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

Good morning, and 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, Eirik Knudsen. Today's presentation is available on our website. Please take notice of the disclaimer on Page 2. Simen will now cover the key highlights, the market outlook, the backlog and our capital allocation update. You can submit your questions through the webcast portal or by using the dial-in numbers. I now hand it over to Simen.

Thank you, Gert, and welcome to this call. First of all, I would like to say I'm very happy to say that we have a record quarterly earnings this quarter. We have earned NOK 243 million EBITDA, a margin of 17.4% compared to 14.8% from previous quarter. This -- it's also the first full quarter with Kaseum and Razor contributing with NOK 35 million to EBITDA and with adjusted EBITDA, excluding acquisitions, still up 8% from previous quarters. These are the main drivers for the improvement. That's the Kaseum and Razor contribution. It's -- we are running -- as we said before, we are running an improvement and performance program focusing on performance and cost discipline and in OTL in general, also has improved over the last quarter. Regarding the market, we signed with Adura Energy, which is a JV between Equinor and Shell taking care of the assets in the U.K. offshore sector. We signed LOI extending one of our largest integrated operations on the Mariner platform was extended to November 28 with a further 2-year option added. This is an extremely important achievement because that's one of the platforms we are really showing the integrated operation and the synergies between the different divisions in OTL and showing that these are building together a value creation for the client. We have a strong order intake of NOK 1.1 billion. That's including the said Adura LOI, but we also see a notable, as we say, service wins in Kuwait, U.K., Spain and Malaysia. I will come back to the market later to say -- to share with you how we see the market going to the next half and onwards, but I'll come back to that. We had a strong cash flow during the quarter, about NOK 1 billion in liquidity with a leverage ratio of 1.33x with debt to EBITDA and somewhat down from the previous quarters. So the order backlog is about NOK 11.5 billion. The market share things about there, somewhat similar to what we said last quarter. North Sea is stable. We see a lot of increased tendering. One of the major KPIs we see globally, not only for the North Sea is the rig count around the world, we operate, as you all know, in more than 30 countries. We have a huge number of clients out there. And we see that the rig count in general are coming up. We also see finally an improvement in the deepwater market. which also is an indication of increased activity from the big majors and similars. And that is, in general, an important observation that we are seeing here. And we also see the tendering activity in general is coming heavy up. Middle East is always of the late. As you all know, the war in the Middle East has caused disruption in our business. We have increased costs for evacuation of people, especially from Kuwait and in the Emirates. However, we have to say that the impact is not good, relatively limited. It could have been much worse. We have seen around us. that there are other companies being hit harder, but over (sic) [ overall ], I would say, impact is significant compared to the numbers. But in general, it could have been much, much worse. That is also impacting the performance, especially within rail services. And the day Middle East gets more into normal mode around it, we think that's going to be picked up. We have quite good dialogue with the clients down there. As you all know, with -- especially within the acquisition we did with -- especially with Razor, we see we are building up their presence in Saudi, and we also build up their presence in the U.S. market, Gulf of Mexico. So in general, that's what to say there. It's also quite interesting and which is a trend clearly that we operate here up in the North, U.K., Norway with quite mature fields. Also in the Gulf of Mexico, we see more activity building up demand on plug and abandonment. And in that respect, it's important to say that our acquisition of Razor and Kaseum together with our alliance with Halliburton in Norway puts us in a well position for capturing our share of the market in that future. Just an example is what we have won on Ekofisk already and the other projects we are following up in the U.K. and the Norwegian sector. We see an increased demand for that in that respect. So regarding our growth profile or initiatives, we -- as I said, we are pushing hard to grow more in the Middle East. I mentioned Saudi Arabia and America's, U.S. Gulf, also partly South America. We see -- we are now gradually seeing the synergies by using our -- Well Services international network for providing tools and equipment sales services around the world. especially -- so we have already employed people from -- for Razor into the Americas and into the Middle East, especially with the focus on Saudi Arabia. We expect now and we see now gradually starting the synergies by combining Razor and Kaseum into our own network that, that will be beneficial for the growth into the future. We -- the reason we acquired Kaseum and Razor, we are looking for more technology-led differentiation. So that -- those acquisitions absolutely bring