform quite well. They've cleaned up some of their own operations as well, particularly in Singapore. So I don't see any reason for Longitude to change direction over the next 3 to 6 months. I think where they are is where I would expect Longitude to continue to be. But they'll always have these peaks and troughs just because they are lump sum based projects, discrete time period. So you'll always get this. It could be 21%, it could be 28%, it could be 15%. That's the only issue with Longitude is that you'll get these peaks and troughs. But overall, I think the level of activity within Longitude is very positive. And I think the long-term trend for Longitude is positive as well because they're in both the spaces, they're in both oil and gas and renewables. So they have the ability to take business from both.

The final question online. Can you give us some more flavor on the framework agreement with Equinor?

I cannot. I'm well aware of it. We have a few. I mean it's not only one. I think we announced we have 1 with AGR, but we also have framework agreements also with as ABL as well. It's not only AGR. So we have a few agreements with Equinor. I can't give you the details on them specifically, but they're long-term agreements as well. So we hope to ride on some of them and some of the quite new as well. So I can't give you more detail than that I'm afraid. I can get it for you, if necessary.

No more questions online, I think. So yes.

Okay. Great. Thank you very much, everybody. And if we don't speak to you beforehand, have a good Christmas, good New Year, and we will see you back again in the beginning of 2025.