Earnings Call: Q4 2019

Feb 21, 2020

Summary

Q4 EBITDA rose to NOK 805m from NOK 546m, alongside 83% fleet utilization and stronger performance across segments. 2020 guidance was in line with or slightly above 2019, while refinancing and Brazilian Anchor Handler renewals remained key uncertainties.

Good morning. Now we have to go over to English for this webcast. Good morning and welcome to the quarter 4 presentation for DOF. Operationally, it has been a good quarter. We said in quarter 3 that we delivered the best quarter since quarter 2 2016, and quarter 4 is a few million NOK better than quarter 3. So the best quarter in the year and the best quarter now since quarter 2 2016. Very happy with that performing at that level in today's market. You can see there. I have Hilde here and you are there. Had, of course, fleet utilization of 83% in quarter 4. I think that's. We're very happy with that as well. We saw improved earnings more or less in all segments. In the PSV segment, in the Anchor Handler market, it was a decent market in quarter 4 until second half in December, and also the subsea project fleet delivered better numbers than in a long time in quarter 4. All in all, operationally a decent quarter. I guess most of you are waiting for an update on the refinancing discussions, and we have some slides on that later on that Hilde will take you through. I guess the main message is that it's not concluded yet. We are still discussing, but of course, we see some progress and hope by end of the quarter that we will be able to come to an agreement with all stakeholders. We also bought the remaining shares in DOF Subsea, so now we own DOF Subsea 100%, and we are, of course, very happy with that now and we hope that's going to be a good investment for us. We see DOF Subsea also performing quite okay in quarter 4 and also in the second half. Altogether has been a good quarter for the good half year for DOF Subsea. On the contract side, we have won a few contracts. I think I start with the bottom here. It's showing we have 83% backlog in quarter 1, and I guess that also tells that quarter 1 may not be a disaster quarter. When you have more than 80% backlog, the full quarter is probably going to be okay. The total numbers, the backlog in 2020 is close to 5.7 billion NOK and I did some calc that based on the turnover in 2019, that's around 74% of the. So the backlog is around 74% of the turnover we had in 2019. Some wins around the globe. One, on top here, the Skandi Vitória, been in lay-up in Brazil for 18 months. So of course, very, very happy to see her going back to operations on a 2-year contract. So of course, that will show some improvements in the earnings. Also, very happy with the 5-year contract on Geosea, an old lady built in 2001. So of course, very happy to see her now fixed on a 5-year contract. So of course, that also will give some positive contribution to the earnings going forward. We don't mention all of them, but a decent quarter and good backlog for the winter. Of course, we expect to pick up quite a bit of contract going forward for the summer season. We think it's going to be a, we'll continue to build backlog through the year. The next one you have seen a lot of times before. It's showing where the boats are. I don't think it's much new on this one. What we have done here is we have also introduced showing where we have offices. The blue ones are where we have offices around the globe. It shows that we have a global presence and a sales force around the globe, and I think that is part of the reason why we see the backlog and the utilization is so much higher in DOF than in the average in the industry. All around the globe. Next one is, we mentioned it last time as well. We have in a research project together with Kongsberg and SINTEF and a few others. The total budget for the project is around $10 million. The plan here is that we will develop a decision support system on board, and that will optimize the operations. We expect, depending on vessel type, between 10% and 30% reduction in fuel consumption if you succeed with this. The investments on this is, when you are done with development, is rather limited in equipment. It's mainly a computer. We think we have a high hope for this one and, of course, also started to talk with our clients and, of course, fuel reductions, it's very important these days. We think it's going to be a good sell for us globally and, of course, also a good contribution to reduce our own emissions. I think this is where the industry is going. We have to do more and more of this to be on top in this industry. DOF Subsea, as we said, we own now 100% of and just to repeat, in Q4 we had NOK 1.3 billion in revenues in DOF Subsea, NOK 13 billion in backlog. It's a bit down. Of course, it fluctuates with exchange rate, especially NOK towards dollar. Of course, if you measure today when the dollar is back again, of course the backlog is higher than 12.8. Global presence and, of course, around 1,200 employees around