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

Hello. Welcome to Odfjell Technology's 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'll find the presentation on our website, and I ask you to take notice of the disclaimer on Page 2. Simen will go through the key highlights and talk about the market outlook, the backlog and contract status. 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 use the dial-in numbers. I'll now hand it over to Simen for the first part.

Thank you, Gert. And thank you for calling in, everybody. I'm going to go through, as Gert said, highlights in the markets for both financials and what's happening in the market. So the overall numbers, which will be more in detail by Jone later is revenue in the quarter of NOK 1.36 billion. We have an EBITDA of NOK 221 million, and net profit, NOK 88 million plus. The order backlog is still strong, NOK 13.4 billion and still strong cash position with NOK 846 million and still quite comfortable leverage ratio with debt on EBITDA of 0.7. If we look at the order backlog, we are -- the next slide, please. We still have -- we are reporting the whole backlog and within operations, also what's including platform drilling and jack-up management, we also report options because we -- it's quite very likely quite often and very seldom these options are not declared. So it's different from other type of businesses. We are reporting the part of backlog because it's really -- we performed well on what we do. The options are there and has historically shown that these are close to 100% called upon if we do the job well and do write HSE and so forth. So the backlog today is NOK 13.4 billion. And of course, the biggest portion of that is within operations. Significant backlog in Well services, which is also quite interesting, and the smallest part is by the nature of the business is project and engineering. I come back to the tender activity. We have several tenders active these days. And I'll share with you a little later where and what type of activity we foresee over the next period and the next coming years. Contract overview and awards, we have -- as we announced earlier, we have got a stronger portfolio with Equinor in Norway. We are -- by first of October, we will start up with 2 new platforms, Grane and Visund and still keep Johan Sverdrup. And all these options have been onset has been declared. So we are running these contracts until '28. We also see that the activity level also in the U.K. is ramping up. We have several tenders now also working to increase the backlog over there. And we have seen that Equinor, for example, has exercised the options on Mariner, a very important business for us in the U.K. It's a quite complex and demanding operations and we have deserved our worth there. Together with an alliance or a teamwork together with other main service and the client himself. We serve with Well services, and we also serve them with a project that's nearing upgrades. There's a lot of things happening there. So Mariner is really an important operation, both for us and, of course, for the client. Same with bp Clair, which has extended the options there and declare them. And of course, together with Johan Sverdrup, you see this coverage here, which is a quite comfortable situation regarding the operations side, which also includes jack-ups. This part is quite important for the rest of the company because all these installations are in a way now and then under modifications. They are -- we deliver Well services type of thing, rental capacity, well bore capacity, casing running capacities. And so a lot of the business we are doing is kind of is an add-on services to operations itself. So the platforms are literally spoken the platform for add-on services for the rest of the company. That's why we focus on this one. And that's why we also want to extend and increase the number of platforms and increase the order backlog in that respect. If we look at the activity globally, this is the map I've shown you before. What's new here is that we have -- we are about to open out the office in the U.S.A., in Houston for business development sales office. We are already quite in advanced discussions with clients in Brazil, and we also now have an opportunity in Suriname. So that's where we follow our own rigs, but the rigs are moving in one of the cases is 1 of the rigs we operate, which could be also operating in South America. And of course, by that, we also just follow with the setup we have on all the add-on sales and services. Our unique combination with Well Services integrate operations together with the rig crew and the rig management has shown to be a very efficient package. Clients that have seen it, they like it. Many of them has asked for more because you see that, first of all, it's much more efficient and the costs are lower. So having this close integration between wealth services activities, and tools and dynamics in that respect, together with the cross-training with the cruise has shown to be very interesting and very efficient way of operating, which shows that the fleet in ODL, we are on -- although the rigs are mostly on, maybe one exception, but has shown to be the top notch regarding efficiencies, safety and effective operations. We have several advanced bids running now in Brazil. We have not yet concluded any of them, but we see a significant ramp-up in Brazil regarding several tender activities, tenders coming up with both Well service things and operations. So hopefully, not too far into the future, we hope to announce that we have done the first contract there, but it's too early to say for the time being. The clients there are big ones. There are main service providers and direct oil companies. We also have opened an office down in Indonesia to serve close to the market in that area. And we are looking at activities both in Australia and also, we are looking at some interesting opportunities in Brunei. So yes, the international market is quite big. We are not the biggest player in that market. So we can actually have the luxury of choose the ones that we find most interesting. We're not just not running after the big volume. We're running after the best opportunities where we can have some competitive edge and have some extra margins to offer. I think that these areas, we see the market, in general, quite strong even though we observed that the deepwater market in West Africa, South America and also North America has developed but not in the pace that the rig owners, I think would like to see, but our position in OTL is that we serve all the type of big markets. We operate in the Middle East, onshore, offshore, mid-water, shallow water, deepwater, we operate kind of all over the place and see a quite significant market out there. We are positioning ourselves with the things we are good at. We try to concentrate on the biggest clients we can see. I think today, we serve more than 200 clients, but the top 10, top 15 is the most important of them. I mentioned the Middle East. Of course, Saudi Aramco is very important in this area. We have not been hit by the termination of jack-ups in that area. We serve about 25 jack-ups in Saudi with all these kind of services, and we see that, that area is actually coming quite strongly back. I think to say that, well, as a sum up, we continue to be quite optimistic about the expansion. We have said earlier that -- our growth will come international. As [indiscernible] speaking from the Norwegian sector. Our growth within Well Services will come on the other areas I have mentioned all over the place. So our ambition is to grow the international business within Well Services. And we have looked at one small acquisition already. We have mentioned that earlier. We are also looking at other type of interesting companies, technologies where we want to kind of expand the product portfolio and type of operations. So all in all, I think we can say that there's no change in what we said earlier. We look at the coming years, that's quite interesting, and we will do our effort to deliver what we have indicated over the next periods. So with that, I thank you. And I think I'll leave the road over to Jone for the financial update. Thank you.

