Earnings Call: H1 2017

Aug 23, 2017

Ladies and gentlemen, good morning. First of all, thanks for attending COSO's Interim Results Presentation 2017 today. I'm Paul Shamm, Managing Director of Wendell Sky Financial Group. Now please allow me to introduce to you the management on stage. Mr. Lu Bo, Chairman of the company Mr. Chi Mei Sheng, CEO and President Mr. Liifei Long, Executive Vice President and CFO and Ms. Jiang Ping, Company Secretary. At today's presentation, Mr. Li Fei Long will walk you through the financial figures and operational review for the first half of twenty seventeen. Then he will share with you the company's outlook in the latter half of the year and the future. After that, we will open the floor for questions. Now may I pass the time to Mr. Li. Mr. Li, please. Thank you. Good morning, again, ladies and gentlemen, our friends. Thank you for attending CorSo's Interim Results 2017 today. Please take note of our disclaimer for materials included in this presentation. Today's presentation will be divided into 2 parts. First is 2017 interim results overview. In the first half of twenty seventeen, crude oil prices slightly rebound, but still maintained at low levels. The market expects that oil supply remain a challenge for heavy equipment. The oilfield services industry was still in a slow recovery. Facing the challenges of lower crude prices, the company further explored the domestic market and global market to better satisfy customer needs. Meanwhile, KOSO also formulates specific business strategies to face the short term industry challenges and improve its mid- to long term core competitiveness. In this context, CorSo has achieved a series of operating achievements in the first half of twenty seventeen. The utilization rates of equipment segment increased. The contribution of technology segment increased, and the international competitiveness of Geophysical and Surveying segments was improved. Despite the Industrial Equipment segment oversupply, the utilization rate of coastal vessels and other facilities still stand out among peers. In the first half of twenty seventeen, the company's financial performance and indicators show varying degree of improvement. The company recorded operating income of RMB7.1 billion, representing an increase of 1.6% half over half. As you can see, the operating profit, excluding the impairment, has been coming out to a positive. Net loss decreased by RMB8 1,000,000,000. Profit was gained specifically in the 2nd quarter. Both the cash flow and dividend payout policy were stable. In terms of financial performance, the operational revenue increased in the first half of twenty seventeen, and the revenue and profit will further improve in the second quarter. For segments revenue distribution, the well services and management support segments were outstanding with an increase of 35% 16%, respectively. Performance in different cycles reflected the defensive uniqueness of the company's integrated business trend. During the period, KOSO achieved market breakthroughs in Middle East, Far East and other regions with 72 new overseas contracts. Our safe and efficient services once again won the 2016 Outstanding Contractors Award. Kaianxiu 936 successfully received commendation from clients for high quality, high temperature, high pressure valve services. In the context of low oil prices, Coso's R and D team focused on reducing costs per barrel, stabilizing and simulating the production capacity of mature oilfields. Besides, we provide safer, high quality and efficient technical solutions for high temperature, high pressure and high difficulty wells. With their both mentioned efforts, the company achieved noticeable growth of technical segment revenue. Cost is always the ice catching issue, which reflects the compactness of a company. In the first half of twenty seventeen, the company reduced costs by RMB1, roughly,000,000,000 through by strengthening materials management, lowering rental expenses and labor costs and controlling administrative expenses etcetera. KOSO will better tap market opportunities by maintaining a competitive cost structure and seeking more measures to reduce costs. Safety is on Korsa's top priority. Our all site index stood only at 0.046 in the first half of twenty seventeen by inspecting heightened dangers and conducting emergency management. A premium QHSE record plays key role in realizing KOSO's objectives. During the period, KOSO will fully affirmed by the capital market from you guys. In the next section, I would like to share with you the outlook for the company. Already mid to long term oil and gas will continue to play an important role in energy structure. For KOSO, opportunities ahead outweigh challenges. We will further maximize synergies and cost advantages of segments. Adhering to prudent financial policy, we will aim to realize our goal of equilibrium revenue from each market and target a 50 to 50 mixture of revenue contributions from the Technology and Equipment segments. Amid times of lower oil prices, oil and gas companies need to utilize the limited CapEx to launch more exploration and development activities. KOSO will actively satisfy the requirements of low oil cost per barrel and effective management of low permeability, mature, transboundary and high risk cost. Thus, bringing the new increasing points for KOSO in the future. This is an update summary of contract status for the rigs we operated. Workload is expected to increase in the second half for 2017. KOSO will continue to explore new services models, rapidly promote the exploration in 6 regions and closely follow Sino overseas projects. We have signed a number of long