the globe, mainly engineers, survey people, ROV people and project people. Doing Subsea projects around the globe. Then Hilde will take you through the financial numbers. Thank you. All the numbers shown here are based on management reporting. Main highlights for this quarter and year to date is that there are good performance in all segments, PSV, Anchor Handler, and Subsea. Fourth quarter, NOK 805 million compared to NOK 546 million, and a year to date EBITDA of NOK 2.86 billion compared to NOK 2.25 billion. By end of the quarter, we had five vessels in layup. The impairments done this quarter is close to NOK 330 million, compared to more or less the same number last year, and year to date is NOK 1.5 billion, close to NOK 1.5 billion. The big chunk was taken in third quarter. We have also impaired the tax assets, so close to NOK 170 million this quarter. Year to date is NOK 930 million. The remaining intangible assets in the balance is actually less than NOK 100 million. It's a small portion of goodwill and a small portion of deferred tax assets. Unrealized currency loss is NOK 880 million. That's partly impacted by a weaker Brazilian reals and Norwegian kroner to U.S. dollar, but also moving hedge from other comprehensive income to the finance results. The hedge accounting, a change in hedge accounting reclassification has no impact in cash or in equity. That also means that going forward, meaning from first quarter 2020, we will not report a hedge accounting. That's removed from our EBITDA. If we split the average utilization in fourth quarter of 83%, it's 94% for the PSV segment, 77% for the Anchor Handler, and 80% for the Subsea segment, of which the project fleet is 79%. If we split in DOF Subsea, you see here, and here is DOF Supply for fourth quarter. You see that the DOF Subsea portion is higher than same quarter last year and still above 60% and expecting to be that going forward. If we split that, the EBITDA for DOF Subsea was NOK 543 million this quarter and NOK 261 million for the DOF Supply, mainly Anchor Handler and PSVs. If we split the utilization for the two segments or the two groups, it's 78% on average in DOF Subsea and 85% for DOF Supply. It's an improved performance, especially in the Asia Pacific and North America. Pretty weak in the North Atlantic and stable in Brazil. That's for the regions. We have had no PSVs in the spot market this quarter, all been on firm contracts and none in layup. If you look at the Anchor Handler, we have seen improved utilization, especially from the spot market in North Sea, the first half of fourth quarter. For the vessel on a long-term contract, especially the PLSVs, the utilization has been close to 100% this quarter. If you look at the profit and loss, the EBITDA before hedge is NOK 793 million compared to NOK 545 million last year. If we remove the hedge, it's NOK 749 million compared to NOK 493 million. The changes there is impact from the joint ventures from the NOK 805 million. If you look at the impairments, already mentioned NOK 328 million. On currency, no big events. The main event is actually year to date, and that is this one, sorry. That is the unrealized loss and reclassification of hedge accounting. The comments here is already taken and commented. If you look at the segments, you see the PSV, it's NOK 39 million compared to NOK 23 million. Anchor Handler is NOK 129 million compared to NOK 119 million. On the Subsea it's NOK 581 million compared to NOK 351 million. This quarter is better than last year in all segments. Here you see the split in impairment, and the largest portion is taken from the Subsea segment. If we split in the EBITDA, it is 78%, which is representing Subsea. We have some Subsea vessels in the DOF excluding DOF Subsea as well. We have 5% in PSV and 17% on Anchor Handler. You can see that it was slightly different, slightly bigger on the Anchor Handler side. Bear in mind that here you have impact on all the PLSVs, the four PLSVs in full operation the entire quarter. Here you see the DOF Subsea segments. Here is the project activity, and here you have the long-term chartering. This margin is more or less stable. It has been close to 80% the entire quarter for all the vessels in operation, and it represents nine vessels. If you look at the project segment there, it represented 18 vessels and it is a smaller margin. This 19% is actually quite interesting because this is the best margin we have received so far this year. We hope that this continue, and of course here we of course have a risk, but we also have an upside. Looking at the historical performance, already mentioned by Mons, this is the best EBITDA since fourth quarter 2016. We have 890 in fourth quarter 2015, and between 500 to 646 million in this period, and here we have 805. A good margin for this quarter. Looking at the equity, which I will come back to, is of course highly impacted by a big loss this year of close to NOK 3 billion, mainly impacted by impairment and unrealized impact on currency