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

Welcome to Odfjell Technologies Q3 presentation. My name is Gert Haugland, I'm the SVP for Finance and Investor Relations in Odfjell Technology. I'm joined by our CEO, Simen Lieungh; and our CFO, Jone Torstensen. Today's presentation can be found on our website, and I ask you to please take notice of the disclaimer on Page 2. Simen will start by presenting the key highlights and talk about the market outlook, backlog and the status of our improvement program. Jone will there after we go through the financial figures 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 hand it over to Simen for the first part.

Thank you, Gert, and thank you, everybody, for calling in to our Q3 presentation. We start with the highlights for the quarter. First of all, we -- we are set for mobilization of the [ Reelwell ] power pipe string. There has been some delays, unfortunately, not caused by any kind of us, but the rig that we are mobilizing the string has been delayed on the field because of delays in the drilling program. So during somewhat later in November, we are set for mobilization. Everything is ready. We also have a good news from Kuwait. We have a contract extension or a very important contract within Well Services in the region, which strengthened over our backlog and visibility and presence in a very important area in the Middle East. We are -- we have talked about M&A. We are quite active with a pipeline of very interesting both on companies that could expand our capabilities and product portfolio and by also adding that into our market networks, we see that -- some of that could be quite interesting in the future. We have nothing, I would say, accurate or presence or I would say, exact to kind of to comment upon more details. But absolutely, we have said that in several conferences earlier also that we are active on the M&A side. And that will build up our capabilities and products to fulfill what we believe is going to be an interesting portfolio in the future for achieving the strategic goals the company has established. We have talked a lot about our performance improvement program. We started that some time ago. I'll comment somewhat more into that later in the presentation. But again, it's a very important program to adapt to whatever we see around us in the market to kind of be -- just ahead of events and be -- adapt the organization into the shape we want to be able to continue to deliver as we do per today. Key financials. We have a revenue of NOK 1.4 billion, somewhat more there. We have an EBITDA of NOK 202 million, NOK 204 million adjusted. The good thing here is that we see the underlying operation has been improved by since the last quarter and the quarters before that since Q4 last year. So this is what we have worked with to improve our performance, underlying performance and the adjusted part of it is because of restructuring and back to the improvement program we have earlier commented upon. The order backlog is somewhat lower, but still very high. There has been some some wins, but still, we are in NOK 12 billion, NOK 13 billion backlog and which is quite important to have a visibility in the future for that. Just to remind you that -- we count within operations, we count -- which is very stable backlog, we count also in the options. But we take a very, very conservative intake for Well Services for good reasons, we are taking just part of the potential into what we call the firm backlog to be on the safe side by not over reporting backlog before we kind of see it's actually realized. Just a reminder, Well Services is very much frame agreements and activity follows the market activity. So that's why we have always taken a quite conservative approach in that part. Dividend has been stable with 11% yield so far in average, we continue to follow the plans also in Q3 and we find that quite strong for our shareholders. On the market side, we still talk about growth, but I need to kind of share with you that -- that we see also that we need to have a quite disciplined operation and have a discipline regarding spending capital. Regarding the market, we probably are quite aware you read all of the company's view on the market. There has been some volatility. They -- we see our operator, we have a quite extensive reach against or talk against our clients majors. We see that majors are actually being more careful by investments. So in the short term, we see some softening in the market. It's not general in the market because there are other markets, which is quite good, but some markets are also -- we experienced also some softening. It has to do with the global political games, I call that. OPEC is doing something. U.S. is doing other things and creating a volatility on oil price is never good. And that's where we see now that the clients are kind of looking for more stability before they go spending and what they want to spend and there might be some delays in that kind of program. That's why we say short term, some softening we see a quite strong demand in the later on, '27, '28, '29 typical where we see demand coming up. The oil demand in the world is stable and growing. But again, short term, it could be some challenges. We see a quite high tender activity globally where we operate. We operate in 30 countries and more we see a very active tender market, we have quite a lot of them, but we are more uncertain about the timing for award. One thing is to win and anothe thing is to award and when they start to execute the contracts. Back to the little more uncertain in '26. So we are not that, I would say, firm on the timing. But the good thing is that these tenders are long term, they go from late '26 and onwards. That's why we see quite much more strong market down the road down in '27, '28, '29. We have -- our position has been -- we are strong in Norway, and Norway is one of the markets, which is very strong regardless of the situation I just described or softening and so forth. Norway has been very stable regarding drilling and production clients, the major clients here in Norway are quite active to secure capacity for increased drilling and production, especially within gas of course, linked to the position Norway has regarding serving gas to Europe because of the tragic war within -- in Ukraine with Russia. So there are very, very heavy activities regarding increasing production drilling and so forth in Norway. And we are strong in Norway. We have probably a little more than 50% of our activity, revenue and earnings in Norway, which is stable. Norway is one of the most active and the biggest offshore market, one of the biggest offshore markets in the world. We talk about performance program. I do that always because this is how we always kind of monitor our organization and performance and have measures to act on things where we don't see the expected outcome of our business. This has to do with -- obviously some sort of a continuous improvement program. It's a word that used quite often, but these improvement programs we are running has important milestones where we act when things happen upwards or things go downwards, we have action plans to kind of -- to quite quick act on those kind of fluctuations. We are positioning for P&A opportunities, strategic P&A opportunities. We have used that word, meaning that we are not rushing after that part of the market because to get volume. We know P&A markets are quite often challenged by margin levels earnings. This is -- that market is -- has always been challenging in a way to secure the right level of earnings. The market is coming strong. I guess now the next few years will be much stronger in the U.K., internationally within Brazil, Gulf of Mexico, we also see things happening in Asia Pacific and also in Norway. Norway has already several programs where clients must plug abandon. And in Norway, they are kind of both from platforms and from floating installations. And our relation with Odfjell Technology is strong regarding positioning integrated services for plug abandonment activities. So I also say, we are not in a rush, but we are looking for the right opportunities that can be good references for establishing a sustainable business going forward. Growth and investment focus. We are, of course, focusing on growth, but not for any means. We have established ourselves in the Americas. So we see the first areas carefully being picked up in the Gulf of Mexico. We're not going to operate in Mexico, but with the U.S. Gulf with Well Services, meaning that we will rent out equipment and run these kind of services. We have established a strategic partner called OSP, a small company in the Gulf -- based in Houston. And so we are working together with them to increase our presence and operations in those areas, both Gulf of Mexico and Brazil has been quite focused. And even though they are the same signals from clients that there might be some delays in spend. We are not there for the big money yet. We will gradually build up our presence and take quarter-by-quarter, year-by-year to build up a sustainable business and be there for the long run. So we're not rushing there to do quick things and not necessarily smart things. We're there for the long run and the strategic presence to build the name and service and quality services, like we have done in other parts of the world. The [indiscernible] pipe remains a strategic priority. We are still looking for clients that are going to take it. We're quite optimistic that in the -- down the road in the long term, that technology will be absolutely top priority for clients, especially in mature fields. So this is also a kind of a long horizon on those investments. And we have, in our view, a fantastic access to that technology, which is protected and there's no really competition on that part yet. But it remains to kind of be activated as we earlier talked about the first offshore thing will come here in Norway, and we also have quite good traction on several opportunities in the Gulf of Mexico, both for advanced drilling and well completion activities. CapEx, we have had a relatively high level of CapEx this year that will be much more disciplined going forward. We have to do some investments here because to replace equipment to kind of -- to still be in the game. We don't see that going forward. And my CFO, Jone Torstensen will come more into that somewhat later how we will -- in a way, be more disciplined and be more -- more selective on what we're going to invest in. M&A is also part of the source that could need capital. So as I said, we are certainly active on the M&A side. And those targets we have picked out are interested -- interesting, and we hopefully will land some of them. Backlog, I said again, not need to say too much more on that with -- as I said here within the Well Services, just remind again, there are much more potential in Well Services, but we are taking a conservative approach. Just to remind you, back in the days when Odfjell Technology were integrated before we split the company, we never reported Well Services backlog. We only reported floaters and fixed installations, not within engineering and not within Well Services because there are more uncertainty there. But the approach for Well Services are -- is a conservative estimate to be on the right side. And that has shown to be quite useful as we don't have overpromise anything and we deliver hopefully better than we indicate. Order intake is okay. We see, as I say, a lot of activity going forward. There are some interesting tenders that we fill up the backlog. So we are not worried about the somewhat drop from 13 to 12 it could even drop some more because we don't -- we still believe that's quite healthy and quite a strong -- but of course, we are chasing all opportunities to build a strong backlog. That is really -- that gives us, in a way, predictability for the company in the future. Dividend, we have active shareholder -- with attractive shareholder return. We get good feedback on that, that we actually are stable. We are promising what we are doing. I have said that the balance sheet that we have allows us to do so. But I always say, but -- our company must also look at future and growth opportunities. And if for very good reasons, we find to invest more than we kind of have estimated today, we have also indicated that there might be times we have to pause dividend. We have no plans for that now, but I'll say it. So you are not kind of shocked if that happens. But I have said that in several conferences, I have answered as good as I can. If we ever post dividend program for some short period. It is for the good reasons, not for any other reasons -- for the good reasons for the company. Performance improvement program. Again, I'm quite impressed, I would say, about how the organization responds to that kind of program because you acn exhaust people by this. But as long as you kind of do it and motivate for it and see results of it in a positive way. It's actually been taken well care of people are understanding the seriosity to be disciplined on capital, discipline on performance, focus on quality and excellence. And that's where we, as a relatively small company need to be to build our name and presence to efficiency, quality and predictability. So that's what we do. So already, we have laid off significant people without any headlines, no nothing, but just adapting into the market position. We see some upside. We might even increase the number of employees. We see something that could happen on the other side means that we might decrease the organization, but all these plans are in place. So I feel that we are quite prepared for any ups and downs in the marketplace. Again, short term might be some challenges. Long term, we see a very, very strong market. With that, Jone, I think you can take over.