term contracts launched in 2018 2019. Breakthroughs in both the equipment and technology segments will be achieved. Over the mid- to long term, the further growth in demand for integrated oilfield services, it will be of high necessity and urgency to promote the synchronized development of the equipment segment and technology segment. Therefore, we will continue to maximize the synergies and cost advantages among different segments. The company's existing rating is still on the forefront of the service industry. Moreover, we have a good credit rating and healthy cash flow, which ensure the company to take flexible business models and opportunities in terms of lower oil prices. In conclusion, the company is adhering to its target of achieving 50 to 50 minutes in domestic and overseas revenue contribution. We should further transform our cost advantage into core competitiveness. With our unique integrated oilfield services, sound financial structure and experienced management and operational teams. We are confident that we will stand out from competition. Thank you again for all of you for your support and understanding this commitment. This is the end of my presentation. I welcome to your questions. Thank you. Thank you, Mr. Li. Now we will open the floor for questions. Please note that we will provide consecutive interpretation during the Q and A sessions. So please raise your question 1 by 1 and allow some time for the interpretation. I'm glad that some of you have raised your hand. My colleague will bring the mic to you very soon. And please do let us know names of your good self and your company. Yes, first question, please. May I have the mic for this gentleman? Thank you very much. Scott Darling from JPMorgan. Well done on the results and also the lovely video as well at the start. Two questions from us. Is your Drilling and Geophysical segments profitable as we speak this quarter? Do you expect them to be profitable for the full year? That's my first question. Thank you. May I have the interpretation, please? Thank you. My second question, on your rig uncontracted rigs, correct me if I'm wrong, but when I was here in March for your year end results, you seem to have 11 uncontracted rigs. If I look at your end June data in this pack, you seem to have 15 rigs uncontracted. So have you seen rig roll off? And what's your sort of outlook for further contracting of rigs in the second half of this year? Maybe some overall views on day rate outlook as well would be good for us. Thank you. Regarding your first question about the profitability of our drilling business, We do expect that towards the year end, given our efforts in both the domestic Chinese market as well as the overseas market, we do expect it to as well as some of the contracts that we are currently negotiating, we do expect that our revenue from here would grow and making us profitable towards the end of the year if we are successful in these measures. And also thank you for your question and also thank you this gentleman from JP Morgan for your consistent and long term regard of us. Indeed, towards the end of last year, we did report 11 uncontracted rigs. And as of today, there are 15, that is true. However, I'd like to explain that this is because of given the very competitive market, the contracts that we are able to sign these days became quite short. Some of them are 6 months contract. Some of them are 1 to 2 years contract. Therefore, if you look at any given point of time, you may see rather big changes. However, given the whole year and if you look at the operational days of the rigs, you should be able to expect to see some growth in this area. I have a little bit of supplement on top of our CEO's explanation. While the international deepwater marine drilling, the entire industry is actually struggling at this point. And the same for us, of course. However, a good news is that despite that in the first half, the drilling operating profit remains at a loss. We are already seeing blue figures, profitable figures starting quarter 2. So this gives actually a good trend. Also the drilling segment is a very important segment to any oil service oilfield services company. And looking at the global situation, there are 800 plus drilling rigs as well as drilling vessels and ours, we have a total of 43 of these and our contribution to the global number would be somewhere around 5%. And if you look at the utilization rate comparing ourselves or our vessels with the rest of the world's, you will find that we are still a bit better than our peers. In the second half of the year, we do anticipate that the utilization rate and the amount of work that we will be able to get will continue to improve. Therefore, for the entire year, we do expect that this year's annualized operating income as well as the profitability of the drilling segment would be better than last year's. Okay. May I ask the same question? Yes, this gentleman, please? Yes. Thank you for the presentation. Neil Beveridge, Bernstein. Two questions. Firstly, on Well Services, you showed a significant improvement on performance in the first half of this year with a significant reduction in costs. A lot of that was down to in sourcing of technology. Can you talk a little bit about how much more room there is to take down costs within the business as you in source more technology with KOSL equipment. Thank you. May I also have your name and your company, please? Yes, New Beverage Bernstein. Thank you. My second question is around the 2020 target for 50% of the revenue for international. I mean, it's clearly a more challenging service environment that we're in. Is it the right thing to