Reach Subsea ASA (REACH) Earnings Call Transcript & Summary

Good morning. Welcome, all, to our webcast and presentation of the results for the first quarter of 2024 for Reach Subsea ASA. Our report presentation were released earlier this morning, setting up the achievements this first quarter and start of the year. I am Jostein Alendal, CEO of Reach Subsea. And with me is CFO, Birgitte Wendelbo Johansen. [ I ] [indiscernible] go through the financials in a bit. We also released our annual report for 2023 on the 19th of April, summing up last year and showing that we are now at a new level, and we are continuing to grow the company. I am confident that our results from the first quarter affirm our consistent and steady progress. Executing on our strategy and achieving overall goals successfully is very satisfying. Therefore, it is a great pleasure, on behalf of our entire team, to present this report to you. Please feel free to submit your questions through the webcast player, and we will provide answers during our Q&A session shortly after this presentation. Let's start with a quick look at the key highlights from this past quarter, starting with Slide #3. Despite typically being a low season, this first quarter, high revenue not only showcases some increased capacity, but also our expanded global presence. Revenue, EBIT and order backlog is significantly higher comparing year-by-year. And this increase in revenue and profitability is, of course, fueled by a strong market. And as I said, Birgitte will go more in details on the numbers. But it also stems from our deliberate strategic decisions and is due to several factors. One is the growth. Over the past 2 years, we have not only improved our service offerings and capabilities but also increased our vessel capacity through long-term charters. Also confirmed by the results of this quarter, our increased geographical footprint positions us to achieve strong resource utilization throughout the whole year. But also strong project execution and safety commitment -- outstanding project execution is a key to our solid margins. I constantly emphasize that safety at sea remains our top priority. And once again, a big shout-out to all our people, both offshore and onshore, for their excellent operations. And as mentioned, improved pricing, the pricing environment in offshore subsea services is improving rapidly across all regions, indicating the start of a prolonged market trend. My assumption is that this will last for many, many years due to the lack of investments in the industry during the long downturn we have behind us. I will, in the upcoming slides, outline these points and given an overview of our main pillars for continued profitable business and growth, namely a diverse array of services, multiple market segments, a broad geographical coverage, not at least to be ahead of any competition, a constant introduction and use of new technology. I will begin with the first pillar, our diverse array of services. So please turn to Slide #4. In brief, our services encompass the entire subsea value chain from engineering and project management to final reporting and our expertise in planning complex offshore operations is essential in all types of projects. We support construction during the installation for the Tier 1 construction companies, such as Simon and Technip, overall extends through the long phase of inspection, maintenance and repair directly serving asset owners like BP, [ Equinor ] and the other energy companies. [ Hydro ] activities for these asset owners also include asset integrity and pipeline inspection for which we provide highly efficient solutions. Our services integrate survey and data processing, data management, analytics and ultimately [ defining ] reporting. And also, I would like to highlight our monitoring technology and expertise, which are leading globally. Our offerings there include geophysical and environmental monitoring along with gas vessel [ oil ] and carbon storage management. So, in sum, it is good business to offer our dealers an array of services as this gives the opportunity to maximize utilization of our resources. together with a constant pushing [ of ] technological boundaries with, for example, its remote technology and [indiscernible] artificial intelligence, a subscription part of our processing and reporting methods. In sum, our integrated services spanning the entire life cycle of an installation are highly valued by asset owners in the ocean space. So let's move to the second pillar, multiple market segments, which we cover on Slide #5. Essentially, any and all ocean-based installation or infrastructure will require various subsea services throughout its life span. And our globally recognized subsea expertise and services enable us to serve a diverse range of customers worldwide. The oil and gas sector, of course, is driven by high global investments and growth in the coming years. Due to an aging asset base and the need for increased maintenance, this market is expected to remain stable for many, many years. The offshore wind sector is also anticipated to experience significant expansion in the coming years. Despite the current challenges with supply chain and cost picture, the volume of future installations is huge. We are well positioned in this segment, providing early seabed mapping before the installations and regular inspections of existing wind farms. The offshore cable sector is another area set for growth with numerous cables set to be laid in the future. And here, we are a [indiscernible] partner for survey, installation and maintenance. I mentioned emerging sectors. Subsea mining, also known as subsea minerals, is expected to emerge in the next few years, starting with survey