Reach Subsea ASA (WWI) Earnings Call Transcript & Summary

Good morning, and welcome to this presentation of the exciting news we released yesterday, the iSURVEY acquisition and the Wilhelmsen strategic partnership. My name is Rachid Bendriss, I'm the Chairman of the Board of Reach. And before moving into what's actually happening here, just a quick word about a disclaimer. I urge you to take note of that. Before taking the step into the transactions we announced, let me just give you a brief update on who we are, where we're coming from and why these moves make sense. Now, we are a subsea service provider. What we do is to provide our clients with data in the form of maps, images, videos, data that aids our clients in their decision-making or we provide them with solutions, typically maintenance and repair of equipment at the seabed or below the subsurface. And the way we deliver those data and solutions to our clients, is by mobilizing our specialists, our engineers and our equipment, typically the remotely-operated vehicles onto a subsea vessel, which we then travel to sites and perform our services. That's a delivery model as such. As part of our scope and what we deliver, we have survey specialists onboard our vessels. These are the people who analyze the data that's gathered. They're the ones who have the knowledge about the sensors that we equip our ROVs with to gather the data. They analyze the data and they convert that into decision-making material for our clients. Now, that part of our offering is not something we have in-house. We use partners at, for example, our Swedish partner, MMT or have subsuppliers on a project-by-project basis. What we're seeing is that, that part of our service is increasingly important going forward. Has to do with, of course, advances in sensor technology, advances in computing power. All these aspects means that the data delivery part of our offering is increasing in importance. Moving ahead, that's how we do it today. In the future, we're taking steps to take advantage of the advances in communication technology, sensor technology and computing power by changing the delivery model. Our clients will still be getting the same thing from us, data or solutions, but the way we deliver these services is changing. Reach Remotes is our project aimed at redesigning the way we deliver our services in the future. Simply put, it's about taking all people offshore, onshore, thereby reducing the scale required for the vessel as such, simplifying a lot in the operations. And by you making things smaller, you make it cheaper. So running remote and autonomous operations, that's the future. The benefits are quite significant for a lot of stakeholders. For our clients, they'll be able to get those data and solutions at 20%, 30% lower cost than what they used to. On such a cost basis, we still aim to provide our shareholders with a 20% to 30% return on investment and not least, virtually eliminate the carbon footprint associated with our operation. The last stakeholder perspective, of course, being running subsea operations offshore is a risky business for our people. So taking all our people away from the hazardous offshore environment to safe, confined onshore environment, also is an element of the Reach Remote solution. Also, worth mentioning here is that Reach Remote as a solution is primarily tailored towards, I'd say, weighted towards the data gathering part of our service. It's ideal for the survey scope, for inspections, maintenance and light repair. So you can then understand that possessing those data analytics, data management, data processing capabilities is a more -- increasingly more important component when it comes to Reach Remote's compared to conventional services. So with that as a background, let me just jump quickly into then the 2 major moves we announced yesterday. First, the acquisition of iSURVEY. We are acquiring that company for NOK 135 million, settling that with some 110 million worth of shares -- new Reach shares and 25 million in cash. This move addresses what I just said. We don't have today in-house data management, data processing capabilities. iSURVEY brings that on board. It allows us to expand our service scope through in-sourcing and in-housing these capabilities. Now, we're very excited to bring on board the hungry highly skilled professionals in iSURVEY into the Reach family. The second step, which was seen in connection with the first one as well, is the announced strategic partnership with the Wilhelmsen Group, more specifically, Wilhelmsen New Energy. Equally exciting. That cooperation is going to be centered on the commercialization phase of Reach Remote. And it's cemented by the prior placement towards Wilhelmsen, NOK 150 million in new equity is going to be raised at NOK 3.25 a share, providing us with the funding required to execute the first 2 Reach Remote projects. iSURVEY. Let me give you a brief intro to that business. They are an asset-light high-quality service provider. Their footprint, when it comes to operations, they operate out of Norway, the U.K. and Singapore. Business wise, they're are about 50-50 split between oil and gas and non-oil and gas, primarily offshore wind and subsea cables. The revenue is fairly diversified geographically, some 1/3 in Norway, 40% plus in the rest of Europe and some quarter in the rest of the world, primarily out of Singapore. Their client base is also very good and interesting and complementary. I would particularly highlight here Nexans and NKT, where they have global frame agreements. One of the major cable providers of the world seeing substantial growth from the offshore