Thank you, Simen. Q2 is another good quarter for Odfjell. Revenue in Q2 '24 has a growth of 8% compared to Q2 '23, EBITDA in Q3 '24 is NOK 221 million compared to NOK 212 million in Q2, which means a growth of 4%. Cash generated from operation is NOK 184 million in Q2 compared to NOK 187 million in Q2 '23. Available cash was NOK 846 million in Q2 '24 compared to NOK 618 million in Q2 '23. Net profit of NOK 88 million compared to NOK 79 million in Q2 and the equity ratio is now 32% compared to 29% year end '23. And finally, the CapEx level in Q2 '24 is in line with established plan and the growth strategy. Let's have a look on the business area and starting with Well services, a good quarter for Well services with growth in revenue and EBITDA compared to Q2 '23, revenue growth of 5% compared to Q2 '23 and EBITDA growth of 3% to Q2 '23, mainly driven by growth in activity in Namibia, Kuwait and Saudi Arabia. And these factors more than compensated for no renewable of the contract in Norway. EBITDA level of 43% in Q2 '23 -- '24, compared to 34% in Q2 '23. We see a strong market for Well services coming up, expected high demand for all product lines globally. And I will say that Well services is now well positioned for further development in existing and new regions. With very high focus on capital discipline and high-margin business opportunities. The next area is operation. The improvement plan, we call it recovery plan is on track, positive development since Q1 '24 reporting. The revenue increased with 8% in Q2 '24, compared to revenue in Q2 '23. The EBITDA margin in Q2 is now 7%. I guess you all remember a poor margin of 2% in Q2. We have worked very hard with this recovery improvement plan. I'm happy to see that this approach has given positive contribution on the margin level operation already in Q2 '24. There is a high tender activity ongoing operations, as Simen said, which is very important for operations is an increase of scale will further improve the financial performance in operations. The next area is project engineering. P&E delivered a strong quarter with a good margin of approximately 17%, due to very high activity and high utilization all segments. Revenue increased by 12% compared to Q2 '23, and EBITDA increased with 18% compared to Q2 '23. I think we can say that we have built a strong foundation, management capability and product execution model has strengthened, which means that project engineering are well positioned to further develop the service offering in existing segments and future energy transition business opportunities. Going to the slide for cash flow. OTL has a strong balance sheet and the cash position is as expected in Q2 '24. The cash balance is affected by typical working capital fluctuation, resulting in a NOK 21 million cash balance decline compared to Q1 '24. Available cash was NOK 846 million in Q2 compared to NOK 618 million in Q2 '23, which is an increase of NOK 228 million. We are now fully prepared for the refinancing process and will execute it on the most profitable time. The LTM figures, 12 months development OTL, revenue and EBITDA are demonstrating consistent growth trends. The long-term strategic direction and actions are in place. The market outlook is good, and we expect positive development for OTL for the next coming years. To summarize, continued steady performance, operational and financially. Order backlog remains robust, expected strong market for '25 and '26, strategic focus on growth organically and through M&A. Liquidity and debt level remain robust, on track with the recovery plan operation; and finally, dividend distribution of NOK 45 million in Q2 up NOK 10 million compared to previous quarter.

