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

Hello. Welcome to Odfjell Technology Q1 presentation. My name is Gert Haugland, I'm the SVP for Finance and Investor Relations at 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 important message on Page 2 of the presentation. Today, Simen will start by presenting the key highlights and talk about the market outlook, our recent acquisition, the backlog and contract status. And thereafter, Jone will cover the financial figures before we conclude with a Q&A session. You can submit your questions through the webcast portal or in the dial-in numbers. I now hand it over to Simen for the first part.

Thank you, Gert. Thank you, everybody for calling in, and welcome to this Q1 presentation. I would like to start with just the highlights for the quarter. We have had a revenue of NOK 1.5 billion, EBITDA to NOK 212 million would give that profit of close to NOK 52 million. We have had in the quarter a good growth on the order backlog. We have worked hard to bring that up. And today, the order backlog has grown by approximately NOK 2 billion to NOK 4.2 billion. The cash and the liquidity availability is still strong. Now we reach NOK 867 million. And we have a very comfortable debt situation by the ratio, the risk ratio of 0.6%. All these details will be more addressed Jone in his presentation. Talking about the market and so forth. We have, for a while, talked about doing growth via acquisitions and organic. We have now concluded the first, which is a company in McGarian, which we have bought 100% of the shares. The McGarian is a known company serving special tools. We -- our interest in McGarian has primarily been to address and get a wider portfolio products and solutions and with patents for weak stocks, casing and package mailing tools and fishing and remedial products. We have, in a way, mapped our capabilities over time, and we have talked about the plug and abandonment slot recovery market as a global market, especially now both in -- especially in the North Sea, especially in the U.K. sector, but the Norwegian sector will also follow closely. This is a good fit for us. We have worked hard to get it concluded. And this company will give us access to solutions where we can combine into a wider aspect of services for a variety of plug and abandonment slot recovery project. This is the first step on the road we have announced that we also -- we have said earlier that we're also going to do more. This is a small bolt-on acquisitions. And we have actually -- the price we have paid is an initial price of GBP 3 million. And we also have an earn out over 3 years of 2.5 -- kept to GBP 2.5 million. This will be based on successful growth and from McGarian being more company today, we will bring the company and the solutions and the people into Odfjell technology, and they will be participating in a much wider marketing network and much wider aspects of client access. So this is a strategic development. And we see that when we do, in a way, simulations of how we can grow this part of the products, they are -- have developed and continue to develop. We see a significant potential here all over the world, really. I'll come a little back to that later. So this is a relatively small acquisition. It's very easy to integrate. It's a perfect fit for us. The personnel we bring over are very welcome, and they are very confident. So I also like to address a little about what we do on energy transition. I have been frequently asked in the market because we have been known after the short 2 years we have existed as a separate company to develop, of course, integrated services integrated offerings with -- based on the long history we have operating over the last 50 years. We -- I also want to share with you how we think about the energy transition because I'm frequently asked about that. So just to start there, we are not there to kind of announce that we have put aside a lot of CapEx to do this. We have on this slide, you can see that the 4 numbers there is kind of saying that in a way, experienced the heritage is opening for us to be a player in the future regarding energy position. We have built up a company -- we are now 2,400. When we announce anyway how we are thinking, we get actually quite good feedback from the market that people want to work with us to go to see both the existing business and the interest shift also into the renewables and emission reduction activities, which is kind of an important element in the global marketplace as we speak. So on this slide, I want to share with you that the number of people that we have integrated global reach and services. We are in a position where we can combine things that others can't do. We have a strong engineering capability of 350 people now, both very core into the oil and gas well services, semisubmersible upgrades, technology to reduce emissions and so forth. So they are well qualified to kind of also develop both sides. The thing we are doing for the future development of renewables we know our clients very well. We know the oil companies very well. We know many of them good and bad, has announced significant investment into renewables. We talk about billions and billions of NOK. Our plan because we have developed solutions that can bring and help clients to install technologies to reduce emissions primarily. In Norway only, the target is to reduce emissions by 2030 50% from some few years ago, significant ambitions, tough to reach, but it's possible. So our plan is to really to tap into their investment capacity and particularly with project solutions and offer solutions and get financing, we have their investment capabilities. So we're not going to set aside quite a lot in a way, a package of money and saying we're going to spend this on the new, no. We are there to use and follow our clients globally, and they are big, and we have mapped their ambitions, and we're going to follow their CapEx capacity. Plug and abandonment is something we will prioritize going forward, the number four, market attractiveness. Plug and abandonment, we have spent enough time there now. It's important for us to be a player. McGarian gives us and wider portfolio products. We look at other companies, too. And I can say that in the future, we expect more to come regarding this. But this will be acquisitions for profitable growth. We're not buying it for just to have