DOF Group ASA (DOFG) Earnings Call Transcript & Summary

Good morning, and welcome to the quarter 3 presentation for DOF. Myself, Mons Aase, will do the presentation. We will, after the presentation, do the question and answers if -- and that we'll do just after the presentation, so you don't have to log off and on again. You just stay on and we open for questions after the presentation. We start with the highlights in quarter 3. And we achieved an operational EBITDA of NOK 879 million based on management reporting, and we are pretty happy with part of the business especially on the Subsea side. We are satisfied with the EBITDA achieved. You can see that from the fleet utilization average, 67%. We had 81% on the Subsea fleet, which is the same as we had in same quarter 2019. Low utilization on the PSV fleet and low utilization on anchor handling fleet. I'll comment on the market a bit later on. But it was the PSV market especially are extremely weak all around the globe, and of course, that's why we have this low utilization. We had taken other boats into lay-up this year. COVID-19 has been a challenge for us, as everybody else. It's impacted the operations and caused significant costs and also lower utilization due to COVID. So we also will touch back on that later on. What we are very happy with in the quarter is that we secured new contracts with a total value of NOK 3.7 billion in quarter 3 and so far in quarter 4. So that I'm very proud of what we have achieved on the contract side in the quarter. We have 13 vessels in lay-up. It is -- around half of it is PSVs, older PSVs, one subsea asset at the end of the quarter and then the last is anchor handlers, mainly 2 of them in Brazil and the rest outside Brazil. We have agreed standstill with the banks until end January '21 and with the bondholders in DOF Subsea until mid-December '20. We also sold the shares in DOF Deepwater to Akastor. If we look at the contracts in the quarter, there's quite a few. We have had a 3-year contract awarded on the Skandi Salvador in Brazil from the Libra Consortium led by Petrobras. It will start in the spring, and the margin on the contract is so much better than what we have achieved on the boat on the existing contracts in this year. So it's mixed up in the right direction for that boat. We also have a very large award from Petrobras on -- we got 4 contracts. We call it inspection contracts. It's really an inspection in Brazil worth around USD 110 million. It will utilize 3, 4 boats, totaling 1,500 days. And we start on the contract in this quarter, quarter 4, and expected to complete in quarter 1 -- late quarter 1 2022. So it will utilize between 3 and 4 boats in most of 2021. So it will be the Salvador partly before we commenced the contract with Libra and then we are sending down [ Buchan ] and Skandi Carla from our international fleet. So very good contract for us. In Atlantic region, we have achieved a 2-year extension on the Skandi Africa with Technip. That is in direct continuation from the existing contract and so it commenced in October. Skandi Vega, we had a 6-month contract with Equinor and they had an option to extend to a 2-year contract, which they then decided to be clear and the [indiscernible] until May '22. We got a good contract in Angola with a major oil company in Angola for the Skandi Seven for around 300 days plus 1-year option commencing then early in 2021. And a few smaller contracts in the Atlantic for Teekay and other clients, so giving good utilization on the Acergy and Iceman here in quarter 3 and into quarter 4. And so it's also filling part of the days in quarter 4, which is important. In APAC, we have -- in the recent quarter, we got extension of a frame agreement with Chevron, which was important for us. And that agreement has given us between, let's say, 80 and 150 days a year of utilization on oiler, the Skandi Hercules; oiler Skandi Singapore. So it's an important contract for us. We finalized a big mooring repair and replacement project in APAC with Skandi Hercules and Skandi Singapore, which gives good utilization then in quarter 3 and in October in quarter 4. And a few other awards, so giving reasonable utilization also in quarter 4 for the fleet in APAC and starting also to pick work now for next year. So in total, as we said on the last page -- the previous page, we have been awarded NOK 3.7 billion in contracts. We have estimated an average margin for the contracts around 35%, so also pretty satisfied with, let's say, the margin -- the average margins on these contracts. If we look at the backlog for quarter 4, we have around NOK 1.8 billion in backlog for Q4. And of course, if you compare that to the turnover then in quarter 3, we had a turnover around NOK 2 billion in quarter 3. So we have almost -- most of it in the bag for quarter 4. For next