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

Welcome to Odfjell Technologies Q2 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 note of the disclaimer on Page 2. Simen will present the key highlights of the quarter and the market outlook. Jone will thereafter cover the financial figures before we conclude with the Q&A session. You're going to submit your questions through the net cas portal or by using the dial-in numbers. I now hand it over to Simen for the first part.

Thank you, and good morning, everybody. Thank you for calling into our second quarter reporting. I'll go through the highlights of the quarter, some overall key financials, take a look into the market, give some comments how we have seen that developing since last time. Give a flash through the different business areas the 3 of them, and Jone will take the financial information and of course, the summary and as Gert said, questions are welcome at the end of the presentation. So highlights and key financials. We have another quarter with good growth within both revenue and EBITDA since the quarter last year. Cash position has been improved significantly since last year with NOK 618 million today compared to NOK 411 million. Gearing are stable with around 1x with net debt on EBITDA. And we see also that our backlog has been stable over the period. We are burning backlog, but we also feel a bit behind. So it's stable about NOK 11 plus billion. And EBITDA, we estimate in the back of 2.3x over net interest-bearing debt. The market are continue to be strong. We see a turn, continuous upturn in the cycle. We have a lot of contract wins, small though, but many, and that's equally okay, all over the world. We see our operations are strong with no major issues. No HSC, major HSC incidents. We operate now in close to 30 countries. And we have knocked wood any significant or any incidents that are in the serious arena.. We are also preparing operations in new countries. We are working and I'll come back to that. We are working with the bases within South Africa, West Africa. We have worked with Canada. We are looking at also markets in the U.S. and South America. We still have -- we have announced in the amount at more. We have paid NOK 50 million in dividend, and we come back to that. We continue to meet our plans to pay another 50 over the next half year. Market, we see that. As I said, in general, we work with technology. We are, of course, focused mostly on the oil and gas sector. And we operate now in 30 countries. We work onshore, we work offshore, mid-water, deepwater, harsh environment. We have activities with those services all over the place. We see stable and maybe an upturn in the oil price, which is stimulated by the energy needs and all the kind of trends in the marketplace, which we, together with our clients, estimates to last for some years. We can't say exactly how long it will last, but we talked about a number of years ahead of us that this will be a strong market. This is also proven by the comments from the different companies close to offshore drilling and how they say or how they talk about the market. We are, of course, in line with that because we serve exactly the same market. We see the key KPI for us is, of course, the number of rigs active, and we see quite a lot of step-up within the Middle East, Asia Pacific, and also within offshore deepwater markets. And behind all this to kind of substantiate why we say this is that we see a number of tenders coming. There are a lot of rumors about new developments coming, and there are a lot of add-on sales from existing contracts. Clients tend to keep our performance over deliveries and extend the activities we are already engaged in. So that's a trend that kind of has continued and has been stronger over the last period, and we expect that to continue down into the future. Within rail services, which is clearly the most international arena, we have. I'll go more into the business later, we see clearly a step-up we see potential to -- within Odfjell Technology to combine type of services into more of what we call integrated solutions, which is actually a preference from our clients. They can kind of meet less contract interfaces. We can have more of the total deliveries. So the trend is that we are able to combine solutions to the benefit ourselves, of course, and our clients. I mentioned the post outlook. I mean, Norway has been strong for many, many years, and we have a very strong position in Norway. During the downturn since '14, '15 and Odfjell has kind of been quite active during those periods whilst other markets totally collapsed in that period. So our position there is strong and we hope to maintain and somewhat increase it. but the potential outlook, we now see the growth potential within rail services, it's clearly on the international arena. Middle East, we have a strong hub in Dubai. We are working with Africa, and we see also continental Europe, East, West is also a decrease in the market. And I mentioned also, of course, on the other side of Atlantic, into Canada and the Americas. Within operations, same is a very predictable outlook. We are looking for new markets or new activity type of things. We are active in the Asia Pacific area and the Middle East for potential jack up management activities. They are ramping up significant numbers of jack ups in those areas and not all the owners have management for their operations. And we are clearly focusing to position ourselves into that part of their business or value chain, like we have done with Linus here in Norway for ConocoPhillips. SFL is there the owner. Again, operations, we are combining solutions all the platforms with well services type of thing with new solutions to be more -- to create more integrated solutions, again, to the benefit of ourselves and the client to have less contractual interfaces. We also position operations for new business opportunities within plug and abandonment especially, and we are also engaged in geothermal drilling. But mainly, the main part of the backlog in the future, we see more markets or more tenders coming up, I'll come back to that a little later that the number of platforms we want to operate, we hope to increase the number in that respect. Within project engineering, we see the same. We -- as I said last time, I think, we are building the company. We are employing more people. We have a large volume plan for Special Period Surveys for drilling rigs in this year, next year at '25, Special Period Surveys is quite extensive type of operation, and we are specialized for that. So we serve our own fleet and the fleet we manage, plus also support other rig orders in that respect. We also see our engineering department coming back to that, which is over enabler for also new things. We support off-shore wind. We have our own company called Odfjell Oceanwind. The company there are significantly involved in that