do to be pursuing such strong growth overseas or is it better to be thinking about trying to boost margins at this point in the cycle? And then just finally, if you just comment again on your outlook for the rig rate market for the second half of this year? Your first question, indeed, our revenue for the first half when compared to that of last year, you will not see a very evident growth in that. However, the actual growth is bigger than the 1.6% that I have just now talked about because in it, there are also compensations of revenue from previous year. Therefore, in the first half of this year, the fact that we were able to realize significant cutting in cost is I mean, reducing our loss to a great extent is through cutting cost. When compared to last year, our costs came down by 14%. If you look at our cost structure, basically, each and every component of that cost structure, if you compare that to last year, there are different levels of improvement. And of course, the main area that we were able to cut cost, in fact, by 40% would be our material cost. And in order to realize this target, we have actually put in a lot of different measures, including the one that you have just now talked about, turning outsourcing into insourcing. And we all what we also did was through public tendering or bidding, we were able to get lower prices for the same quality material. Well, I think I should say that cost control, as I have reported previously, would be a continuous, almost a forever thing that we would go after. And we will, of course, continue to go for a low cost structure as part of our strategy. And we will further through enhancing our operating efficiency to reduce the consumption or wastage of our material. And we will also enhance the utilization rate of those equipment that we have researched and developed ourselves. Of course, this would require a long term effort. Well, I would say there is still room for further cuts, but we will need to work harder. One point of supplement regarding the cost cutting. The reason why we had turned from outsourcing into insourcing is that the our technology advancement has been able to allow us to increase our capacity. Therefore, we were able to cut down on the amount that we outsource. And regarding your second question about our target for year 2020, one which would balance 50 by fifty-fifty the revenue from international business versus mainland Chinese business, that target remains unchanged. And we will do each and everything to ensure that this target is coming closer and closer to us. Well, your question relating to given that the current market challenges, should we go for higher growth or higher profitability? Well, I can tell you that profit to be profitable always remain a target of the company. What we would do as part of our strategy is to enhance the technology sector to be a bigger and better revenue contributor to the company, turning it from 1 third before to a 50% contributor in the future. So in the next 3 years, we will not only expand our overseas market, we will also expand it through an enhanced technology sector. And your question regarding whether the second half of the year would be better than the first half, definitely. Otherwise, our annual target would never be met. Thank you. Yes, this gentleman, please. Aditya Suresh from Macquarie. Two follow-up questions. May I have your name? Aditya Suresh from Macquarie. All right. Two follow-up questions. First on cost, 40% reduction in material cost was it certainly positively surprised our expectations. Can you confirm if this is a sustainable benefit of any inventory impacts in there? I guess as it related to that, is this 36% EBITDA margin which you reported in the first half, can that be maintained into the second half and beyond? Okay. And the second question is on rates. Can you confirm if it's merely a CINO compact is 13% increase in jackup and 24% increase in semi sub rates, is that merely CNOQ or are there other customers who are being willing to provide you a higher rate? And also, can you comment on the rates for Innovator in Norway? Thank you. Thank you. This gentleman, can you repeat the two numbers, please? 34%, is that right? I was just asking about the improvement in jackup and semisubmersible rates. Is that merely a CNOQ impact or are there other customers who are giving you a more favorable rate? Yes. But you mentioned some percentage there. Do you want me to try Jack up plus 13%, semisub plus 24%. Thank you. 14%, 14%. Regarding well, I'd like to make a correction first. Regarding the first half of the year, when compared to last year, our cost came down by 14%, not 40%. And of and our total cost cutting were able to give us a saving of $1,000,000,000 and of which 40% came from our material cut, not our total cost came down by 40%. Well, just now we were talking about the effectiveness of our cost cutting for the first half of the year. And many of you are concerned whether this can continue into the second half. Within our cost structure, some elements have certain level of seasonality with it. For example, our maintenance cost as well as our research and development cost. Therefore, for the second half of the year, we can expect that some of the cost would increase. However, when comparing to last year, the trend of cost cutting will not change. Your second question was relating to rates. Well, overall, regarding our Jackup. Regarding our jackup rates, overall, the price versus last year would be somewhat stable or having a little bit of increase. However, there are still some structural changes in here. Some of these rates have rates that are coming down while some have