us into that category. And we also see more demand on the power wired drill pipe with Reelwell, and we are currently running several operations for Vår Energi here in Norway, testing out the full fledge of that equipment. And so far, the results are promising. We come back to our capital discipline because, as I said, our improvement and performance program focus on performance improvements and cost discipline, and that's why we also will come back to that, and Eirik will share with you some more of that -- of those details somewhat later in the presentation. Little back to the order backlog. I think the good thing is that in this quarter, we have increased the fixed part of the backlog from NOK 6.7 billion in the last year to NOK 7.2 billion, resulting in the full backlog, including most of the options in operations to NOK 11.4 billion, which is stable as you see go backwards. We keep that level of 11 to 12, 13, and that's okay for us as long as we can add on profitable backlog into the portfolio. Most of the backlog is oriented again towards operations, significant also within -- Well Services. I just remind you all that way we pull backlog and report backlog in -- Well Services for operations is clearly the length of the projects we run drilling and operations on platforms. Within -- Well Services, there are more frame agreements and things are more kind of not that fixed. So we normally bring in just 60% of the -- 60% of the potential backlog, what we report. So in theory, there are more in there, but we have also always been on the conservative side regarding -- Well Services backlog. But in theory, it is much higher. P&E has, of course, by the nature of the business, smaller backlog, but still quite significant compared to -- or linked to what we actually are doing the business in project and engineering. The backlog is spread between supermajors and very, very small. You see there's a quite huge number of orders coming in, and they are spread all over the world. I think we have something like -- if you count the clients out there, I think we are close to 300 clients, different sizes, of course, spread all over the regions we are working. But it's stable and good, and we think the quality of the backlog is absolutely acceptable. Operations, platform operations, you see here the platforms we operate. It's about 15 in total, two of them are not active. But to show you here is that to show you the dark blue is the fixed part. The green are our options. Why do we show them? Because we also put the options into the backlog, except for Ekofisk because they're so long. The last win we did there was 5.5 year fixed and the options were up to 10 years, 2x 5 years, not showing here on the scale, but that's up to 2040 plus. So we don't report those options into the backlog because they are so kind of long. So that's very different from the other type of options. The reason we also want to show these options is that these are, we say, not necessarily 100% right, but we say it's very much ours to lose. These options are as long as we perform well efficiency, HSE-wise and so forth, statistically, 85% to 90% of these options are declared. So it's relevant to put them into the backlog, absolutely because they're much more likely to win them than to lose them. So it kind of indicates the total work we are going to execute. So that's why we report normally the options as part of the backlog, except from the long 2x 5-year options on Ekofisk last 10 years after the first five is an alternative. So all right. Next step is to talk a little about capital allocation. We said last time that we paused dividend for up to two quarters. We are not intending to pay any dividend this quarter either. But after next quarter, we are paying dividend. That's our absolute ambition. And why? Because we found it right, 100% supported by our Board. So administration and Board said very clearly that we want to be careful and build up the acquisitions to realize the synergies to make sure we have capacity to do things when it comes up. We see a lot of interesting investment cases coming. And I just remind you, we are building up a network for Razor and Kaseum into our kind of network, business network. We are pushing the tools and equipment from those two companies into those markets. So we are also investing in presence in those markets. First shot will be scale up in the U.S. And secondly, we see a potential scale up already this year in Saudi Arabia. So -- so our intention, as I say, is to show discipline in this aspect. It's not -- it's absolutely our intention to come back to the -- what we did from the very beginning of the company's history to pay dividend, but also to be clear to invest into very interesting opportunities that we are seeing and getting. So again, remind our investors and potential shareholders that Odfjell Technology is a company in a growth situation, but at the same time, we have to handle all the different uncertainties in the market. I mentioned Middle East. Middle East is a super important area for us. Currently, there are a lot of uncertainties. We have to bear all with them. We have to handle them. So that's why we also decide to go more safe than sorry and be disciplined and allocate the capacity we have in the right pockets. So that's the reason. I hope we can come back to the next quarter and say that we are back on track on dividends, and I actually think that's going to happen. So Eirik, the floor is yours.

