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

Good day, and welcome to the Odfjell Technology Q3 Report 2026. [Operator Instructions] Please be advised that today's conference is being recorded. And I will now hand you over to Eirik Knudsen? Please go ahead.

Thank you, and good morning, and welcome to Odfjell Technology's results for this third quarter. My name is Eirik Knudsen, CFO. And together with me, I have Simen Lieungh. The presentation is also on our website. Simen will cover the first part, the market, the backlog and also the dividend. And then I will go through the financials. And finally, we'll close out with questions. And then I'll leave the word to you, Simen.

Thank you, Eirik, and welcome to the call. I'm going to go through, as usual, to the top lines and the headlines and development of the quarter. Q3 confirms for us a step-up in earnings level. EBITDA was NOK 241 million, up 90% from the same quarter as last year. with a margin of 17.2%. We're quite pleased to see that we have been able to keep that '17 level and that has been a target for us to increase the margins. And in this, of course, then the acquisition of Kaseum played a role. They contributed by NOK 34 million in the quarter. We have said many times, we have a strong cash flow focus operating cost -- cash was NOK 200 million, a free cash flow NOK 108 million after CapEx and lease payments. Our cash balance increased by approximately a little less than NOK 100 million in the quarter. I'm happy to say that we have resumed the quarterly dividend payment. We gave a morning or information about that some quarters ago that we would pause it. And now we are back on track, and we are distributing NOK 1.7 million -- NOK 1.5 per share being NOK 60 million in total, this level as it was before we post the dividend. Well, of course, we were extremely happy that we finally won the 4K tax case that you finally concluded in our favor. 6th October, just after the Q3 cutoff, we received NOK 149 million which is now on top of the cash we are actually presenting. The leverage ratio continues to be reduced is now 1.2 and order backlog stands at NOK 11.5 billion, including the options on platform drilling. Come a little back to that. Regarding market, there's no change in our view on the market since the last quarter. 26% is a stable market. We certainly see that that the dynamics around us, we will give a stronger market in general within hydrocarbons, gas oil in '27 and onwards. So our priorities has not changed. We never guide numbers, but we can say that we are quite optimistic about what we see around us. Of course, there's a lot of uncertainties. There are, as you all know, dynamics back and forth with conflicts and ups and downs on the oil price and speculations, is less than center. But we feel that we have a steady course. We see a significant ramp-up in the deepwater market in '27. That's confirmed by the main drillers. The deepwater market is a very good indication indicator for how the oil companies are prioritizing their spend. So we see -- I would guess our view of this is that we see which is an important KPI for us is the number of rigs active in the market, and we certainly see that's coming up. North Sea is stable and strong. We see now heard from the oil companies, the majors in the North Sea, they are working together on exploration activities. And it's a very stable and trustful source of energy to Europe, which has been recognized by everybody. And the plans are clearly from those that operate in that segment to increase and maintain production. Middle East, we have not good do that. So far, we have, of course, seen some slowdown in the region, meaning 2 Saudi Arabia, because of the uncertainties and the context. So far, we haven't seen the big impact on our activity, but still there are some slowdowns and less I would say, activity in some areas. So we do -- we have had some impact on what our expectations. But when this thing are hopefully in the future come down, we certainly see that the Middle East, including Saudi here will be a significant area for ramping up more activities within the type of well services, intervention activities. Plug abandonment is something that will come. It's part of our structural story. We are clearly focusing on positioning ourselves by technologies, cooperations with companies to position us also for Plug averment. But at the same time, we see, as I said, a massive focus from clients to also increase and maintain production. So plug averment will be a part of it, and we think it's going to be a much stronger element in the development of the oil and gas