volume. We're buying it to fill in the gaps we have in our own portfolio, and it's there to do profitable growth. I'd like also to say a couple of words about floating offshore wind. Floating offshore wind has now very good capitalized by having 2 new investors from MOL in Japan, a third biggest ship all over, and Kansai, which is the second biggest utility company in Japan. And they have invested in the company, and we are now in a position now to develop 2 projects where we have on the target. The one is [indiscernible] North where we have is old project. It's 35 million megawatts. Our plan is to develop that. We have been granted from Enova, NOK 2 billion, a $200 million for -- to support our technology further technology development, which shows that we, in competition, have proven that we have the best solution so far. And we also are looking for solutions and in a way, a pace that we can develop those 2 projects [indiscernible] postponed [indiscernible] is different. It's smaller. It's a pilot for us, it's very, very important and it's supported by our clients. So these are the things we are doing and just to have a quick note at the end of the offshore wind actually offshore wind has already profits at the bottom line. So a little more at the market. This map shows that we have said before, we have opened now the office in U.S. is light blue. We are looking at that to be a marketing office primarily. The back office will serve clients that operate South America primarily and also clients that operate West of Africa. We talk about deepwater markets. And we talk about the big majors out there like Exxon, like Chevron, like Total, Shell, ENI and so forth. All the big drillers are based in -- except for very few in Europe. But the big American drillers are all based in Houston, and we serve them by way services. So that's also a very good fit. We have a very interesting build now in Brazil with well services. for a major client. We are optimistic. We hope we can announce something, not too far in the future, maybe a couple of 2, 3 months or something. We see a significant more activity also in Namibia, where we have 2 rigs today and more to come. And we see that the ramp-up of Namibia will be good -- we see also more activity on the general best African coast with deepwater activities. We see now that drillers are getting more longer contracts, better day rates, and we are there to serve them. We also see now that all [indiscernible], especially within well services because this map is really well services. And we come even though there was a slight setback in Saudi, we our view on that picture is that those rigs, those [indiscernible] that was laid off or terminated, they will be active elsewhere. The market is big. We see a ramp-up of activity, and we see more tenders to come in all these green dots over the place. And we have said quite many times, I think you heard me before, '23 and '24 is 2 years where we see a little flat development. So I have not expected too much ramp-up in '24, which has shown to be a fact. We see -- however, we see '25, '26 and '27 onwards as much more promising. This is also reflected by other reflecting about drilling activities. We follow drilling activities onshore, shallow water, deepwater, harsh environment all over the place. So we are perfectly positioned to harvest where we see profitable growth in this area. So sum up for the market we're optimistic to see a stronger market in the future, and we will tap into that market with most we can. The order backlog is now NOK 14.2 billion. And it's good to see that we are able to bring more in. I'm very pleased that we also see growth within both operations and rail services [indiscernible] projects. It's kind of a different type of business. But as I said many times again, that part of the company is key to develop further solutions and to bring also the energy transition in place. P&E serves all the upgrades, SPSs, modifications, entering on new technologies, reduce emissions on existing installations supporting clients it's a key to be and to be a part of a client portfolio and client relation delivering here creates more activity down the road. On the -- back on the next slide, the backlog there is, of course, the [indiscernible] project for Equinor as important to us. We have increased with Equinor on more platform to operate -- we did not -- were able to keep hydro platform, but we won't be soon [indiscernible]. We both -- we know both of those platforms from earlier, do very well. And we will make sure that those 2 parties will be better. It's also good to see that Ready services has also won significant more projects in the North Sea and in the Middle East. We have increased the backlog with NOK 0.7 billion on well services. And you will see later that the margins in a back is in the performance is good. And even though we have addressed and we will address further some problems with operations in Norway operations, Norway has a lower margin today, first quarter than we actually like to see. There is a recovery plan in place where Jone will share with you some of the actions there. 1st of October, we will start a new portfolio with Equinor. We will -- if we look at kind of where we see the challenge in the operation, it's a low margin on operation in Norway. However, we see already significant step-up improvements. So we're quite optimistic that we will build a better performance I'm saying that our targets or long-term targets with operations is high single-digit margin into double-digit area in the future. And that's possible. It's possible, but it needs some, I would say, good performance, REIT incentive schemes, improved terms and conditions and then -- which is always a challenge, but we have done it before, we'll do it again and then kind of roll into a better situation. Operations operates 19 installations, 18 plus 1 jackup. And we also see that out in the world, not here Norway or in the U.K., we see that we are able to address different combinations of services led by operations, which has some sort of -- where we can combine solutions and technologies into new packages -- we talk about Asia Pacific. We talked about also partly Middle East, where we are able to see a better utilization of what we have and better margins. So some tomorrow, we are optimistic about that, too. And by that, I'll hand over the financial updates on you, Jone. Thank you.