development, which is now moving forward. And we're also looking at potential solutions in the future technology developments within hydrogen production. If we go to the business area as highlights, you go a little more into the details there, well services first, NOK 3.6 billion backlog. We have NOK 4.5 billion in cost price and equipment tools. So even though we are -- we do have assets, but we still consider ourselves asset-light. These are thousands of bits and pieces, which would pull into the well in different way and color and supporting clients and other service providers like Big 3, SLB, Halliburton and Baker. We see growth, as I said, we are establishing our basis within Africa -- West Africa. We are focusing strongly on Namibia, where we do have some [indiscernible] drilling sites, 3 rigs there somewhat later. Namibia is potentially a very strong market to expand -- we also see that for the north, there are activities where we support with the wind services. So we're establishing our presence more permanent in that part of the world. Also, we see the same trend in Canada, and we're also evaluating now both for Mexico and possibly also Brazil. and the deepwater markets are expanding. We have been in Brazil before. We currently have no operations there, but we see the possibility of actually piggyback on people we know very well, a company we know very well, which also need our services. So that could be somewhat in the future that we can actually look at. We are focusing on margins. I mean margin is key here, key margin cash flow. We come more back to that [indiscernible] talking. But this -- on the rail services side, we do have establishing in new countries, there will be some cost associated one-off, of course, but to move equipment to established bases, need to be and local and be more permanent take some more costs. So the margins have been quite stable. We have increased the revenue, but we also have some cost that indicates our margin has been not down but stable. That's, for us, okay. We also look at both, both organic [indiscernible] services. We are quite engaged in our M&A activity. We are not there today to buy companies or merge companies bigger than ourselves. I say that clearly, we have identified a number of technology spots we want to have. We have identified candidates that we feel that for us, feel that it purpose technologies and know-how. And so our growth in well services will be both organic and via M&A activities when we find the right candidate, we will do it. Historically, we have done that before. Before the crisis in '14, we actually -- our [ well divest ] activity that was acquired by a company with technologies and tools and in both the IPs and the tools. So the intervention activity in well services is quite recent that we actually acquired those 2 companies that has built that part of the product portfolio. So it's not unknown to us to do this. And we do have capacity and capability now in the company being separated from the rest to have creative solutions to integrate new actors if we find them right and if we find the conditions -- the commercial conditions right. Operations, NOK 7 billion backlog, quite stable. Operating now 16 platforms, one jack-up management, as I said. This is a very stable business. Loan contracts, lots of options. We recently exercised another year with Equinor Marine in the U.K. So the thing here is that we see now the business coming up, we see a lot of type of potential tenders, especially in '24 is coming up. And our ambition is, of course, to increase the number of platforms we operate. These platforms and these activities are literally spoking platforms for add-on sales like well sources and engineering upgrades and so forth. So it actually engaged the whole auto technology company when we do operate these areas. We -- as I said also, we like thought or actually spinning up and developing more jack-up management activities. That's a good business for us. It's a good business for the client. And we have a hub in Dubai, Middle East. So we operate the Middle East market. We also have licenses into Saudi Arabia, which more than a few western companies have that and we also engaged the Asia Pacific from Middle East operations. We have an office or a base in Malaysia, operating for Thailand and Indonesia specifically, but to also support our operations in the Middle East region, North Africa and Middle East or Asia Pacific from Dubai. So we recently have reorganized ourselves to strengthen our presence in that area. Within Project Engineering, close to NOK 500 million backlog. We have a utilization of our people. These are engineers, operating in projects, contracts and so forth and 90% utilization is actually very okay, shouldn't be much higher because then you have -- then you are actually pushing maybe a little too hard from our own experience, from engineering activities. If we are around 90% utilization, you are at the high end actually at -- regarding utilization. We have good activity. As I said, we are very much engaged in type upgrades. SPSs, there are, of course, during the summer, we are working a lot of yard stays and we have done SPSs we are enrolled in upgrade projects for our clients. And during summer time, normally, there are less activity unless it's a very kind of a stressed project and this summer has been somewhat slower, which I thought is very good. We have had a terrible, I would say, "terrible" activity level, supporting the mobilization of Mira, Bollsta and Hercules, so we said thank you for that, and our people to take very earned rest during the summer, and that has also a somewhat small impact on the activity level. We're not worried about that. We're also opening, expanding our office in Manila. We have somewhat, I think, 120, 130 people in Manila today, supporting our global business services with accounting, HR, IT and so forth, supply chain. So we are also expanding that now with 30, 40 engineers doing technical services for Project and Engineering department and with all disciplines, and we expect that part of the company to open and be engaged later this year and this year. I'd like to say December, January. Then we can also put activities in that part of the region, which is high value. It's a much lower cost, but creates a lot of value, and we are looking for more capacity, and we cannot just rely on employing people from Western Europe. That doesn't work. There's a heavy competition there. And so salaries are going higher. -- but to expand in a more -- in that region where we know the region very well. We know the capacity and capability very well. So I look forward to also to use that part of the chain to blend our costs when we build for services to our clients. So this is the view for the business. I hope that was showing that we are in a move. We are optimistic about the future. We have good KPIs, so, Jone, you can roll in further on the financial summary.