sector, especially on mature fields due to several things, requirements for closing down old fields. To do more environmental, obviously, cleanup of fees that wells that are leaking. So governments are not pushing quite clearly in that direction, but it will be a combination with plug abandonment, slot recoveries and production. So we kind of see that we balance our efforts into that picture and kind of not saying that we are going to do only plug & Banma. We're going to do [indiscernible] on top of the regular services. I said many times that we want step into those new activities without knowing that we actually are earning money. We will not go for the volume we go for the margin and the healthy projects. So for the market future, I think I can say that we have finally now been able to establish a trust organization in Houston to serve Gulf of Mexico and South America meaning Game, Suriname and Brazil. So the organization there are established. We have moved equipment over to the Gulf and especially within the rater, we hope and believe that we'll pick up more activity late this year and, of course, into '27. We see that as clearly a growth area in the U.S. market. for those kind of tools are quite promising. So if we flip to the Slide #6 in the presentation, the order backlog is stable at 1.5% in 6.4 million is firm. It's nothing really more to say about that, only that we feel that that's a very comfortable element the most of the backlog is within operations, platform, drilling and associates. I said last time, I think I said it every time that within -- well Services, we take a very conservative number from the potential backlog we have because that's very much activities that is run by call-offs and not that kind of a firm term contract but more linked to activity level. So there are more rigs in operation, more activity within rail services. But now the we count goes up. So we believe that the number you see here on the backlog from -- well Services is relatively conservative. So we think that's okay because it's -- we don't want to say more than we can deliver. I'm quite confident that the level we are presenting here is absolute within 80% accuracy. So if -- so the backlog is okay. The clients are stable. We feel that the market is responding to our tenders over wins. It's not everything we report into the market. So there's a lot of small wins that we just build backlog on, but we don't necessarily report them as contracts. That's the nature of the business. So within operations, you see there, there's these bars, blue and green shows fixed contracts and options. We have taken options into their backlog because very often, these options are cleared. And I'm saying that It's, in a way, I say sometimes it's ours to lose. If we operate well, if we do our job well, we do the HTC performance well we do okay and better performance efficiency, very often, clients are just calling the options and will be part of the firm backlog. That's why we kind of show this -- with the [indiscernible], we have not taken the options in because there are 5 plus 5 years options. So it is actually a 15-year contract we won potentially. But the 5 plus 5-year options, we are not taken in because in too far into the horizon. So let's see what happens when the options are when you approach the time for calling the options. Again, I'm quite happy to say that we are now back in the dividend picture. We said we would resume it for good reasons. Case rate was good reasons. They have contributed very well. And maybe there was to be safe before sorry, we waited, we posted dividend because it's always to buy companies to integrate companies to make sure that they are that we can deliver on the synergies we have estimated, which is actually happening, and that's why we believe that we can now -- and the Board approved that we could go back to the same level of dividend. As we did before the pause. So if you kind of just say that -- this -- so far this year, KasmanRaser, the reason for posting the dividend has actually contributed with close to NOK 80 million of EBITDA. With this very strong rate of conversion to free cash, which is part of the story we want to tell. It's very quite important to make sure that we are that we are generating free cash and where that will be able to distribute to shareholders and to do future also investments like future M&As and other things we have planned for and we'll comment more on that. but that will come in due time before we do it. So that's the story -- overall story from my side, and then I switch over to Eirik, please will take the finance update. Thank you.

