Odfjell Technology Ltd. (OTL) Q4 FY2025 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. Today's presentation can be found on our website, and I ask you to please take notice of the disclaimer on Page 2. Simen will start by presenting the key highlights and talk about the market outlook, our newly acquisition and dividend. Jone will thereafter go through 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. I now hand it over to Simen.

Thank you, Gert. Thank you for calling in. Good morning. I will go straight to the highlights. As we have indicated in previous investor calls last year, we also -- we said that we expected a stronger second half than the first half, and we have made a strong finish to '25. We delivered solid operational performances across all segments and generated EBITDA of NOK 213 million with a solid cash generation. And even more importantly, we materially improved our working capital and liquidity during the quarter. More details will follow when Jone, CFO, will present the numbers in more details. Fourth quarter, we signed a strategic acquisition of Kaseum and Razor, strengthening our intervention platform and improving the margin mix going forward. I will come back to that acquisition somewhat later in my presentation. On key financials, we have a stable revenue, strong EBITDA and cash conversion. Revenue Q4 was NOK 1.4 billion, reflecting stable activity levels. EBITDA came in at NOK 213 million, as I said, or NOK 222 million with adjusted for one-offs, which was related to our improvement program last year. Over the last 12 months, we have delivered NOK 5.5 billion in revenue and NOK 801 million in EBITDA. Backlog stands at NOK 11.5 billion. Q4 contracts awarded were about a little more than NOK 300 million, NOK 318 million. So the key message is stable top line, stronger profitability and improved cash conversion. On market, we see a quite strong market going forward. Norwegian Continental Shelf has been strong all the way. It's actually a very -- in a way has been very stable over time, and still is. There's a lot of tendering activities going on, but it has been some slower awards, but they are quite active, and we are active in many of those tenders. Internationally, we see that '26 will be an interesting year to position for the future growth as we expect with coming late '26 into '27 and '28 and onwards. This is reflected by information we get from many players, clients, other information sources. So with the expected decline in production in a way here in Norway and also globally, we expect that clients will more actively improve their spending on production and fulfill the gap with taping loss in production with new field developments. We see that coming up. Internationally, we see selective growth areas, especially in the Middle East and also Americas. We have -- as we have told earlier, we have established ourselves in Houston, U.S. with focus on Gulf of Mexico and South America, and we see actually more activity coming up and more interesting type of work we are tendering for. We remain focused on operational efficiency and cash generation and building a stronger intervention platform on -- and also within plug and abandonment. CapEx will moderate from 2026, and the Razor, Kaseum acquisition strengthens our margin profile and growth profile potential into '27. I'll come more into that going forward. Related to our strategic acquisition of Kaseum and Razor, we have many times indicated that we are looking for such a bolt-on type of mechanism to build a stronger platform for tiebo intervention and P&A activities. The strategic rationale for the company is very clear by doing this. Behind us, we have acquired earlier McGarian with whipstocks for sidetracks and slot recoveries, and we have also invested in a company called Reelwell for wired powered drill pipe. All these are sophisticated technologies for doing oilfield -- increased oil recovery and intervention activities. Kaseum and Razor adds into that picture. Kaseum and Razor represents a structural strengthening of our intervention plug, abandonment offering. Kaseum brings proprietary wireline intervention technology, whilst Razor is a service and rental tool company, providing the same in a way business model as we have with our own Well Services business area. This acquisition represents a high-growth, high-margin intervention platform. Kaseum develops and manufactures proprietary wireline tools protected by patents and strong IPs. Razor on that side provides the service capability, deploying those tools into intervention and plug, abandonment operations. The market rationale is very supportive. Aging offshore assets are driving structural growth and intervention and decommissioning activities. We have spoken about that for quite a long time, and we are kind of approaching that market, and we see a very strong market over the next decades. Operators prefer lighter and more cost-efficient wireline solutions, where these companies are well positioned, very well fitted with our own capabilities as per today. Financially, this is immediately EBITDA accretive and strongly cash generative. Financially, this is