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

Welcome to Odfjell Technology's Q4 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'll find the presentation on our website, and I ask you to take notice of the disclaimer on Page 2. Simen will start by presenting the key highlights and talk us through the business area update, achievements and outlook. Jone will thereafter cover 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 welcome, everybody, and thank you for coming in. I'm here to present today's Q4 results. And just to flash, we have seen a year behind us now, which has been in our view, quite successful, significant improvements on certain KPIs, which I'll come back to. We have a revenue of the Q4 of NOK 1.3 billion. We have the EBITDA up till to '23 and a backlog now NOK 12.3 billion. Available liquidity, NOK 913 million including also the undrawn RCF. We have deleveraged our balance sheet, debt on EBITDA, we had now to 0.6, which I also find quite comfortable to use that word, that we have our backlog compared to the debt level is the EBITDA expected in the backlog, which is to us is quite important. KPI is now 4.3 up from 2.1. So the Q4 also indicates a year-end sum up. And if you look back on the year, we have an annual growth of close to 30%, 29%. We have achieved a 25% EBITDA growth. We have a backlog growth of NOK 1.5 billion, including the recent contract of -- within operations on Yme. Our net profits are NOK 344 million. And as I said, the available liquidity is strong and quite healthy. If we go on the -- this time, I want to give you some more detailed update on the business areas. And I think we'll be going to 3 of them, which is the Project Engineering, the operations and well services. Remind also, we have a big area with common services GBS, Global Business Services. I'm not going to go into those details, but that part of the company also serves the other Odfjell companies like Odfjell Drilling and Odfjell Ocean Wind. But anyway, Project Engineering, as I said, we are focused strong to build up again that area. To us, that's as the key enabler for our growth and our transition. We see that the Project Engineering department or business area are really 1 of the strong points in the company, doesn't mean that it provides the biggest bottom line effect because of the nature of the business. But it really, really keep us protect our technical integrity and qualify what we actually are doing regarding development of the company. That part is building upon the especially the marine competencies and the drilling competencies over the last 50 years. And just an example, the effort we are doing on Ocean Wind or the marine activity there on the harsh environment development of solutions for offshore floating wind is basically driven by the technology in this department. So we are into execution of projects. We do SPS, periodic surveys for drilling rigs, very critical activity for rig owner, as you all know, costly, $40 million, $50 million, $60 million at least each time or more. Very important to have a qualified group of people to support the drilling companies to do this most cost-effective, reduce downtime and so forth. We do a lot of modification upgrades on existing platforms and drilling rigs. We are -- we also do the green shift on those installations to install technologies for reducing emissions, CO2 and others. I mentioned offshore wind. We have asset integrity management, meaning that we are controlling the marine part of installations. I remind again that our specialty is actually a harsh environment. We also do more other areas with more benign waters, but the most extreme is, of course, the harsh environment located in the north and in Atlantic Canada in the very south of Africa and more south. HVAC activities, Marine services. And of course, we are -- as I said, this is the enabler for us to qualify and identify areas where we're going to continue to develop the company into the energy transition activities. Already, we have quite significant activities, profitable activities in that area. So this is the really technical enabler. Moving over to operations, who we are there. As you know, this is the platform in traditional platform drilling operations. We have also expanded the activity into operating jackups. We have 1 operations in Norway today. We are looking at more in the north and we will also have a couple of interesting possibilities in Asia Pacific, especially along Malaysia and in those kind of waters. They are a market for that because of the change in the market situation since the crushed down in 2014 and '15 in the marketplace. Many players left the market and still, there are opportunities to operate. And many -- some people have invested in assets with no operational experience, and that's where we can come in and management. So today, we are about 1,200 people. We are -- as I said recently, we won Yme, which is for Repsol, and a very welcome contract with a long backlog. And we are active on several tenders now to expand our operations also both within jackups and fixed installations. And 1 of the things with the platforms, even though the margins in this area are lower, it's literally spoken platform for add-on sales, is also an area where we can expand into more integrated services. For example, plug abandonment activities, slot recovery activities and on both floating and drilling platforms and fixed rigs. So all in all, this area for us is quite important. And as I said, it adds on activities for both engineering upgrades, well services upgrades and as I said, integrated services, which has been quite important for the company going forward. Moving on to well services, which might have the most, I would say, first of all, the most complex setup because it's a very international setup. We have described it as a specialist provider of missions, mission-critical life of field services and equipment. That sounds very bold, but it's true. We are about 600 people now, and we are expanding the activities internationally. We actually have served more than 200 clients into 2023. We operate close to 30 countries, and we have 13 bases and operations all around the world. Nothing in the U.S. so far, but -- or in Americas so far, but we -- I'll come back to that, how we are thinking there. The strategy here is to expand the activities, is to expand with new product lines, is to expand -- not headless. We are always focus on disabled manner to where we are investing and where we are spending our money. And as you've seen on the numbers, we have said earlier that we grow with a profitable growth. We're not going for the volume only, we are growing with a focus on profitability also. So we are not depending on the large volume every day. We are depending on growing in the right areas, in the right spot with the right clients with the right margins. So discipline is a key here. And again, our product lines is Tubular Running Operations, which is quite big. We have a big portfolio of tools within Rental, quite profitable business area. We have expanding also within Well Intervention activities. And as I said, again, Well Services is a key player within Integrated Services, both with plug abandonment, slot recovery, also with integrated activities on drilling platforms, where we actually do cross training of the crews that some of the drillers, they can use their own drilling crew to do build services activity. While we rent out equipment they operate it, maybe sometimes without supervision, sometimes with supervision. And depending on how well we know our clients and how well we are prepared to take the chance to operate via the drilling personnel. So we operate both with our owned or associated [ auto ] drilling, but we also operate with our -- with other international drilling activities -- companies. Quite important area key here for us is to look at the market. So I'll come back to the market also. But very important KPI is actually rig count. Both offshore, mid-water, harsh water, benign deepwater and so forth, more activity in operation, more activity for us. More rigs operation, more activity. This is a