Reach Subsea ASA (REACH) Earnings Call Transcript & Summary

Good morning, and welcome to our third quarter 2024 webcast for Reach Subsea ASA. Our report and presentation were released this morning. And I am Jostein Alendal, CEO, and with me is CFO Birgitte Wendelbo Johansen. I will start with the key highlights and achievements from the quarter as well as some views relating to the progress of our Reach Remote 1 and 2 USVs, and Birgitte will then cover our financials in detail. [Operator Instructions] The financial performance of the quarter documents our continued growth with a revenue increase of almost 30% compared to third quarter last year. That said, the revenue growth in this quarter is not only driven by high project activity, but also by increased reimbursable sales, which typically have slightly lower margins due to the lower risk profile. However, the EBIT level is above the third quarter last year, as expected. And when looking at the revenue these first 9 months, we have now passed the full year revenue level of 2023, leading above NOK 2 billion. We are maintaining strong fleet utilization while gradually unlocking additional potential through our step-by-step plan. The company is on a new level compared to just 12 months ago with more organic growth to come. Our commitment to safety and exceptional project execution are core to our business. So a big thanks to all our team members, both offshore and onshore, for their outstanding performance also this quarter. Reach Remote 1 is now sailing for her first exam, this sea acceptance test. Meanwhile, clients are lining up to be a part of the solution. And the EU Innovation Fund has granted us EUR 14.3 million for scale-up of Reach Remote. The outlook is evidenced by a vital market and our capabilities to meet the growing demands, and our order backlog and outstanding tender value is remaining strong. Let's take a closer look at the key factors influencing our previous results and the outlook ahead. Our order backlog and tender volume are higher compared to the same cutoff last year. And one comment there is, when comparing to last quarter this year, both order book and tender volume are slightly lower, but this is consistent with the regular build cycles we experience in the market. A vital part of our capacity to deliver to our clients is the fleet, and we have a relevant fleet on competitive terms supporting our growth ambitions for the years ahead. The fleet is mobilized for subsea projects due to maximize utilization and creating additional organic growth. And the Agalas newbuild arriving in 2026 is designed with a focus on a greener future, and the steel cutting started last month. We continuously assess the expansion of our chartered fleet, exploring both project-based and long-term charter opportunities. Reach Remote 1 and 2 is a part of our fleet and will join the fleet in 2025, and which I will discuss in a bit. So now let's take a look at the activities across our fleet in the last quarter. The Viking Reach spent her time in the North Sea, conducting survey and light construction work before heading off for a scheduled 40-day yard stay. Havila Subsea is currently operating in the Gulf of Mexico, handling ocean bottom node operation. And Deep Cygnus returned to work this quarter, performing IMR operations and supporting trenching activities in the North Sea. Go Electra was remobilized with a world-class ROV-system and survey spread in the quarter, carrying out IMR and survey scopes throughout the quarter. Olympic Triton provided IMR and construction support in the North Sea, while Northern Maria was chartered out for subsea inspection work. The Olympic Taurus completed her full subsea and survey mobilization, kicking off IMR operations. Offshore Surveyor is on duty for the Australian authorities, conducting hydrographic mapping. And meanwhile, our survey USVs, the Orca 1 and 2, are busy in the Gulf of Arabia, creating hydrographic charts for the Saudi government, showcasing how unmanned technologies in complex areas reduce HSE exposure while enhancing efficiency and project delivery. Looking forward, our Reach Remote USVs are getting ready for operations and Reach Remote 1 is now conducting her first exam. [Presentation]

