James Fisher and Sons plc (FSJ) Earnings Call Transcript & Summary

Hello, and welcome to the James Fisher Interim Results Earnings Call. Our speakers today are Jean Vernet, Chief Executive Officer; and Duncan Kennedy, Chief Financial Officer. Following the presentation, there will be an opportunity for Q&A. [Operator Instructions] Please note, this event is being recorded and will be available in the coming days on our website. I will now hand over to Jean.

Thank you, Martin. Good morning, everyone, and welcome to our James Fisher 2023 Interim Results Earnings Call. Please note our disclaimer before I begin. After a brief introduction, I'll hand over to Duncan to run through our financial performance, and then we'll discuss our divisions further and our outlook to the rest of the year, finishing with Q&A. I am pleased to report a solid performance against our key financial metrics. This includes strong revenue growth of 17% in the first half of 2023. In particular, the Energy division performed well despite being compared against a relatively weak prior period. Underlying operating profit improved by GBP 2.6 million from GBP 14 million, and we enhanced our operating margin by 30 basis points. While we aren't operating at our targeted long-term levels yet, it does demonstrate early progress on our company turnaround. In April, we also completed a refinancing of our borrowing facilities in the period. This has allowed with the help of our banks to deliver on our critical priorities in the first half of this year. Duncan will talk you through some of those details shortly. Operationally, I am encouraged by our progress so far but we are just at the start of our journey to become a more efficient, effective and resilient company. We've further simplified our portfolio with the sale of the Swordfish, JFN and some underutilized and obsolete assets. We continue to measure all our business portfolio against the financial targets we set for ourselves of 10% underlying operating profit margins and 15% ROCE. Under the banner of One James Fisher, our 3 new divisions: Energy, Defense and Maritime Transport are tasked with building a more integrated company model underpinned by the right process, systems and teamwork culture. This is enabled through the group functions, including business excellence, which was stood up earlier this year and is initially focused on HSEQ and project management. We are working at attracting and retaining the right people with the relevant skills, as demonstrated through the appointment of key divisional and functional leaders in the first half. So when I look at the progress achieved in the first half, we are improving our forecasting accuracy, which is critical for us to regain credibility with our stakeholders. We set ourselves specific targets around revenue accuracy compared to our plan, which we have hit for the first half, alongside reducing margin deviation on projects. And while we have seen some success, there are also some challenges. For example, in the European subsea activity, which are -- which we are determined to overcome. We are much better at our collection process. We've also made good progress with our HSEQ rollout with group policies and procedures now in place. Our target is to improve our overall safety performance by 10% year-on-year benchmark against the highest industry standards. The first half of this year, we are largely on track and maintaining momentum as we build a stronger culture underpinned by a cadence of safety campaigns and leadership engagement. Our focus for the second half of this year remains centered on divisional success, driving towards our midterm 10% underlying operating profit and 15% ROCE targets. Duncan will talk to divisional performance in more detail. Overall, we'll still have much to do, but I'm encouraged with the progress that the group has delivered in the first half of the year. I'll now hand over to Duncan to run us through the financials in a little more detail.