year, we have NOK 5.7 billion in the backlog for '21. So we call it a decent foundation for '21 already in the bag. If you look at -- I guess, this slide mostly you've seen before. So we are a global player. And I think also this quarter has been extremely important when you see where we win the jobs in West Africa, in Brazil and in Asia. And so it's important to have this global placing forward. We have around NOK 7.4 billion (sic) [ NOK 17.4 billion ] now in backlog, around 3,200 employees and we operate 65 vessels globally where we own 56 of them. On the COVID side. Of course, it's -- I will not say much. It's challenged. It's tough for the employees. We are going to do a lot of testing. We do a lot of quarantine. It brings significant costs and also, of course, impact on utilization. It's -- but I think we have all managed to do operations as normally. It's a hard job and I'm very satisfied with all the employees the way we have handled this so far. If we go to next page, it shows in the third quarter for DOF Subsea. So we report that in 2 segments, the subsea IRM segment and the long-term chartering segment. So the subsea IRM segment, we see we had revenues of around NOK 970 million in the quarter. It's NOK 245 million in EBITDA, so giving a margin of around 25%. And I think that is a bit up on the average we have had the last few years, so moving in the right direction in the quarter. We built backlog in the quarter and the backlog in that segment is now around NOK 5 billion. So we have close to 1,200 employees on the -- in that segment on the subsea IRM segment. So that is engineering resources, ROV pilots, it's server people, it's project manager and so on. So -- and we operate -- in the quarter, we operated 17 boats in that segment. And as we said, all, apart from 1 boat, in operation by the end of the quarter. So 1 boat in lay-up. On the long-term chartering side, it's 9 boats. It's the pipe layers we own in a joint venture with Technip [indiscernible] And it's the Acergy and Patagonia and [indiscernible]. We see revenue in the quarter of NOK 580 million with an EBITDA of NOK 462 million, so giving a margin of 80%. And we have a backlog in that segment of NOK 8.1 billion, so giving a total backlog of NOK 13.1 billion. So all in all, as we said at the start, 81% utilization on the Subsea fleet. And I would say we are satisfied with the quarter in DOF Subsea. And I'll leave it to Hilde to do the numbers. Hilde?

Thank you. If we go to the highlights. Main highlights for third quarter is, as already mentioned by Mons, good operational performance and that relates to the Subsea segment, but reduced performance from the PSVs and anchor handlers. Total EBITDA of NOK 879 million compared to NOK 803 million same quarter last year. We have seen a drop in fair market values also this quarter, and we have also recalculated our value in use. A calculation, which is based on our long-term forecast, and that resulted in an impairment of NOK 667 million this quarter compared to NOK 917 million last year. Year-to-date, we have taken close to NOK 3 billion in impairments compared to NOK 1.1 billion in previous quarter. If you look at the financial costs, they have NOK 343 million, which is more or less interest costs compared to NOK 1.4 billion in third quarter last year. Nothing much has happened on the FX, only that Norwegian kroner has strengthened during the quarter and then BRL has continued to drop. If we look at the year-to-date financial costs, there is a significant impact on unrealized currency losses of NOK 2.3 billion in total. So net loss of NOK 406 million. The other events on the balance sheet is that the standstill have, of course, impacted the balance sheet, increasing the interest-bearing debt and increase the cash position. And we now have a negative equity of NOK 1 billion approximately that impacts on the going concern assumption. This result has been prepared on a going-concern assumption due to standstill agreements until December and January. So if we go into -- more into the operational side. The average utilization is 67% in third quarter. It's 64% for the PSV segment compared to 94% same quarter last year, and 48% for the anchor handler segment compared to 75% same quarter last year. And on the Subsea segment, it's more or less the same utilization rate as we achieved same period last year. If we look at the mix between DOF Supply and DOF Subsea. DOF Supply includes to DOF Rederi and NorSkan. So they achieved 20% of the group's EBITDA this quarter, NOK 173 million in total. And DOF Subsea achieved an EBITDA of NOK 706 million, that represents 80% of the total EBITDA. Included in the EBITDA for DOF Subsea is a termination fee, which is booked as revenue this quarter, received this quarter due to 2 contracts that were terminated as we reported in second quarter. I