Odfjell Technology Ltd. (OTL) Earnings Call Transcript & Summary

Welcome to Odjfell Technology's Q1 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. You will find the presentation on our website, and I ask you to take notice of the disclaimer on the second page. Simen will start by going through the highlights of the quarter and the market outlook. Jone will thereafter cover the financial figures before we conclude with a Q&A session. You can submit your questions through the webcast [indiscernible] or by using the dial-in numbers. I now hand it over to Simen for the first part.

Thank you, Gert. I'm going through the markets and the headlines. And as I said, we will take care of the details regarding financial information. So we have a quarter behind us now. First with approximately NOK 1.1 billion in revenue. We have the same business areas as we have said. Also, to start with, the Well Services and Projects & Engineering operations and what we're working with on the energy transition. We can take comments on that later. EBITDA was NOK 193 million, in line with the last quarter but significantly above a year ago. Backlog is stable. I'll come back to how that is spread, about NOK 11 billion in the backlog. Cash position, about NOK 600 million. The KPI debt/EBITDA 1.1%, coming down, it's close to 1% now. And it was also a quite interesting KPI we used is the estimated EBITDA in the backlog compared to our net interest-bearing debt, 2.5%, which should give a robust basis for running the company. On the next, just some key highlights for the quarter, we have carried out operations in line with our safety guidance. We have no serious incidents, always not good to say that. We know that also, in a way, they are extremely important for us to document and operate safe so we can give credibility to our stakeholders and clients. We have a high activity level in line with what we saw in Q4, meaning that we have exceeded the expectations related to seasonal effects. Seasonal effects is typical in the winter time. Weather could be instability of start-up activities and so forth. But this time, we have seen that we have exceeded our expectations for effects linked to the first quarter. That means that we have through the quarter have a strong operational performance, which is shown by the numbers. And regarding the backlog, which is stable, but we have built more backlog within Well Services and Projects & Engineering, which is kind of the international footprint, especially within the Well Services side that we see a better and stronger market international. [indiscernible] back to that somewhat later. We have also confirmed that we will pay a dividend of NOK 50 million, which is approved now and will be paid by 1st of June, and we have the intention to do NOK 50 million more over the next 2 quarters that will be approved accordingly when we follow the developments. On the market outlook, it's very much the same as we saw last year, strong market building up linked to the need for more hydrocarbons. We see globally that there are growth within almost all areas, both onshore type of business, midwater, shallow water with jack-ups, harsh environment and deep-water activities are ramping up, of course, driven by the lack of investments over the last 6, 7 years, the need for more energy. Having said that, it is -- there is more attention to do this with a better, I would say, performance on emissions. So the clients, the majors, especially are more driven by also pushing solutions technologies that we can prove that we are actually participating to reduce climate gas emissions. That's quite important now, coming up stronger and the ESG reporting is also catching up with us. And we have been -- in Odfjell, we have been quite okay over the last years because we have had all of our rigs in operations, all businesses in operations while others have struggled with other things. So we have been developing solutions that is now attractive for clients, which has also been approved for that actually do bring effect into reduced emissions. We also see now that there are a growth with regarding the number of rigs active, which is a quite important KPI for us, especially with the Well Services. That goes for all drilling areas and well maintenance areas. We also see a growth within activities -- planned activities for more plug and abandonment. Within Well Services, we are well positioned to harvest in the market. We have -- we are working on solutions where we try to combine technologies within the company, within Odjfell Technology also with potential corporation partners to find solutions, which is more attractive, more efficient for clients. And Norway is a strong market, been that quite through the last year, but it's coming up stronger. But what is positive is that we see significantly trends in the Middle East, in Africa, in Asia and Eastern Europe, where we see more activities. We are following the mobilization of the 3 rigs that drilling is going on to mobilize in Namibia. And we are also developing and putting our bases down in Namibia to support all the needs they need for type of Well Services. Operations is stable. That's a very stable type of activity. There are [ known ] contracts. There are a lot of options in the contracts. These options are obviously likely to be confirmed by the clients. If we perform well, if we give good efficiency and perform well on [ safety ], very often, these options are