wind sector, where cable demand is rising significantly. And with these frame agreements, we see great opportunities for combining Reach and iSURVEY services into a combined offering towards these clients. So that's more from a geographical spread than clients and client perspective. When it comes to their business lines, they have these 4 business lines as they define it today. Rather, I like to divide this into 2, and I've highlighted the top 1 here, seabed surveys. This is where iSURVEY typically mobilize onboard a vessel, takes responsibility for a project, mobilizes their Servetech people, their rig sensors, the kits and hire in an ROV operator as a third-party supplier. Go out and perform a survey project. That can be anything from creating a seabed map over an area where an offshore wind developer needs data to plan his construction phase, or it can be the survey of cable routes where Nexans at some point is going to lay their cable to clear it out for hazards. That's the seabed survey part of the business. Today, that accounts for some 40% of their business or 2021 rather. The 3 other business lines is more a sub-supply business, where they provide a survey and positioning services as a sub-supplier into other projects. For example, to Reach. We have cooperated with iSURVEY for many years, where they provide us with positioning services and some data processing and data management services as a subsupplier. But the top part is, I'd say, the primary source of synergy between these companies. And let me just highlight what we mean by that and how we intend to operationalize this. Here, we see 2020 and 2021 iSURVEY splits between their survey product business, the green, and the subsupply service business, if you want, the blue. We see that we can double and then some the business of iSURVEY by mobilizing that organization, those skilled people onto our existing spreads. To take the example with 2 of our spreads. Today, Reach operates -- provides all services from 6 vessels or spreads as we call them. On 2 of these vessels, we have what we call multi-capabilities, the vessels, Stril Explorer and Havila Subsea where we cooperate with MMT. These vessels have survey, inspection, light construction capabilities, can operate in different modes. In such a setup, we know from experience, and we see that typical revenues is around NOK 250 million per spread, with project margins in the area of 15% to 20%. The survey scope, now which we're now going to in-source through providing iSURVEY service onto our spreads, accounts for around 50% of that business volume, and there are good margins. This is nice in theory, but you need key enablers to make this happen, and that's what Reach possesses and can help iSURVEY realize. We have the commercial track record when it comes to managing such full spreads on a commercially good and sound way. We have a technical track record that makes the clients trust us. And of course, we now -- we have the balance sheet required to take on these projects. As I mentioned, iSURVEY is an asset-light business. They have a balance sheet, capital employed in the order of NOK 40 million, NOK 50 million, not positioned to do full-scale survey projects. Now, we have these capabilities combined with us, and we can start pursuing such projects. Worth mentioning here, of course, is that the primary demand driver as we see going forward for this typical multipurpose capabilities and the surveys as such is the huge trade growth trend we see with an offshore wind and the associated electrification effects. So as a quick summary when it comes to iSURVEY as such, I think these 2 companies together, first and foremost, they have a relationship and experience in working together in the past, which I think takes down the transaction uncertainty when it comes to the integration phase. But in summary, I think we're now, as a combined company, have the capabilities to operate the full-service spreads on multiple vessels, which carries better margins and places us in a stronger competitive position in these new verticals we see emerging in the marketplace. It strengthens the value proposition of Reach Remote, as I mentioned, I think the data gathering part of our subsea service is going to increase in importance and Reach Remote is tailored towards that part of our offering. And lastly, it increases our presence in the renewables space and also, increases our offerings. Remembering that iSURVEY has some 50% of their business to the non-oil and gas industry and also, has the local presence in U.K. and Asia, which you can build upon, which Reach does not have today. Some might wonder, how does this fit with our pre-Christmas announcements of the acquisition of OCTIO. Well, this all forms part of a puzzle that we are trying to put together. The OCTIO transaction is also about data management, data analytics and data processing. But that is a more specialized skill sets in addition to the patented unique monitoring technologies they have developed, the tools as such. iSURVEY is more of the generalist multicapabilities within survey. Combining these 2 is actually complementary and gives us the software we need, so to speak, surrounding Reach Remote to make that project and that offering more competitive and more complete. Moving on then to Wilhelmsen. As many of you know, the Wilhelmsen Group is a major global maritime player. One of the business areas in Wilhelmsen is Wilhelmsen New Energy, their dedication towards the renewable sector at large. The partnership with Wilhelmsen, I think, will be really important enabling factor for the commercial success of Reach Remote. They already had