immediately -- sorry, the business model is a tool-based model with short investment payback periods and limited capital intensity. Together, Kaseum and Razor form a scalable platform that can be accelerated through OTL's global footprint. We operate in more than 30 countries, whilst Kaseum and Razor has a limited global operations. Our network with clients and relations gives a quite significant tool or platform for stepping up and creating synergies by doing this acquisition. Transaction. We have indicated -- said that we will finance this transaction with a tap on the existing bond of NOK 600 million. The transaction is structured with 70% ownership at closing in Q1, today this year, phased acquisition of the remaining 30% through a call and put options over the next 3 years. The enterprise value is GBP 38.5 million with GBP 27 million paid at closing when the financing is concluded. Funding, as I said, will be done through existing facilities and a bond tap with no covenant changes required. This phased structure provides immediate control and earnings accretion while preserving financial flexibility. And also this model with 70% and 30% left also creates a quite strong motivation and, I will say, motivation for the owners and the organization within Razor and Kaseum to sit with the company and work together with us to create more values over the next few years. This is quite crucial. And we have spent quite a lot of time with the 2 organizations to motivate them and make them understand how we in Odfjell Technology will work together with them and create the necessary values for what we expect going forward. The current run rate within Kaseum and Razor are strong. They are already in a way above what they expected for '26, and we see that as a quite interesting way also to step up in -- with our own networks, providing more opportunities for increasing sales and deploying their tools and equipment. So -- and we will organize the 2 acquisitions by letting -- we will keep the name. We will keep the organization as is. We will identify now synergies. We will identify sales synergies, potential -- some cost synergies. But we are quite clear that the 2 organizations will report into Odfjell Technologies. And over the next few months and year, we will make a more kind of a close integration based on a win-win basis. We have time for that, and that is quite important. So we kind of -- we will find our way forward. And I'm personally quite excited about how we could work together on the next coming periods. Regarding backlog, I said that currently, we are also entertaining several tenders in the market within all business areas. And we, of course, expect to win some of them to continue to build an order -- a stronger order backlog. There has been some slow activity regarding awards, but the number of tenders are actually quite high and we do not see it's going to drop down. We see the opposite. It's going to be even more. So we expect from going forward that we will improve that backlog, hopefully increase it. And we do kind of -- we are optimistic to kind of review on that part. Regarding dividend, we have had commitment to attractive shareholder returns by -- supported by strong operating cash flow and low leverage. Since listing, we have returned NOK 565 million to shareholders and established a consistent quarterly dividend program. At the current levels, this implies around approximately 10% annual direct yield, supported by strong cash generation and clear commitment to delivering reliable returns to shareholders. However, I'd like to indicate now because I have said that sometimes on many conferences and calls last year. If we make a bigger acquisition for good reasons, and Kaseum, Razor is a good reason, we might pause dividend 1 or 2 quarters. And this is in order to preserve covenant headroom and balance sheet flexibility. And we expect to pause maybe now, Q1, and possible Q2. This is due to acquisition payment timing related to Kaseum and Razor acquisition. As I said, I have earlier indicated that such a pause might happen due to those good reasons, and I see clearly that acquiring Kaseum and Razor is certainly that good reason. So I keep my word intact, and we expect, as I said, to pause dividend 2 quarters starting from Q1, maybe also Q2. And then back again to the normal -- I would say normal promises that we will continue to pay dividend when we feel that we have balance sheet and flexibility to do so. Remember that Odfjell Technology is a relatively young company. Our balance between paying dividend and growth is also very critical. And together with the Board of Directors and administration, we have agreed that we will go that balance. We are looking for growth, and we're also looking to -- when we can, to share extra back to shareholders. And in this case, I think we -- just now, with this acquisition, we need to protect our balance sheet and make sure that this acquisition goes well. And it certainly looks so and that will bring us to a different platform going forward based on both growth and size. So with that, I leave the rest of the financial information to Jone, the CFO. Thank you.