will come back to that. If we take the DOF Subsea and the DOF Supply again, you see that the DOF Subsea alone achieved a utilization rate of 82% and DOF Supply utilization rate of 57%. Currently, on the anchor handler fleet or -- by end of third quarter, we had 6 vessels in lay-up. And 1 vessel was sold, that's the Skandi Giant that had been in cold lay-up for 2 years before the sale. We also have experienced reduced utilization in Brazil. That is partly due to docking, mobilization to new contracts and lay-up. In Subsea, as you can see, the utilization rate is the same as it was same period last year and improved performance from Subsea regions, especially the Atlantic region and the Asia Pacific region. One vessel in lay-up in this quarter. Within the Subsea segment, we have also recycled a vessel, that is Skandi Hav, which was built in 1983. By end of September, we had 13 vessels in lay-up versus 17 in second quarter. So the number of vessels in lay-up has been reduced. Included in the lay-up are also the DOF Deepwater fleet with 4 vessels. The shares in DOF Deepwater has been agreed sold in August and closed in October. I will also come back to that. So if we go to the P&L, you can see that the EBITDA is NOK 879 million compared to EUR 803 million. And total EBITDA -- or year-to-date EBITDA is NOK 2.4 million, close to, compared to NOK 2 billion same quarter last year. The gain from sale of vessels is actually the price that we achieved for Skandi Giant because that vessel was written down to 0. It's also important to mention that included in the revenue and the EBITDA is NOK 110 million booked as termination fee due to 2 contracts terminated within the Subsea segment. I've already mentioned the impairment of NOK 667 million and included the depreciation that gives a negative EBITDA of NOK 46 million compared to NOK 503 million same period last year, and accumulated NOK 1.4 billion compared to minus NOK 188 million same quarter last year. And here, you see that the year-to-date impairment has highly impacted the numbers so far this year. Net profit before unrealized currency is minus NOK 403 million. Interest cost is more or less at the same level as last year. And if you take the accumulated, it's slightly higher and also impacted by a currency loss that happened during first half this year. If we take the unrealized currency loss on market -- on debt and on market instruments, it's nothing much to report this quarter compared to previous quarter. And that gives a net loss of NOK 389 million compared to NOK 1.9 billion last year. More -- and if you take the accumulated, it's as big as NOK 5.3 billion minus compared to NOK 2 billion. And you see that the unrealized currency loss or currency loss in total has highly impacted the numbers year-to-date, but not particularly this quarter. That was it on the numbers on the P&L. So if we go to the segments, here you see the 3 different segments. And the PSV -- the EBITDA from the PSV segment has gone down. Revenue is the same, but the EBITDA is lower meaning it reduced margins. It is -- this quarter is slightly better than second quarter, also fair to say. The second quarter was NOK 16 million in EBITDA compared to NOK 22 million in this quarter. If we look at the anchor handler segment, you see also that revenue is more or less the same, but the margin is better, NOK 151 million compared to NOK 140 million. Compared to same period last quarter, the number was -- compared to second quarter, the number was NOK 140 million, so a slight improvement on the anchor handler segment as well compared to previous quarter. If we look at Subsea, they achieved an EBITDA of NOK 706 million compared to NOK 583 million. So that is a significant improvement, and of course, the main contributor here is, of course, DOF Subsea. If we reduce with the termination fees of NOK 110 million, it's still a good number on this segment also on the EBITDA and it's better than second quarter. And if we look at the margin on this segment, we achieved 44% compared to 36%. If we reduce with the termination fee, it's close to 40%. So still good numbers or good performance from the Subsea segment. If you see on the cakes below, you see that Subsea is a substantial part of our revenue, the PSV is declining and the anchor handler segment is declining. On the impairment, you can see it's a split on all the segments: NOK 69 million on the PSV, NOK 14 million on the anchor handlers and NOK 584 million. It's also fair to mention on the anchor handler, we took a big hit in second quarter. So that is the segments. So if we go to the historical performance, you see the line on the top, the margin is pretty stable, around an average of 35%, 36%, and of course, an increased margin in the latest quarter but still a margin close to 40% if we deduct with the termination