Yes. Thank you, Simen. I will now go through the financials and starting on the group financials. Revenue grew 1.5%, both year-on-year and quarter-on-quarter to close to NOK 1.4 billion, with activity held steady across all the three business areas. As Simen mentioned, the EBITDA reached NOK 243 million this quarter. That's an increase of 19% from Q1 and also lifting the margin to 17.4% from 14.8%. This was also the full quarter with Kaseum and Razor, which contributed with NOK 35 million. The business, excluding the acquisition, also grew with adjusted EBITDA up 2% year-on-year and 8% on the first quarter. Free cash flow turned positive at NOK 46 million, a marked improvement, I would say, from negative NOK 64 million in the first quarter and negative NOK 73 million a year ago. And this was driven by the EBITDA growth, together with an improvement in working capital, and it reflects progress on converting a greater share of EBITDA into free cash flow. So to sum up on the group financials, steady revenue, a clear step-up in earnings, and we have the free cash flow back in positive territory. And then we can move over to the segments and starting with Well Services. Revenue grew 11% quarter-on-quarter and 25% year-on-year to NOK 583 million, driven by Kaseum and Razor, which contributed NOK 70 million of revenue in the first full quarter. The legacy business was fairly on level. EBITDA grew 18% quarter-on-quarter and 26% year-on-year to NOK 182 million, with margin at 31%. In general, I would say the quarter has been satisfactory. We have managed to successfully integrate Kaseum and Razor, and we expect the synergies to further improve in the period ahead as we are mobilizing to new regions within the Well Services network. Additionally, Norway had a strong performance within rental and TRS equipment, which was partly offset by lower activity in Africa. On the CapEx side, it was NOK 86 million compared to NOK 108 million in similar quarter last year. The level of CapEx is below from last year, and we continue with our high focus on CapEx discipline. And then we continue with operations. Revenue declined 9% year-on-year and 7% quarter-on-quarter to NOK 597 million. The reduction was driven by scheduled maintenance on Grane for two months of the quarter and by Yme returning to maintenance mode. Despite that, EBITDA grew 9% year-on-year to NOK 49 million with a margin at 8.2%, the strongest for the past three quarters. The improvement came from better cross utilization of staff across the portfolio and an improved bonus scheme in line with our performance improvement program. On the right-hand side, you see the rig count active plus maintenance grew from 14 to 13 a year ago and the shift within the quarter from active to maintenance reflects the move of Yme that I just mentioned. And then over to Projects & Engineering. Revenue was NOK 154 million, down 22% year-on-year from a quarter that included high SPS activities, but up 8% quarter-on-quarter. And this is the second consecutive quarter of improvement. The EBITDA was fairly stable at NOK 6 million with a margin at 10.5% against 11.5% in the first quarter as the revenue growth came at a lower average margin. The chart on the right shows revenue by asset type. And I'm happy to say that the mix is broadening. The semisubmersible are down 15% year-on-year to 38% and production units, FPSOs and fixed platforms now make up close to 1/3 of the total. And this reduces our dependency of a single asset class and shows the result of our efforts to sell our services to new customers. And we expect more of this diversification going forward. And then over to the cash flow for the quarter. And rather than reading the waterfall line by line, let me give you some commentary around the figures. This quarter, the cash followed the earnings. The operating cash flow was positive with NOK 139 million compared to a small negative in the first quarter, and this was driven by EBITDA improvement and also less buildup of working capital. The buildup of working capital was also significantly lower than same quarter last year. As many of you will know, our working capital is seasonal. We build normally in the first half and then we release in the second and usually with the largest release in the last quarter of the second half. On the CapEx side, the spending was high this quarter of NOK 93 million in total. However, this is due to prioritization effects, and we continue to maintain a disciplined CapEx focus going forward. Lastly, the line called other investments, that is approximately NOK 48 million and is related to growth spend. These are not recurring outflows. They are investments behind the growth strategy that Simen earlier described, building our well intervention and P&A platform and our technology position. Putting these together, the free cash flow came in at positive NOK 46 million against a negative NOK 73 million in the same quarter last year. That is a swing of almost [ NOK 120 million ], and it's the direction we are working towards converting more of EBITDA into cash. We ended the quarter with available liquidity of NOK 1 billion and our leverage at approximately 1.3, and we are, of course, comfortable with both of these. Then over to the next slide. This shows the development in revenue and EBITDA. And I would just like to pinpoint the step-up in earnings based on the same revenue base, which is a strong signal that we are improving our EBITDA margin. And then over to our performance improvement program, and it continues to deliver results in 2026. As mentioned before, in 2025, this resulted in savings of approximately NOK 100 million. And you can also see the numbers are working in this quarter. Operations is a clear example, improved cross utilization of staff was one of the contributors that lifted the margin to north of 8%, the strongest over the last three quarters. And P&E is another example where the capacity is held disciplined through a period where we have lower SPS activities. Going forward, the priority is cash conversion. We are targeting tighter working capital and CapEx discipline and with clear targets and accountability. The ambition is to convert a greater share of the EBITDA into free cash flow while accelerating earnings growth and strengthening the balance sheet. So to summarize, let me close with three main points to take away from today. The first is the earnings. We stepped up this quarter to a record of NOK 243 million and with a margin of 17.5%. The second is the visibility. NOK 7.2 billion of firm backlog means that the earnings is based on contract with customers we have worked with for many years. Third, is the balance sheet. We have a strong balance sheet now with NOK 1 billion of available liquidity. That gives us the flexibility to both invest and also return capital to our shareholders going forward. We are happy with the development, and our focus is to improve further by converting more of our earnings into cash and continuing the performance improvements we have seen this quarter. And this concludes the presentation, and we open for Q&A.