and seabed mapping. [ Aquaculture ] is moving to deeper offshore waters, representing a new type of offshore installation for us. And additionally, we see tremendous potential in [indiscernible] monitoring and CO2 storage, where our unique monitoring technology and expertise stands out. The global market for offshore and subsea services is permanent and ever-present and vessel install [Technical Difficulty] component of our services and capabilities. So let's move to Slide 6 to see how we have prepared our fleet to support future growth. In a rising market, it is vital to have a good operational control of core assets and the long-term vessel charters we have today makes a core and flexible fleet for survey, IMR and light construction in the coming years. Recent additions to the fleet, Olympic Taurus and Northern Maria, which is already in operation, and Offshore Surveyor, which will join in second quarter. With a smaller survey vessel, Offshore Surveyor will be occupied in the Australian market. The [indiscernible] base is equally important and the terms we have on our fleet is highly competitive in the current and future market. Our purchase of Viking Reach a year ago is a good example of good timing. The replacement cost of such a vessel has almost doubled during that short time. The Agalas newbuild is really a vessel for the future, built for efficiency and [ dual fuel ]. It is prepared for the greener future. Also here is the timing very good as we see a huge increase in newbuild costs for similar vessels. The Reach Remote vessels will also join the fleet this year. I will come back to those on the next slide. That said, project charters will also continue in the years to come and the expansion of the core fleet with more long-term charters and [ all-party ] ownership is also constantly evaluated. I will come back to this under the 3 organic growth levels. The order book and tender volume are constantly increasing comparing year-by-year, all in line with our increased capacity, a good indication for [indiscernible] 2024. So let's move to Slide #7, the third and fourth pillar, geographical footprint and new technology. The Rach Subsea group are today represented across regions from north to south in Norway, Sweden, U.S., U.K., Singapore, Australia, Trinidad and Brazil. And as we aim to capitalize on a very attractive global market outlook for our traditional services in the coming years, we are, at the same time, dedicated to develop and utilize next-generation technology. We have for several years said that our ambition is of extending lead subseas and, in particular, the Reach Remote presence across all time zones. And in April, we reached a significant milestone with the successful sea launch of the first Reach Remote USV, a major achievement for our team. And the interest in the Reach Remote is growing constantly across all regions, and we have a robust pipeline of both national and international projects that are ideally suited for these vessels. Our goals for bringing robotic technology into the subsea industry are quickly becoming a reality. But also, alongside of each remote, we have been making significant progress amid smaller U.S. lease types over the past year. [ Orpheus ] [indiscernible ] USV, which is a smaller USV, was launched last year and has already proven its work by successfully completing over 25,000 kilometers of high-precision hydrographic survey lines. This accomplishment was made possible through our remote operations, which allows for real-time control and data processing. Building on this success, we have grown our fleet by adding a second [ Reach ] USV, which joins our first USV in a major project in the Middle East. Together, they will be [ open and ] operating and enhancing nautical charts and seafloor mapping for a significant governmental client. So [indiscernible] this, we are on route with the establishment of Reach and Reach Remote in the different markets and time zones. And I will round out with the 3 organic growth levels before I give the floor to Birgitte, which brings us to Slide #8. I have outlined the 4 main pillars of our business, a wide range of services, a wide range of market segments and geographical coverage, along with the introduction of new technology. But there exists considerable untapped organic potential within our group. And first, expand the number of spread. As discussed during the fleet overview, we [ see and ] operate 8 long-term spreads and supplement this with project-specific spreads as necessary. There is a potential for further increase of our core fleet to enhance our offerings in key geographical areas. [indiscernible] spot market project charter [ with ] long-term [ charge-off ] and/or [ partner ] ownership of new vessels. Secondly, enhanced services on existing spreads. There is a substantial business potential in integrating our new capabilities into more value-added services and fully utilizing all our service [ points ] or subsea spreads. This includes continuously introducing new subsea technologies and improving methods, acknowledge that the latest in [ LOV ] subsea sensors or data processing tools has yet to be invented, and this will add selling and margins on the current fleet. Finally, launch Reach Remote, which is on track. This initiative is the cornerstone of our next-generation services. And it allows us to offer the same services to clients at a lower cost, reduce HSE risk and minimal to no carbon footprint. The deployment of the 2 first units in 2024 with an option for 8 more marks a solid expansion to our global services and offering through unmanned operations. So with this, I will hand over the word to Birgitte for the financials start to first quarter of 2024. And yes [indiscernible].