fee. So good performance on the operational side. If we look at the current assets, they are going down, of course, impacted by the impairments. No vessels delivered since first quarter 2019. And of course, the equity is negative, very much impacted by weak result this year due to impairment and currency losses. Net interest-bearing debt is 21.5 compared to 22 the previous quarter. I will come back to that when going through the balance sheet. So if we go to next, you see the tangible assets has been reduced from, well, NOK 24.3 billion end of the year, NOK 21 billion by end of previous quarter to NOK 20.2 billion this quarter, and of course, impacted by depreciation and impairments year-to-date. Deferred taxes, no big events. We did a big breakdown on those in 2019. So total current assets (sic) [ noncurrent assets ] of NOK 20.8 billion compared to NOK 22 billion in previous quarter and 24 -- or close to NOK 25 billion by year-end. If we look at the current assets, you can see that the cash has increased gradually and that is, of course, impacted by standstill for the group. That excludes the DOFCON JV and also the DOF Deepwater JV during the period. The group did a full standstill for the group. Parts of the group has had standstill also in a full second quarter. But during second quarter from May, the group has had standstill from the secured lenders and bondholders the entire quarter and also from May in second quarter. If we look at the equity, already mentioned, it's, of course, negative of NOK 1 billion due to weak result also this quarter after impairments, so the net result was minus. And that, of course, impact the going concern assumptions. But already mentioned, we have standstill agreements with banks and bondholders until December and January. If we look at long-term debt of NOK 4.5 billion, that is our part of the debt at DOFCON JV of 50%. And all other secured debt are classified as short term and that was NOK 19.9 billion this quarter. And you can see that it has been -- the gross debt has been classified as short term during the entire period so far this year. It is -- the long-term debt is, of course, negatively impacted by accumulated interest and FX year-to-date. So if we go to the group key financials. So what is, of course, positive, if you take the last 3 years or if you take it from 27 (sic) [ 2017 ], the revenue has been stable and is starting to increase again. And if you look at the EBITDA, also deducting with the termination fee, it's going in the right direction, which is positive, so the operational side is good for the group, has been good the last 12 months. If we look at the backlog, we see that there is a decline and the numbers was NOK 18 million by end of 2019. And today, it's NOK 7.4 billion. So the group has been able to build backlog also during this quarter, already mentioned by Mons. So if we go -- say a few words on the debt restructuring. We have agreed standstill agreements with the secured lenders within the DOF Group, representing 91% of the lenders and that excludes DOF Subsea and the DOF Deepwater JV. And DOF Subsea has agreed with 88% until end of January 2021. We have also signed standstill agreements with the bondholders until the 15th of December. We have agreed to standstill agreements with BNDES until end of December. This is part of a governmental package due to COVID-19 in Brazil. In October, they released an extension of these standstill agreements from end of December until during first half 2021. So it is possible to extend these standstill agreements until end of June and we have, of course, applied for that scheme. If we look at the DOF Deepwater, as part of the debt restructuring in DOF Deepwater, of which the group owned 50% of the share, the shares was agreed sold to Akastor in August. So that means that the results and balance sheet from DOF Deepwater will, from fourth quarter, not be included in the group's balance sheet. It's also important to mention that the DOF's guarantee commitment of 50% of the DOF Deepwater, approximately NOK 530 million, will be part of the group's debt restructuring. As part of the agreement, Akastor waived any recourse claim to DOF, and DOF is still operating the DOF Deepwater fleet. The group has, as we report in the financial report today, has submitted a debt restructuring proposal to the secured lender and bondholders. This proposal includes conversion of debt to equity meaning that it will, of course, have a comprehensive impact on the group's balance sheet. It's not more to say about that. We are, of course -- the Board and management are, of course, working hard to secure a long-term solution for the group. And how long that will take is not easy to forecast, but the discussions is ongoing and the dialogue is constructive. So that was it for me. So then I give the word to Mons.