losses. Interesting bearing that by end of fourth quarter 2015, it was 23.7, and today it is 21.5. Main change from fourth quarter to fourth quarter this year and last year, that is delivery of one vessel in January this year. Looking at the margin is pretty stable, and we hope it is continue in that direction going forward. Looking at the balance sheet, no major changes on the tangible assets. It is basically impairments and depreciation this quarter. Year to date, the goodwill has been impaired with 209, so the remaining value is 85 million. You see on the deferred tax assets, if I see correct there, it is 200 million remaining out of 1 billion by end of last year. Here you see the big impairments that is done on deferred tax assets and done on goodwill, and it is done on tangible assets. If you see the cash flow for the group year to date, the operating cash flow was 1.5 billion, compared to 1.259 billion last year. Total investments 1.3 billion, compared to 1.4 billion. This is mainly the PLSVs delivered in 2018 and 2019. From financing, the net cash flow, it is -722 million, compared to 26 million in 2018. On the equity, of course impacted by poor results, but you see here is a movement from minority to equity, and that is due to our acquisition of 35% in DOF Subsea. Now we own 100% of that company. Year-to-date, the amortization is 1.8 billion so far this year or year-to-date. New loans of 1 billion, and the IFRS 16 has increased our debt of 525 million. I guess you are familiar with this new regulation that was implemented from 1st of January 2019, and some reclassification due to of loan and FX effects. If you see the short portion of that includes a bond loan, it includes the normal amortization, and it includes balloons of NOK 1.7 and other credit facilities and other items. This is, of course, very positive that the revenue has increased, that the EBITDA has increased. This is year-on-year, so a high improvement compared to 2018. It is a decline in backlog. The current backlog today is NOK 18 billion. It is declining, but it is still high. If you look at the existing current maturity profile, here you see DOF excluding DOF Subsea. Here you see the amortization and the balloons for 2020, and here is a big balloon in DOF Rederi. If you do the same in DOF Subsea, this is normal amortization, and here you have balloons and the bond loans. The current situation is that all short-term balloons has been waived until February 2020. Due to that, the refinance process has taken longer time than we have assumed. We have applied for a waiver until end of April. DOF Subsea has, in addition, agreed deferral of bank and bond installments until end of February. They have applied for the same until end of April. DOF Rederi has waived its financial covenants until end of February, also applied until end of April. We have an approval in place from BNDES for a four-year refinancing, including soft terms that excludes the DOFCON JV. If we go to the next one, this is what we are working on and where the board and management believe it is achievable to have in place by end of March. However, we cannot guarantee anything, but this is what we are working on. I would also like to emphasize that it takes time to get this in place, and our goal is, of course, to get a sustainable solution for the company and its shareholders. It is the same structure. This is DOF excluding DOF Subsea, and here you have DOF Subsea. Here we have moved the big maturity until end 2023 and lower installments in this period, and DOF Subsea has in fact done the same or is planning the same. We have called for a bondholders meeting, which will be held the 27th of February. What, among others, will be decided there, is extension of maturity of three bond loans. Here you have DOFSUB07 until end of April 2024. You have DOFSUB08 until May 2025, and you have DOFSUB09 until October 2025. This was more or less decided in a bondholder meeting on the 20th of December. However, based on the fact that the decision was not in line on what was stated in the summons, we need to have a new bondholder meeting. An agreement with the bondholder meeting is subject to an agreement with all the banks in DOF Subsea. DOF Subsea has, since September, worked on a common term sheet for all bank facility excluding DOFCON. That is a four-year duration on all facilities and amended financial covenants. They have one BNDES facility, which is already approved. It is also important to emphasize that to have a longer horizon on all the balloons is extremely important because what we experienced in May this year, already published in the second quarter, was that banks were reluctant to renew balloons. That is a big risk for the group, and that is why we need this duration. If you look at the DOF, excluding DOF Subsea, there we have our subsidiary, Norskan, a fully Brazilian company. Here, BNDES has approved a refinancing of the facility until end 2023. The bank balloons are planned to be refinanced with maturity until 2023. That is