Thank you, Jostein. Good morning. Before I start, as always, just a reminder that you can ask questions on the chat in the webcast. For those who have read - followed Reach for some time, it's well known that the first quarter traditionally is characterized by a weak winter season, at least in Europe. And in the first quarter, this year, Reach had strong activity with NOK 575 million in turnover, which is a 146% increase compared to the first quarter last year. This is mainly a result of an increased number of vessels in our marketed fleet with a strong activity level combined with increased service scope on projects and also higher margins. EBIT was NOK 29 million compared to negative NOK 8 million last year. And the improved EBIT is primarily a result of higher utilization and market improvements. Pretax profit for the first quarter was negative NOK 9 million compared to NOK 6 million last year. And interest expense related to our IFRS 16 charter commitment debt and partly unrealized currency loss explain most of the year-on-year difference in the net financial items. Our investment program for 2024 includes Reach Remote as well as scaling up the service scope on our marketed fleet, as Jostein said, by mobilizing work ROVs, service spreads and other equipment. We continue to have a solid cash position and our net interest-bearing debt, excluding the IFRS 16 charter commitment debt, is still negative. So let's look into details and what lies behind the figures on the next slide. These graphs illustrate Reach's financial journey the last 6 years on a 12-month rolling basis. We've had substantial revenue growth, a result of increased activity level with expansion to new business segments and regions with an increased asset base. And in addition, the integrated group projects contribute strongly to our growth. The 12-month revenue has increased by more than 200% over the last few years and has exceeded NOK 2 billion. We have focused on sustainable and profitable growth, and our operating result and pretax profit has improved in line with the revenue growth. Next slide, please. So let's look at the quarterly revenue development year-on-year based on segments, sectors and regions. To the left, we see the first quarter turnover from renewables and other sector was about 52%, while projects in the oil and gas sector represents 48%. Last year, the split was 35% to 65%. Year-on-year, the growth came from both sectors, as you can see. The illustration in the middle splits the revenue in our 2 major market segments, which is Data and Solutions. Solutions refer to a service project where we do installments, maintenance, repair, decommissioning and, et cetera. And Data is where we deliver a data package to the clients, typically a survey of a pipeline or a cable route positioning or an inspection of infrastructure, to mention a few examples. The Data segment will become even more important when the Reach Remote enters the market, as survey projects will be ideal for this type of equipment. In first quarter, 63% of the turnover came from Solutions due to a few larger service and Walt to Work contracts, including a high number of vessel days, while 37% came from Data. The activity within Data, which includes survey projects without vessel exposure, is higher, estimated to be around 50-50 to Solutions, measured in project days. We also present our geographical distribution of turnover on 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 first quarter, activity in Europe, including Norway, represented about 64% of our revenue compared to 62% last year. The growth in Asia Pacific is expected to increase as a result of the acquisition of Guardian Geomatics, the transaction we closed in the fourth quarter last year. Next slide, please. We continue our sustainable growth also in the first quarter of '24, balancing cash and working capital and debt with a robust equity level. And at the same time, we have delivered to our shareholders with paying a dividend according to our policy. We have a cash and working capital position of about NOK 350 million and limited existing financial debt to credit institutions. We have increased our charter commitment, hence, the leasing liabilities. Our equity share is still almost 30% of the total balance sheet. 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 our assets are sold to a project. And in addition to revenue and profits, it depends on the complexity of the projects and also the seasonal changes. [ Peer ] survey and monitoring projects with [ our ] vessels through the P&L are not reflected in these figures. For those who have read the full report already, the number of offshore man hours has also increased substantially over the last couple of years, which reflects a general increased activity volume and gives 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. In Q1, we had 90% utilization of all vessels. Utilization of our vessels is our #1 priority. And by growing into new areas, such as Australia, Africa and Americas, we reduce the seasonal changes in the North Sea. As illustrated on the graph to the left, the number of sold ROV days is highest in the second and third quarter. In large parts of '23 and also the first quarter of '24, we had a few vessels in the Walk to Work segment and similar projects and that don't require work ROVs, leaving a few ROVs idle. Utilization was still 66%, which means the mobilized service had more or less full utilization. Next slide, please. We report quarterly on our sustainability goals. We recently started preparing for [ CSID ] and ESRS reporting with an updated double-materiality analysis and establishing an ESG group with a dedicated resource to follow-up activities and reporting. In the first quarter, we present status on the key performance indicators for 2024, the combination of our focus on emissions and environment, being a responsible employer worldwide and keeping a high governance focus. The [ KPIs ] represent our belief in ESG focus as a foundation for profitable growth in the coming years. On the environmental side, we achieved an increase in non-oil and gas activity, as mentioned, and we had no major spills to the sea. Establishing a relevant CO2 footprint level and taking delivery of the Reach Remote USVs will be the focus in the next couple of months. Safety, as always, our absolute priority, and we are proud to have strong positive [ safety ] statistics, especially combined with growth in project size and complexity. And in addition to focusing on turnover and safety at work, we are committed to have at least 10 apprentices this year. The first group of young talents is ready to start working in Reach this summer. On the compliance and governance side, we have continuous improvement projects to ensure that we always operate with the highest industry standards, trending within cybersecurity, ethics and ESG. And our training portal is an important focus area this year to ensure awareness amongst our colleagues. I then hand the word back to Jostein for a summary.