typical KPI, which also rules for the main service providers like the big ones, Baker Halliburton, [indiscernible], OSLB, we are kind of focusing on the same type of KPIs. So that's where we are. And if we move to the next area for charter, we show where we are moving. This is a Well Services the global picture of Well Services. And as we said here, I've been through this before with you, we -- in Asia Pacific, we are also now focusing on Indonesia. There are a couple of clients there. We know very, very well. And for serving jackups, we are there for Well Services activities and of course, also, as I said, with the potential management of jackups. Without management, just more to say that too, we sell our management associated with Well Services activity. So the next step for us is to establish an office in Houston. Why? Because in Houston, most of the clients for deepwater activities and offshore drilling are located in Houston. We also know, for example, that [ Seadrill ], which is an important client for us too, are also moving their head office to Houston. The big majors, they also are -- most of them are located in Houston. And from Houston, they serve deepwater activities in South Americas and West Africa. So to be present in Houston, we used to be that many years ago after the -- again, back to the [ press 14 ], we backed off for a good reason with no activity. But now we are looking at activities especially in Brazil, where we do have quite interesting leads where we also will do more investments on equipment to serve typical -- be subcontracted to the main service providers like Baker Halliburton and SOB. We also look very -- at a very interesting area for [ Surinam ] and Guyana, where there are a lot of activities with majors, where all of our clients we serve elsewhere are located. So yes, South America is coming, and I don't expect a huge step up, as we said some time ago, I think I say it every time, '23, '24 to us is not a year where everything will be very steep ramp-up. '23, '24, we see it's a moderate growth but we see a lot of more potential activities in '25 and onwards. And that we have said before. So we view the '24 as a -- for us, an area for establishing and position ourselves for the next wave of activity and then hopefully harvest more into the future. Now maybe I'd like to also talk about because we do have 3 rigs there now. Namibia is a very, very interesting area with a harsh environment, very deep water markets. We are drilling there with the -- one of the rigs we operate now, the [ Mira ] rig for 3,000 meter water depth. We have drilled for Shell and Total, successfully though. So I expect now Namibia, there will -- typical clients will consolidate. They will digest what they have found because I think every well we did was fine. And the clients are now because Namibia is a very new market. There's no infrastructure, but the potential production in the future in Namibia is significant. And I think that all of the big majors in SMS in Houston, they are positioning for activity in Namibia. And that's a typical semi-submersible market, not too much for drillships because of the harsh current waves, and you name it. So semi-submersibles are preferred in that region, which opens up a fantastic opportunity for Odfjell Drilling and for Odfjell Technology. Okay. Next, let's talk a little about our strategic performance because I think I was asked once that we have been kind of a careful when we launched Odfjell Technology as a company not to kind of say too much how -- what we expect. And of course, we have ambitions to grow. We have the ambition to become larger. But we have -- we want to do kind of to establish the company in the marketplace first. There's not too many peers to offer technology in the market. But we have peers on rail services. We have peers on operations, then not many peers on engineering. So our engineering departments is quite unique with that profile of competencies. So I can't see -- if I look into the marketplace, I don't see anyone with the same competence. And if we increase that size in engineering project, it's going to be a very interesting enabler for maybe many and expanding activity. So we achieved then 29% growth compared to '22. We said we want a growth, and we are -- we're going to do it by, again, discipline. We're not running after the volume, we're running after profitable growth. I underline that with 3 lines. We have identified M&A targets, not the biggest 1 in the world, but an interesting product lines, new product for supporting what we don't have ourselves today. So not far into the future, we will probably announce the first one. We have grown the EBITDA and with 25% growth from '22 to 2023, that's, to us, is actually okay. We have focused on cash and working capital. I'm very happy that we have reversed the buildup of working capital, which Jone will come more back to. And we also said that we will establish a dividend program. We have agreed on what we're able to give dividend in 2023. But we also see on the numbers that potentially we might have -- will support a future dividend program also. I will not say anything about level but of course, if we look at the numbers and we compare what's necessary for investments and growth, we also have capacity for interesting dividend capacity, but that is -- that remains to be discussed and launched with times-wise. If we look at the revenue growth on the next slide, I think, of course, we are big in Norway. And I say thank you for that because Norway is a very, very stable market. And 60% of the revenue is coming from Norway today. And well, it looks quite modest the other regions, but that's the potential we have in those regions. I remind we are not in South America yet. But if that region meets at least half of the expectations we have is going to be very interesting. So Norway, strong, has been strong all the time with the catastrophic war with -- on energy. And for example, in Russia, Ukraine and other places, Norway is perceived as the most stable energy provider in the world, at least in the Western world, and of course, that saying that, meaning that this market is strong and active for a very, very long time. And why shouldn't we focus on Norway. We are here, and we have a long tradition. We have been active through the last crisis, and we look at Norway as a growth area but not -- but Norway is kind of up to a level where it's actually delivering quite well. So we will maintain or somewhat increase our presence in Norway and increase our profitability in Norway. Rest of World, we have growth all of the places, summing up to close to 30% growth if we look at the global number. Next slide, backlog. Of course, with -- it's NOK 12.3 billion. I think that backlog is a healthy backlog. We know we have estimates on what kind of EBITDA we expect from that backlog. And so as I said earlier, 1 of the KPIs is expected EBITDA on debt showing that we have a quite healthy operation. So of course, within operations with long contracts, that's where the backlog is biggest. But remember also that Well Services is the most profitable area. And growth in Well services backlog is quite important to give an immediate effect on the bottom line and earnings. Engineering project course are more modest based on the nature of the business. But even though the margins are more modest than Well Services, that division is equally important for developing Odfjell technology as a company going forward. Clear message. And remember that we have been running the 2 years now with approximately NOK 11 billion backlog all the way now we're more than NOK 12 billion. If we are successful with some of the tenders, it will be even higher. But remember, we just marked that we have earned backlog all the time because through these years, we have been stable on approximately NOK 11 billion backlog. So we win contracts all the time, big and small, but -- so we maintain our position. The market is showing that the market is good. If our predictions for '25 and onwards, remains valid, I think we can look at some interesting years ahead of us. Jone the financial information is yours.