Thank you, Simen. I'll start with the financial status. Steady activity level in Q4, and we saw improvement across key financial KPIs. Stable revenue around NOK 1.4 billion. EBITDA in Q4 '25 is NOK 213 million, up from NOK 202 million in Q3 '25. This confirms the second half improvement we have communicated in previous quarters. The EBITDA margin has also improved compared with earlier quarters. Adjusted EBITDA in Q4 is NOK 222 million, including restructuring cost of NOK 9 million. The improvement program is on track with restructuring cost of NOK 26 million year-to-date. This program will continue into 2026. Free cash flow, available liquidity and working capital all improved significantly in Q4. Then we go to Well Services. It's a strong quarter for Well Services with increased activity and improved EBITDA. The EBITDA NOK 176 million compared to NOK 148 million in Q3. The improvement is driven by strong activity, especially in Norway and Europe, improved product mix, increased product sales and improved cost efficiency. EBITDA margin is 32% in Q4 '25. High tender activities ongoing globally, as Simen said, with focus on high-margin business opportunity. CapEx is reduced compared to previous quarters. The next is Operation. The activity level is steady, predictable and solid. Order backlog remains solid and Operation continues work closely with customers to execute and deliver efficient solutions. EBITDA is NOK 50 million compared to NOK 62 million in Q3. The margin level is steady, around 8%, due to good performance and high bonus achievements. Finally, Project & Engineering. EBITDA is NOK 11 million versus NOK 10 million in Q3. EBITDA margin has improved in Q4 compared to Q3. P&E is currently aligning capacity with its activity level to secure optimal utilization going forward. In addition, P&E actively positioning to expand the external client base [ across FPSO floaters, MODUs and other growth opportunities. Then we go to the cash flow. Strong Q4 operating cash flow with disciplined capital allocation. Working capital has improved to NOK 210 million compared to Q3. CapEx is reduced compared to previous quarter. Cash flow from operation activity is NOK 309 million compared to NOK 169 million in Q3. Cash end balance, including undrawn credit facility has increased to NOK 240 million compared to Q3, and dividend is paid in the third quarter. This is the development in revenue and EBITDA since we started the company. Revenue started -- I will focus on '25. Revenue started '25 below the strong -- and I -- revenue started -- sorry. The revenue has been stable through the year with growth in each quarter. EBITDA improved in the second half compared with the first half of the year, what is what we said in the previous quarters. The improvement program in '25 delivered a strong contribution to financial performance, generating approximately NOK 100 million in savings and improvement. These savings were primarily driven by structural resource reduction, supported by NOK 57 million from performance-related bonuses and margin improvement across region and product lines. EBITDA and competitive edge impacts costs in 2025 with further improvement in 2026. We will continue the program into 2026, focus on high return initiatives, further reduction in cost base and strengthen the balance sheet. Simen mentioned financing. You know that the current facilities is a bond of NOK 1.1 billion pre-tap and the RCF of $50 million. What we're doing now is to using the existing bond. The amount is NOK 600 million. Then the total outstanding will be NOK 1.7 billion. Maturity is in August '28. And terms, no changes to existing terms and conditions. Use of proceeds is to acquisition of Razor and Kaseum and general corporate purposes. The process time line is, bookbuilding and pricing actually today and maybe tomorrow, if needed. And the facilitators are DNB, Clarksons, ABG. To summarize, we had a strong Q4 delivery, earning and cash generation. We have done a strategic acquisition, which improved our margin mix and technology. The performance program is on track, will continue into '26, and we still have a disciplined growth approach going forward. Thank you.

Thank you, Jone and Simens. I think we'll open up for a Q&A session, and we'll start with calling questions if there are any.

[Operator Instructions] Our first question comes from the line of [ Tommy Eklund ] of [ WellTech ].

Yes. Will Odfjell continue the current business model that Kaseum had, where you sell tools to the market, to all players in the market?

The answer is yes. We will not influence on that or make any negative impact of that. That has been one of the criterias. Kaseum will operate as they do.

[Operator Instructions] Our next question comes from Truls Olsen from Fearnley Securities.

Congratulations on what seems to be an attractive and interesting acquisition. Can you talk a bit more about how that call and put option is structured? Just starting there. And I have one other question as well, which is more on your operations. But I'll come back to that.

Gert, maybe you can take that, and I can take the overall...

The option on Razor, Kaseum?