rates that are going up. And the same applies for both the domestic market as well as the international market. As for our semi submersible rigs, all in all, the rates daily rates seems to be coming down. While you may have noticed this from our information that we have disclosed. Please note that the figures that we have disclosed were actually the average income of the rates and not the actual daily rate of the rates. The average income of the rigs is subject to the various impact or changes coming from our cost structures or various components of our cost structure. Please repeat your question regarding the Norway I was just wondering if you make a comment on the rate realized for Kausal Innovator. Is it above the $188,000 per day which you have reported for the first half? Regarding Innovator, perhaps you have seen some news about our Innovator Machinery getting a new contract. Well, our policy before has been one that do not disclose the individual rates for each rate. However, I can tell you that this new contract that we have signed is in accordance to the market circumstances. Well, if you compare this to the earliest contract that we have signed for Innovator, of course, it is evident that the rates have come down significantly. However, I have to say that this new contract matches with the market that we have now. Thank you. Okay. The gentleman please. Thank you for the presentation. I'm Andy from Morgan Stanley. I have two questions. First question is regarding the business model. So if you look at the revenue breakdown for the company in the past several years, we find interesting change. The drilling revenue actually is getting smaller. Well, if we look at the well service, the revenue is getting larger. So like in 2015, the well service is just half of the drilling. And if we look at the first half of this year, it's already become similar. So my question is, can we say that KOSO is strategically changing the business model from SS heavy to SS light and enhancing the technology content. In that case, we are actually positioning ourselves more like oil service company like Schlumberger, Harry Burton rather than a traditional driller. So this is like strategic positioning. This is actually an excellent question. Thank you very much. Well, our well services sector, the positioning and the direction of development has always been one that we want to balance the revenue from our equipment segment as well as from our technology segment. I mean, the equipment and the technology plays an equally important role. This is a direction that we will continue to work hard to achieve. And we are also stepping up on our investment in technology. And we actually have quite a few technology breakthrough. And for example, the logging while drilling technology is one of them. And we also have been have some breakthrough in the rotary steerable drilling systems. So as our technology is being enhanced, we would be able to provide better services to oil companies. And we also would need to work on balancing our equipment business with our technology business so that we are a better integrated service provider. I'd also like to make an explanation. Indeed, our strategy has been somewhat adjusted. Well, there are several reasons. The first one is that the equipment sector has we have been seeing way too much competition in this sector. And therefore, we have chosen to go down the path of the technology sector. And the comparing the 2, I believe the technology sector would give us a lot more room to grow. For example, if you're talking about equipment, equipment to be used on land cannot be used at sea. And equipment that are to be used in Mainland China is not absolutely adapted to overseas market. However, if you're talking about technology, technology is beyond the limitations of sea or land, China or international. Therefore, we are pushing our efforts into expanding our technology capabilities. Okay. I'm afraid this is a time constraint. We can take no more questions. But may I ask if the management have anything to add? Well, perhaps I'll say a few last words. If you look at CorSo right now, indeed, we are under a lot of pressure. However, if you compare this to last year, you will see that we have given a lot of effort and we have put in a lot of different measures in order to tackle this. For example, we have cut down on our costs. We have aggressively expanded both the domestic as well as the international market. We have brought up our technology standards, and we have also enhanced the quality of our services. And all of these efforts have been effective. As you can see, in quarter 1, we were still at a loss. However, quarter 2, we saw a 1,000,000,000 additional revenue that has brought us from loss to profitability. In the second half of the year, judging from the workload that we already can expect, we do believe that the second half would be better than the first half and quarter 3 would be better than quarter 2. And towards the end of the year, we do expect to turn from red to blue and we are quite confident in doing this. Well, last but not least, I thank you and invite you to continue to pay attention and follow us. And I also thank you for your support all along. Well, hopefully, well, we will try our very best, towards the end of the year to provide you with a result that can be satisfactory. And also, please continue to track us and see how we do in 2018 2019. We are quite confident that we will be in a much better light by then. Okay. Thank you very much. With that, I'm pleased to announce today's presentation is successfully ended. Thanks again for joining us, and goodbye and good day. Thank you.