This groundbreaking project integrates unmanned surface vessels with subsea robotics, including ROVs AUVs and other underwater tooling. Both vessels are now on the water with the sea trials nearing completion. Once approved, the vessels will begin a technology qualification program in the North Sea sponsored by Equinor, Total Energies and other international energy companies. The program, lasting about a month, will demonstrate the full functionality of the unmanned concept, covering pipeline inspection, surveys and ROV interventions, with secure data transfer to shore. And Reach Remote 2 following the same sea trials, and as #1, will have a slightly shorter program. But this initiative is the cornerstone of our next-generation remote services, setting new standards for global maritime and subsea operations and in partnership with kongsberg and Massterly. Interest in the Reach Remote is growing internationally, and we have well positioned to introduce new technology to the markets across different regions. We have a strong pipeline of national and international projects suited for these vessels. While slightly behind schedule, we are confident that Reach and Reach Remote will soon be well established in key markets and time zones. Reach Remote 1 and 2 are just the beginning. The Ship of the Year award in September and the industry collaboration are fueling our progress. The EU Innovation Fund grant underscores the strong belief in the concept extending beyond Reach Subsea. So as the Reach Remote 1 completes her final exam, we are planning to scale up the Reach Remote fleet. But now I will hand over to Birgitte for the financial update.

Thank you, Jostein. Good morning. Before I start, just a reminder that you can ask questions in the chat on the webcast. Looking at the third quarter, we see another period with strong underlying financial performance, well above the same period last year. Revenue was NOK 835 million compared to NOK 651 million in 3Q last year. Year-to-date, we have reached a milestone of just about NOK 2 billion in revenue compared to NOK 1.5 billion last year. The strong increase in revenue is linked to high project activity as well as increased reimbursable sales in projects, and these sales normally have somewhat lower margin than our traditional project margins, which is also linked to the risk picture. EBIT was NOK 134 million in 3Q, slightly above the NOK 112 million in 2023. And the year-to-date EBIT is NOK 284 million compared to NOK 252 million for the first 9 months of '23. And bear in mind that the last year's EBIT included a sales gain of NOK 30 million. Pre-tax profit for the third quarter was NOK 115 million compared to NOK 92 million last year. And year-to-date, the pre-tax profit was NOK 217 million compared to NOK 208 million in the first 9 months of '23. And again, last year's 9 months figures included a sales gain of NOK 30 million. Our investment program for '24 includes Reach Remote as well as scaling up the service scope on our marketed fleet by mobilizing work ROVs, service spreads and other equipment. And we continue to have a solid cash position, and our net interest-bearing debt excluding the IFRS 16 charter commitment is still negative. So let's look into the details and what lies behind the figures. These graphs illustrate Reach's financial development the last 7 years on a rolling 12-month basis. We've had a substantial revenue growth, a result of increased activity with expansion to new business segments and regions with increased asset base. By increasing the IQ or the scope on the vessels, we have grown both our revenue and profits steadily over time. And our acquisitions in the last 3 years have contributed strongly to our performance and our ability to offer integrated projects to our clients. And our revenue has increased by more than 140% over the last 2 years and has exceeded NOK 2.5 billion. We have focused on a sustainable and profitable growth and our operating result and pre-tax profit has improved in line with the revenue growth. If you look at the revenue mix split between segments, sectors and regions in the quarter, our third quarter turnover from renewables and the other sector is quite steady of about 30%, while projects in the oil and gas sector represented about 70%. We also split our revenue on our 2 major market segments, data and solutions. The split here is not 100% academic as we experienced that quite a few projects include both segments. Solutions refers to a service project where we do installments, maintenance, repair, decommissioning, et cetera, and data is where we deliver a data package to our clients, typically a survey of a pipeline, seabed, cable route positioning, inspection and so on. When Reach Remote enters the market, the survey projects will be even more important for Reach. Last year, we have had substantial investments in technology development within monitoring, survey and data segment, which we expect to see the results of in our financials in the coming years. In 3Q, about 60% of the turnover came from solutions due to a few larger service and work-to-work contracts, including a high number of vessel days, while 40% 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 to illustrate our strategic expansion to new areas as well as meeting new and existing client needs. In the third quarter, activity in Europe, including Norway, represented about 70% of our revenue compared to 42% last year. The 2024 figure is driven by large turnover projects in the North Sea and Europe. So let's look at the balance sheet. We continue our sustainable growth also in the third quarter of '24, 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 our policy. We have a cash and working capital position of NOK 374 million and limited existing financial debt to credit institutions. We have increased our charter commitment, hence, our leasing liabilities. Our equity share is still around 30% of the total balance sheet. So 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 survey projects and integrated projects as well as the planned scale-up for Reach Remote units. We also have an update on our sustainability goals. We use an ESG focus as foundation for profitable growth in line with our strategic goals and KPIs. We are on track preparing for CSRD and ESRS reporting by doing the initial double materiality analysis and identifying risks and opportunities from inside-out and outside-in perspectives, digging into both sub and sub-sub topics of what is or may become relevant for us. In the quarterly report, we will present status on the key performance indicators for 2024, a combination of focus on emissions and the environment; social, being a responsible employer worldwide; and keeping a high governance focus. On the environmental side, we have a quite steady activity in non-oil and gas projects, and we had no major spills to the sea. Our CO2 footprint is below our maritime peers. And taking Reach Remote USVs to the market is now approaching a reality, as Jostein just said. Safety is always our absolute priority, and we are strong to have -- we are proud to have strong positive HSEQ statistics, especially combined with the growth in project size and complexity. In addition to focusing on turnover and safety at work, we are proud to see that we are attractive for young talents and that our group of trainees is really growing. Within governance, we have continuous improvement projects to ensure that we always operate with the highest industry standards. This year, we have focused on training within compliance and cybersecurity. And we see that now that a solid portion of our employees have fulfilled all courses in our internal Reach education portal. However, there are still a few left. So then I hand the word back to you, Jostein, for a summary.