[Operator Instructions] And we're going to take our first question. And the question comes from the line of Truls Olsen from Fearnley Securities.

A question on CapEx. If you go back a few years, you were running sort of CapEx in the NOK 200s million. Now you're in the NOK 300 to NOK 400s million. As we think about growth and your ambitions, particularly within -- Well Services, is the current level -- I know you don't guide, but say, NOK 300 million to NOK 400 million, is that a, call it, sustainable level? Or is it -- or does it need to grow further for you to reach the ambitions that you're targeting right now?

Yes. Thanks for the question. I think in general, the maintenance level of the -- Well Services should be somewhere behind 20% to 25% of the EBITDA as a rule of thumb. And you see now the second quarter is influenced by prioritization. It's a little bit higher this quarter. But we -- if you take the first half as a guiding point, I think that also is a good mark for the second half. But I think 20% to 25% on the maintenance part on the CapEx side is a good estimate. And then when we are considering growth CapEx for -- well Services, we are quite strict on the return criteria. We want to see payback in -- on fairly decent terms. And that's kind of a very strict discipline going forward so that we spend money wisely. We spend it on the product lines that creates a solid return and that we're disciplined on the maintenance CapEx.

Okay. Good. So you talked a lot about converting EBITDA to cash, which basically ties into your working capital improvements. Are there other means and ways that you can improve your EBITDA, et cetera, with the growth?

Yes. I can -- I would like to mention three things. Of course, is to improve the EBITDA by having focus on cost and to improve the general performance. The second is, of course, to improve the working capital and the tie-up of working capital. We see that we are building up working capital strongly in the first half. We know it's going to be released in the second half, but we are continuously working into how we can improve this going forward. And the third element is, of course, the CapEx that I just mentioned. So I think if we add up those three things, that will imply a greater share of the EBITDA being converted to cash. And that's kind of to sum up the main priorities from our side going forward.

And final one for me, and that relates to the Middle East. Is it possible to quantify the impact on -- Well Services down there this quarter? And how do you think about that in the second half of the year?

Simen here, I think it's -- of course, we can quantify. We have done that. It's the impact was very much in the beginning where we had to evacuate everybody from Dubai into Malaysia. They relocated there, the whole management plus families. We had to stop a lot of operations in the region because we just follow clients when there are drones, missiles, debris falling from the sky, especially in Kuwait, a lot of the operations stopped. So if we just -- and we still have platforms also in Saudi where operations has been paused. But we mitigate it differently. We try to find other things and other work for the people. So if it's a number could be for Well Services, I would say, if you sum up, it's not necessarily 100% right, but I guess it's some NOK 7 million, NOK 8 million, NOK 9 million, NOK 10 million impact on direct bottom line effect. And it's not over, but we expect now that if things come down, and I think everybody dream about that, this will come back to normal. So it has been an impact. But as I said, relatively moderate compared to the worst case we saw at the beginning, but that was really bad. So -- but significant impact anyway. So that's also part of the lack of margin improvements or EBITDA improvements in the -- Well Services area. I have to remember that. It's still war down there. We have 200 people in the region. So all of these has to be taken care of and make it safe and evacuate when necessary. So there are absolutely costs there. So in a normal world, this number would have been significant better.

Understood. Difficult to guess on peace and all that in the Middle East, it appears so. But hopefully, things -- but there are -- has been some improvement in activity on the broader basis and let's keep our fingers crossed.

Yes, I do it very much. And as I said, we are ramping up -- we are moving equipment people down to Saudi now to scale up Razor because we already see a lot of potential increase there. And that's one of the synergies we certainly see by buying Razor, especially Razor in this case, the service side is to complete our services in the region and Saudi is going to be big. So that's where we see the upside.

Dear speakers, there are no further questions on the audio line. Please kindly proceed with any written questions.

Yes. We have a question from [Jørgen Lunde ]. He's asking if -- just on the working capital for the remainder of 2026, should we expect it to continue to develop along the lines in Q2?