clear. So we see typical 80%, 90% of evidence that these options are cleared. We also are looking at new type of businesses. There are need for -- Middle East has a tremendous growth within jack-up operations. We have a base down in Dubai, supporting the whole region including North Africa and Asia Pacific and Central Asia. And we also are looking at potentially jack-up management activities for clients that has an organization to run their operations. So there are potentially something we can pick up down there. So -- also, we see that the operations are more -- could be more active with plug and abandonment activities, especially in the U.K. And we also see that we are looking at -- we have done some geothermal activities, which is growth potential, especially within Europe -- East, West Europe driven by the need for alternative energy sources whilst the gas from East is almost [ vaporized ] literally spoken. And so there's a lot of activities in Europe to find alternative sources to do both renewable and create more sources for providing energy. Within Project & Engineering, again, a lot of activity. I think I said last quarter that we are manning up the organization. We are looking for more people. We are building up more activity down in -- technical activity over -- in our hub down in Manila. We also have campaigns to employ more people. We are -- we see a lot of activity now regarding the [indiscernible] on our rigs. There are a lot of activity linked to mobilization of our mammoth fleet, the external fleet with Mira and Hercules, and we also see that there are more coming up. We are supporting our initiative and our engagement within Oceanwind -- Odfjell Oceanwind, where of course the engineering project department has significant input and is actually the backbone to provide those solutions. So the activity level is high, margins are getting better, we don't see any drop in the closest future, meaning a couple of years at least. So it's difficult to see longer, but we see that, that part of the company will be more and more important to be the driver and as a backlog for developing more activity and new activity which is according to the plan and why we actually did the split and how we kind of are now engaging for the strategic drivers going forward. On the business area highlights, I've been mentioning some of it. But with the backlog within Well Services are very good. We have a good pool of equipment. Still, we are talking about investments in the range of $18 million to $20 million. Some drop, some lower now, but we don't foresee that, that will go down. We have established a very good cooperation with NOV Totco regarding well wired pipe. So we will be providing the wired pipe solutions where that's needed, especially in the northern part of the market. So we believe that the wire pipe technology will be more and more attractive when clients are figuring out how to use it. I mean, Equinor, Aker BP is doing it already. It's not really deployed offshore international, very much onshore international, but a lot of the efficiency and the performance is improved by running wired pipe solutions. It doesn't do it necessarily drill faster regarding meter-by-meter, but do less missed errors. So the efficiency is significantly increased. That is a good business for us that also could drive -- if that -- if those activities are coming up, that might also drive some investments, but the investments -- the payback period for these packages are significantly high and the IRR is very attractive. Regarding operations, we have -- we operate now on 16 platforms, and we've seen potentially for more. We are tendering several jobs in the U.K. sector now. Not being confirmed. So the backlog remains strong and stable, and we actually are -- we have a combination of base margins there, but we also have -- when we operate well, when we operate good, we get -- we have incentive schemes running and sometimes that pays a lot. Sometimes we have not the same effect, which we see now in this quarter, but the previous quarter has been good and the future, if we do well, that margin doesn't really concern us. Regarding Engineering, you see that backlog is also very, very good. We have a very high utilization. I mean, 93% is, I will say, about the edge. It shouldn't be much higher, so we need more capacity. And I've said enough about that, how we're going to do that. So we probably will start to bring more people into the organization to serve what we see is coming up. That's a challenge for everybody, but we have so far, a good track record there. We have an attractive company doing both oil and gas, hydrocarbon divisions and activities. And also, we are attracting people which -- also to work on the energy transition, meaning that we are active on Oceanwind activity. We do some studies on the hydrogen area. We do some geothermal activities. And we also work now to figure out plug and abandonment solutions, both from fixed installations and to plug and abandon subsea wells. So that's -- the last one is actually viewed as a part of the energy transition. You actually plug abandon oilfields and which is perceived positive by the market. And we will -- we have a very, very, I would say, strong foundation and technologies and experience to be -- to take part in that market. The U.K. market is strong and the Norwegian market is coming stronger year-by-year. So we are active there. I think the next will be you, Jone.

