Odfjell Technology Ltd. (ND4.F) Earnings Call Transcript & Summary

Welcome to Odfjell Technologies Q2 presentation. My name is Gert Haugland. I'm the SVP for Finance and Investor Relations. I'm joined today by our CEO, Simen Lieungh; and our CFO, Jone Torstensen. The full presentation is available on our website, and I ask you to take note of the disclaimer on Page 2. Simen will start with the key highlights, including market outlook, backlog and contract status. Jone will then take you through the financial results before we conclude with a Q&A session. You can submit your questions through the webcast portal or by using the dial-in numbers. I now give the word to Simen.

Thank you, Gert. Thank you so much, and welcome to the Q2 conference call, all of you. Just to start with a quick focus on the company itself. We have still a global presence. We operate in more than 30 countries, and we are actually looking at also new areas. We have a strong liquidity position. We have a substantial equipment pool with NOK 4.6 billion as a value. And we have maintained a very strong order backlog over the period. From highlights. Highlights are -- financial highlights are, as I said, the revenue is approximately NOK 1.4 billion. We have achieved NOK 193 million EBITDA. If we adjust for the restructuring costs, we will come back to later and some one-offs, the underlying operations are about NOK 204 million, which indicates a trend for increased earnings and margins as we have also indicated earlier in the second half of 2025. The order backlog, as I said, maintained at a high level. And the good news is that we also see more activity within the Well Services sector, which has also grown their backlog over the period. We still pay NOK 60 million dividend. We have done that for a while now, which yields approximately 11% over the period. Market outlook. In general, we need to share somewhat information what we see on the market side. We operate in a market where over the period, last period has been some softening, but we still see quite heavy activity within the sectors we are operating in. The tender pipeline about -- as we talk about, about NOK 8 billion is just an extract of what we actually have put on our priority list, which is a mix between the different business areas. There are quite a lot within -- Well Services, there are actually more and more activity within plug abandonment activity, especially in the U.K. and in the Middle East and somewhat also now in Norway. But U.K. and Southeast Asia is more active regarding plug abandonment. We also see now that there are activities within operations, typical potentially wins in that direction. And of course, we also see that the activity level within Projects & Engineering are quite active. We have now finalized all the SPS for ODL but we see still quite much activity for engineering projects coming over the next period. What we see now is that, yes, we have spent CapEx for growth. The company has delivered well over the period, but we also see now that we will put priority on investment at the company level. Also one of the reasons we have increased CapEx over the period because they are invested against both maintaining the position we have, but also future spend. We will -- for type of growth thinking, we are looking at the potential M&A market. We will still -- we have already invested in the book heavily within wired pipe, power pipe where we can come back to more details. But we today have 3 contracts within that area, 2 with power pipe and one with extension with regular wired pipe. And the reasons we are -- have increased CapEx is also that we -- due to the fact that there are delivery time on equipment that we see are relevant for many of those tenders we are working with that we need to make sure that we have CapEx in time and place that we can meet and win the requirements from the different tenders we are working with. That means, as I said, some front-end loading of that, but still we never invest against the type of leads that doesn't bring us up to the level we want regarding both margins and cash flow. For the next -- for the order backlog slide, nothing really more to say. I think the good thing there is a strong backlog within Well Services. Operations are always very stable. We also report the options, but within platform operations, the options are very much up to us and others to lose. So we report them. Within Well Services, we are quite conservative when we estimate the Well Services backlog. We know that many of those contracts are based on frame agreements and not that fixed as a type of term contract. So we are -- so this is just an extract of the potential within, approximately, I think, less than 50% we are reporting as a backlog. So there are much more potential in here, but we don't take that into grant just to be careful on that side. We have recently also within Rail Services signed new contracts in the Middle East and Central Asia. We finally signed a very important contract for us in Turkmenistan with Dragon Oil. And we also have signed a new fishing and retrievable contract in Kuwait. In addition to that, we have also announced that we have won a strategic contract with what I call a blue chip client for drilling rental tools, which will start from Q4 and onwards. Quite important, these contracts are all on the right side of the margin level we are looking for. And this is also why we are investing in that direction. We paid dividend. We have paid stable dividend over the period. Since listing, we have paid NOK 444 million to shareholders since we listed in '22. That means a quite unique position, and we still prioritize both growth and dividend. While saying that, we will carefully look forward now because there are some very interesting leads we are looking for, especially in the South America and within some P&A type of activities. We are looking for -- maybe we will do some focused investments in that direction based on, of course, winning contract and based on the right level of margins and on tools and services. P&A will be important for us, but I have stressed many times that even though the markets are very, I would say, attractive interesting, growing, we see all over the place that plug abandonment will be more and more, but I think clients are looking for solutions that are more, I would say, maybe smart, disruptive to the regular way of doing it and which will require also more new technology and different way of executing those kind of processes. So we see a P&A market, which fits very well into OTL as a company that integrate both Well Services, Operations and Engineering. And with the right mix of tools and partnership, we are quite focused to go in that direction. I actually forgot to mention our partnership in the Gulf of Mexico with OSP. We expect now that the first contracts with rentals and support and both in the Gulf in South America and also the synergies against the Middle East market will pay off and start later this year. OSP is a very strategic partnership for us and has very complementary equipment and technologies that will fit into our portfolio of services. So yes, we focus growth over the next period. You will see that we have indicated a higher income, higher earnings, higher revenue second half. We see the same going on in '26. And that's why we also have done the performance and improvement program, which is part of the growth history we have. We started early back in '24, initiated that program in significant, I would say, total program within the company streamlining operation resource base, taking down manning, doing things more efficiently regarding process analysis. Today, we have let go -- reduced the headcount in more than 80 people. We have today NOK 15 million in restructuring costs. We still see some restructuring costs coming out in the next half, but all these activities within improvements will gain and start to bring to the results in the company later this year will be a part of the second half increase in both in earnings and efficiency. And we see the full, I would say, potential being taken out in '26. So we have absolutely not forgotten any or reduced the focus on the improvement program. I also can mention that our organization down in Manila will also be streamlined more in direction with what we actually are doing there also to reduce cost in manning and increase efficiency. So with that, we look at the market as a quite potential positive for us. We indicate increased earnings second half. We see that the CapEx level well could be viewed somewhat high currently, but that will be stabilized and will be done against contracts and investments, which yields the right level of return. So with that, thank you, Jone, and start on the financial update.

