DOF Group ASA (DOFG) Earnings Call Transcript & Summary

Welcome to the first quarter presentation for DOF. Hilde Drønen, the CFO; and myself, Mons Aase, are present. So it's a bit of a mixed feeling in the first quarter. We have delivered the best operational first quarter since 2015 with an EBITDA of NOK 804 million, which is the third quarter in a row above NOK 800 million in operational EBITDA. Good fleet utilization, good performance in all segments. And we see tight markets through the quarter. And then end March, we, as everybody else, were hit by the COVID-19 and a collapse in the oil price. And after that, it's been extremely challenging to operate and to win contracts and so on. So we see the quarter where we have taken huge impairments. We have big realized and unrealized losses on currency, and the long-term financial solution that we have been discussed. There is no delay, and we are in a phase where we have standstills from secured lenders and bondholders. We also expect to be hit by a huge drop in the earnings going forward for remainder of 2020 and at the end of May. As we speak, we have 18 vessels in lay-up. So we foresee a very tough last -- second part of 2020. On the contract side, we have a few wins. In South America, we signed a 2-year book with Technip for the Skandi Vitoria. We have -- on the negative side, we have a termination of contracts for Skandi Hav and Skandi Botafogo that we redelivered. They were terminated in April, redelivered in May. The contract were originally supposed to end in June. So we're a month earlier but -- and more problematic is that all tenders we have been discussing with Petrobras has been postponed. So -- and here we're optimistic on rolling most of the Brazil fleet over to a new contract with no experience, idle time lay-ups, and today, it's very difficult for us to say if and we expect -- also on the tenders and when the management will be. So it's too early to say. In APAC, we have won a couple more work for Singapore. We had a good first quarter in APAC. But April, May, it's been very slow and mostly due to postponement of contracts that we already were awarded due to COVID-19. We also had 2 anchor handlers contracts terminated early. So they came back in March, April, a few months earlier than planned. In Atlantic, we are pleased with the Skandi Vega contract, 6 more months with Equinor. On the negative side, we have had the termination of 2 PSVs, the Captain and Texel. Not a big impact on the earnings for the group as the rates we had on these contracts were low. The Skandi Caledonia were awarded a 4-well contract with Premier Oil estimated to roll in 400 days and supposed to start in June and July, now postponed until September, October. Geosund was awarded a 6-month contract. We started Geosea a 5-year contract in Holland, very happy with that. And then on the negative side, Skandi Acergy was terminated by their client, and we are receiving a termination fee that partly compensate the loss of the contract. We have won some work for some maintenance, Skansen, Hera and Iceman to install a fish farm in Norway in [indiscernible]. So all in all, we have 69% coverage for quarter 2 and 51% coverage for quarter 3. This slide, you have seen a lot of time before. It's not much new on that. So around 3,400 employees spread around the globe. So you also see where the vessels are operating at the moment. Then also here a slide we have used before. It's showing that DOF is much more than a shipowner. It's also a subsea company. And in quarter 1, we had NOK 1.3 billion turnover in the DOF Subsea, we have a backlog of NOK 13.8 billion and around 1,200 employees in the Subsea Group and also a large fleet of ROVs, 71 ROVs, which is one of the largest ROV fleet in the globe. Then Hilde will take you through the financials for quarter 1.

Thank you. And as normal, all the numbers are based on management reporting. Main highlights financially for first quarter is, as already mentioned by Mons, good operational performance. If we compare Q-on-Q, it was NOK 804 million compared to NOK 541 million last year. Beyond -- or below the EBITDA, it's impairment of NOK 1.5 billion, which is reflecting a weaker market going forward. And we have actually reevaluated all the value-in-use calculation during first quarter due to the sudden impacts in this year. It's split between vessels, so NOK 1.447 million (sic) [ NOK 1.447 billion ] on the vessels and equipment and NOK 85 million on the goodwill. High financial costs due to extreme volatility in the currency, especially a weak Norwegian kroner and Brazil reals to U.S. dollar. So our financial cost is impacted by close to NOK 3 billion due to this weakening of these currencies. So this gives a loss of above NOK 4 billion this quarter, and the equity is now negative. Before we go into the numbers in detail, this dramatic impact to the first quarter numbers was actually addressed in the director's report for 2019. If we look at the financial highlights on the segments. We have achieved 94 utilization within the PSV segment, which is substantially better than last year. We have 75% utilization rate of the anchor handlers and 78% on the subsea segment, of which the project fleet represents a utilization rate of 73%. So all utilization rates are actually better than same period last year. If we split into DOF and DOF Subsea, we still see that DOF Subsea represent the majority of the EBITDA, 61%, compared to 67% last year. And then it's 39% for the rest of the activity and -- compared to 33% last year. And that represent an EBITDA from DOF Subsea of NOK 491 million this quarter. And for the rest of the activity, DOF Supply, that's the anchor handler on the PSV fleet, of NOK 313 million. So if we split on the 2 groups, it's 75% utilization for the DOF Subsea fleet and 85% for the DOF Supply fleet. So all PSVs have been in operation this quarter, mainly in the North