Thanks, Jean, and thank you all for joining us today. So looking at our continuing operations, revenue growth was strong at 17.2%, generating GBP 252 million in the first half of '23. As noted by Jean, this was against a relatively weak comparator period. The Energy division in particular, showed encouraging signs for the future against a strong market backdrop. Underlying operating profit, which excludes certain one-off impacts such as refinancing and business and asset disposals, was up 22.8% to GBP 14 million. And this includes the negative impact of a contract provision of GBP 1.7 million in relation to our subsea business in Europe. This increase in underlying operating profits allowed us to demonstrate a modest 30 basis points improvements in margin, where the strong revenue growth and our internal improvement initiatives have more than offset the negative impact of inflation and some central function investments that we're beginning to make. And we're beginning to make some positive progress towards our midterm target of 10%. From a statutory perspective, our operating profit was down from GBP 9.8 million in the first half of 2022 to GBP 3.2 million in the second half -- at first half of 2023, excuse me. This is principally the impact of GBP 9.3 million of refinancing advisory costs, which has offset our positive trading performance. The appendix to the presentation includes a full reconciliation of the statutory to underlying operating profit numbers. Loss before tax of GBP 4.4 million is GBP 9.6 million below the first half of '22, which again really reflects the positive trading momentum offset by those one-offs. In terms of the loss before tax -- excuse me, principally refinancing advisory costs, and we have seen an increase in the bank base rates pushing up cost of borrowing. Following the sale of our nuclear decommissioning business in March, discontinued operations contributed a loss after tax of GBP 6.4 million in the period compared to a loss of GBP 1.6 million in the first half of '22 and a full year loss of GBP 19.8 million in 2022. The first half of 2023 results includes the trading losses of JFN through to the date of its sale, a book loss on the sale and a provision in relation to some outstanding guarantees. From a divisional perspective, this is the first time that we've reported the new Energy, Maritime Transport and Defense divisions. It's pleasing to report that all 3 divisions delivered improvements in revenue and underlying operating profit in the period. Jean will cover some additional operational highlights. But in terms of the financials, the headlines really are: the Energy division performed well, particularly strong performance in well-testing, artificial lift and bubble curtains. Although this was somewhat balanced by some challenges in the inspection repair and maintenance product line. Maritime Transport is very solid, with strong day rates and high fleet utilization within the tankers business and a stabilized performance from Fendercare in the period. Defense posted growth after a disappointing 2022 with strong demand for commercial diving equipment and good progress on long-term service contracts following some challenges last year. The central cost line reflects investments in strengthening our central functions and our group-wide governance improvement programs, including setting up the business excellence team during the first half of 2023. Looking at our cash flow performance in the period. We generated GBP 3.5 million from operating activities compared to an outflow of GBP 1.1 million in the prior year. Within working capital, we've made positive progress on debt collections, reducing debtor days at the end of June from 83 in 2022 to 70 at 30th of June 2023. We've looked to manage that against our creditor position where we've made an active decision to rebalance the overall working capital of the group and creditor days reduced from 97 at the end of June '22 to 82 at the end of June '23. We generated GBP 18.1 million in the period from asset disposals and business sales. This includes the Swordfish Dive Support Vessel, the JFN business and some underutilized or obsolete assets. This process of ensuring we're actively managing our capital base is continuing, and we could expect to see further sales of older equipment in the second half of the year. CapEx showed a significant increase over the first half of the prior year as we completed the purchase of 23 new more energy-efficient compressors to support the growing demand for bubble curtains in the offshore wind market. The seasonal nature of the business means that net debt is overall higher than it was at the 31st of December but we're showing good progress against 30th of June '22 comparator. And just touching on our refinancing, Jean mentioned that we refinanced during the period. This slide just sets out the key terms of that new facility and our progress to date against the covenants. Overall, the facility provides us with the stability we think we need to execute on our turnaround plans, and we're pleased that all 6 existing lenders are still supporting the group. The facility starts at GBP 210 million, which is a reduction from the GBP 247.5 million that we had at the end of December '22, and GBP 287.5 million at the end of June '22. This really reflects the steady progress that we're making within the business to improve the overall financial position of the group. There are planned step-downs in the facility at the end of this month, the end of December and the end of June 2024. Meaning that at maturity in March '25, the facility would be GBP 175 million. We have quarterly covenant tests of leverage and interest cover, as summarized on the slide. And these were set at levels to provide some headroom to our base business plan. The cost of putting in place the new facility in the period were not insignificant with GBP 9.3 million of professional adviser costs expensed in the period. In addition to a modest arrangement fee, the margin on borrowings flexes from between 250 up to 500 basis points depending on our leverage. You can see from the table, we're comfortably in compliance with covenants at the half year, and we're expecting to make further positive progress before the end of this year. We remain determined to reduce borrowings overall in line with our plans and expect to make further progress by the end of 2023. And with that, I'll hand back to Jean to cover some additional operational highlights and to wrap things up.