Thanks, Birgitte. And to sum up, Reach Subsea is well positioned for continued growth and we have a strong presence across Norway, Sweden, U.S., U.K., Singapore, Australia, Trinidad and Brazil, and it's all backed by a globally recognized subsea expertise. The market outlook is promising with significant investments expected around the globe, and we are poised to play a key role in this expansion. Nearly our entire fleet is mobilized for value-added sales. And our reputation and operational track record are solid. Our advanced technology and software provide a competitive edge. Financially, we are stronger year-by-year, allowing for smart investments and growth. And rest assured, our growth plans will remain disciplined and shareholder friendly. With our team's execution and the favorable market conditions, we aim to deliver excellent services, achieving strong results and capitalize on the demand for both traditional and next-generation services, while also bringing new technology to the market through our global presence. So with that, let me conclude the presentation with our saying everything within Reach. But please continue to submit your questions in the webcast player, and we will return shortly to answer them.

Yes, we have quite a few questions. First of all, how do you see Q4 in light of the past seasonality? I guess what we can say is that we have high activity also in Q4. We don't guide on margins and results, but the activity is very high. And we have more or less all vessels active, planned for projects in Q4 as well. So that's good. Was it possible to carry out all planned maintenance work on the ships?

Yes, I think -- yes, the maintenance, we have had 2 vessels in dock, one in second quarter and one in third quarter/over to fourth quarter. So we have one docking next year Q1/Q2. Yes.

Yes. How much revenue potential do you see with the available resources? I guess what we said before is we said something about the IQ. We can increase the revenue still some with the existing vessel fleet by increasing the scope on the vessels and the complexity of the projects. I don't know if there is anything more to add on that.

Yes. I think we have the capacity to reach our goals of sort of next step. The next step is sort of between NOK 3 billion and NOK 4 billion in revenue. So when you are looking at 2, 3 years perspective, of course, we have higher ambitions. But for the time being, we have more capacity within the existing sort of fleet and also equipment base. So…

Yes. The revenue share of data solutions has increased by 10% and they are working on many software solutions. Can you tell us more about this?

Yes. I think the software solutions is coming because the data acquisition. And also when we introduce Reach Remote and so on, the data part of our revenue will increase. Of course, solutions will also be there because of our fleet with the IMR vessels and sort of light construction capacities we have. But in the future, data will become more and more part of -- a bigger part of our revenues.