Thank you, Simen. I will then start with the group financials on Slide #9. The revenue for the quarter was approximately NOK 1.4 billion. slightly up from the second quarter this year and 2% below the same quarter last year. Well services, they grew close to 30% on last year. However, this was offset by lower revenue in both operations and Project & Engineering. On the beer side, we arrived at NOK 241 million this quarter with a margin of 17.2%, approximately the same level as in Q2. In this quarter, we had no one-offs. The free cash flow was NOK 408 million, up from NOK 31 million in the second quarter. explained by higher operating cash flow and lower CapEx. On a 12-month basis, the cash conversion rose to 40% of the EBITDA from 25%, and I'll get back to more details later on. If we then switch to the next slide, and we move into the -- well Services segment. The revenue was NOK 596 million, up 2% on the second quarter and 29% on last year. Excluding castrate, revenue grew by 14% year-on-year. The EBITDA was NOK 192 million, a record for the segment actually with a margin at 32.3%. And excluding [indiscernible], the EBITDA grew with 7%. The growth came mainly from the U.K., Malaysia and Kuwait, and also with some improvement in Saudi. Africa, Western Europe and Thailand, where however, somewhat lower. Case in Marais, they delivered NOK 69 million in revenue and NOK 34 million in EBITDA, approximately the same as in Q2. The integration of those 2 companies is on track. We have now hired our first resources in the U.S. And also, we have hired more people in Saudi Arabia and Malaysia. For the quarter was NOK 71 million, down 17% on the second quarter and 46% on last year. Confirming our strict CapEx discipline that we have emphasized earlier. And then we can move on to operations. On Slide 11, was NOK 660 million, up 3% on the second quarter, however, below the NOK 758 million of last year. The main reason was a large settlement from the Brune contract that was canceled, which we received in the third quarter in maintenance mode on the Conoco Philips platforms and also lower rig inspection volumes contributed to this. The EBITDA arrived at NOK 53 million and the margin rose to 8.7% from 8.2% in the second quarter. and we were happy with the development in operations. The Equinox portfolio and the better use of people across the rigs drove this margin. As mentioned, rig inspection volumes some bonus timing and also the maintenance mode on the Conoco contract pulled it the other way. For this quarter, we had rigs in operations and up from 13% a year ago. And then moving to P&E on next slide. Projects & Engineering had a normal seasonal third quarter. Revenue was $128 million, down from NOK 154 million in Q2. And this is basically explained by the several holidays in July. Engineering activity on the Oil drilling portfolio was also lower and partly offset by more work in the U.K. Last year, the third quarter looked different. We were completing as best projects and to meet the deadlines -- many of our people worked over time and moved their holidays. That kept revenue up through the summer. EBIT was NOK 11 million in this quarter, down from NOK 16 million in Q2 on the lower activity. And compared with last year, the margin improved from 6% to close to 9%. And we have adjusted our cost base to the activity level and a higher share of our hours is now invoiced. On the right-hand side, you see the revenue mix by asset type FPSO, FSUs and fixed platforms now account for close to 50% of the revenue. That makes the business less dependent on the drilling rates and on the timing of the SPS campaigns. Near-term activity is expected to be softer, reflecting the lower SPS scope and our clients' focus on cost, and we will, of course, continue to match capacity to activity going forward as well. And then moving on to Slide 13. I want to just walk you through the cash flow development in the quarter. And we're very pleased to see that we are improving our working capital position with the release of NOK 38 million this quarter compared to NOK 55 million buildup in the second quarter. And furthermore, we see that the CapEx is continuing to be disciplined. We arrived at NOK 73 million this quarter. And summing up these things, we had a positive buildup of cash in the quarter of close to NOK 100 million and EBITDA to cash conversion over the last 12 months of 40%, and we are really happy with the development on the cash conversion side, we will continue to monitor and focus on converting as much as we can of them, but they have to cash. So we believe that the 40% is a strong figure for the last 12 months. And then I'll quickly go to the performance improvement program. And that's just a reflection from what we have seen now on the cash conversion. We continue to focus on our performance improvement program. And it's basically into 3 elements. We, of course, have our focus to grow the EBITDA, both on commercial activities, but also on cost initiatives to always have the correct focus on how we are to develop and grow the EBITDA, both on commercial side and on cost side. As mentioned, we have a strict focus on cash and cash discipline. In terms of CapEx and how we are approving new CapEx initiatives going forward. And this is shown also in this quarter with the NOK 72 million that the CapEx are -- and finally, to convert as much of the EBITDA into free cash flow will always be the end measure. So this will be a continuous focus going forward and also into next year that we are retaining as much of EBITDA as we can. I think then we could move on to the last slide in the presentation the summary. And to summarize, firstly, the earnings the EBITDA, they arrived at NOK 241 million with a 17% margin. Our second quarter now above 17%, which is -- we're very pleased with that. [indiscernible] and race and well services, they carry at a higher level. Secondly, the cash, as just mentioned, the operating cash flow of NOK 200 million and free cash flow of more than NOK 100 million this quarter helped us to provide a 40% EBITDA to cash over the last 12 months. And on top of that, as Simon also mentioned in the beginning, we were successful in the auto offshore tax court, and we received the settlement or the tax refund in the beginning of October. So we just missed that for this quarter, but we received approximately NOK 150 million on top of these figures at the beginning of October. And finally, we are resuming the dividend. Now the dividend is back at NOK 1.52 per share. as we also said in August. The leverage is comfortable at 1.2x and the available liquidity, including the unused revolving facility is now at NOK 1.1 billion. So all in all, a stable 2026 and with a market set for a stronger 2020. So I guess that concludes our presentation, and we are open for Q&A.

[Operator Instructions]

There is one question here that I can comment on, and that's related to the tax case that we have in the U.K., and as also mentioned and and the note #14. And as you know, this has been a process ongoing for a long time. There is still no feedback from the hearing that was conducted in July. We are waiting for that. But we are confident that this court case will go in our favor at the end. But we admit it's unfortunate that this takes so long time. We think that the final outcome of this will even take longer time than -- and then the current hearing that we are waiting for as there can be further appeals dependent on how this will turn out. So we don't expect the final outcome of this before perhaps maybe into the beginning of 2028 when all the court instances have been finalized. But we are confident on the outcome of the tax case.

And there is a question from Lucas Don.

So Lucas Dow from Optic.

I mean, given your constructive outlook on the 2027, I mean if you decompose that, of course, the 3 main divisions that you have where do you see the biggest potential for following the tip line? And where do you sort of see the biggest potential for margin operation going forward. if you could sort of elaborate a bit more on that.