Loc Group Holdings Limited (ABL) Earnings Call Transcript & Summary

Welcome to this webcast presentation in connection with AqualisBraemar's announced acquisition of LOC Group. My name is Haakon Brandrud, and I am the Director on Strategy and Corporate Development at AqualisBraemar. I'm joined here today by our Chairman, Glen Rødland; and our CFO, Dean Zuzic, who will take you through the presentation. [Operator Instructions] Before we start, I would like to bring your attention to the disclaimers on Page 2 of the presentation. And with that, I will hand over to our presenters. Over to you, Glen.

Thank you very much, Haakon. Yes, could we switch to Slide 3? AqualisBraemar is a marine and offshore consultancy. Our business model is based on hourly billing and pretty similar to the Scandinavian civil engineering consultancy of Sweco, ÅF Pöyry and Multiconsult. The common denominator for most of the work we are doing is to work for the marine and energy insurance industry. Our biggest hubs and our key customers are based in London, Lloyd's of London. And we all know Singapore, Houston, New York and Oslo. Those are the hubs for the marine insurance industry. We divide what we are doing for the industry into 3 separate area. We do project consulting within offshore wind; marine operation; harbors and removal of wrecks; accident prevention, something we call marine warranty certificate or Marine Warranty Service. That's approval of complicated marine operation in order to be insured during the operation. And then from time to time, accidents happen in our industry, in the energy industry or in the shipping industry. And we manage the accidents on behalf of the insurance company and to limit the damage and to also take care of the interest of the insurance industry. So if we switch to Page 4. AqualisBraemar as of today, before the transaction with LOC, we will get back to that. But I thought we should take the time to go through our business as we are a small company and relatively unknown to many. Renewable is one division. We have historically been involved in more than 50 offshore wind projects, and that represent more than 25% of the globally installed capacity of offshore wind, including in those projects we are working on for floating offshore wind. So the industry is about to move gradually from only having a bottom-fixed offshore wind mill to also floating. I'll get back to that. Offshore, a lot is about moving rigs. Last year, 2019, we moved to more than 600 rigs or rig moves. And we were involved in more than 300 marine warranty service projects in offshore. Marine, the shipping fleet, we are a large player in the hull and machinery area. And last year, we were involved in close to 2,000 inspections globally. And we were involved in repair after accidents of more than $0.5 billion last year. Adjusting is mostly working with the oil and upstream, downstream, midstream industry. We were involved last year in 275 incidents in the energy industry, and we were also involved in the 5 largest casualties in the Lloyd's market last year. Page 5, just to give short examples of some of the projects we are involved in. This is an offshore wind project. The Erebus offshore waves is a floating wind project. Most floating wind projects so far have been 1 or 2 or 3 mills just to test the concept. This is a full-scale and the world's first full-scale development of offshore wind floating project. We are in total, in world of -- in 4 of these offshore wind projects, that's floating offshore wind projects right now. So there is a market that is about to emerge. And with our background within offshore and marine, we have a very good competitive advantage to capitalize on this market as this move forward. Page 6, another we -- outside the United States, outside the East Coast of United -- of the U.S., we are involved in a project now with Shell and EDP Renewables outside Massachusetts and significant development. And we expect this market to develop quite rapidly going forward. Page 7, just another example of what we are involved with. This is a floating solar on a dam in Thailand. The plan is to build 15 of this in Thailand alone. We also -- many of you might be aware that Scatec Solar just recently in October bought SN Power, and the concept of Scatec Solar is to use floating offshore -- floating solar together with hydropower. So during the day, you use a lot of the capacity that come from solar. And during the night, it's, of course, water. So it's a good combination, and we are already involved in this in Thailand, as I said. Page 8, another example of how we are involved with this. We are working for Ouyang Offshore with 2 newbuilds. We previously also worked with 2 in 2018, '19. So these are 4 wind installation vessels that we are -- have been working with for a Chinese client. Similar for ZPMC, a big Chinese yard group, we are now working on the first floatover of a transmission station that is being fabricated in China. If we go to Page 9, the -- just another example how we can use our marine competence not only for ships and for oil and gas, but also for bridges, installation of bridges. And we are -- have also been involved with aquaculture, fish farming offshore. The more offshore it is, the more complicated it is, the more it fits with the competence of our group. And finally, before I start talking of -- about the transaction, Page 10, this is also on the -- due to the rapid development around offshore wind and energy offshore, a lot of harbors need to be modified, extended and upgraded. And we are involved -- we have been involved in a lot of harbor projects. And just recently, the U.K. announced a program to invest more than GBP 160 million over the next few years in -- and similar programs are -- have been announced in the U.S. Page 11, just showing this company is coming from a shipping and offshore energy, offshore oil and gas background. We bought Offshore Wind Consultants back in 2014. And since then, offshore wind -- since first quarter 2018, offshore wind and renewable have grown from 6% of our revenue, and latest in the third quarter was 21%. And our goal, as I will get back to, is to get renewable up to 50% of our revenue. Okay. Then we are on Page 12, and now we are getting into the transaction. So what I've said so far was more an introduction, just to give you a flavor of what kind of capacity and competence we have in our group. So the strategic vision of AqualisBraemar is on 3 pillars: One, expand into the rapid growing offshore renewable industry. I mentioned offshore wind, offshore solar, but also tidal energy and wave energy is, of course, part of this. The second thing is that we have a strong position in the traditional, mature areas like oil and gas and shipping, marine. And the strategy is to consolidate and leverage our position so we can be profitable within this industry for many, many years going forward. And the third pillar of our strategy is to use capital efficiently and maximize