Thank you, Simen. Starting on Page 12. Q1 is a good quarter for OTL taking into consideration Q1 is usually the quarter with highest seasonal financial impact company like Odell Technology. Revenue in Q1 has a growth of 12% compared to Q1 '23. EBITDA in Q1 '24 is NOK 212 million compared to NOK 193 million in Q1, which means a growth of 10%. Cash generated from operation is NOK 75 million in Q1 compared to NOK 86 million in Q1 '23. Available cash was NOK 867 million in Q1 compared to NOK 598 million in Q1 '23, and net profit of NOK 52 million compared to NOK 43 million in Q3 '23 and the equity ratio increased from 25% in Q1 '23 to 32% in Q4 -- Q1 '24. And final page, CapEx level in line with plans and the growth strategies. Let's have a look on the business area, starting with Well Services. It's another good quarter for Well Services with growth in revenue and EBITDA compared to Q1 '23, it's a revenue growth of 19% and EBITDA growth of 28%. And that's mainly driven by good operation globally, high activity in Kuwait, Europe, Malaysia and Namibia and had put a very good performance in Saudi and very high utilization globally. EBITDA level is of 37% in Q1 compared to 35% in Q1 '23. We see a strong market for Well Services is coming up with expected high demands for all product lines globally. And Well Service is now well positioned for further development in existing and new region with focus on capital discipline and high-margin business opportunities. The next one is operation. As Simen said, a challenging start for the year for operation with a margin level of 2% for Q1 '24, Q2 low bonus earnings, high cost related to crude transportation delays and high sick day at offshore. The revenue increased 7% in Q1 '24 compared to revenue in Q1 '23. As Simen said, we have established a commercial recovery plan for operation in Norway, and I expect that this approach, in addition to expected positive commercial impact from new awarded contracts in the portfolio will improve the financial performance going forward. And we're talking about a lot of cost initiatives. We're looking into contract terms. We will have a lot of initiatives to achieve more bonuses, et cetera. There was a high tender activity ongoing operation now which is an important operation since increased scale, but also improve the financial performance. The next business area is project and engineering. P&E delivered a strong quarter with a normalized and good margin level of approximately 15% due to very high activity and high utilization in all segments. Revenue increased with 16% compared to Q1 '23. I think we had to say that we have a strong foundation established management capability and project execution model strengthen, which means that project and engineering is well positioned to develop a service offering in existing segments and positioning OTL for huge energy transition business opportunities. Going to the next page, cash flow. As Simen said, OTL has a strong balance sheet and a cash position is as expected in Q1 '24. The cash balance affected by typical working capital fluctuations resulting in a NOK 61 million cash balance decline compared to Q4 '23. We had increase in working capital with NOK 116 million in Q1 due to increases in trade receivable. Remember that the last 4 days in March were public holidays and a reduction in trade payables in Q1 compared to Q4 '23. Odfjell cash was NOK 867 million in Q1 compared to time to NOK 598 million in Q1, which is an increase of NOK 269 million. We are currently planning the refinancing process, and we will execute at the most optimal time for the company. The LTM figures, the last 12 months development for OTL still good trends with revenue and EBITDA and demonstrate consistent growth trends. We are now working with our strategy process update, including the strategy direction, objectives and action and this plan will be based -- is based on expected upcoming market outlook. So to conclude good performance. Strong order backlog and order intake, positive market outlook, well prepared for growth, organic and more M&A in the coming years. good balance sheet and significant available liquidity, low debt recovery plant operation established at operation Norway. And finally, dividend increased from NOK 25 million to NOK 35 million.