Thank you, Simen. I'll start with the group financials. Steady activity level with underlying margin improvement. The EBITDA level in Q3 is improved compared to the first 2 quarters in 2025. EBITDA in Q3 is NOK 202 million compared to NOK 193 million in Q2 and Q1 '25. Adjusted EBITDA is NOK 204 million, including restructuring cost of NOK 2.4 million. The improvement program, as Simen said, is on track with restructuring cost of NOK 18 million year-to-date. The improvement seen in the last quarter are expected to extend into Q4 2025. Cash flow was affected by high CapEx and changes in working capital in Q3 '25. We said in the Q2 presentation, that we expect an improvement in working capital in Q3 '25. Unfortunately, a large payment that we expected to be received in Q3 was delayed and received the 2 of October. However, we expect an improvement in cash position, improved working capital and reduced CapEx in Q4. Some words about the CapEx level for 2026. We expect a reduction in CapEx in 2026 to a more normalized level compared to high CapEx spend in 2025. However, we are always looking for good business opportunities going forward, which might influence our CapEx level going forward. Wealth Services EBITDA margin improved in Q3, '25 compared to Q2 and Q1 '25, driven by improved product mix, increased product sales and improved cost efficiency. EBITDA margin is 32% in Q3 and 35% if we exclude pass-through charges. High tender activity is ongoing globally with focus on high-margin business opportunity. We expect that the CapEx incurred in Q3 and margin improvement in some regions outside Norway, will lead to a stronger financial performance in Q4 '25. Next is operation. The activity level is steady and solid. In the business area. The margin lift achieved in Q3 was driven by contribution from our performance improvement program and high bonus achievements. EBITDA margin in Q3 '25 is 8.2%, up from 6.9% in Q2 '25. Operations remain focused on optimizing operational structure, continues improving efficiency and optimizing cost level. Both Shell Drilling and Serica U.K. has extended their contract with operation. In addition, as Simen said, operations are continuously working with customers to develop effective solution within P&A. The next one is Project Engineering. Q3 was seasonally lower due to vacation period. Main workload related to ODL SPS closeout, [indiscernible] will be modification and Mariner 5 years inspection. P&E has been affected by market changes, shifting from a few of our major projects to smaller scale projects. P&E is actually working to build up its order backlog with major oil companies and drilling companies. We expect an improvement in EBITDA margin in Q4 '25. This is development in revenue and EBITDA since Q1 '22, our focus on '25, and revenue has increased each quarter in 2025. EBITDA remained stable in Q1 and Q2 '25 and improved in Q3 '25, as we predicted during our investor calls in Q1 and Q2 '25. We expect this trend to continue into Q4 '25. To summarize. Still strong order backlog, which is limited and affected by market fluctuations, still attractive yield with dividend payments of NOK 60 million, equal to direct yield of 11%. As Simen said, very high focus on our performance improvement program, which already has improved our financial performance, and I have to say more to come. We will continue to work on growth opportunities with this disciplined approach to secure value for shareholders.