Thank you, Simen. I will start on Page 15. It's a strong quarter and a strong year for OTL with revenue and EBITDA growth and significant free cash flow mainly due to working capital improvement in Q4. EBITDA in Q4 is NOK 223 million compared to NOK 212 million in Q3 '23, and NOK 197 million in Q4 '22. For the year, EBITDA is NOK 840 million compared to NOK 673 million in '22 which means a growth, as Simen, of 25%. Net profit in Q4 is NOK 136 million and for the year, it's NOK 344 million. The cash generated from operation is NOK 551 million in Q4 '23 compared to NOK 45 million in Q3 and NOK 296 million in Q4 '22. We had an improvement in working capital with NOK 334 million in Q4. And finally, on this page, CapEx level in line with plans and growth strategy. Let's have a look on the business area on the next page, starting with Well Services. Another good quarter for Well Services with growth in revenue and EBITDA compared to Q3 '23 and Q4 '22, mainly driven by good operation globally, new contracts in Namibia, Netherlands and Malaysia and effects from ongoing cost efficiency program. 2023 is a good year for Well Services with 30% growth in revenue compared to '22 and 29% growth in EBITDA. I will say that Well Services is now well positioned for further development in existing and new region with a very high focus on capital discipline and high-margin business opportunities. Operation is the next one. Operation delivered steady operational performance with a margin level of 7.4% for 2023. The revenue and EBITDA in Q4 '23 are approximately in line with Q3 '23 figures and somewhat lower EBITDA compared to Q4 '22 due to additional costs caused by bad weather and reduction in [indiscernible]. For 2023, there was a growth in revenue of 21% compared to '22 and a reduction of EBITDA of 5%. There's a high tender activity ongoing now, as Simen said, which is actually good news for us since an increase in scale of business is very important for our operations. The next business area is Project & Engineering, what we call P&E, delivered a strong quarter with a normalized and good margin level of approximately 15%. P&E delivered growth in revenue and EBITDA compared to Q3 '22 and '23 and Q4 '22, mainly driven by high activity in SPS project and modification work at Heidrun B, good process execution and other projects and high utilization in all departments. For 2023, there has been a growth in revenue of 70% compared to '22, and a growth in EBITDA of 112%. I will say that we have established a strong foundation in P&E. We are well positioned to further develop the service offering in an existing segment and also positioning OTL for future NOC transition business opportunity. The next 1 is the cash. Strong cash management finished in Q4 '23 resulting of a free cash flow of NOK 493 million and NOK 353 million improved cash driven by a significant improvement in working capital in Q4. The working capital is improved with NOK 50 million for the year, even if we have an increase in revenue with 30% in '23 compared to '22. The cash availability is now NOK 913 million in '23 compared to NOK 560 million in Q4 '22. Our close the financial part of the presentation showing you the trailing 12 months LTM figures, which demonstrate good performance and development in both revenue and EBITDA. It's still very important for us to have a kind of a controlled growth strategy with a focus on high-margin business opportunity, ensure very strong cost and capital discipline as Simen said, to ensure robustness and predictability in future financial performance. To summarize, we feel that we are delivering on our strategy. We are well positioned for growth in a strong market. The cash flow supporting both investment and returning cash to shareholders. We have a good cash position and low net debt. And also that the financial performance in '23 supports a potential dividend growth in 2024. And we are always working with improvements. So we have a kind of a systematic execution of business improvement progress ongoing to further strengthen our performance in the business. We are now ready for questions. The Q&A session.