I think we're then ready for the Q&A session.

[Operator Instructions] There are currently no questions in the phone queue. With this back over to you, Gert.

Yes. I will take a few questions that's come in. And the first one from Danske Bank. Asking the lower EBITDA margin within Well service, is it fair to expect that this was a one-off effect in Q2.

I can try to give a flavor on that. The Well services margin has been somewhat lower and it has to -- it's a combination of the market trend itself, not a trend, but activities in the market. A lot of the rigs we are working on every time there's kind of an SPS or a rig move, Well services on those rigs are not getting any income because rigs -- are not operating. And this period last behind us has been quite hectic regarding rig moves and SPSs. That impacts the activity level, and of course, the same coming with also the margin level. In those type of periods, we cannot just adjust the cost level because we know it's going to ramp up later, quite soon later. So we just have to kind of be on hold and then wait for it. So we see that the reasons behind this is quite transparent is nothing magic. It's a lot of activity coming up, as I said also. So we are positioning for the kind of go back to operations on those assets again, has also been typical behind the summer. There are also a lot of revision stops and upgrades which holds the operation itself. And that is the periods where Well services actually suffer from not having income when the operation stops. So this is a periodic thing. Sometimes it's less, sometimes it's more. This time, it's been somewhat more. But there's nothing that kind of worries us regarding the margins on Well services. We are kind of more looking at the future to position the tenders. We are -- has advanced discussions on to kind of position the equipment and people for operating in those areas. So that's the focus we have. We're not worried about that.

No. I think a follow-up to that. We also have our questions where if this is a natural speed bump or the market has weakened and also it's on here is the governing party in the U.K. will have an effect on our business in the North Sea.

No, I don't see that at all. I can't see any link there. So answer is no.

Yes. And, the OTL bond is called in August. Can you give some insights whether we will call the bond at the first opportunity or not?

As I said in my presentation, we are well prepared. We have a tight connection with the facilitators, and we will, as I said, do it at the best time. I can't say anything more than that.

And so -- yes, again, another question here on the U.S. office. Can you comment on how the development has been so far and also comment on the outlook?

The U.S. development, again, the establishment in the U.S., we have decided and we have a location, we have a place there. We just wait for the formalities to fall in place. I guess that the key personnel that will move there will do that in, let's say, late September, October. We have already quite a hectic activity with the same people not being present 100% in use on yet, but with the clients we work within drilling and of course, also within clients down in South America. The main target from establishing in the U.S., I'd just remind that is that all the big players playing in offshore, especially offshore South America, like Guyana, Suriname, Brazil are kind of located in Houston. And they're also the same players also focusing and operates on the West of Africa. So it's the same type of clients. So we want to be close to that client hub and with both the big drillers and within typical deepwater drilling and, of course, also with the clients we work with elsewhere. So the office in Houston is there to be closer to decision-making processes where tenders and awards are given and activities are created. So that's the reason -- main reason so it's mainly a place to be closer to operations and harvest more in the areas we want to do. Like we see now in Suriname, we follow 1 client over there and to kind of just continue with the same services, which knows us. We also see the same down in Brazil that the companies we work with elsewhere is also located there. And we have quite strong indication and invitation from them to establish our business in -- especially in Brazil. So we see a lot of activity coming up there. It's too early to say how much we will get, but we are quite optimistic about that.

Yes. There is a question here from Tommy Johannessen. Can you elaborate on the contract that was not renewed in Q2? And what the EBITDA loss in Q2 was and the coming quarters. I think all the details we probably won't disclose, but can you Simen talk a little bit around the contract?