mainly the DOF Rederi 3.8 billion NOK facility to continue with soft term, and today that is 25% amortization and has been that since 2016. Our main shareholders has committed to participate in a rights issue of 200 million NOK. That money will be used as increased equity in DOF Subsea AS. However, an equity issue is subject to a satisfactory solutions both in DOF Subsea and the rest of the DOF Group. Our target is, of course, to get a sustainable solution for the company and its shareholders. That was it on finance. On markets, of course, we have experienced in second half that the utilization is up and earnings are up. Of course, we also see that trend is looking at the backlog for Q1. We hope to see the trend will continue on, and this slide just show, of course, that the spending is going up and that some of the places where we are very well established are the most interesting places to be. Of course, I said before that in the longer term, we are very optimistic on Brazil and also we have 700 people in our office in Australia and of course we will see also that is going to be busy going forward. I think we have seen the start of improved utilization on the subsea fleet and more activity, more bids out and of course, we hope that transfer will continue. On the PSV anchor handling market, I think we see the PSV market for large PSVs that we mainly operate has improved. Rate levels are up and we believe that trend will continue. North Sea has been okay, and of course, we will see increased demand around the globe as well. Anchor handling market, it is very difficult to say where that is going. We had a good ride in Q4, helped by bad weather and then we have had an extremely bad ride in the spot market so far in Q1, and the wind has worked opposite. It has been so bad weather that we have seen rigs waiting a month at least to get a better window to start on a new well. That has led to low activity. The optimistic side of it tells us that quite a few of the North Sea fleet is leaving the North Sea for work from March onwards, and of course that means that the supply side in the North Sea will be lower than we have seen in years and of course we see more rigs and activity. We are optimistic, but of course it is extremely difficult to predict the Anchor Handler market globally. We see still too little demand for the global fleet, and we will need more activity globally before we can say that the Anchor Handler market is really moving in the right direction. But we think we are going to have some good periods in the North Sea spot. Overall, we think it is going to be another tough year for the Anchor Handler fleet globally. But a small positive trend, I will say. On the outlook, I guess last year we guided on the same guidance that 2019 would be slightly better than 2018 and then I guess we were a bit too optimistic, but we do the same this year. We say 2020 is going to be in line or slightly better than 2019. We believe the international PSV and Anchor Handler fleet will have increased earnings. We believe DOF Subsea perhaps also in line or slightly better, but the big challenge here is the renewal of our Anchor Handler fleet in Brazil, where quite a few vessels are up for renewal. Let us say we are uncertain of that and of course, that is part of the reason why we are not more optimistic on the guidance than we are here today. Let us see. We will know that, I think during the next few months what we achieve, but that is where I would say the highest uncertainty is the next few months on the earnings in the group. Backlog 61%. I think that is more or less on the same level as we had last year. But the good here is, of course, that the backlog for the start of the year is high, and higher than last year. Often if you have a good first quarter, the year will be good as well. Of course, we expect to increase that backlog going forward. Also, I think we will see utilization at least on the same level as we saw in last year, and perhaps a bit higher. As we said, on the markets, we saw especially the second half 2019 increased activity in APAC, in U.S., and also in West Africa. Brazil flat and North Sea, of course, in Q4 and so far in quarter 1, low activity as normal. All in all, some signs of improved market and we see, of course, that reflecting in utilization and earnings. Then, Hilde, I took you through the financials. As she is saying, we will not conclude on this before we have a very satisfactory long-term solution that give us at least until end 2023. That is what we are working on. Of course, there is a lot of stakeholders involved, but we are optimistic that we will conclude within first quarter. But of course, the most important here is to get the best possible solution for us. We can't guarantee that we get that by end of this quarter, but that's where we see it moving now. As Hilde said, we have agreed with in Brazil, so it's moving slowly the right direction. Then we say thank you. Any questions? We can do English, Norwegian. I guess we're limited to