Earnings Call: Q2 2020

Aug 21, 2020

Summary

Q2 EBITDA held near the prior-year level despite COVID-19 disruption, while impairments and FX losses drove a net loss and negative equity. Backlog and Q3 coverage supported near-term activity, but refinancing and weak offshore markets remained major risks.

Good morning and welcome to the second quarter presentation in DOF. Mons Aase, together with me is Hilde Drønen. We start looking at the highlights for the group in quarter 2. EBITDA in quarter 2 came in at 701 million NOK, which is more or less in line with what we did in quarter 2 in 2019. The average utilization of the fleet 67%. Of course, COVID-19 has had a major impact on the operations during quarter. We have had postponement of jobs, termination of contracts and operational challenges due to COVID on board the fleet and also on very difficult changing personnel on the boards. By August, by today we have 17 boats in layups mainly PSVs and small size anchor handlers. I think also the same team, we have one of the subsea boats in layup. On the subsea side, most of the fleet are in operation right now. A few boats in Brazil, meaning that Brazil hopefully will perform better in quarter 3 than in quarter 2. Also some project was in the Atlantic region and the APAC region on the subsea side in quarter 3 and resulting that, the backlog for quarter 3 is fairly decent on the subsea fleet. We have a standstill with banks and bondholders now until September 30 and of course are working on the restructuring and we talk a bit more about that later in the presentation. On the contract side, we had three term contracts on the anchor handling fleet in Brazil, Skandi Urca and Skandi Fluminense, a 2+2 year contract with Petrobras at what I would say decent rate levels and also Skandi Paraty a one year contract at decent levels. All in all, two of these boats were idling a bit in quarter 2 and are back working again, which is very positive. Contracts also include ROV operations by DOF Subsea so it's important for the whole group these contracts. In APAC, we have a few important awards. Probably the most important award is we have had a five-year frame agreement with Chevron in Australia that we now have renewed and typically that contract has in boat days probably absorbed somewhere between 150 days a year and then on engineering and all the services on top. It's a very important contract for us and very happy to continue the relationship with Chevron in Australia. Then we won a big project. This is in Southeast Asia and so for Skandi Hercules and Skandi Singapore, so around 70 days of work for Skandi Hercules and 30 days for Skandi Singapore and at fairly decent margins. In the Atlantic region, we have Skandi Vega extended with Equinor for six months and also at what I would call a very satisfactory rate level. Skandi Constructor had a good job in the flooring and then we also got contract for one of the smaller subsea boats with an international client. All in all, not too much on the contract side, but some important wins and giving better backlog in Brazil and also giving on the subsea side good utilization in quarter 3. The backlog for the group in second half is around 3.3 billion and if we look at that compared to the income in first half, 3.3 billion is around 84% of the turnover in the two first quarter this year. It is a decent starting point for the second half. As we say, we expect quarter 3 to be okay and of course there are more uncertainty in quarter 4 today. But hopefully we will win a bit more jobs into quarter 4. This is an old slide, but I think it is more important than ever that we have this global network and a global placing power and in the difficult market surroundings we are in a way it is important to be global and be a differentiator in the market. We see some segments and some regions there are opportunities and I hope and think that we will be able to show that the organization and the system continues to perform in a tough market. This one slide on the COVID-19 situation. On the operational side, as we said, we have had some challenges, crew changes globally. We have had terminations and we have had off-hire situations due to positive cases on board the boats. But I think we have been able to manage this very well and limit, let us say, the consequences on the operations. Of course, we monitor this extremely close and we work on procedures, guidelines and I think so far the organization globally has been able to, let us say, control and get the best out of the situation. As we speak, we have no vessels off-hire due to the COVID-19 around the globe. But it is challenging and it really requires a lot of work from in all parts of the organization. DOF Subsea is also an old slide showing revenue in quarter 2 of 1.2 billion and a backlog of still around NOK 12.4 billion. So still a very decent backlog in DOF Subsea. We have a number of employees reduced a bit due to a more challenging market. So we now have around 1,050 employees. This is done not including the marine personnel. As you know, in DOF we are integrated supplier of subsea services around the globe and controls a fleet of 27 vessels and 71 ROVs. Then I leave the floor to Hilde to take you through the financial performance in the quarter. Thank you. The numbers we show here are all based on management reporting, meaning that 50% of the joint ventures are including both in the P&L and the balance sheet. That is mainly relevant for the DOFCON JV. As already mentioned by Mons, the second quarter EBITDA was 701, which is pretty in line with the second quarter in 2019. Good operational performance from the Subsea segments and reduced utilization for the PSV and anchor handling fleet. We have done impairment of close to 780 million this quarter and the year to date is 2.3 billion. The financial cost is 336 compared to 224. What has happened this quarter is that the Norwegian krone has strengthened towards USD. However, the Brazilian reals continued to drop this quarter, meaning that the year to date financial costs are still highly impacted by an unrealized loss of 2.3 billion. This