Thank you, Simen. Starting with the financial performance on Page 12, starting with the revenue. The revenue in Q4 was NOK 1.15 billion which is an increase of 1.3% compared to Q4 '22 and an increase of 37% compared to Q1 '22. EBITDA in Q1 was NOK 193 million, a reduction of 2.1% compared to Q4 '22 and an increase of 64% compared to Q1 '22. EBITDA margin slightly reduced in Q1 '23 compared to Q4 '22 due to seasonal effects, mainly affecting bonus achievement in operation. And EBITDA margin is increased compared to Q1 '22. The cash position was NOK 598 million in Q1 '23 compared to NOK 560 million in Q4 '22, an increase of 7%, even with a working capital decrease of NOK 103 million due to delays related to ERP system upgrade. Cash generating from operation was NOK 86 million in Q1 '23 compared to NOK 190 million in Q1 '22, and the leverage ratio was further reduced to 10.5 (sic) [ 1.05x ] in Q1 '23 compared to 1.23 in Q4 '22 caused by higher cash balance and improved [indiscernible]. Then we go into the business area performance. That's on Page 13, starting with Well Services. Revenue of NOK 393 million in Q1 compared to NOK 287 million in Q1 '22, an increase of NOK 106 million. EBITDA NOK 136 million in Q1 '23 compared to NOK 93 million in Q1 '22, an increase of 37 million. And a small increase in revenue and EBITDA in Q1 '23 compared to Q4 '22 and EBITDA margin percentage stable on approximately 35%. Operation revenue of NOK 549 million in Q1 compared to NOK 413 million in Q1, an increase of NOK 136 million and EBITDA of NOK 34 million in Q4 compared to NOK 28 million in Q1, an increase of NOK 6 million. EBITDA dropped 35% in Q1 compared to Q4 due to lower bonus achievement caused by season effects and also a positive escalation effects recorded in Q4 '22. Engineering of revenue of NOK 140 million in Q1 compared to NOK 93 million in Q1 '22, an increase of NOK 47 million. EBITDA of NOK 28 million in Q1 '23 compared to NOK 7 million in Q1 '22, an increase of NOK 21 million. The EBITDA margin in Q1 '23 was 20.2% compared to 7.2% in Q1 '22. And increase is mainly explained by higher -- very high utilization and also execution of some lump-sum project, which has higher risk, which also then provide higher margins. Let me go to the summary to try to sum up. It's a strong financial and operational performance in the quarter, which is normally challenging. Cash and debt situation is solid. Our focus now will be on working capital improvement to further improve our cash balance. We see a positive market outlook for all segments with Well Services positioned to capitalize on growth opportunities. Dividend distribution of NOK 50 million announced and commenced the start of regular cash disbursement to shareholders. And we also celebrated 1 year university on OTL and have now established a solid foundation to further develop the company.

Yes. And that concludes our presentation, and we're now ready to take questions.

[Operator Instructions] Our first audio question is coming from Mr. Tommy Johannessen, calling from SB1 Markets.

Yes. Starting off with the Project and Engineering division, a very strong growth in margins, both in Q4 and Q1. Could you give us some more color on what you expect there going through 2023? Should we expect a decline? Or could the very high levels be maintained? And also a related question, when you plan to add more people in this division, do you see any pressure at the moment?