That concludes the presentation, and we're now ready for the Q&A session. And I think we'll start with call-in questions. Is there any?

[Operator Instructions] Our verbal question today is coming from Lukas Daul calling from Artik.

Just a quick question on the dividend announcement. Obviously, you have increased it from the previous quarter's level. But you are still below what you are allowed to pay out in terms of the covenant that you have on your debt. Can you just sort of provide some color on what you are thinking going forward?

Yes. This is Jone. The Board of Director decided yesterday to increase the dividend payment from NOK 25 million to NOK 35 million. As you know, the capacity is higher is actually NOK 172 million for the year and NOK 43 million in the quarter. The dividend program will be revisit in the next -- for next quarter after we have finalized and discussed with the Board the strategic direction and a 5-year financial view. So we'll come back to that in the next quarter. And just a reminder that dividend payments in 2023 was NOK 100 million.

Okay. And then on Simen's comment about your sort of offshore wind initiatives, obviously, you have multiple activities in that space. But I was just wondering, as they progress, where do you sort of see yourself in that overall offering? And I mean what kind of -- do you want to be an operator, you want to be a technology provider? And what kind of capacity or CapEx commitment would those potential paths encompass?

Well, well, we -- currently, we have financed Odfjell Oceanwind with quite a lot of external investors. As I mentioned, the Japanese companies has a big trust in what we have done. Odfjell Oceanwind is a company where we will both develop technology, but we have also said to be profitable to have cash flow until the market is kind of established. We have also said we are a developer. So our plan is to participate in development all projects. I mentioned [indiscernible] wind, which is exclusive to us, a small one, but an important one to prove that we have technology assumptions for a harsh environment, 50-megawatt offshore. And [indiscernible], we also are the business list there and probably are well qualified for the 1/3 that is available for us. Our plan is never to be into execution. We are developing the project. We are farming down at FID for an investment decision to principle zero. So we are there to establish projects, develop it and [indiscernible] and roll their earnings to the next project development [indiscernible]. This strategy has shown to be successful so far because we actually have black bottom line in Ocean Wind. They are Odfjell Technology will not be sitting and pouring CapEx into Ocean win more than we have done. So the plan is not to be a leading shareholder or anything. We are there to support what we have done so far, developed the company and participate when it's suitable, we have no plans to owing more equity. Technology has people supporting the development, both execution of projects, engineering and so forth. And that's what we what we invoice into the Odfjell Ocean Wind and get paid for. So for us, it's a very good synergy between the 2 companies. It's born out of 50 years' experience of Maritime business and is going to harvest over the next future. Odfjell Oceanwind ambition is to be a leading technology globally, and we talk about hundreds and hundreds of installations globally. That's why we also get access to, for example, the Asia Pacific market around Japan is the first step. I hope that answers.

Okay. And then when I look at your platform drilling portfolio, there is quite a few contracts coming up for renewal early next year. So the question is when there will be a decision whether those options are taken or not? And what are your sort of base case expectations?