Reach Subsea ASA (REACH) Earnings Call Transcript & Summary

Welcome all to our presentation of the results and the -- for the second quarter and first half of 2023 for Reach Subsea ASA. Our report and presentation were released earlier this morning, and I hope you have had time to look through it. I am Jostein Alendal, CEO of Reach Subsea. And with me is CFO, Birgitte Wendelbo Johansen. And Birgitte will present the financials shortly. In today's presentation, we will focus on our good quarterly and half year results, which also, this time, are marked by substantial growth in both revenue and operating profit compared to last year. It is good to deliver on our strategy and ambitions, so it is a pleasure for us on behalf of the whole team to present this report. We value your insight and questions, so please feel free to submit your questions through the webcast player. We will provide answers during our Q&A session shortly after the presentation. Last year, we reached our earlier goal of more than NOK 1 billion in annual revenue, and I have consistently emphasized our commitment to reaching new heights. And our 12 months revenue is now approaching NOK 1.6 billion. You reach one goal, and then you go for the next. So in my head, the next target or milestone is now NOK 3 billion. I do believe our results this quarter validate our steady progress. But before we go into the numbers, I will give you a short summary of the last quarter and insight in how we are positioned for even further growth in the coming years. Also an update on the Reach Remote progress this time also with a short film. So let's begin by looking at the key highlights of the quarter, starting with Slide #3. We commenced the quarter with an order book at an all-time high, and the recent months have been exceptionally busy fulfilling these commitments. And this year, season shows a strong resource utilization, not only last quarter, but also the quarter we are in now and the rest of the year as it seems. Last week, we announced a 75-day project in fourth quarter for one of our survey vessels. On the revenue side, we can again report great year-by-year growth and even better is the strengthening of the EBIT and bottom line, which has a huge improvement compared to last year. Even when we take away the one-off gain on sale of an ROV system in the second quarter, the [ results ] are very, very good. Selling ROV systems is not what we normally do, but this gives us the opportunity to order new ones for 2024. And I will come back to this later when we look at our long-term fleet and assets. The pricing environment is improving and solid execution of projects contribute to solid margins. And another significant change we experienced is the huge increase in tender volume, which is now up to approximately NOK 5 billion in both long and short term. This is naturally due to increased capacity and also our broadening of services and international footprint. Our clients recognize and appreciate our increased capacity, and we get invited to bid on larger projects. Our order book has also increased compared to last year's second quarter, and I will illustrate the order cycles and how this vary through the year a bit later. On the operational side, we mobilized Viking Reach in the start of the quarter with a world-class ROV as one of our high-speed survey ROVs. And she has been fully occupied with work throughout the quarter with projects in the North Sea, Mediterranean and the Baltic Sea. And she is currently working for Equinor here in Norway. And not at least on the operational side, I will say this often and every time, safety at sea is extremely important for us, and we have continued our excellent operational performance. And once again, I am happy to report zero incidents during also this quarter. All credit again to all our people offshore and onshore. So allow me to provide you with a brief recap of our services, which takes us to Slide #4. Our services covers the whole subsea value chain of all types of offshore and subsea installations. We offer mapping and documentation before installation, construction support during installation and through the lengthy period of inspection, maintenance and repair. Also, decommissioning and removal is a part of our services. So whether oil platform, offshore wind farm, subsea template pipeline of power cable, they all require various forms of subsea services. Our wide and integrated offering and the capability to offer services through the whole life cycle of an installation is well received by asset own offs in the ocean space. We are continuing our strong fit all in the oil and gas sector, and now today working for most of the international energy companies around the world. And our balance between equipment, people, vessels and cutting-edge technology is also giving us a solid competitive advantage and the foundation for further expansions of our client base. Upcoming markets will include emerging sectors, such as carbon storage, subsea mining and offshore fish farming. Our expertise in planning of complete and complex offshore operations is vital in this matter. And also data-related products, including surveying and inspection technology, data management and data analytics and final