Sea and mainly on firm contracts. So I think it's only 1 vessels who partly have operated in the North Sea spot market. A stable utilization for the anchor handler fleet in Brazil. At the start of the quarter, especially from February, we saw a tightening in the markets in the North Sea. But towards the end of the quarter, the impacts from COVID-19 started to impact the operation and reduce the utilization, especially in the North Sea from April onwards. High utilization on the subsea vessels on firm contracts and improved performance from the regions. And as already mentioned by Mons, by end of May, we had 18 vessels in lay-up, and that is a number -- the highest number ever in the group. If we look at the P&L, you see that the EBITDA before -- is NOK 800 million compared to NOK 541 million or NOK 496 million if we include the hedge accounting from previous year. All hedges were released by end of 2019, so there are no impacts in this quarter from hedge instruments. Depreciation, more or less at the same level. And here, you see the impact of the impairment of above NOK 1.5 billion compared to NOK 50 million. So that gives a negative EBIT of NOK 1 billion compared to a plus of NOK 133 million last year. It's fair to say that the FX, a very weak Norwegian kroner to -- especially to U.S. dollar has had a positive impact on the EBITDA. However, the utilization of the fleet has actually been better within all segments compared to same quarter last year. The impairment is, as already stated, based on updated value-in-use calculation and fair market values. On the fair market values, we have experienced a significant drop based on an expected weaker markets going forward. On the financials, we have experienced a loss in currency, both on realized currencies and unrealized currency. That gives a total number of NOK 2.9 billion in this quarter only, of which NOK 528 million is realized. Part of that is release of FX and transaction and also payment of -- or normal amortization. So the movements or -- within the currency has been extreme this quarter and at levels I could not imagine when we started the year. If you look at the segments, and here, you see that the segment has achieved a better operational EBITDA than the same quarter last year, NOK 39 million on the PSV compared to minus NOK 6 million. It's fair to say that during first quarter last year, we had several vessels in -- preparing for new contracts performing class dockings. On the anchor handler side, that is pure utilization. It's a better utilization compared to previous year, and some of it is FX. And you see on Subsea, the comparable numbers is NOK 534 million compared to NOK 376 million, which is also better performance. So in total, that gives NOK 804 million compared to NOK 496 million. But if you look at the EBIT, you see there is a minus in all segments, and here, you see the split in impairments done on the various segments, of which the largest part is on the Subsea assets. Since 2015, we have done impairments, especially on the PSV and anchor handler side and less on the Subsea assets due to a newer fleet. So that's the main reason why the highest impact is actually on the Subsea assets. So that gives a minus of NOK 147 million on the PSVs, minus NOK 325 million on the anchor handlers and NOK 564 million (sic ) [ minus NOK 564 million ] on the Subsea assets. So the EBITDA margin is pretty good, but the EBIT margin is, of course, extremely weak due to impairments done in this quarter. And again, this is the impact after the COVID-19 and a sharp drop in the oil prices, which has resulted in expected reduced activity going forward and reduced earnings. On the EBITDA, you see the split is -- the majority of EBITDA come from the Subsea assets, slightly lower this quarter compared to quarter last year. If you look at the DOF Subsea Group, DOF Subsea is reporting in 2 segments. It's the subsea IMR projects and it's the long-term chartering, of which the majority of the backlog is within the long-term chartering, mainly the PLSVs in Brazil. If we start on the IMR project, you see a total revenue of NOK 859 million and an EBITDA of NOK 141 million. This gives a margin of 16%, which is a better margin compared to same period last year and a backlog of NOK 3.3 billion. And here is the majority of the vessels, in total 18, of which 1 vessel is hired in from an external party. And close to 1,200 employees working in this segment. If you go to long-term chartering, it's a revenue of NOK 470 million and EBITDA of NOK 349 million, which gives a margin of 74%, which is not far from or more or less in line on the same quarter last year. Nine vessels in operation, and a backlog of NOK 10.5 billion. If we look at the historical performance, and here, you see where we had the EBITDA at same level as this quarter was actually first quarter 2016, an EBITDA of NOK 801 million and an EBITDA of around NOK 530 million to NOK 540 million during the -- from 2017 until 2019 and then NOK 804 million in 2020, partly impacted by FX, a weak Norwegian kroner towards -- versus U.S. dollar but also good utilization of the fleet, which gives a margin of 39% this quarter. If we go to noncurrent assets, that's mainly vessels of NOK 24 billion and represent -- I think in this balance sheet, it's 64 vessels in total plus our subsea equipment and ROVs. But the main impact this quarter is the equity, which now is minus NOK 245 million, and that is due to -- it was actually a weak result in fourth quarter but even weaker result for first quarter due to high impairments and high losses on currency, of which the main part is unrealized loss on currency. So that gives a negative equity of NOK 245 million. You can also see that the noncurrent debt and the current debt is significantly changed compared to first quarter 2019, and that is due to the reclassification of the majority of the secured debt and the bond debt