Thank you, Hilde. On the market and outlook, if you -- yes, thank you. The markets. Of course, we see oil price has been stable around between $40 and $45 lately. The outlook for the industry is, of course, still weak. We have had deferrals and interruptions from COVID-19, and of course, the oil price put pressure on the whole sector. So it's still very challenging markets to operate in. So it's -- and of course, it's -- of course, this figure shows the impact on the anchor handler's utilization, the PSV utilization and also, of course, on the rate. We see here that on the PSV side, the drop in North Sea is more than 40% on TC rate. So -- and I think that also, of course, reflects -- is reflected in the performance in our PSV segment in the quarter where we see a lot of boats going into lay-up. And so it's a really tough market on the PSV side. On the anchor handler side, it's a more mixed bag where we see -- we have been able this year to secure decent contracts in Brazil with the renewed Skandi Vega on a good level. And where, in the PSV segment, big difficulties to, let's say, differentiate yourself from the competition. On the anchor handling side, it's a bit -- it can be done geographically or due to the vessel specification. So the Skandi Vega is a good example of that where we have basis much bigger than -- also compared to the fleet, meaning that you get the premium for the boat. And still, of course, we see that, in Brazil, that the rate levels are better than what is possible to achieve and sales. So -- but on the PSV side, it's very, very difficult to find work that this is a decent payment. We call it almost impossible. On the Subsea side, I think it's still possible to find work and also with decent payment in various segments and in some regions. It is, we call it, completely dark on the PSV side, still a few opportunities on the anchor handler side and the same on the Subsea side where it should be able to win -- continue to win a few contracts like we did in quarter 3. So if we flip the page, we go to the outlook. We have mentioned it. COVID-19 have impacted the operation, and we expect it to do it going forward as well. So it impacts on the way that we have higher costs due to quarantine requirements where we have our people and offshore workers in hotels in quarantine before they go onboard. Both, of course, that cost money, and of course, it's also very tough for the employees to be in quarantine or isolation in hotel rooms across the globe. So they do a fantastic job for us in this very challenging times. But we also have had COVID onboard the boats. And of course, that have resulted in off-hire and the change of the entire crew and the cleaning of the boat, so they also impact the utilization. What we have seen is that we have been less hurt in the last 3 months than maybe we are, let's say, at the earlier part of the year. As we mentioned on the lower operating market is -- the markets are challenging. But as we said, various utilization and good earnings between different regions and segments. To repeat myself, we see very, very, very tough on the PSV side. And we see on the anchor handling side, especially in Brazil, that there are opportunities and still possible to secure decent contracts. On the Subsea side, I think quarter 3 shows that it is possible to work on decent utilization rates and that we are able to win contracts in some segments and some areas and that gives this margin. But of course, the underlying is that it is challenging all over the segments and the regions. If we look forward, the backlog for quarter 4, as we said, is NOK 1.8 billion. It's a decent foundation for quarter 4. And comparing to the turnover in quarter 3, it's a large portion that already secured. But next year, we have NOK 5.7 billion in backlog and that, of course, also gives, let's say, a decent starting point for 2021. We expect, as we always do, that quarter 4 will be weaker than quarter 3. The good part of it is the termination fee in the mention of NOK 110 million. But we will also expect the market and some regions to be [indiscernible] due to seasonal variations in quarter 4 compared to quarter 3. If we go to the financials just to summarize that. As Hilde mentioned, we have presented a refinancing proposal to the -- to our creditors. And we are dependent on continued standstill agreements with the creditors until a long-term financial solution is agreed to maintain us a going concern. That is the end of the presentation, and then we go now direct to a Q&A session. So please ask questions, if you have any.

Okay. Then I think we close the presentation. Thank you for listening to our webcast today. And then we close the presentation.

Thank you very much. Have a nice day. Thank you. Bye.