Which contract you talk about?

The contract that came to an end in Q2, CCS.

CCS, of course. Yes, yes. Sorry, I say that because it's perhaps some 100 contracts and some of them are wins, some of them are losses. Be more specific, and I can answer that. Thank you. But well, the CCS system was not extended with Equinor for a reason, they don't need equipment. Well, that system has been invested and paid off quite some time ago. And yes, it was a setback that they didn't want to use it, but it wasn't really a surprise because they indicated that. So we are working now to find a replacement for that type of equipment. We own the equipment and is relevant for certain operations. And I cannot say how and when, but there are quite a lot of activity because we don't like to see all that kind of equipment just been laid there and not being active. So we talk to a lot of clients, not only here in Norway, but also elsewhere that we can hopefully, redeploy that type of equipment. When and how we have to come back to that. I can't say what impact it gives. That's not for the conversation today, but there's an impact. But we, of course, we have a lot of activities and ad hoc operations to close that impact. So yes, that's what I can say.

We have a few questions on the expected growth projections for the 12 to 24 months. And I think we don't give any specific guidance as many companies do. But maybe you could give a little bit of a view on that, Simen?

Yes. We have -- up until now, we have had a quite a nice story behind us. There's been a quite significant ramp-up and you see the history in OTL all these 2 years, we have existed on our own in the market. We have seen a quite nice growth period. I have said many times that I repeated now that '23 and '24, I have said is kind of a same type of year. There has not been any big ramp up in activity in '24. However, we see -- we have said that in late '25 and onwards, we see a much better market because many of the contracts, which has been awarded and are about to be awarded kicks off in that period. So there shouldn't be any surprise to anyone that '23, '24 and partly into '25 is not kind of the big ramp-ups, not at all been planned for. We are working on the long horizon. We don't work quarter-to-quarter. We work on a long-term basis to position our long-term growth and I think that's quite important for a company like us not kind of a rush after the short-term stuff, but build a stronger backlog over the longer term with the right clients, where we see also the best earnings. So we talked about potential refinancing. We have a strong cash position. We might make it even stronger if and when we do the refinancing. So we prepare for growth, especially with international growth because we have a strong position in the North Sea, Norway. We see a lot of activity coming up there, but it's a limited market. We will have our share and plus, and we see also the potential somewhat increased activity level in the North Sea, Norway, but we see a much bigger potential outside Norway. And these are areas I showed on the map where we have been most of them, and there's some new areas where we are looking at. For example, we have been in Brazil before. So we are starting up again if we get those contracts we want and we have been in Southeast Asia markets before, and we are just ramping up that with, based on the activity and the organization we have in the Middle East. And so we also kind of work with a stronger organization in Southeast Asia, and as I said, also in South America. But the growth we see will be international, mainly South America, Southeast Asia and more in Middle East.

Yes. I think we'll take one more question here. It's -- we lifted the dividends for Q2. How do we plan on future level of dividends? And can this structurally quarterly? Or are we planning for a long-term sustainable level?

Yes. As I said, we are in kind of a refinancing process and the timing, I can say, but we are soon there. When we have done the refinancing and hopefully improve the terms in that, we will update our dividend program on a more long-term perspective and of course, more predictable for the investors. Yes.

I agree to that. Just to add on there that, of course, this -- our business is much driven by cash flow, we are looking at growth. We generate significant cash. We, of course, will be a dividend provider and share back to their shareholders, which we find quite interesting. And with the projections we have as you said, we are running, but we are running slowly, and we want to do the right steps at the right time and also close moderation with the market. So our ambition is to have a steady program. Hopefully, it will be increased in the future. But we will start with -- start slow, but we're going to -- we have the ambition is to increase and be more, I would say, not aggressive, but have a more strong potential, and we see a stronger potential to share out earnings to shareholders -- cash to shareholders. So clearly, yes, both from the Board and from the administration, we are focused on that part. So that's going to be a part of the governance going forward.

I think we'll conclude the Q&A session, today. If you have any further questions, please reach out to me. You can see my contact details in front of you. I thank you all for joining today, and have a good rest of the day. Thank you.