Thank you, Simen. Starting on Page 10, financial performance. The revenue growth of 10% compared with previous quarter and 37% compared to Q2 '22 due to a strong market, improved contract portfolio and a very good operational performance. EBITDA improved by 10% compared to previous quarter and 25% compared to same quarter last year. The EBITDA margin slightly reduced to higher costs, as Simen said, driven by observation and preparation for new projects and regions and also change in the segment mix. Net profit of NOK 79 million in Q2 versus NOK 43 million in Q1 and versus NOK 7 million in Q2 '22. Year-to-date net profit of NOK 123 million versus NOK 100 million same period last year. The cash balance improved by 3% compared to Q1 even with dividend payments of NOK 50 million. And cash generation from operation increased from NOK 86 million in Q2 and Q1 to NOK 197 million in Q2. And finally, leverage ratio and [ in fact ] stable in line with Q1. Going into the business area and starting with Well Services. It's a revenue growth continued with 12% improvement compared to previous quarter and 33% improvement compared to Q2 '22. And the growth was mainly driven by Western Europe and Norway. EBITDA of 9% compared to previous quarter and 28% compared to Q2 '22. Stable EBITDA margin in the last 12 months. Operation, revenue up 9% compared to Q1 and 25% up compared to Q2 '22. Improvement in revenue mainly due to higher bonus earnings and high activity for rig inspection services. EBITDA improved by 51% compared to Q1 and 2% compared to the same quarter last year, and bonus earnings improvement is the main positive contributor compared to Q1. Then finally, Project Engineering revenue improved 17% compared to Q1 and 140% compared to the same quarter last year. Increase in revenue mainly from U.K.-based project with the Norway activity remaining strong due to very high activity in the yard stay activities on deep-sea Mira, Hercules in addition to modification work on Heidrun B. EBITDA of NOK 26 million in Q2 is NOK 2 million lower than in Q1 due to lump sum projects that recognized in Q1 and more normalized utilization of personnel in Q2. Let me go to the summary. Still solid growth and the milestone has been broken by delivering EBITDA above NOK 200 million for the first time. As Simen said, growth plan established. We're targeting margin expansion through new business improvement program. Strong cash position, solid debt structure and leverage level. dividend distribution of NOK 50 million paid 1st of June and payment of an additional NOK 25 million approved by Board of Directors with payment in September. And intention to pay further NOK 25 million in December of the Q3 reporting according to our dividend program plan. That's it. Let me go to Q&A.