return on capital and return -- pay a steady stream of -- an increasing stream of dividend to our shareholders. And as is at the bottom of this slide, the ambition is to be at 50% renewable within 2025. So then we are on Page 13. Aqualis have today announced that we are acquiring one of our strongest and best, most well-run competitors, LOC Group, London Offshore Consultants Group. We are doing this for several reason. First, as I said about the strategy, we want to consolidate the traditional business, marine and offshore oil and gas. LOC is highly complementary. There's very little cannibalization from our acquisition. With LOC, we are broadening our service offering and our scale. We estimate that the synergies from this is at least at $3.5 million per year. And of course, also combining the companies make it even easier to optimize the use of capital in the company. And finally but not last, LOC is also a very strong player in the offshore renewable market. And we increase our footprint. And we reaffirm our commitment to the energy transition through this acquisition. Page 14. So this is combining -- this is looking at the 2 companies. Back in 2019, Aqualis bought Braemar. At that time, we doubled our revenue, about. This time, we do another doubling. So since beginning of 2019 until today, when we close LOC late in December, we will have more than 4 -- quadrupled our revenue as a company. And over the last 12 months, we see that the combined group have had a revenue of $139 million. We have had EBITDA over the last 12 months of $12.5 million as a combined group, and our backlog is about $83 million. And remember that both LOC and Aqualis and the combined group, we have no backlog when it comes to marine accident and also accidents within the oil and gas. That's something that is never in the order book. Those are call-out orders, and the same goes for a lot of the work we do in AqualisBraemar within offshore. It's -- it will never end up in the order book. It's frame agreement with large rig owners and ship owners. Employee, we will be close to 900 when we have merged these 2 companies with highly specialized mariners and engineers. Page 15. Okay, short about Aqualis. I also said something at the outset. We have 3 brand names. It's AqualisBraemar. We have an AqualisBraemar Yachting Service. We are the leader in the world with offices in the Mediterranean and in Florida and in other hubs for the big superyachts. And it's a very profitable niche we are doing. And then we have the Offshore Wind Consultants, which you -- which is our renewable arm. If you look historically, we have had a downturn in revenue from 2014 to 2015, stabilizing around $70 million and then improving to $76 million this year from $73 million last year. What is still very encouraging is that our margin have increased quite a bit in 2020 or last 12 months. And the acquisition of Braemar reduced our overhead by -- in 12 months, we reduced our overhead with 5% of revenue. So a lot of the increase we see from 2.3% to 7.5% in margin on the key financial graph down to the left is related to synergies when we did the Braemar acquisition. We have office locations all over the world, as you can see from the map on the lower right. Similar, if we go to Page 16, LOC also have 4 trading names. It's the London Offshore Consultants, the main company. It's the Longitude, which is -- are the engineering and design consultant -- consulting within shipping and offshore. INNOSEA is a French-based company they bought back in 2018. It's specialized in offshore wind, wave and tidal energy. And it complement very well with our offshore competence in AqualisBraemar as of today. And then finally, John LeBourhis, which is a rig approval service, where -- which is also very complementary to the service we have in AqualisBraemar. You can see on the lower left that LOC have been very profitable even in the downturn. They came from $100 million of revenue and fell down to $60 million in 2018 and is now on its way up. But the margin have improved quite substantially lately, even though we are not back to the level of -- before the oil price dropped. I think there will be a lot of synergies. We will get back to that when we put the 2 companies together, especially on the back-office side. Okay. If we go to Page 17, I think this is something both LOC and AqualisBraemar is bragging a lot about. We are a global industry. We need to be where the shipping industry is, where the trade is, where the oil and gas industry is located: offshore. But -- so this is something we are bragging about. But this is also, what should I say, the problem of this industry. We are 1,000 employees -- or 900, I'm sorry, just south of 900. But we are working in micro offices. And what we saw with -- and back before we did Braemar, we were 3 companies: Aqualis, Braemar and LOC, and we had the same footprint, more or less. What we are doing now is bringing all of these 3 offices together. We have already done Aqualis and Braemar. Now we also do LOC. And by doing this, there's a lot of cost synergies. The number of offices, which you see on the left, is 85. But 18 of those are common like in London and Abu Dhabi, Dubai, Mumbai, Singapore and so on, Houston. So we will reduce the number of locations with 18. And just there, there's a huge benefit without reducing our footprint. So I think this is a strategic strength. It's strength, what you see on Page 17, but it's also where we have the most of our synergies, by combining these offices. Go to Page 18, looking at the 2 groups, AqualisBraemar and LOC. You see on revenue so far year-to-date, LOC is very strong in Europe, 49%. AqualisBraemar is stronger in Asia and the Middle East with 28% and 35%. If you look on the far right, you see that when we combine these 2 companies, we see that we are much more balanced. Europe will be the largest market for the new company; APAC is -- Asia Pacific, the second largest; and then Middle East/Africa with 17%; and America with 18%. If you look on where we have our revenue, AqualisBraemar has now less than 50% of our revenue from oil and gas. LOC have more from oil and gas in -- but when we combine these 2 companies, what we see is interesting. It's that the renewable side, these are the last 12 months, is 18% for the combined group. So we are not losing, what shall I say, momentum. But lately, if you look on third quarter stand-alone, as I explained earlier in my presentation, we were above 20% within renewables. So this is looking in the rear mirror, the last 18 months. Oil and gas is just above 50% for the combined group. But due to the renewable growing so fast, I think this -- when we get to 2021, oil and gas will be below 50%. And marine will also lose market share to renewable, not because the revenue is going down in oil and gas, and marine is also quite stable, slowly growing, but it is because renewable is growing. So with that, we can turn to Slide 19, and I would like to give the word to Dean Zuzic.