Thank you, Birgitte. Let me sum up with the last slide as a backdrop and also show that we are on the -- yes, the same strategic path. We are well-positioned for continued growth and value creation. And the market outlook is extremely promising, as I said, with substantial investments anticipated in our main markets for the coming years. And we are a key player in this expansion, and we'll continue to be even a bigger player. Over the years, Reach Subsea has built a strong reputation and a solid operational track record as a provider of subsea services. And I am confident that, with our team's excellent execution in the [ subsea ] market, we will continue to deliver outstanding services to our clients and thereof also achieve strong financial results. Our cutting-edge technology and advanced internal technical systems provide us with a significant competitive edge. And our financial strength, as Birgitte has shown, has been improving year by year, giving us great flexibility to make good investments and expansions moving forward. It is important to note that our growth plans will remain disciplined and shareholder-friendly, as it has been for our approach this far. So I have outlined the 3 organic growth levels. To repeat, we will expand our services based on a wide range of services and market segments and geographical coverage, all while continually introducing new technology. In essence, we aim to capitalize on a very favorable market outlook in the coming years and [ are ] simultaneously pioneering next-generation services. So with that summary, let me conclude the presentation with our saying everything within reach. So please continue to submit your questions in the webcast player, and we will return shortly to answer them.

Yes. We have a few questions. It's still possible to ask more questions in the chat. The first question is related to Reach Remote. Can you give some more information about the startup for Reach Remote, when it's expected start-up of testing or projects for external clients?

Should I answer that?

Yes.

Yes, I think there was a great milestone getting one -- the first one in the water in the [ Eastern Time ]. And we are lining up pilot projects with the major clients now in the summer season. So I guess, when we come to July, August, we will have gone through a lot of interesting pilot projects sponsored by main international clients. So we are on track, and that's a good sign. I guess, in August, I think that's the time when we will decide where we [ deliver 51st ] units for -- globally. So we have some interesting leads in Australia and Middle East and also in the U.S. and -- but of course, close to us in the North Sea and in Norway, of course. So it will be exciting in August when we have to decide where we [indiscernible].