Yes, yes, the 30%.

Yes. So we have a call option in the first 3 years, and they have a put option on -- in year 3. So we have agreed to basically -- I think the intention is very clear, to have the current funders with us for the next 3 years and then buy them out at an agreed multiple. That's the intention.

And that's based on the 100% value of GBP 39 million? Or is there upside to this then for the owners, obviously?

No, there's an agreed multiple based on the figures, the last 12 months when we get to the buyout phase.

There is an incentive in there for the 2 organizations, allow ourselves to increase values. And that will be helpful for their potential exit.

Yes, yes, yes. Clear, clear. Understood. And then just on P&E, you talked about aligning to current capacity. Can you talk a bit more what that entails and how we should think about that segment going forward?

We -- our long-term focus has been over the last few years to establish a credible model for in a way approaching P&A activities, which we certainly see that will come and is already in an early stage. We have talked about P&A for many, many years, but finally, we see that market itself and the maturity of the fields are now in such a condition that plug, abandonment is something we -- clients have to do. And what they're after is, of course, a very efficient way of doing it and just not kind of copy what has been done earlier. Our ambition is to find models where we are more efficient and more kind of a -- more like a one-stop shop for the clients and focus on the efficiency and safety. With Kaseum and Razor, we get tools for downhole wireline type of services. Together with what we have done before, we have now also acquired earlier whipstocks, cutters, and we also go into the so-called powered wire pipe, which also can be used for plug, abandonment activities and downhole operations. So with these 2 companies, with Razor and Kaseum, which we have followed for quite a while, we will certainly start to integrate business models. They will operate separately as they do today. But when we see projects, opportunities where we will combine OTL's business areas, which is operation, which is well services, which is project engineering and well engineering, when we can combine that with what we have acquired earlier together with products from Kaseum and Razor, maybe also together with a high-end service provider, we think we can make a quite interesting approach to future plug, abandonment to make sure that we are entering those businesses with expected quite interesting bottom line delivery. So we have said we have time for this. We will spend time to make our models. But we certainly think that Kaseum, Razor will add on a significant edge to win those contracts going forward. But as also underlined, in the meantime, and expect from all those so-called integrated services, Kaseum and Razor will operate as they do today.

I was actually more thinking about your Projects & Engineering segment. So [indiscernible]...

I thought you said P&A.

But that's still a -- it's a good detail on the P&A side.

I thought you said P&A. You said P&E. It's just a letter between A and E, okay. With P&E, has been a little slow down because of all the SPSs and slowdown in that side of the market. However, I think -- I hope -- during '26, there are several interesting projects that we are working with that will probably generate more activity within P&E. Meaning that it could be modification projects, it could be supporting some rigs that want to come into Norway. And our competencies by having that kind of experience is very relevant. And there are rigs out there now with no newbuilds, but there are conversions. And that's the typical market for P&E. So I'm quite optimistic that during '26 and '27, we will see a ramp-up of activity within that business area.

Okay. So perhaps somewhat slower this year and gradually increasing in '27 is one way to think about it.

It could be slower this year, but don't expect too much slower. Something will probably happen second half.

We also have one question from the line of Jonas Shum of Clarksons.

So on your Slide 7, in terms of the market outlook, you elaborated a bit on the P&E segment. But just to understand kind of your wording here, you're suggesting flat activity entering '26 and then positioning for growth later in '26 and '27. But if you compare that to '25, you had kind of an improving trajectory. So when you see flat activity entering '26, do you then take into account kind of your run rate as you end in'25? Or are you comparing to kind of first half of '25 versus first half of '26?

Well, I didn't hear you. Very little, kind of a vague here. But I understand you're asking for our prediction in '26. Is that right?

Yes. Specifically because of your wording suggesting that the activity levels will be flat entering '26. I'm just wondering about is that compared to your run rate like from the last part of '25? Or is it compared to the first half of '25?