Thank you. Thank you, Glen. This is Dean Zuzic, the CFO of the company. Let me just run you some of the -- run you through some of the transaction figures. As you see on Page 19, we are doing this transaction at an enterprise value of approximately $19 million for LOC, cash consideration of around $20 million. We are also offering 2 million of conditional warrants for AqualisBraemar shares to the owners of LOC, of which 1 million become valid if the share is above NOK 7.5 over the next 18 months and the other million if the share price is over NOK 10 over the next 36 months. We are taking over a company with a net cash position of $2 million. They have $15 million in debt, but they have -- sorry, $13 million in interest-bearing debt, $15 million in cash, which gives us a net cash position of $2 million. And the sum of this brings us to the $19 million in entity value -- in enterprise value that we are paying here. We plan to finance this with an equity issue at fully subscribed. We did send a stock exchange notice this morning about that. It's done at NOK 6.10. We also have announced a subsequent offering, a so-called repair issue. We are -- we have secured a USD 15 million net debt facility with Nordea, and we will be using $5 million of our own cash. So total source is $35 million. That will be used for the cash consideration of $20 million, the repayment of current debt in LOC by $12 million, and we expect costs and integration costs of around $3 million. Completion, expected on or about the 21st December, has to be approved by the EGM, which is summoned for the 14th December. We have already commitments more than 67% of the share owners. So we are very confident that we will be able to close on December 21 or around that date. If we move on to Page 20. As Glen has already mentioned, the combination of these 2 companies puts us in a different league. The way we -- I mean view it, the combined company almost doubles its revenues, $140 million for the first 9 months of this year, which is equivalent to the sum for the whole year of 2019. So there is significant and nice growth in both of the companies in 2020. We will have a combined EBITDA of -- or we have a combined EBITDA of $12.5 million the last 12 months ending Q3 of this, I mean, year, which is a doubling from the EBITDA in 2019. And as Glen also mentioned, the order backlog of $83 million. And again, let me just repeat that all of our business does not have an order backlog, especially the accident side of the, I mean, business, which is talking about 30% to 35% of our main revenues. So $83 million, which is a significant increase from 2019. If we move on to Page 21, showing a bit simplified pro forma combined cash and debt position of the 2 companies. We have -- we are starting with $14 million of cash in AqualisBraemar at the end of Q3. The transaction financed for $15 million equity issue and $5 million of our own cash would sum up to the $20 million. That is the cash consideration that we are paying to the owners of LOC. $3 million in transaction costs and contingencies, I mentioned the $15 million equity issue. We have $15 million in cash in the -- in LOC as of September 30. New debt facility with Nordea of $15 million, repayment of debt with $12 million will give us at the end a combined cash balance of $24 million, which is much higher than what the combined interest-bearing debt of $15 million. So the net interest-bearing debt in the combined company will be a positive $9 million, very, very comfortable cash position to be in. We will keep a $0.5 million facility from LOC. So the total interest-bearing debt will add up to $15.5 million. But that is still much, much lower than what our combined cash balance is. If we move on to Page 22, synergies. As have been mentioned, we do expect to take out cost synergies of $3.5 million stemming from 4 main areas: SG&A and back-office optimization. Facility redundancy, Glen showed you a map showing that we have an overlap of, I mean offices. We will obviously combine these in cities where we have several offices. Utilization optimization, which we will be able to achieve by access to a larger consultant base and the better utilization of people across the 2 companies; and by increasing our capital efficiency. We have not counted in any revenue synergies. But it shouldn't come as a surprise to anyone that increases the market share, which is basically getting doubled. We are doubling the size of the, I mean, company and by the selling of, I mean, complementary services to each other's clients should, I mean, result in revenue synergies that will come on top of this $3.5 million. And there will be focus on capital efficiencies. We've had a lot of focus on that in AqualisBraemar. I know they're focused on that in LOC also. We will have a stringent cash management regime in the company and try to optimize, which means reduce our net working capital. That will allow us to pay our dividends as we have done in the future -- as we have done in the past in AqualisBraemar as well. If we move on to Page 23, just kind of to show a bit where we are on synergies and how we think. When Aqualis acquired Braemar in June of '19, we had an initial estimate of cost synergies or an initial target of $1.1 million, which represented 1.5% of the combined revenues. That was supposed to be implemented over the next 2.5 years. As of Q3 2020, AqualisBraemar actually realized $2.4 million on the -- on run rate cost synergies and increased the target to $2.8 million, which represents 3.8% of our combined revenues by the second quarter of 2021. We are starting the acquisition of LOC by -- with a target of 2.5% of revenues, which amounts to $3.5 million. And given our history and experience with the Braemar merger, we are pretty, pretty confident to be able to achieve the 2.5% in cost synergies over the next 6 to 18 months. And with that, I think I'll give the microphone back to Glen.