Thank you, Simen. This is Jone. Steady activity level with underlying margin improvement. The quarter is in line with Q1, reflecting steady performance without highs and lows. EBITDA of NOK 193 million includes NOK 11 million in restructuring costs related to our performance improvement program, which means that adjusted EBITDA is NOK 204 million in Q2. The improvement program is on track, and we have had NOK 15 million in restructuring cost year-to-date, and that's the majority cost is behind us. The underlying improvement in the last 2 quarters expects to continue into second half of 2025. We have, as Simen said, already reduced our workforce with 80 employees in 2025. Available liquidity remains solid despite high front-loaded strategic CapEx and working capital buildup. We expect improvement in cash position, improved working capital and the reduction in CapEx in Q4. The order backlog remains stable around NOK 13 billion. Next, please. The next is Well Services. EBITDA margin improved compared to Q1 due to improved product mix. EBITDA margin is 31% and 34% if we exclude pass-through charges. The current extension of Kuwait and Turkmenistan contracts and the high-performing wired drill pipe contract prolonged. There's a high tender activity ongoing globally with focus on high-margin business opportunities. We expect that the high front-loaded CapEx combined with effects on ongoing improvement program will contribute positive on EBITDA and cash flow from Q3. Operations, the activity level is steady. Rig mix stability supports predictable earnings and margin lift underway from performance improvement program. Operations remain focused on optimizing operation structure, continuous improvement of efficiency in operation and optimize the cost level. There's a high tender activity ongoing globally, both for traditional drilling operation and for P&A projects. One of our main commercial priorities for operation is to secure work with Brunei Shell Petroleum in Brunei using the technology and experience from our previous collaboration. Engineering delivered a strong quarter with high revenue and strong EBITDA margin. Increased activity in Q2 due to high activity on SPS for Deepsea Stavanger and Deepsea Aberdeen, which was successfully completed on time, on budget. SPS work for key clients for drilling has been an important element of our development over the last years. In parallel, we have developed solid position and contract within modification at fixed installation platforms and floating storage with key clients as Equinor and Aker BP to balance our portfolio. This is showing the KPI and revenue development since Q1 '22. For revenue, stable, predictable and controlled growth in revenue, solid EBITDA growth until Q2 '24, small drop in Q3, Q4 and Q4 '24 and improvement from Q1 '25. We expect this improvement to continue into the next upcoming quarters. To summarize, stable operation with margin improvement, dividend of NOK 60 million, equal to direct yield of 11%, strategic '25 CapEx front-loaded from wired drill pipe and growth projects, strong cost discipline approach and on track with our performance improvement program. And finally, positioning for a stronger second half, driven by contract ramps up, better Well Service product mix and ongoing efficiency initiatives.