It's -- I think we can say that we expect -- the last part of '25, as we hoped for, was a better half. That run rate, we expect coming into '26 and more. However, normally -- we see normally a drop in Q1. That's why we kind of say it's a little flat into Q1, due to the fact that we operate in a harsh environment. And typically, Q1 is a winter season and the weather are more rough. And so we normally see a drop in Q1. But rest of the year, we actually see a better performance normally. But it's not going to be a kind of a big step-up because the market activity in '26 will -- is not coming until late '26. We see the number of rigs active coming up second half '26 and into '27. That goes for jack-ups, that goes for ultra-deep water assets. And of course, we see already in the Norwegian Continental Shelf -- and also the U.K. sector is quite active already. But these international markets, we expect a ramp-up. That goes for maybe South America and Gulf of Mexico and West Africa. And so I think that, I would say, that '25 second half is an indication of what we expect going forward into '26. And when we take the late '26 and go into '27, with -- as we said now, with the contribution of Kaseum and Razor's delivery, which is quite strong regarding both EBITDA and cash conversion, from EBITDA to free cash, we expect better numbers, especially in the, I would say, the second half of '26. And that will hopefully run into '27 with the same run rate.

There are currently no more questions from the phone line. Please continue.

Okay. We have a few written questions, and we'll take a few of those. The first is from [ Lucas Dahl ], who is asking if the dividend pause imply that we target a 1 multiple net debt to EBITDA leverage ratio. And I think we don't have 1x as a target. I think we're happy to keep it between [ 1.2x ], dividend position. But I think what we're seeing in the next 2 quarters is there is some uncertainty around what the leverage ratio will be, and we're being prudent in what we're communicating today. And [ Lucas ] is also asking what revenue we're expecting from these companies we're acquiring and when the numbers will be included in our numbers. And maybe I can answer that.

Please do.

I think -- first of all, I think the numbers will be -- I think the completion of the deal will be done in first half of March. And so we should include some of those figures already in Q1, but not a substantial amount. And when it comes to the growth rate, I think the 2 companies, Razor and Kaseum, have a growth rate which is much higher than our own. We don't think that's something that's going to slow down with the collaboration with Odfjell Technology. And the focus is going to be to scale the business. So I think that's one of the main drivers behind the transaction. And I don't want to -- I don't think -- we never guide and we won't guide on the exact numbers here either.

No, we can't do that. But as you said, Gert, that these 2 companies, we will slowly work together, and we are quite occupied that they shall operate as they do today. And what we certainly see, the 1 plus 1 will be more than 2 is when we approach plug, abandonment type of projects. That's where we see the upside and significant upside to be able to win and execute those kind of operations with a profitable bottom line. And this is clearly communicated to the 2 companies. And they're quite excited about the possibility to increase their footprint globally together with us and, of course, to continue with the good relations they already have with their own clients. That's very, very, important. So that's an answer.

We also have a question from [ Victor ], who is curious about the -- how we see the OTL valuation. And I think it's something we shouldn't have too much of opinion on. But we -- and I think a lot of the smaller oil service companies are seeing fairly low multiples. But I think, again, this transaction we're doing now is one way of trying to improve it. And we want to improve our earnings quality and are looking for a bigger size and looking for something that can be scaled up and create substantial growth and just improve the margin picture also. And this is what we're getting through the Kaseum, Razor acquisition. And I think if you look at the EBITDA multiple on this transaction and comparing it to OTL, yes, we're a little higher, but it's not a big difference. But we should still say that it is quite a big difference if you go and dig into the numbers. The capital intensity is very different. There is a fairly low CapEx when you look at Kaseum and Razor. Kaseum has no CapEx. Razor have a very limited CapEx and have been able to grow without spending too much on CapEx. And I think also if you look at the EBITDA level, the growth rate and the free cash flow generated by these entities, they're quite big -- quite different from OTL, and it would be more fair to look at the free cash flow multiple or EBITDA less CapEx. Then you see a big difference. And this is very accretive to us. But I think this is one of the steps that can help us improve our valuation.

Absolutely. Good answer. That's it from my side. Smile.

Yes. I think we don't have any more questions, and we will conclude the Q&A.

Thank you.

And we thank everyone for joining the call and hope to -- you join our next quarterly call also. Thank you.

Thank you. Bye-bye.