Thank you very much, Dean. If we page -- turn to Page 24. So we think this is a [indiscernible], 3 wishes on the same time, this transaction. It's good for our customers. We get the new capabilities. We increase our scale, and we have a global -- wider global footprint. Most of our clients are truly global, shipping and energy. And there's very little overlap in what we are doing, and we are just being able to increase our involvement with our customers' key projects. Employees. Of course, with operations in more than 40 countries and with -- working on all kind of high-end projects within the energy industry and shipping industry, it give a much, much better career prospects and more opportunities for our employees. And I also think that there will be -- we will be a more attractive employer than we are today. And finally, the shareholders. There's a lot of synergies. We have estimated them to $3.5 million at -- as a starting point. We see also opportunities to increase revenue over time because there is more possibilities of cross-selling because we are complementary. And finally but not last, LOC are very -- also very complementary to us on the renewable sites. They are more into tidal, into turbines and also marine warranty for these projects. So we expect this to even increase our growth within renewables that we combine the 2 companies. So if we go to Page 25, summing up. Again, just to be short, this is a consolidation of the mature part of the industry, oil and gas and marine. I think that's a key theme for mature industries. They need consolidation in order to deliver good profitability going forward, as the industry is flattish or maybe even going gradually down, both for oil and gas beyond 2030 maybe. LOC, highly complementary. I've mentioned that before. Scale, synergies, broadening service offering, especially capital, use of capital, there's one -- we are -- the operating margin we have is attractive compared to peer group like Multiconsult, Sweco and ÅF Pöyry, as I mentioned at the outset. Our problem is that we tie up too much cash, $24 million. Dean just went through it, and we also have too much working capital outside cash. So this is going to be worked on very professionally. And finally but not last, this LOC transaction is a contribution and a commitment to the energy transition going forward. So with that, I stop the presentation, and we open up for questions.