reporting are also becoming a larger part of our integrated services. We continue to strengthen our global presence. The Reach Subsea group are today represented at most regions from north to south in Norway, Sweden, U.S., U.K., Singapore, Trinidad and Brazil. Last quarterly presentation, I gave you a couple of project examples from Brazil and West Africa. Today, I will give you a couple of examples from the Far East, which leads me to Slide #5. The Reach Subsea Monitoring division in Bergen has successfully completed our baseline survey off the coast of Japan. This is a major step towards our goal of adapting the gravity watch technology to a new market within monitoring earthquake hazards around the world. The project has been ongoing for some time, and it's a collaboration with JAMSTEC, a Japanese ocean research institute and the University of Bergen. This is a good example of the potential in combining scientific innovation and partnerships as well as a solid proof of the high competence and technology we have in Bergen with a great future ahead. The campaign hold the use of our newly developed deepwater gravity watch instrumentation in over 4,000 meter water depth, and it's based on the same in-house technology used in gas reservoir monitoring. We likely are doing for Equinor here in Norway these days for the Viking Reach, and we will do for good side on their gas fields in Australia for the coming years. Another example is from our Singapore office, which takes us to the next slide, #6. Our Survey division provides services for numerous clients and a lot of different vessels and rigs, and this is a good example where we provide survey and positioning services required as part of construction of an offshore wind farm. The clients' vessel was mobilized with our survey spread in Singapore before transit to the field in Taiwan. Our Survey team provides survey-related measurements and guidance for the installation of the transition pieces onto the [ Monoprice ] as shown in the picture. This is heavy offshore lifting, and the demand for accurate measurement is extremely high. Our Singapore team is growing and is an established and well-known partner in the Asian market. And in time, they will also include vessels, manned and unmanned, in their services. Vessels and complete spreads have most influenced on events on our revenue and margins, of course. And it is here, we focus on an optimal balance between cost and control of core assets, which leads me to look at our fleet going forward. Let's move to Slide #7. Last year, we made a long-term vessel strategy to match our services and to meet our rising market in the coming years. And there is a notable shift in our tender activity. We now see larger scope tenders for '24 and beyond. And as I said, the volume is now up to NOK 5 billion, a firm sign of a rapidly growing global market in general. Longer visibility on future tenders requires good control of core assets, and partly ownership of Viking Reach and long-term charter of Deep Cygnus, Go Electra, Olympic Triton and Havila Subsea makes a core and flexible fleet for our survey, IMR and light construction services. Our legacy, traditional services, if you like. In addition, we have the flexibility and capacity to take in project charters like -- for this year with Olympic Zeus for the FPSO hookup scope in West Africa. Also for this year, we are supplying ROV services on toward Olympic Delta and Stril Explorer with the opportunity to use the vessels on our own projects. So these project charters will continue in the years to come, and we are in constant dialogue with the vessel owners in the early tender phases. On the ROV side, we sold 1 ROV system in the end of June, and we can now timely deliver a new system to the start of next season. The number of owned ROV system next year will be at least 12, including the 2 ROVs for the Reach Remote. Also on the ROV side, we hire an extra capacity on a project-to-project basis. The order book, you see on the right-hand side of the slide is continuously increasing to higher levels. The typical cycle is that the order book will increase during the winter quarters for execution in the coming season. So I expect the coming quarters will show a similar trend as last year. It is good to be at the point where our tendering also includes services being enabled with Reach Remote, and this is for delivery already in '24. The Reach Remote vessels are also a part of our core fleet. And as you see on the slide, an overall ambition is to steadily build up that service line with multiple units and operation centers in several locations around the world in all time zones, so to speak. The ambition is to be among the global leaders in marine robotics, together with our partners, Kongsberg and Massterly, which leads me to the next Slide #8 for an update on the Reach Remote progress. All Reach Remote initiative takes a huge step into the unmanned and robotic future, the advantages are many related to CapEx, OpEx safety and not at least emissions. And I say go green with the robotics. But I won't spend much time on this slide, but show you a short film, 1 minute and 40 seconds to be precise before I give you an update on the building process. [Presentation]