by end of 2019. So that gives noncurrent debt of NOK 9.8 billion compared to NOK 20 billion in first quarter last year and NOK 18 billion compared to first quarter of NOK 5.6 billion in first -- in 2019. So that's a major change, which I will show on the next slide showing the balance sheet. And here you see the development from end of last year and first quarter 2019. As already mentioned, the vessel values -- the book value of the assets, mainly vessels, are impacted by high impairments of more than NOK 1.5 billion. And the goodwill is, as you can see, now written down from NOK 295 million last (sic ) [ first ] quarter last year from NOK 85 million by end of the year to 0 this -- by end of March this year. So that's the main changes on the noncurrent assets. If you go to current assets, the cash and cash equivalents are, of course, very important. If we see the operating cash flow achieved this quarter is actually NOK 440 million compared to NOK 43 million last -- same period last year. If you see on the investments, it was NOK 86 million, and that represent mainly class renewals dockings in the fleet compared to NOK 902 million last year. Last year, we received our last new building of PLSVs -- PLSV in the DOFCON JV, was delivered in January 2019. If you go to the financing activity, we have a negative number of NOK 127 million versus a positive number of NOK 520 million last year. But the main impact on the cash this quarter is from the FX, which is a realized loss of NOK 336 million, and that is release of the several position -- FX position in one of our subsidiaries. That gave cash from NOK 1.7 billion in -- by end of the year to NOK 1.6 billion, of which NOK 166 million is restricted cash. And then again, you see the equity has moved from NOK 5.6 billion first quarter 2019 to NOK 3.4 billion by end of the year to minus NOK 245 million, impacted by impairments and currency loss already mentioned. And on the long-term liabilities, that represents -- of NOK 9.6 billion this quarter, that represent the debt in the DOFCON JV and the debt to BNDES for the group. All secured debt and bond loans are classified as short term due to that waiver periods are less than 12 months. So that's the number you see of NOK 16.5 billion. The group has, however, paid installments first quarter and the number is NOK 360 million approximately, and that represents normal amortization in parts of the group and mainly to -- related to DOFCON and BNDES debt. As you also can see is that the gross debt has actually increased even though we have repaid some debt this quarter, and that is due to FX, which has increased the debt by NOK 2.8 billion. So that was the numbers. So if we take some key financials, so year-to-date or if we take the last 12 months, we see that the revenue has increased, the EBITDA has increased and even the backlog. On the backlog, that's basically due to a very strong U.S. dollar because most of our firm backlog is in U.S. dollar. The EBITDA and revenue, already mentioned, is also impacted by FX. However, it's also impacted by a good utilization of the fleet this quarter. So that was it for the numbers.

Yes. Then we're all on the last page, outlook. And I think it's more difficult than ever to comment on the outlook. Today, we are hit by COVID-19 and we are also hit by the large drop in oil price. And the COVID-19 have -- will delay and postpone projects. And of course, we do expect that when restrictions are gradually lifted, some of these projects will come back and will be executed hopefully later in the year. So what we are seeing is that April and May has had very low activity and also that is due to projects being postponed by COVID-19. However, there is no doubt that the low oil price will have, let's say, a long -- because we don't know how long the COVID will last, but we know that as long as oil price are at these levels, we expect the activity level to stay low. So -- when we now have delivered I will say 3 quarters with last -- second half last year and first quarter this year with EBITDA above NOK 800 million, we'd be -- are not able to give a precise guiding for the remainder of the year because the uncertainty is very high. But we are -- what we believe is that we will see a sharp reduction in the operational EBITDA for the last 3 quarters of the year. And we have, for the next 12 months, we have the backlog of -- contract of around 50%. We -- as we saw earlier in the presentation, we have 69% covered for second quarter. And if the market continues as they are today, it will be very difficult to build new backlog for the group. But as we said, we don't know how much is influenced by COVID and how much is influenced by low oil price, and of course, it's part of the reason why we are not able to give a new guidance on the EBITDA for remainder of the year. As we have said, the global markets in all segments are very challenging, and the tender activity is very low. The rate levels are low, and of course, the utilization are very low. And of course, for the fleet, that work in the project market or in the spot market has been extremely low utilization in -- after the COVID-19 hit the global markets. So it's -- we expect this to be challenging also for the remainder of the year. We cannot predict when we expect this to turn and we just have to do our best day-by-day in this challenging market. On the financial side, as we have said in the press release, we or -- the Board and management are all working on a long-term solution and/or in discussion with bondholders and secured lenders, and of course, the solution is -- probably need to be different than the solution we discussed before the COVID-19 and before the large drop in oil prices. So thank you. That was the presentation. We will host a call and you are all invited to call in on that, and we will try to answer questions as good as we can. Thank you very much.

Thank you.