the knowledge when it comes to Reach Remote and our company, as they are the 50% owner of Massterly which is the bridge or the marine crew of Reach Remote, if you want. Their substantial global maritime network is, of course, important, can open a lot of doors for us. And we have, from the side lab, been watching with interest on how they're building, from our perspective, a sort of an ecosystem of services along the entire maritime renewable value chain. Reach Remote is actually perfect fit into that value chain. It should also be mentioned here that Wilhelmsen and Reach, together over the last few months, have carried out a joint market study on Reach Remote, identifying opportunities and potential new business models for the future. I think we're very excited about pursuing these opportunities in collaboration with Wilhelmsen in the years to come. Cementing this partnership is the prior placement, where Wilhelmsen provides NOK 150 million in fresh equity to reach at NOK 3.25 a share. As mentioned, secures the equity funding for 2 Reach Remote units. And the potential exercise of the warrants, of course, could contribute to accelerating the role of strategy for Reach Remotes. And again, cementing the relationship, of course, with Wilhelmsen to be represented on our Board of Directors, which we're very excited about. Through what I've told you so far, I hope I've sort of given you a glance of the building blocks we're planning to put in place surrounding our future Reach Remote. We have, for a long time now, cooperated with Kongsberg when it comes to the early pace of the project, design the technology components and the development phase. I think that's one of the strongest part you can have in that respect. Thinking ahead, we now have iSURVEY as our in-sourced and in-house survey capacity, which is going to be important for the data management capabilities surrounding Reach Remote. We put in place OCTIO, which provides some unique patented monitoring technologies where Reach Remote is ideally suited for deploying these monitoring technologies into services. And lastly now, Wilhelmsen onboard as our so to speak, industrial, global partner for our go-to-market strategies. And the final link, maybe to note is Massterly, the bridge or the maritime crew on Reach Remote, being 50-50 owned by Kongsberg and Wilhelmsen, which gives us both the technical aspects provided by Kongsberg into the operations and the operations experience from Wilhelmsen into the mix. So I think we now have all the building blocks in place for making that major step into the future, which Reach Remote represents. And with these moves, we, of course, have quite bold ambitions. Putting some numbers into this, and these are our ambitions of what we try to achieve with these 2 strategic moves that we just announced. Using our 2021 trading performance as a baseline, our profits last year, we see and we believe that the integration of iSURVEY into our organization, the mobilization of the iSURVEY competence on to Reach spreads, providing multipurpose offerings to our clients could add some 50% to our baseline profits. Reach Remote, we think, can add even more. And the derisking of that commercialization, I think, is the key word here when it comes to the Wilhelmsen and iSURVEY transactions that we announced today. So in total, we're looking at more than doubling our profits from these 2 transactions if we can execute properly. From a shareholder value perspective, worth noting that doubling the profits, while increasing our share count to, by some, 55% is accretive to our shareholders. Now, it's good to have bold ambitions and plans, but you need to be able to execute and be in a position to execute. And that's maybe the last aspect of what I want to tell you here. We now have a robust financial position. The equity of NOK 150 million and acquisition of iSURVEY is integrated into numbers you see here. We now have some NOK 350 million roughly in cash and working capital. Limited bank debt, some NOK 30 million. Our banking partner, Sparebank 1, is backing us with debt financing. And I was actually told this is the first remote USV project they're backing. And I think that's a testament to both Sparebank 1 as a good partner, but also the confidence they place in Reach and the building blocks I just show you, creating the credibility around execution and commercial success for USVs. So I think in short, we have a strong balance sheet now. We're positioned to pursue Reach Remote, pursuing more full-scale survey projects and also, reserves for other opportunities. In summary, our ambition is to be the trusted data and subsea service provider for ocean-based industries at large. We see a rapidly growing ocean-based industries markets, with new verticals emerging driven by the energy transition, while the old conventional vertical, the oil and gas, which we thought was in a structural decline a couple of years ago, might still be in a structural decline in the long term. But in the medium term, we see some very significant headwinds coming out of that market -- sorry, tailwinds, obviously. We think we're well positioned to capture these growth opportunities with our execution track record and with the building blocks we're now putting in place, we have the financial position and profile to execute. We're focused on creating value for all stakeholders in a sustainable way. And I think you've seen our previous statements about pursuing value-accretive bolt-on acquisitions that we are delivering on also, those aspects of our ambitions. So with that, I thank you for your attention. And obviously, we open up for some of the questions.