A major milestone is reached, host of fabricated and well on our way to a shipyard in Norway where they will be outfitted with all the Remote technology. And it is also progressing well on the equipment side. ROVs and subsea equipment will be delivered later this year, and the plan is still as when installations are completed. We will be ready for an extensive full-scale testing certification and client verification in first quarter next year. And after that, ready for operations and market in second quarter and the season. More on a positive side, Massterly, our bridge and navigator is -- still gain more and more experience with our control center in Haugesund and their operations with [indiscernible] and the ASKO vessels. In parallel, all the aspects of the projects such as work towards clients and regulators continues with full force and is progressing well. And again, in the [indiscernible] with our customers, we experienced great interest in the concept worldwide. And the best part in this market environment, with higher and higher cost of manned vessels, there is remote business case with these savings, is better and better. So with this, I will hand over the word to Birgitte for the financials for second quarter.

Thanks, Jostein. Good morning. First of all, please remember to write any questions you may have in the chat on the webcast, and we will answer the best we can after the presentation. As Jostein said, it's a good message we bring this morning with the strong figures, both our financial results, our balance sheet and the other KPIs. The second quarter was characterized by high activity for all vessels, equipment and personnel. The revenue in the second quarter was NOK 636 million, almost doubled from the NOK 341 million in the second quarter last year with the increase explained by a higher number of project days, increased service scope on projects, higher pricing and, as Jostein mentioned, the sale of an ROV. After the M&A transactions last year, we are now one company with integrated solutions and projects, including gravimetrics, monitoring and services in addition to Subsea and walk-to-work. EBIT was NOK 148 million compared to NOK 50 million last year. And this year's EBIT includes the sales gain of nearly NOK 30 million from the selling of the mentioned ROV in June, which is a one-off event. Beyond this nonrecurring effect, the improved EBIT is primarily a result of higher utilization with strong project margins as well as contribution from the acquired businesses. Pretax profit for the second quarter was NOK 110 million compared to NOK 56 million last year. Let's look into the details and what lies behind these figures on the next slide. As illustrated on these graphs, Reach has had a positive activity development the last couple of years, resulting in a substantial revenue growth. Revenue has, in fact, increased by 159% over the last 2 years. And our revenue in the last 12 months is now close to NOK 1.6 billion measured for quarter end. Our operating result has also had a positive development, as you can see on the graph to the right. The last 12 months, we have surpassed NOK 200 million and pretax profit reached well above NOK 200 million for the same period. Next slide, please. So let's look at the development year-on-year. To the left, we see that our second quarter turnover from renewables and other sector was about 29% while projects in the oil and gas sector represented 66%. Last year, the split was 31% to 69%. Our activity in the renewable sector has increased, but in the second quarter, the revenue growth is driven by projects in oil and gas. The year-on-year EBIT development from the second quarter last year to the same period this year shows an improvement of almost 200%. Pretax profit has improved by 96% in the same period, and the improvements are primarily driven by higher activity including strong performance on integrated projects within the group, improved market conditions and higher pricing as well as the mentioned NOK 30 million gain on sale of an ROV. Our pretax profit also has an unrealized [ usher ] effect from net finance caused by our charter commitment, IFRS 16 debt, of which a large portion is in other currencies than NOK. More details about that can be found in the notes in the full report. Next slide, please. Illustration to the left, splits of revenue on our 2 major market segments. Solutions is where we do installments, maintenance, repair, decommissioning, et cetera. And data is where we delivered a data package to the clients, typically a survey of a pipeline or a cable route or an inspection of infrastructure, to mention some examples. The data segment will become even more important when Reach Remote enters the market as survey projects will be ideal for this type of equipment. In 2Q, 79% of the turnover came from Solutions due to a few larger service and walk-to-work contracts, including a high number of vessel days while 17% came from data. The activity within data, which includes survey projects without vessel exposure measured in project days, is higher. Estimated to be around 50-50 to solutions. We also present our geographical distribution of turnover in the illustration to the right to illustrate our strategic expansion to new areas as well as meeting new and existing client needs. And in the second quarter, the split between Europe including Norway to the rest of the world was about 50-50. And this growth and this development is strongly driven by the projects in Brazil and the Ivory Coast to mention a few examples. Next slide, please. We continue our sustainable growth also in the second quarter, balancing cash and working capital and debt with a robust equity level. At the same time, we have delivered to our shareholders with paying dividend according to the policy. We have a cash and working capital position of about NOK 360 million and limited existing financial debt to credit institutions. We have increased our charter commitment, hence, our leasing liabilities, but our equity share is still above 30% of the total balance sheet, which has grown. The solar ROV in the second quarter giving us the opportunity to invest in new and modern equipment. Here, we have no debts, no book value and resulted in a sales gain of almost NOK 30 million. Reach is well positioned for the remaining investments in Reach Remote and vessel and equipment mobilization for our fleet in order for us to have all vessels ready for integrated subsea and survey projects. Next slide, please. Since our turnover and EBIT is strongly driven by the utilization of vessels and ROV equipment, we measure the number of days sold, and in addition to revenue and profits depend on the complexity of the projects. And also the seasonal changes, projects in survey and monitoring are not reflected in these figures. As illustrated on the graph to the left, the number of sold ROV days is highest in the second, third and sometimes fourth quarter. And in the second and third quarter of '23, we have 2 vessels in the walk-to-work segment and 1 vessel mobilized with a [indiscernible] spread, leaving a few ROVs idle. So utilization was 71%, which means the mobilized ROVs had more or less full utilization. For those who have read the full report already, the number of offshore man hours has increased substantially, and this reflects the general increased activity volume and give some flavor to the increased turnover, together with the increased number of sold vessel days, as you can see on the graph to the right. By growing into new areas such as Africa and Americas, we reduced the seasonal changes in the North Sea. Utilization of our vessels is, of course, our #1 priority, and we achieved 95% in the second quarter. Given our current order book, we intend to keep a high utilization throughout the third quarter and hopefully secure projects into the winter season. Next slide, please. We report quarterly on our sustainability goals, and our ESG reporting is a combination of focus on emissions and the environment, being a responsible employer worldwide and keeping a high governance focus. And in the full report on web pages, you can read more about how our report complies with the United Nations Sustainability Goals and also the GRI standard. Safety is always our utmost priority, and we are proud to have strong positive HSEQ statistics, especially combined with this growth and project size and complexity. As you can say, there's a positive outlook for all our 2023 ESG KPIs. Some of the activities will start during the third quarter, which is after the main season, and we expect to meet our goals also this year. So then I hand back to you, Jostein for a summary.