Thank you, Duncan. Turning to our performance by division. Energy has made some significant progress in the period, but also face some challenges we have to work through. Within our inspection, repair and maintenance business, the team delivered good revenue growth aided by the Swordfish being fully operational under the short-term lease that we contracted following its sale at the start of the year. In Europe, there were challenges with one of our seasonal charter vessels, which experienced a period of underutilization in June as work schedules changed. RMSpumptools, which produce artificial lift products that enhance the useful life of all reservoirs, continued its positive momentum for the second half -- from the second half of last year, with impressive revenue growth of 43% in the first half of 2023. Its order book is at record levels, and we believe that this level of business is driven by a midterm up cycle in oil and gas global ESP activity and a promising outlook also underpinned by an increased focus on sustainability in a demand-driven market. The Middle East, Asia and offshore Latin America are major strategic drivers for ESP, which is why we opened a new manufacturing site in Saudi Arabia earlier this year aimed at supporting the significant growth potential in that region. Further high-performing product lines within the Energy division include the well-testing and the bubble curtain businesses. They delivered equally impressive 47% top line growth over the first half of last year in a strong market with a new compressor fleet immediately deployed on the U.S. East Coast wind farm projects, a really strong and potentially significant opportunity market for us. The decommissioning product line faced some challenges but we recognize its potential in the marketplace. We have a unique technology offering in that space and having more selective on choosing our projects, resulting in a top line retraction. With good tendering activity anticipated for 2024 and a new management team in place, there is room to markedly improve that business. Renewables delivered strong top line growth, and a modest operating profit, reversing the loss position from 2022. The global opportunity for James Fisher is significant and something we have heard firsthand from our customers leveraging our track records over the past few years in Europe alongside the breadth and -- of our product and services. We can deliver support through the asset life cycle from construction through to operation and maintenance of wind farms. We have a unique and compelling differentiation, and we will focus on progressing this strategically important area in the coming months. Now turning to Maritime Transport. You will see that this division is already ahead of our 10% and 15% targets. It delivered 6% top line growth in the period and an improvement in operating margins. Within the tankers business, the whole fleet was highly utilized during the period, with a continuation of robust day rates for spot charters and rate increases for some of our long-term agreements. The gradual modernization of the fleet is a key priority for us to ensure the health of this business over the medium and long term. And we have now taken delivery of 2 new tankers in the last year with the latest addition of the Lady Maria Fisher, which is fully operational. At the other end of the age spectrum, we sold the Mersey Fisher for just over $3 million in the period. This vessel had reached the end of its useful commercial life after 25 years of loyal services. The fleet renewal program will continue over the coming years. Now within Fendercare, the first half of this year was broadly in line with the second half of 2022 as this business has stabilized with good momentum in Brazil. A fourth LNG ship-to-ship transfer kit was purchased and quickly the subject of a customer retainer agreement. We also took the decision to exit our business in Malaysia after a fall in activity in the region over the last 2 years. So overall, a positive half year for Maritime Transport, and we are looking forward to a strong second half. And finally, the Defense division, our order book in the OEM project segment of our business has yet to rebound. However, despite this, Defense has delivered encouraging top line revenue growth of 13.5% during the period and reversed the operating loss from the first half of 2022. Revenue growth has been driven by higher demand for commercial diving equipment, which is consistent with the higher levels of activity seen by our subsea businesses, in particular. The Defense team is also developing our next generation of products, and I'm excited by the level of ideas and innovation coming from this division. Long-term service contracts have seen good progress during the period with some challenging situation now being resolved, thanks to the hard work and dedication of our people, particularly in India. This is a business where I see a significant market potential. The subsea defense sector is undergoing an accelerated transformation, and the interactions with key customers continue to provide us with confidence that this division can once again become a key contributor to the financial performance of the group. This is further recognized through a strong sales funnel with over GBP 270 million of near-term well-qualified opportunities that the team is working to secure. Now as I reflect on the past year, and a focused, simplified deliver agenda that we shared with you in April, we now have a simpler, more cohesive organization, and we have a united hands-on senior management team. We also have embarked on the most urgent change initiatives, and we will continue to be selective on our portfolio to achieve our 10% UOP, 15% ROCE at pace. We are still early in this transformation, but we are positioning to be differentiated over the long term. Our strategic growth will be driven by the quality of our workforce, our ability to deploy consistent service around the world and our commitment to invest in unique bespoke technology and IP, leveraging our ability to partner our industry verticals. So to wrap up, I'm encouraged with both our financial and operational progress in the first half of the year. We delivered strong revenue growth and an improvement in underlying profit margin. The cost of our refinancing, although significant, provides a stable platform for the group to continue its turnaround. Operationally, the teams are working extremely hard as a team together to deliver our One James Fisher ambition, leveraging our strength as a group and enabling us to deliver our transformation agenda over the coming months and years. As we look to the end of 2023, trading in July and August were in line with our plans. Despite the macroeconomic environment showing some uncertainties with high interest rates, a slowdown in some key parts of the world and high inflation in the U.K., the markets in which we operate remain robust. In conclusion, we expect to make continued financial progress by the end of the year. And with that, I'll close the formal part of our presentation and open up to questions. Back to you, Martin.