Thank you, Simen and Jone. We'll now move on to the Q&A session.

[Operator Instructions]

I think there's no -- there's one question from Truls Olsen.

Truls Olsen, the first question.

Just a quick question on CapEx. As you think about -- I know you don't give guidance, but as you think about 2026 forward, what should we sort of think about on that side, given sort of the, call it, elevated level that we've seen coming?

As I said, we don't guide on numbers. But I think we will absolutely -- we have front-loaded some CapEx, and we see that probably that's what you think of will that trend just continue? No, that will not continue. We will reduce CapEx because some of this has been loaded early, some linked to Reelwell, some linked to strategic equipment we need to secure for future contracts. Typically, we will maintain the equipment with some part of the CapEx that's -- I can just indicate some NOK 100 million, NOK 120 million, NOK 130 million for maintenance. But on top of that, we will see a reduction in CapEx from -- at least from Q4 and onwards. But I also say that if we find cases where we see a good rate of return and rate of return on investment on all the right CapEx, all the right KPIs, we have capacity to do investments. But we don't plan for more from up. We don't plan for that. So we see a reduction for the current level from Q4 and onwards.

That's clear. Another one as well in terms of -- you talked a bit about M&A. Are you then talking about more, call it, partnership buying part of companies? Or is this equipment or so companies? How do you think about that position, if you will?

Regarding M&A, I think we did part or we bought partly us into the ownership of Reelwell. We see Reelwell products as quite interesting going forward. Currently, we have 2 contracts on power pipe. One will start later this year, I guess, October, November, maybe in that area. And the second package will start up in March next year with very nice, I would say, numbers, good margins I would say, excellent in that respect, plus that we have -- still wired pipe from the previous technology we bought from NOV with Deepsea Aberdeen with Equinor that will be -- that will run the wired pipe out '26. But as we also know that the wired pipe with Aker BP is done future with NOV, but we still see the package we have one of the rigs for ODL will run out '25. So regarding -- that's an M&A in a very early stage project. What we're looking at when we -- I mentioned that we are positioning ourselves for future plug abandonment work on kind of a major operations. In that respect, we have targeted a couple of companies with technologies which operate today with full cash flow, so we don't buy into any equity raise or any development raise. We buy -- we could potentially buy us into type of technologies that will be quite interesting for providing a more complete package to clients for plug abandonment activities. We do that together with operations in OTL, we also look at subsea plug abandonment together with ODL, meaning that Subsea plug abandonment will be kind of a natural operation for us used to be one company. We know we operate on all the ODL rigs already. We know how to integrate smart operations and the efficient integrated operations. So that will be just extracted more into the plug abandonment world. But still the plug are still on an early stage, but we foresee that OTL as a whole will benefit from that market, but we also like to look at tools and equipment that could make a more disruptive solutions compared to the regular way of doing it. So I think that illuminates one of them. OSP is a strategic partnership in the Gulf. There, we decided to go with a partnership, not straight M&A. What happens in the future, nobody knows. But we are carefully looking at the Gulf of America and Brazil, typical, we see quite many interesting -- very interesting leads over there. And time will show how we generate it, but we expect the first revenue from that region, Americas later this year, late this year. That's what we expect.

Okay. So that means fourth quarter then basically. But anyway, it's good to hear that and good to hear that things are moving in the U.S. Gulf and in South America as such.

Just to say that, Truls, just a comment, we -- what we do over there will be tools equipment technologies, we will not provide in a way personal services in the Gulf of Mexico. That will be based on rentals of drilling tools and equipment for downhole operations and others regarding drilling, well intervention and similar. So that's where we kind of attach the OSP into the portfolio, which is very, very, I would say, complementary to our own package or storage of tools and technologies, just as that comes on.

Just as a small follow-up on that, in terms of tariffs and will that have an impact on your, call it, U.S. expansion as such?