[Operator Instructions] I don't see any question coming to the audio. I'm turning to Gert for webcast questions. Over to you, Gert.

Thank you. We have received a few questions. I'll pick out a few of them. And I think additional questions can be directed towards me. To start off, we have a question from [ Gunderson ]. And I think I'll direct that to you, Simen. He is asking what we think the revenue growth will be for the different segments in '24 and '25?

Yes. Again, we never guide on these things. We have talked about that before. But as I said in my speech, is that the market is good, though '24 is a market -- is a year where as we see waiting for the next wave of activities. '23, '24, as we said for quite a long time, I'm also have the honor to be the Chairman of the Board Odfjell Drilling. And so I know the drilling activity, the offshore floating activity in the market quite well, and we see exactly the same. So I expect we are working with growth plans for '24, but we also see maybe a more potential in '25 and onwards, based on the rig count activity, plan activity and the awards of contract. The lead time from today from when you get the contract when you on start to operate is longer and longer. That's the best indicator for a better market. So the lead time from award to commencement is longer, good indicator. So the growth we have seen from '22 to '24 million is good. If that will be the same in -- we said the same in '25 or Q4 this year remains to be seen. So I won't say more. But I'm absolutely positive.

Okay. We have also a question from Jørgen Andreas Lande, he is asking about the reactivation of rigs is a good revenue and growth driver for OTL. And in this context, the Middle East region have been a force to reckon with. With the recent announcement from Saudi Aramco, has this either impacted your market outlook in any way? Or have you already witnessed real impacts?

Reactivation of rigs is a good business for us and for our own -- again, back to overall group, our rigs has not been reactivated -- they have been active all the time, but we have seen reactivation and modification of assets. We also manage today where P&E, Project & Engineering has a significant input to do the upgrades and the modifications necessary for activation. We also support activation of drillships all around. And we also support because the wave of installing technology for reducing emissions like what we have done in Norway because 1 of the reasons Equinor and AkerBP has been so active, they also take applied new technology for using emissions, which has reduced emissions significantly over the last 10 years. And that's going to come into the global market. When the rig activity goes up in '25 and onwards, there will be more demand on reducing emissions. That's a good thing for us with the jackup situation down in Saudi, we have a significant part of the jackups they're going to activate. For Well Services, no, nothing yet on modification activities, but we expect that to come. With the jackup activity coming up in Malaysia or Southeast Asia. We see also a combination of operations and projects and upgrades and Well Services. So all these are kind of building our services into those areas are quite important. The jackup business down in Middle East is very interesting for us. We are 1 of the very few that operate in Saudi with license to operate there. So important market to us. Next.

Yes. And I think this question, I'll direct to Jone. And there is a question about capital allocation and how we balance between the shareholder returns and with the leverage in mind. I think with the low leverage ratio, the dividend payment of NOK 25 million a quarter. Where will we be going forward? And what's the prospect of a bond refinancing? Could you say something about that, Jone?

Yes, I'll start with the dividend program we have, as we said, established a program, which actually Q4 '23 is part of. New [ ablation ] potential upside of the program will be done prior to Q1 '24. Once the financing, the bond tenure is 4 years until February '26. OCF is 4 years until January '26. The first call of the bond is August '22, with a core price of 103, '24, of course. We are, of course, working with this now when it comes to refinancing, and we'll conclude on this shortly, and the targets will be to reduce the spread improve the terms and improve the financial flexibility.

And I think there's some other questions regarding that, which is answered by that. I think that concludes the Q&A session. I thank you all for joining the call today. Please contact me if you have any further questions. And I say thank you and wish you a nice weekend.

Thank you.