[Operator Instructions] The first will go to any questions from the room.

It's Thomas Rands from Davy Capital Markets. Two questions, if I may. You mentioned in decommissioning there were some challenges. Could you elaborate on that a little bit more as to what -- which customers or which products within decommissioning you're having those challenges with, please?

What I was referring to is the fact that we have been more focused and selective on what we provide to this business segment around some differentiated technology and service skills, which led us to choose not to compete for some of the broader, less attractive projects.

The second question was just on Defense and the pipeline of next-generation products. Could you give us a little bit more color on which areas are of particular focus or which ones you're most excited about?

It's a very rich pipeline, both in diversity of products but also geographies. And it's really across our rebreather product line for subsea combat. It's around our submarine rescue systems and services, and it's around the work we do for customizing ingress and egress in and out of submarines. And finally, some of our mobility solution for special operations forces, right? But I would say that there is definitely an acceleration in that space led by the current geopolitical situation and a very tight relationship between the known allies U.K., U.S., Australia and the likes.

Alex here from Investec. Just a quick one on the sort of margins and maybe some areas of portfolio that's really going to push in the short term, I guess, 5.5% margins and 10% target. You mentioned pumptools as a kind of key kind of driver or maybe a small gem in the portfolio, but looking over the next 12 to 24 months, maybe what could you see as the key drivers to really push those margin expansions? And on the flip side, maybe what might be quite difficult or difficult to kind of push those margins as well?

So without getting too much into the weeds, our 3 divisions have different economics. I would say in Energy, the ideal model to pursue is where we can provide value chain services, where we can price the value of our services. And we are on the back deck of a vessel and we provide rent or service by the day, right? That is the ideal direction we are doing. Sometimes, we are being asked to take more than that. And in a market, typically, whether it's oil and gas or offshore wind, where it's a biased market for this type of vessel risk. We are being more selective and more -- I would say we are trying to -- we are working at negotiating a better risk/reward setup condition with our customers. So it's a culture shift. It's an evolution in where we think we fit in the market, and that's going to be a key part of attaining those targets. In the Defense division, as I mentioned in my prepared remarks, we are at the trough in terms of the OEM part of our projects. These typically are anchors in much longer-term services agreement. And for us, it's going to be a question of regaining scale, right? We are subscale right now. And as we realize those pipeline of OEM projects and the subsequent service agreement coming with it. It will be hopefully easily meeting those targets. For the Tankship, we're already up there.

Just a second one on JFN. I guess you put in a provision in the interim results of GBP 4 million. Maybe you could just see at its end of liquidation. Just maybe a bit more color and clarity on maybe some time lines of the process there with talking to the administrators?

Should I take that one?

Yes.

So the provision at the end of June was based on -- as you'll see in the detail of the financial section, discussions we were having as at the end of June, which ultimately weren't concluded. But from an accounting perspective, that pushes us into a provision position in the financial statements. We're working pretty closely with the administrators and with some of JFN's old customers to ensure that we find the best solution through a difficult situation for all of those involved. So in terms of time lines, it will -- I suspect, play out over the coming months. There's no clear time line from A to B, but we'd be hopeful that over the coming months, we can do what we can to ensure that those projects are delivered properly and in line with JFN's original commitments.