Yes. The tender volume has fallen. Do you see a slowdown in the market here?

No, on the contrary, it's just a fluctuation in the cycles in the -- our clients' tender or -- yes. So then we are in the -- yes, the late year, and then I expect the tender volume to increase during the winter because of the cycle of tendering for next season and so on. So it's not the market, no, by far.

Are there currently efforts to conclude long-term contracts or recurring revenues? Or do you want to continue to use the spot market and remain flexible?

Yes. I think we like the spot market, of course, in a rising market. That's the fun part. But we like to have a -- or the ambition is to have a good mix of long-term contracts and play in the spot market. We have fixed some long term for next year for a couple of vessels. And yes, a good mix there is the ambition.

Yes. Are there any plans for further M&A activities?

Yes. That's a good question. We have focused on organic growth going forward in the next year. In the past 2 years, we have had a focus on M&A and non-organic growth. So I guess -- well, you never know. You never know what the future will bring. But the focus for us now is organic growth at least for next year.

Yes. What is the time table for the Reach Remote vessels?

Time table is -- they are now performing the sea trials, and, hopefully, they are finished with that in some weeks. And then we are preparing for the pilot. And the pilot is scheduled for approximately a month for the first vessel. So going into the first quarter and be ready for the season in '25, that's the time schedule. And then as soon as we have decided we have to position the first 2 vessels, we are planning the scale up sort of going forward. So that's the time schedule I have at the moment.

Yes. Then it's a financial question. Is it possible to disclose the level of reimbursable revenue in 3Q of '24? I don't have an exact figure, but around a little less than 10% of the total revenue is really -- is directly linked to cost plus sales. Can you give some color on the tendering volume, which is down from Q2? Which regions are down? And what has driven this? Is there anything we can say about the regions?

Yes, the tender volume is also in a cycle, as I mentioned earlier. But the regions are -- it's sort of -- it is a global market, so it's not region specific. Yes.

Yes. Do you see rate utilization levels for the upcoming winter season compared to the last couple of winter seasons? I guess there's also a question of guiding to some extent. We see very high activity -- that is well known -- and we do believe in a very strong market. However, we don't guide on revenues or profits. So I guess we can refer to the market, which is very strong. Other oil service segments are reporting slowing contracting and clients becoming more cautious in signing up for new projects. Do you see similar trends in subsea in recent months?

We don't see any slowing in the oil and gas sector. Maybe the renewables is slowing down a bit. They had their struggles, of course. But we don't see in the subsea segment any sort of slowing down.

Yes. A few large IMR contracts have been awarded lately, especially on the Norwegian continental shelf. Do you see opportunities for each subsea to be awarded such long-term contracts?

We are working on that. And hopefully, yes, we will have some long-term contracts. We have long-term frame contracts within light construction and survey and also IMR. So it's just to get the call-offs. And it is a good sign that our end clients are now securing long-term capacity, and that's a sign of a rising market. And indeed, it is a sign of that there's a mismatch between capacity and demand. But yes, at one point, we will also have some more long-term contracts in that type of market. But it is a good sign.

Yes. How is Reach Subsea managing cash flow amid current market conditions? Can you elaborate on the company's strategy for maintaining liquidity and managing debt? I guess I said something about it in the presentation. We have a quite conservative approach to our liquidity and also debt situation, which we have shown over time. And we plan to continue in the same way with the same strategy, to be quite conservative. However, of course, we will be -- that will be challenged with the increase of the scale-up of Reach Remote. However, we plan to still be quite conservative and balanced when it comes to equity and debt, and also watching the cash position, of course. Can you tell us about the fleet clients? Are these strong and solid companies?

Our clients?

Yes.

Yes, our clients are solid. Typically, it's the energy companies. So there are sort of around 30, 40 international energy companies around the world and we -- yes, they are our solid counterparts.

Yes. That was all of the web questions. Thank you very much for watching. We'll see you next quarter. You can follow us on social media in the meantime for smaller updates. See you in Q4.

Yes, see you then.