Fjord Defence Group ASA (DFENS) Earnings Call Transcript & Summary

This is Lee Parker and Nils Haugestad from Axxis Geo Solutions. We're here to report the first quarter 2020. I will start by flipping the slide to Page 2, which is a regular disclaimer and safe harbor statement. Then we will move into Slide 3, which is really just a summary about AGS, which is continued in Slide 4. We're an ocean bottom seismic company. We're a mixed mode. We do multi-client and also contract work. We've got an experienced management core, and we're basically an asset-light business model. We have core competencies and proprietary technology in-house, and we're really focused on operational excellence. So we try to deliver our product as fast as we can. We do that through 2 offices, primarily Oslo and Houston. Oslo is a financial center, and Houston is the operational base. Slide 5. Our real basic way that we work is we have an asset-light model in 3 main forms. Our vessels are flexible charters they brought in for the projects as we see fit, and we release them back. This allows us to reduce seasonal discrepancies in utilization. We have our nodes on a short-term and long-term leasing model. So again, that allows us to flexibly hand those back as we require them. And then our field crews, the field operations are all on a, what would we call, a flexible contract. They're on voyage-based contracts. They move in and out, as required, to different areas of operations. So we have -- we can very quickly ramp down our cost base and go to a very light level. Really, we're linking our utilization to our activity level. So if you've got a high utilizations, we charter lots of vessels, lots of nodes, and we have lots of people. When we're running light, we get rid of everything and hand everything back. Slide 6. Seriously, with the COVID-19 changes that have occurred, there's been a big drop in the oil price, partly due to COVID and the demands on oil and gas also driven by OPEC. So we've continued to focus on existing fields and reserves. That was our model originally, and it's even more applicable in today's stressed economic environment. Basically, a lot of our services are looking for appraisal, enhanced oil recovery, locations that can quickly return cash to oil companies. That really is -- a lot of that is infrastructure-led exploration. So what we're trying to do is maximize production and minimize cost. We see ourselves as a very attractive alternative to high-end streamer. This has been seen over the last few years. The streamer market is more exploration in a lot of the areas, especially in the multi-client, and we're more focused in the production and development cycles. If you look at the quarterly highlights. We had full operations throughout the quarter. Everyone is aware we had a significant delay in Q4, in the start-up of our Middle East program. But we're in full production throughout the whole quarter in the Middle East. We completed the source operation in Brazil with the Neptune Naiad. And a very important delivery milestone of the northern portion of our multi-client program in Utsira was done during the quarter. To extend the life of the projects that we currently had on the backlog, we received a letter of intent from Equinor for North Sea work in -- to occur in late Q2. That was finally signed in May, and the crew is currently mobilized for that project. I'll now hand over on Slide 10 to Nils, who will give you an update on our financial situation.

Thanks, Lee. So first, just an update on reporting going forward here. Since we have a significant exposure on the multi-client side, and that's part of the company's core strategy going forward, we will generally be looking at segment reporting as we are talking about numbers. And the biggest change there is dealing with prefunding and percentage of completion method for multi-client investments. We will, of course, also be reporting IFRS numbers as required. And so in our quarterly report and in the annual report, you will be seeing those numbers as well. We think this is generally in line with industry practice. Turning to Page 11. With regards to the first quarter, we had $45.9 million in revenue. So this was a solid quarter in terms of the top line. Cost of sales of $31 million and then personnel and other expenses of about $1.5 million, which takes us to an EBITDA of $13.5 million, which also is a 29% margin. On the D&A side, we have $2 million of D&A, takes us to an EBIT of $11.5 million or a 25% EBIT margin, which we think is also a solid number for the quarter. In terms of the D&A, just so that people get familiar with those numbers, in the D&A number here, there's about, rough numbers, $1.6 million of depreciation and then amortizations as this is segment reporting of about 0.4 in this case. Turning to Slide 12. Looking at the revenues over time, we think this is an important discussion. We see the variability here. But this is something that, as long as we're running one crew, we should be expecting, depending upon whether we're operating in a multi-client mode or in a contract mode. So if you're looking at Q1, Q2 of '19 here, this is contract work, in this case, in South Asia, moving into Q3, Q4, which is primarily then related to the multi-client survey that was done in Northwest Europe and then turning into the first quarter of this year, which is the contract work in the Middle East. On the EBITDA and EBIT side, the big adjustment here is the Q4 2019 that was talked about last quarter. Here, of course, we had a significant write-down of the multi-client library in light of our take of the world and opportunities at the moment. So we took a conservative approach and wrote down the multi-client library, then coming into Q1 of 2020 with a $13.5 million EBITDA and $11.5 million of EBIT. Going on to Slide 13. Looking at the asset position and how do we look now after these adjustments. So you now see a multi-client library of $29 million all the way to the right, total assets of $83 million. We have $16 million in PP&E. And in rough numbers, about $4 million of that is related to the Neptune Naiad and then, of course, a significant portion related to seismic equipment and handling equipment. On the $38 million of current assets, we're sitting at the end of the quarter with [indiscernible]. There's approximately $10 million of receivables and $16.5 million of accrued but uninvoiced assets. Turning to Page 14. Looking at the rightmost bar here, we now see an equity of $12 million or about $14.5 million of the $83 million in total liabilities and equity. The issue we've been addressing, of course, is the $71 million in liabilities. And this has been an ongoing effort for the last few months, and we'll come to that on the next slide, and we will update a bit on this. So turning to Slide 15. We have been in ongoing discussions with key creditors for quite some time. We believe, at this point, we are in mutual agreement on overall terms. The plan that's being discussed is one that would significantly strengthen the working capital and also improve liquidity of the company. We are not completely finished with the work, but we expect to be able to report something on this very shortly, and we'll be back to you at that time. Turning it back to Lee.

Okay. I will continue to give you a little update in our ongoing operations [ sort of ] in the Q2 and on territory. So we started, as we previously announced in early January, the survey in the Middle East. We have since completed that program that required a modern OBN imaging, well known by the team at AGS, and we expect that to field -- yield future opportunities in that area. The first phase finished. We finished an extension, and we are currently mobilized into the North Sea, on schedule for a late Q2 start onward there. Just a quick overview on where we are in the backlog and where we see the current outlook. So the top, we've got committed. So that's what's actually currently contracted. So we've finished the work in Brazil. We've finished the work in Egypt. We're currently still doing some short streamer work in Egypt, which is used to enhance the processing capability of that data set. And then we've got OBN operations in the North Sea. We still have outstanding opportunities in the North Sea for late Q3, early Q4. We then expect some tenders to come out, which are still in the pipeline for India, Gulf of Mexico and with West Africa and North Sea. We still have outstanding tenders in place for work in 2021, and we expect tenders to come for work into 2021. As written on the bottom there, we currently see our backlog at a little over $30 million at the end of the second quarter -- sorry, at the start of the second quarter. And we're seeing a pipeline of opportunities of $500 million from 2020 into 2021. Some of the work that's occurring in 2021 is multi-seasonal. It's between 2 and 5 years in duration. And we expect -- we've already tendered some of that, and we expect some of those tenders to come within the next 30 to 60 days. With the advent of the COVID-19 situation, we feel we've been quite fortunate. We only had one small VSP program canceled in Q2. The rest of our programs have continued. And all we've seen so far on the market is some slides to later in '20 or into 2021, but none of the programs that we had as high potential have actually been canceled. They're all going ahead. They've just been slid in time. With that, I think that wraps up our Q2 -- Q1 presentation and Q2 outlook. And any comments, you can address via e-mail or telephone to ourselves at AGS in our offices. Thank you very much.