gives a net loss of NOK 689 million and the equity is now negative with NOK 728 million. If you look at some operational information again, the average utilization this quarter is 67% split in 74% for the PSV, 48% for the anchor handlers and 75% for the Subsea segment, of which the project fleet represent a utilization of 64%. If we start with the PSV segment, this is actually 20% down from first quarter. For us to have this low utilization for the PSV segment is actually not normal. But it is an impact on what happened in first quarter due to COVID-19 drop in oil prices. In fact, we took several vessels into layup. If you look at the anchor handlers segment impacted by the same, but also that vessels in Brazil have been idle between contracts, and two vessels went into layup in this region as well. If you look at the spot market this quarter, which is not much impacted our results, but if you look at the average utilization, it was below 50%. On the Subsea, we also there saw a reduced utilization for the project fleet, but for the time charter activity, and in particular the PLSVs, we achieved a high utilization, close to 100%. All the six PLSVs owned by the DOFCON Joint Venture was more or less fully utilized this quarter. If you look at the EBITDA, and if you split to DOF excluding DOF Subsea, meaning DOF Supply and DOF Subsea, you see that the EBITDA portion has increased compared to the same period last year, 75% to 25%. Meaning that the DOF Subsea EBITDA in total was NOK 529 million and the DOF excluding DOF Subsea was NOK 172 million. By end of August, or by end of June, I should probably correct there, we had 17 vessels in layup. Today it's actually the same number. If you look at the total P&L utilization already mentioned, the EBITDA is NOK 701 million, compared to NOK 712 million. If we take out the hedge, it's NOK 701 million compared to NOK 669 million. If we take the segments again, the PSV segment is, of course, impacted by six vessels in layup and nine vessel is actually working on firm contracts, has done this period. When we come to the anchor handlers, I've already mentioned a low utilization for parts of the fleet in Brazil and also a low utilization for the North Sea fleet and two vessels working in the Australia APAC. By end of this quarter, we had nine anchor handlers in layup. After balance date, we have actually sold one of these anchor handlers, just to mention that. On Subsea, if we look at the region, Atlantic region, Australia APAC, and North America, the utilization did decline this quarter. Brazil was pretty stable and it's mainly firm contracts this period for this region. The main reason for reduced utilization is actually postponed tenders and termination of contracts. By end of the quarter, two vessels were in layup. One of these vessels is today prepared for operation. Impairments, a substantial amount also this quarter of NOK 780 million. If we take the accumulated numbers, it's NOK 2.3 billion. No big impacts on the financials, even though the Norwegian krone has strengthened a lot. However, the Brazilian reals continued to drop. The unrealized impact in this quarter was pretty low. That gives a loss before tax of NOK 689 million and after tax of NOK 675 million. If we take the accumulated numbers, there is an EBITDA of NOK 1.5 billion and a negative operating profit of NOK 1.389 billion and a net loss before unrealized currency of NOK 2.4 billion, highly impacted by high impairments. If you take the profit before taxes, it is close to NOK 5 billion. Main reason or important reasons is the unrealized FX losses that happened in first quarter and the total number of impairments. If we look at the segments, the PSV, anchor handler, Subsea, and here you see the reduced activity reflected in the numbers. PSV is NOK 17 million in EBITDA compared to NOK 43 million, and the anchor handler is NOK 140 million compared to NOK 183 million. On the positive side, you see Subsea, which is close to NOK 100 million higher EBITDA compared to same period last year. That gives a total number of NOK 701 million. Here you also see the split in depreciation and impairments. The main impairments done here is on the anchor handlers and on the Subsea segment. I just want to specifically mention the Subsea segment. One major reason for the impairment is actually the drop in dollar, because that has impacted the value in use calculation because of a strength in Norwegian krone. If you see the case below, you can see that the PSV segment is now only 2% of our total EBITDA, while anchor handling is 20% and the Subsea segment is 78%. If you look to DOF Subsea group, which is split in two segments, the first one, which we call Subsea/IMR Projects, and then long-term chartering. In Subsea/IMR Projects, the total revenue achieved this quarter was close to NOK 700 million and an EBITDA of NOK 80 million. That gives a margin of 11%. By end of the quarter, this part of this business had NOK 3.1 billion in firm backlog, representing more or less all employees in DOF Subsea and 18 vessels in operation. If we look at the long-term chartering, the revenue in total was NOK 548 million and an EBITDA of NOK 448 million, and a margin of 82%, which is very high and also in line of the previous quarters. Here you see the largest portion of the group's backlog, which is NOK 9.3 billion, representing operation from nine vessels. If you go to the historical performance, and if you look at the EBITDA number, you can see that this quarter, if you take the five last quarter, is actually on average. It is an increased EBITDA, especially since 2018 and in line of 2019. You can also see that the margin is pretty stable comparing the previous quarter. What is special for this quarter and also for first quarter, is that the equity is now negative by NOK 728 million, and the main reason is the huge losses that we took in first quarter. The other thing which is worth mentioning is the split between non-current debt and current debt, where of the non-current debt basically represent the debt in the DOFCON JV. Net interest-bearing debt of NOK 22.64 billion. If you look