Yes. Thank you, Birgitte. Let me sum up with the last Slide 20 as backup. Reach Subsea has over the years built a strong reputation and solid operational track record as a supplier of subsea services. And we have, over the past 1.5 years, taking new steps into expanding both our product range and through M&A and also organic growth. And in addition, reinforced our long-term vessel capacity. Now our financial strength is improving year-by-year and give a great flexibility to do the right investments and expansions going forward. Important note here, rest assured that we will continue our growth plans, well disciplined and shareholder-friendly as we have done so far. We will still continue to look at acquisitions opportunities and corporation partners in other geographical areas that will add value to our business. And I believe that combined with a great execution from our team in a strong market, we will continue to deliver both excellent services to our clients and good financial results. We are in the forefront when it comes to technology, and our internal technical systems give us a huge competitive advantage. Some examples, Surveyor Interceptor, our high-speed survey ROV is a good example where we increased the speed of subsea data collection 3x faster than traditional systems and methods. Also, our monitoring technology is unique and we're leading accurate monitoring of gas fields and future carbon storage reservoirs without seismic is not only extremely nature-friendly, but also very cost efficient. [indiscernible], also our robotic future, Reach Remote will be another growth driver for us and leading the way into a more efficient and climate-friendly and sustainable future. So I'm looking very much forward to the coming quarters and years. First half of 2023 was great and the market is very strong, both in oil and gas and renewables, and we expect this to continue for years. So with this, let me turn off the presentation with our saying, Everything Within Reach. Please continue to submit questions in the webcast player. We are back to answer your questions shortly.