Yes, we've received a few questions here. The first question is what are the next steps from here onwards, once iSURVEY has been integrated into the business and Wilhelmsen has gone in as a strategic partner, what happens from here?

Well, let's take the immediate first steps, more from a process and legal perspective. We will shortly be convening for an extraordinary general meeting, where we will put these matters up for a vote for our shareholders. Anticipated that, that will take place sometime mid-March. Provided we had the shareholder support for this, we will then -- shortly thereafter close these transactions and start, also, the post-integration phase, if you want. So our -- this is -- the planning is already going, of course. So we have the ambition of already this summer to start mobilizing iSURVEY people onboard our vessels to start targeting selected survey projects on these multipurpose spread that we're mobilizing. So 2022, start mobilizing these capabilities on to Reach spreads, learn from that experience. Going into 2023, first year, full-scale operation, 1, maybe 2 spreads with iSURVEY mobilized on board.

Second question is, have you now put in the order for the 2 first Reach Remote USVs?

There is a mix answer to that question, because there's not one single order. There's pieces of -- separate steps involved in that process. So the long lead items, the ones where we see the supply chain issues, which we talked about last year, that's under control, that's ordered and firm. And then there are other aspects which are falling into place as we speak this week. So we're going to get back to you on the full details when we get to the Q1 presentation.

Another question is you've now completed 2 acquisitions in the space of a few months. Might we see more acquisitions in the immediate future? And if so, what type of companies are you looking at?

We're looking at everything all the time. But if we do anything, I think you'll see that's centered around what we talked about today, completing the value chain of Reach, adding more analytics, capabilities, software, sensors, those kinds of aspects, unique aspects into our service offering. Nothing planned as we speak. I think we've been quite busy recently. I think our team in Haugesund needs to break from working on transactions and focusing on serving clients and making profits for our shareholders.

The next question is iSURVEY has not had stellar profits for a few years. Will Reach aim to reduce overhead by closing the office in Billingstad and moving personnel and the workshop to Haugesund?

No, not at all. I think this is primarily about -- as I try to explain, revenue synergies. It's about expanding the scope and the service on our own business, utilizing the highly skilled iSURVEY organization. When looking at those numbers, there are, of course, a couple of things to be aware of. As of now, this is a business with some NOK 220 million revenues, double-digit EBITDA margins. And for those of you looking at Norwegian registers, you will see that depreciation line is pretty big, has to do with the historical goodwill associated with the 2013 transaction. It's not going to be the same in our books, but the key driver is doubling that business volume through survey projects. And we know what those margins are, and we know what that can be converted into. We have a pretty good playbook when it comes to this.

Then a few questions here on -- first, on iSURVEY. How is EBIT compared to EBITDA in iSURVEY? And what do you expect of revenues and margins for iSURVEY in 2022?

That's a guiding question, and we don't guide. So I'm going to refer to what we already said about this. And again, just saying that if you look at the depreciation numbers in the official Norwegian documents, that's a bit misleading compared to what you're going to see in our books.

And then another question is, how do you see the ramp-up plan for additional USVs beyond the first 2, which you will order now?

That's a decision to be made. It hinges obviously, on the first 2, how those projects goes, the commercialization success in getting those into normal operations, so to speak, getting the cash flow out of that. But it's also a discussion to be held at the Board level, obviously, and Wilhelmsen and ourselves are the ones who are going to be making those decisions, so to speak. If it makes commercially sense, it's going to be accelerated. If it doesn't, then we're going to need more time. But our sights are pretty firmly placed into the future. Our business in the future is going to be Remote. No questions asked.

Do you expect around NOK 200 million CapEx, also, on future USVs?

No, it's going to be lower. Remember that those -- the Reach Remote, which you're looking at in the appendix. The Reach Remote CapEx you see in there is not necessarily all physical hardware CapEx. It's the cost of the project overall. Some of that investment is upfront investments, which will benefit all other future USVs as well. The infrastructure, the onshore control facilities and not least, the feed and the sign costs that are going into the first 2 that can be spread on other units. And there's going to be a learning curve effect as well in here, but they're going to be lower. That's what I can say.

Can you provide some details behind the assumptions for Reach Remote returns?

At a later stage. At this point, we have a buzzword called the competition sensitivity. So we will get there eventually. What I tried to show you now is maybe in a more normalized operational mode, normalized market conditions, providing cost savings for our clients. We still believe that those kind of numbers are achievable for such a concept.

Another question is, what is the projected financial impact of iSURVEY in 2022? Is it first, assume approximately half of its 2021 EBIT given rollouts in the second half of 2022?

Again, back to guiding. We don't guide, but you're going to follow our quarterly P&Ls. We have, so far, been I think fairly proud of what we achieved. As I said, we have the playbook for how to deploy this into our business. It's not going to be off the bat, the first quarter, obviously, but we're quite confident that this is going to add significant to our business going forward.

Next question. Congratulations on some very positive news. When including debt, the Wilhelmsen investment and potential warrants, have you made any estimates on how many USVs you now see as fully financed?

A lot more than 2, obviously. There is another aspect, of course, here, which is the cash generated from operations, which is an other component of future equity, if you want. But it's not very hard to envisage 3, 4x up on our Reach Remote business volume based on those funding sources available.

Can you say anything about the backlog for iSURVEY? How is the backlog price -- covenant backlog for iSURVEY?

All the questions on -- I understand and appreciate the need for more financial inflow on iSURVEY. That will come in due course. I forgot to mention about the process, of course, the prospectus will be out covering these 2 transactions over the next few months. So you get a lot of answers in there. And we'll also make sure that we prepare something more to shed some more light on this going in our first quarter presentation.

Those are all the questions we have for now.

Okay. Thank you for your attention. And now, hopefully, back to the finish of the Olympic Biathlon competition.