Right. Thank you, Glen. The first question we have is, "Can you give a reason for the apparent low multiples LOC Group is being acquired at?" Glen, did you get the question?

I'm sorry. I forgot to unmute. Yes, thank you for that question, Haakon. Going a little bit back in history, this process started back in the fall of 2019, just after we had bought Braemar. And it kicked off. Really, the first meeting was in early March, just before the lockdown, both in U.K. and Norway, everything. So this process has been going on in the lockdown. That's one thing. Secondly, oil and gas is still 50% of this group. So I think we are priced as an oil and gas provider, and everybody know that oil and gas have been very out of favor lately. That goes for AqualisBraemar's share price and also indirectly for LOC, its value. And then of course, what happened with COVID and all that have been a difficult period. And I think also, the last one is, of course, that AqualisBraemar, we can't pay more for an acquisition than how we are priced ourselves, or else we will destroy value. So that has also been a limiting factor. So I would say that I think both companies are quite small. Combining these 2 companies, we will be more visible in the market, more visible with customers in the stock market. We get a lot of synergies. So I hope that the multiple we bought the company for and we are also at ourself, that over time we will have a -- gradually a multiple expansion. And of course, also that we have a renewal agenda and also a fast growth in renewable probably also will gradually help with the multiplier. So I think -- I hope that over time, we will have a gradual repricing of the company as well. So -- but it is what it is. It's 2 medium-sized, small companies, and they are normally not priced at very high multiples. Combined with COVID and oil price fall led to that we were able to complete this transaction.

Thank you, Glen. Then we have a question on who will be invited to participate in the subsequent offering. And when the last day to own shares to participate was? And I can answer this since it's a quite technical question. All shareholders as of the end of November 20 who did not participate in the private placement or was given the opportunity to participate with a significant amount of time and elected not to participate will receive rights in the subsequent offering. So if you were a shareholder and did not participate, you will receive rights. The ones that participated will not. And for the avoidance of that, Braemar will not receive subscription rights for the subsequent offering. Then the next question here is, "Is the LOC ownership in INNOSEA still 70%? And if so, is it possible and/or planned to merge it with OWC as is? Or does it need to remain stand-alone?"

Yes. I can answer that one. Yes, the ownership right now is 70%. There is an agreement with -- this company was bought -- it's a French company. As I mentioned, it's a French company that LOC bought back in 2018. There have been an earn-out and also an agreement to buy the remaining 30% for a relatively moderate amount, less than $1 million at a later stage. And we haven't decided on this, but it's likely that we will buy the last 30% and be 100% owned. Regardless of 70% or 100% of INNOSEA, this is going to be integrated and coordinated well with Offshore Wind Consultants. They are very complementary, and this is going to happen regardless of the ownership.

Okay. Thank you, Glen. The next question is for Dean. "USD 3 million of transaction and contingencies costs appears high. Can you elaborate and split this?"

Okay. Let me just -- I won't split it. But what I can say as a general comment is that financial and legal due diligence in 30 jurisdictions, an equity issue of $15 million, a debt take-up of $15 million, if you sum all of this up, I do believe the $3 million is in line with what you will see in the, I mean, market, even if it does look high at the first glance compared to the total value of this transaction.

And Dean, if I might complete, hoping to add to that. I think also, some of the cost of taking out the synergies is included in that number as well.

That's right.

Not all necessarily, but some of them. So -- and also, to the last question about why did we buy this at such a low multiple, of course, it is a complicated transaction. It's a small company, a lot of jurisdictions, and that have also influenced. And we had high cost, and that should be viewed as part of the purchasing price. So if you take the $19 million, maybe the correct answer is to think about this as $22 million if you include the full cost. It's still a decent deal, I think.

Thank you, Glen. The next question is, "How much revenue cannibalization do you expect, considering that your 3 main competitors are merging, especially where you had overlapping locations?"

There are some cannibalization, or we would like to call that overlap, where we can't be competing or we are working on 2 sites. We could be working for the insurance company on one side as LOC, and then we maybe work as the consultancy for the energy company on the other side. So that can't be happening going forward. It's a bit like in the auditing industry. You have to either be auditing the company or you can advise the company. But we have studied this very thoroughly, and that had been part of the due diligence. And the cannibalization or the overlap is much, much less than we thought. So actually, I think there will be more revenue synergies than there will be cannibalization even in year 1 from this transaction. That's our view, at least.