That concludes the presentation, and we now will start on the Q&A session.

[Operator Instructions] And now we are going to take our first question and it comes from the line of [ Lucas ] [indiscernible]

Thank you, good morning, gentlemen. Simen, just wondering on your comments regarding near-terms of weakness or, let's say, reduced visibility. if we were sort of one [indiscernible] in outlook for 2026. I mean year-to-date, your EBITDA is down 5% year-on-year. So in light of your comments what's your best estimate at this point in time, 2026?

There's so much noise, but I understood that your question was what do I think about EBITDA level OF '26 related to the comments of a possible more soft market? Is that right?

Yes. Yes. If you could sort of quantify what you are saying in terms of the market dynamics being maybe a bit softer in the near term, but relatively strong in the longer term?

Yes. As a principal, you know me, I don't -- can't give you any quintans or any guidance on numbers. But all I'm saying is that we are looking at the market where we see that some of the tenders that have been awarded and some of the activity that has been going to be awarded and might slip in time. So it's difficult to say exactly how much and if it happens at all. I was just saying that talking to clients, talking to our competitors, talking to other service companies, we see the same market, we are preparing for that by having this improvement program to compensate for eventually any loss of income or earnings to kind of composite that picture. And so we -- you see now that we are -- we have improved the underlying operation regarding performance if you focus EBITDA, I think we are, in a way, continuing kind of seeing that the slow improvement will continue. Whilst we also believe that some quarters might be hit by delays or uncertainty, which I know we have the other agenda. I can't comment more on it, but I'm not concerned about the performance of the company. So don't take me wrong. I'm just saying that we are heading a market situation where things in some markets might be more volatile than, for example, what we see here back in Norway. So not necessarily very clear answer, [ Lucas ] but that's the best I can give you.

Okay. Fair enough. And then your comment, obviously, you have said that you are looking opportunistically at possibilities of how to grow the business. Could you sort of specify or at least highlight what kind of product lines or potentially regions would be sort of where you would like to add scale?

Yes. It's -- I can say it's more or less 100% within the Well Services business we are running. That part of the company has quite good performance with good margins on some products. Where we are looking for more to expand the product portfolio is into more advanced downhole equipment used for well completion can be used for plug abandonment and other things related to that part of the the service sector. We see -- we believe that plug abandonment will be a good market in the future. I don't think it's a market today, but I don't think it gives the necessary return that we expect and are looking for as per today. Some might disagree with me, but I think we are at least quite conservative in that respect. So what we are looking for to build a broader portfolio is that we would like to add on some special technologies, tools for different operations, especially for more advanced downhole operations. Same into rentals, same into their business area we have, same into the -- same type of providing equipment. But also be able to take responsibility for more integrated operations together with other parts of our own business areas, for example, with operations including our engineering department and adding on our technologies and solutions within Well Services could be an interesting cocktail for making kind of a different approach to, for example, plug abandonment, way completion and so forth. So we are kind of modeling ourselves. We also look at some strategic alliance type of opportunities. So we don't kind of just spend a lot of things on just buying things, but we also, we want to own and operate some type of equipment, but where we don't do it that today, but we can also work together with other where we see a synergy and I would say, a good cooperation in that respect, meaning that we can be more taking a bigger responsibility for a bigger operation. That's what we are looking for. So the M&A activities is to build a more broad portfolio of technology and equipment whilst also focusing on executing those kind of programs. In a different and more efficient way than we see, for example, many are doing today. So that's it.