Yes, that's a good question. We have very high activity level now. We did that -- also you saw the last quarter in Q4, we have still high level of activity. And yes, the margins are in this context, viewed as at the upper end, what's typical within Engineering. My own background before I joined Odjfell, not within Engineering. So I used to do that with Aker. So I like to be a little bit careful just to kind of say this is how it's going to be forever. It's -- we have kind of said some years ago that if we hit 10%, 15%, that's good when we are higher. With the current level of activity going forward, we expect that level will be maintained over a period of time. But there are pressures on the salary levels in the market. There are pressures on getting people in the market. So I will also be somewhat careful just to put in the spreadsheet the same level. So be a little careful. We will have more volume. So I'm kind of -- I'm not talking it down, but I'm talking it carefully and maybe somewhat conservative because I don't want to create so much kind of -- this is just going to open up and up. It is a lot about having the right quality of people, which is difficult to get. It's about training people, which is a very lengthy period of time. We need to be patient to do that. It takes time to develop good technical people with the right competencies. You can't just buy them from the shelf. And it's also a combination of what you can get for clients and what you have to pay for those, hence, you are engaging how you kind of see that. So I think potentially increased rate could be somewhat eating about higher salary levels. So you do your own math, but I will be somewhat conservative just to plug that straight into the future.

The next question is coming from Jørgen Lande calling from Danske Bank.

Just on the order intake for -- during 2022 and first quarter 2023 seems very strong now. And what's your view on the, let's say, outlook for order intake and perhaps also the timing '23 versus '24? What's your kind of comments and views on that.

I can start there, Jone. You might add on things if I forget something. But just a general comment on the order intake, I think we have been around NOK 11 billion plus, and we have been catching up orders going forward now. We are increasing the backlog, which to us is quite important. The backlog within operations are quite stable. When we win a contract, we have several tenders out there that will have a significant [indiscernible] because those contracts are long and there are lots of options, and normally, we take some of the options conservatively into the backlog type of thing because they are very likely to be executed, at least some of it, but we know what clients are thinking. With that what's important for us is to see that we are growing the backlog within especially Well Services, international. And that is where we see now more activity and not necessarily in -- too much in '23, but we -- if the trends are following, '24, '25, will be quite interesting. So we are measuring and already, we have a lot of orders, small and some bigger coming into the -- flowing into the Well Services side. So I said about investments. We will keep the level of about NOK 200 million investment, $20 million typical up and down in that area. If we get some very interesting type of business opportunities, that could, for example, be a wired pipe package that might increase the investments, but the payback is fantastic. So if we can -- we are focusing on very much maybe in our book, Tom, you said maybe too much, but it's never too much, is to get a stronger foothold international. Meaning that we also need to ramp up the organization and some equipment we need to already order because it's a quite long delivery time on certain equipment. So we have started to do speculative ordering that we know those equipment that's going to be asked for will be provided when we get into the '24. Some equipment takes a year to get them and we know that -- we know those equipment are quite attractive. So, yes, to the question, backlog, Well Services is extremely important to build and the backlog for Project and Operations and Engineering will be -- will continue to be quite okay. the backlog with the Operations will come when we win contracts.

But can I also have a follow-up, please, just on the terms of the -- perhaps if you are successful in that strategy in '23 kind of building more backlog also international. Could you then -- is it a fair assumption to make that CapEx for '24 perhaps will be higher than the roughly [ 18 to 20 ] previously guided for '23 value?

I think you can eliminate somewhat there, I think.

Yes. As we said when we split, we estimated the value of between $17 million and $20 million. Now we are putting NOK. So what we said is this year is about 200 plus, and that will give us a robust flexibility going forward because if there was a huge growth, then we have to invest more, if there are good business cases. But the figures where you see now is 200 plus based on current activity level plus additional one. That's the situation.

[Operator Instructions] We'll now go back to Mr. Tommy Johannessen of SB1 Markets.

Yes. My line was broken in the last question, but thank you for the color on the Engineering division. I just want to talk on the cash flow, the working capital movement in the quarter. Can you say anything about the expected timing of a reversal of that? And sort of what measures are being taken to improve the working capital?

Yes, I can do that. As we said, we upgraded our ERP system 1st of January, and that has a negative impact on the working capital in Q1 due to some delays in the merging process. We know what the issues are. We are on it, believe me. So we are working very hard to improve it, and we expect that we will be back on track within Q2 reporting.

And just on consolidation on M&A, any updated color you can give there, what you're looking at, what regions, size, et cetera?