It's Alex Paterson from Peel Hunt. Can I ask 3 questions, please? Firstly, on the ship-to-ship transfer side in the statement, you talked a little bit about benefiting from a higher and more stable oil price. Obviously, since the period end, the oil price has gone somewhat higher. Is that something that you would expect may lead to an increase in trading activity and help that business? And then secondly, if I can just ask -- or it's 2 questions really on the financing facility. Does the margin on that move in a linear way from the 250 to 500 basis points? Or are there particular steps? And then would you -- what would you expect in terms of refinancing costs when that matures in March '25? I imagine they'll be a lot lower than what you've just incurred, but would there still be some element of refinancing cost when that comes to maturity?

So maybe I can pick up the first question, although you are more experienced than I. You have more perspective on Fendercare than I have, but Fendercare thrives -- I mean STS thrives when there is not just high oil price but also volatile oil price. So when you have backwardation in an old curve. And there is a lot of volatility right now. So it is actually pretty supportive of our business. So we would expect under these conditions to have a solid second half. Duncan?

Yes. I think that's right. And so on the financing facility, the margin steps are pretty linear between the leverage levels from 2.5 down to 1 on leverage and 500 basis points down to 250 on the margin. In terms of the refinancing costs, I would very much hope we're not refinancing in March 2025. But as we run through the life of this facility, I would expect that the next set of refinancing advisory fees would be markedly lower than they were this time around. And if you recall, it was a particularly complex set of circumstances that we're all dealing with, us and the lenders, bringing 4 separately negotiated agreements from years gone by into 1 and dealing with complexity around the JFN disposal. So it was a particularly complex period, but I'm pleased to get the facility in place and give us the headroom to move forward.

This is [ Plan ] from Radnor. The working capital improvement, what drove that? And how much more is there to go for?

Yes. So we've been focused, laser focused, I would say, on debt collections over the last 18 months or so. Yes, we've been able to drive much better collection process within the business. It all sounds very basic. But there's been a real focus from not just the finance folk, which is where people tend to look but across the business, the operational managers, the MDs, really ensuring that, firstly, we build quickly; and secondly, that we're all over the customers who aren't always jumping to pay us on time. So we're really focused on that. And in conjunction with that, we're trying to balance the overall working capital position of the group. So as debtor days have come down over the last 12, 18 months, we're also trying to balance out our creditor days, which if you go back sort of 18 months or so, we're well over 100, they're now much closer to 80. So it's been a balancing act for the working capital position as a whole, but really driven by the focus of the teams on collections.

Sorry, Thomas Rands. A quick follow-up question. With the U.S. wind opportunities and the bubble curtain progress that you mentioned, have -- has the project rollout and what you've captured on our market share been within your expectations? Has it been better or worse? And how has the opportunity changed or the outlook for that U.S. East Coast kind of changed over the last 6 months, please?

So the U.S. East Coast actually happened a little earlier than we planned. We were able -- I mean, the team, the supply chain and the teams, we did a really excellent job at bringing those new compressors live not just on time but a little bit ahead of time, which was great to kick off this campaign early. But these compressors are not just for the U.S. East Coast. They are mobile by definition. There is a tremendous upcoming demand in Northeast Asia where it was just for 2 weeks at the end of August. Where you see between the U.S. East and then later on West Coast and then Northeast Asia and then Australia and then Brazil. Later on, an incredible movement, acceleration of opportunities in terms of construction -- preconstruction and construction services for wind farms. So this is -- we see this continuing. Just to put some perspective, as of last year, the global capacity of offshore wind was about 50 gigawatt, and it's -- when you add up all the pre-FID, FID under construction projects, we are looking at close to 1,000 gigawatts by 2035 -- 2040, right? So it's a huge uptick by 20x, right.

We currently have no questions coming in via Zoom online or any raised hands. So I'll hand back to you, Jean, to wrap up.

Thank you, Martin. Thank you very much all for joining this call. Looking forward to talk to you at our year-end results and have all a great day. Thank you.