more into the balance sheet, and if you take the tangible assets, mainly the vessels, this is, of course, impacted not only by depreciation but also an impairment. The main difference there is actually the impairments in this period. The goodwill is written down to zero on deferred taxes, which was more or less written down in 2019, for the group, excluding the DOFCON JV. What you see here is deferred taxes on our joint ventures. That gives a total current assets of NOK 22 billion compared to NOK 24 billion the same period last year. Compared to year end, sorry. If you look at the current assets, it is more or less in line by actually the last quarter and also by year end. The equity is negative, unfortunately, already explained, and is highly impacted by the impairments and currency losses. The non-current liabilities of NOK 4.6 billion compared to NOK 9.8 billion previous quarter. The changes done there is that we have moved or grouped that from short-term to long-term due to increased financial risk for the group and the standstill period that ends in end of September. What you see on non-current interest-bearing debt is actually debt in the JVs. It is also fair to mention that the debt has increased by NOK 1.6 billion only due to FX year to date. Before we leave the balance, we could say some words about the cash flow. The operating cash flow has been more or less in line on the same period last year. The investments is naturally pretty low, and the finance activity is NOK 176 million. It is also fair to say that this quarter, from end of March until end of June, has been positively impacted by a standstill for the group, because the standstill means that we haven't paid any installments and interest for the group, and that excludes the DOFCON JV and the BNDES facility this quarter. This is some graphs that we show on all our quarterly presentation, and you can see that the revenue is a bit up. Of course impacted by currency but also generally stable and good performance for the majority of the business. Also on the EBITDA, if you take the last 12 months, it has increased. If you take the backlog, that is declining from, if I take last quarter, the backlog was NOK 18 billion, and by end of June it was NOK 17 billion. We have not prepared any separate slide related to the refinancing because there are nothing more to inform than what we have said earlier, is that the standstill period is agreed until end of September. We, of course, have ongoing discussions with the banks to reach a long-term solution, which we still believe is possible, but there is nothing more to report than that the existing standstill agreements are in place. It is also worth mentioning that we have a consent from 93% of the banks on the standstill, and the remaining 7%, for those, the company has sent a unilateral standstill to the relevant banks. This is more in detail explained in the financial report for second quarter. Yes. A few words on the market. I guess most of you know that, of course, after the COVID-19, the outlook for our industry has been weakened a lot due to, I would say, the short-term effects that COVID-19 have had on operations. Several regions have reduced the activity a lot and hopefully part of that gradually will come back. However, of course, the oil price drop has led to postponements of projects and of course with the activity level, even if the operational side stabilizes after COVID-19, we expect the activity level to remain lower than we expected before COVID-19. We see here that on the indicators that it's more lower rig utilization, more rigs in lay up, PSV utilization is down and of course the TC rate industry here by the PSVs are dramatically down 40%. I think the PSV market today in the North Sea is extremely challenging and rate levels are at OPEX level or even below OPEX level. So it's very challenging. The next slide is showing where the market expect the spending to come and what's interesting for us is with Brazil where we see a fairly high number being spent the next years and a lot of course, big projects in the pipeline with Petrobras but also with the international companies. I think we believe we see that in Brazil has become more active lately and we see opportunities here for renewal and also perhaps also to add some more boats into Brazil in the next period. I think it's going to be tough all places, but some of the regions we operate in, it might be a bit more opportunities than others. Let's see. But I think it's important that Brazil will be important for us. Australia APAC will be important for us going forward. On the outlook, we have talked about COVID-19 and drop in oil price, and as we say, we expect that will influence negatively the market in 2020 and also into 2021. Of course, we see less activity, partly due to COVID-19, partly due to low oil price and of course, utilization is down, rate levels are down and so it's challenging in most segments. For quarter three, we have a coverage around 65% and 47% for the next 12 months. So we have a job to do to build the backlog for the next 12 months. As we have told all of you, the activity in Brazil is expected to improve. Partly of course due to the awards we just got on the anchor side. We have had a discussion whether we could guide on the EBITDA as we normally do in quarter three. We do think we can but of course, the uncertainty is still high. But as we see it now, we expect quarter three to be more or less in line with on the operational EBITDA, we are to be more or less in line with second quarter. But we emphasize of course that it is with some uncertainty we give that guidance. On the financial side, as Hilde said, we have been working continuously on the debt restructuring and of course, almost needless to say based on the tough markets, we see of course that the financial risk in the group has increased. We are hosting a call at 9:30 Norwegian time. You are very much welcome to call in on that and we will try to answer any question you might have as good as we can. Thank you very much for listening and we hope that you call in on the call. Thank you. Thank you.