[Operator Instructions] Since there are currently no questions in the phone queue. [Operator Instructions] As there are no questions at the phone at this time. I'd like to hand the call over to Gert for any webcast questions. Gert, over to you.

We have received a question from [indiscernible]. -- in saying we have historically had stronger second half possibility development versus first half, what are our views and comments on 2023 in this context? Simen?

Yes. We have -- that's a fact really. But we are not there into any kind of guiding, but I guess that history will repeat also here. we normally see that happening. And that's because the first quarter is quite often influenced by some trouble weather conditions and so forth, tougher winter climate here in the North. And -- but yes, I believe we will at least. We will deliver over the year I'm sure.

Okay. We have another question, which is, can you share any insight on the split between greenfield and brownfield in the demand coming from well services.

Well, I honestly, I'm not sure about that split, green and brown meaning here that you actually operate if you do for example, if you do type of plug abandon clearly a brownfield activity when you closed out existing wells and these kind of things. But I cannot say the split there. We are looking at the drilling activity market, even though we do production or exploration. It's -- I don't have that split. Have you Gert any idea?

No. I think for us, it's a bit difficult to estimate.

We can actually note that question because it's an ex waste over the time we can actually have some -- I don't have that, unfortunately.

And then I think the other question here is the trend of continued margin improvements evident in the new backlog? I guess that would mean do we see better margins in the new contracts that we are winning.

Yes. I guess, hope so and guess so that the market is strong. We are well positioned to do it. We are now building a program maybe a new order backlog. So we expect and we work very hard to improve the margin in the new order backlog.

And is priced with the expectations when we took these jobs with expectation of some growth in the market, so we are pricing in type of expected escalation of salaries and things like that. So we try to mitigate the backlog by protecting us against inflation and increased costs.

Yes. I think a follow-up to that is there is a question about that the backlog has been kind of flat over the last 9 months. And should we read anything from this, which kind of contrasts a very positive market outlook.

I can try to say that. It's -- there are -- we -- in well services, we have something like we have a number of clients, and we have been filling up a lot of activity with smaller extensions and so forth within the market. The backlog, if you look at the backlog itself within the major part of the backlog is actually linked to drilling operations. And there has not been any significant wins there. We are equally occupied by building the backlog on well Services because clearly, the margins in that part of the business is much higher than within the drilling activities. Drilling activity, the operations are mostly linked to Norway and the U.K. And I mentioned also that we are active down in the Middle East and with Asia Pacific. So when we see tenders coming up late this year and next year, as I've said in the presentation, when we win and if we now win a big drilling contract, you will see a big step up in the backlog. But at the same time, it's equally important to look at the international rail services market, where we are picking up a lot of activities within the top 10 clients we have not yet any big contracts like filling up billions. No, but there are a number of activities that we are kind of just filling back with rail services and maintaining and increasing that backlog is quite much more important looking at the margin level for the whole company. Both are important, of course, but I don't -- I'm not any -- very concerned about the backlog being flat as long as I see all the activities that we ramp up and how we kind of view the future and all the tenders and the requests for operations we are getting, that number is increasing significantly, and that will materialize down the road, I'm sure. But when we look at the backlog of the company, look at the backlog for the different business areas. That counts regarding the margin for the whole company. Just a hint there.

Yes. I think we will conclude the Q&A session here. And I thank everyone for joining the call. And please contact me if you have any further questions or need information. The details can be found on the website or in the presentation. Thank you.

Thank you.