Yes, we actually have quite a few questions. The first one is financial related. Do you have some revenue targets for the financial year 2023 and '24 long-term target margins for EBITDA? Well, we haven't been guiding previously, and we haven't decided to start guiding. So I guess you'll have to look at the prognosis of the forecast that we say a little bit about what we expect for the vessels and the equipment, the coming period and also the order book. But I think that's about what we can say when it comes to the coming revenue and margins. It's also a related question about the slower Q4 and Q1. I guess the answer is the same there. The order book is quite front-ended, so that means that a lot of the order book is for work, which is now in Q3 and Q4. And the utilization in Q3, as I said in the presentation, is looking quite good without saying anything about the markets. So Jostein, there is a question about expansion and M&A and so on. I understand very much is happening in the sector and the company in the coming year. How is the strategy thoughts about expand operation and -- or versus operation expenses?

Yes. I think, in general, I can say that we continuously looking for opportunities. So we will follow that track also in the coming years. So as we did last year with M&A, we still look for other opportunities, of course. And our ambition and goals, that's clear. And I think we have broadcasted at several times that we're going to have a footprint in several regions and also a global sort of footprint when it comes to the future of robotic and unmanned marine operations. So -- but still, our legacy operations, they will be increased over the coming years because the market, as I said, is rising. And my guess is it's going to be rising for the next 8 years. Backlog there is we have been through 8 years of downturn market and these long cycles in offshore and subsea. So it's -- well, my guess, the next 8 years will be -- we have to maneuver in a rising market and it's a bit more fun, Birgitte. So I hope that answer. We still have the same ambitions.

Yes. There was also a question related to the same, whether we've had the possibilities of cross sales to new client groups and so on after the M&As we did 2021 and '22. And there is an example in the report of projects that we're doing in the company together with the business we have hired in '21 and '22 [indiscernible]. It's a competitive landscape. Are there any competitors in your niche? And how big would you approximate your market share?

Was that a question for me, Birgitte, I guess.

Yes. That's a question for you, and it's also about the increase in the offshore wind. It goes a little bit on the market.

Yes. It's back to the offshore market in general. That's a huge sort of globally, and I don't think anyone had the total [indiscernible] here. But we will take more and more market share, of course, as we grow the coming years. So back to not guiding, but we have an ambition and a target, and I think I mentioned that next target is NOK 3 billion. So you always have to make a new target. So when it will occur, okay, that's the big question. But back to the shift in market. And after a long downturn, the competitive landscape is heavily reduced over these years. So looking forward, we have less competitors than 8 years ago. So -- and it takes some time to build up a competitor in this industry as well. So I guess, if I have a good year ahead of us with the usual well-known competitors.

Yes. There's some questions about the fleet. First of all, the Reach Remote, if we can say more about the type of missions that the Remote will be doing, type of clients and future investments connected to the Remote.

Yes, the Reach Remote will be a tool like manned vessels, and -- but they will introduce new clients because when you introduce a new technology, which makes it more affordable to take offshore tasks and so on, you've got new clients that will be introduced and surveillance of the ocean. That's a very important sort of future market because that will come when you introduce robotics and so on. So it is the technology steps that we are taking, sort of will introduce new clients.

Yes. I'll come to a few questions regarding the financing of the Reach Remote as well. And as described in the full report, we have secured bank financing for the -- for both vessels, and our cash position is enough to cover the equity share of remaining investment for the Reach Remote. There's also a question related to vessel charter. How many vessels we have and whether contracts for Zeus and Olympic Triton have been extended? Jostein, would you like to say something about that?

Yes, yes. We -- earlier this year, we extended the charter of Olympic Triton. Olympic Zeus is a project charter this year.

Yes. I think that was it. A question, where do we expect [indiscernible] to exercise the warrants? I guess, we should direct that question to [indiscernible]. It's difficult for us to say too much about that right now.

Yes.

Okay. I think that was all the questions. Thank you very much for many interesting questions and for listening.

Yes. See you next quarter.