Earnings Call: Q3 2019

Nov 28, 2019

Summary

Q3 EBITDA reached NOK 803 million, the strongest since Q2 2016, with fleet utilization above 80%. Large impairments and unresolved refinancing weighed on reported results, while winter backlog supported the outlook.

Morning and welcome to the third quarter presentation for DOF. Here are the highlights. It is the best EBITDA result we have had since second quarter 2016, so 803 million NOK in EBITDA. Of course, it is positive and we have seen good utilization in all segments. It has been a good quarter. We have improved earnings on PSV, on anchor handler and also on the subsea fleet. As you see, we have had on average, above 80% utilization on the total fleet, including everything. We are fairly happy with the operations in third quarter. Could have been a bit better. We had to take a loss on a client in New Zealand on two boats. We could have delivered 825 if it was not for that loss we had to take. Another thing that we are happy for, of course, is that we reached an agreement with First Reserve to buy their remaining shares in DOF Subsea. We now own 100% of DOF Subsea. We are still working towards a solution on long-term refinancing with the end of the year. We have dialogues with all stakeholders and still believe it is possible to get that agreed before end of year. Of course, it is not guaranteed, but that is what we believe today. On the contract side, we have focused a lot on covering the winter, and been fairly good the last few weeks and months to get the good backlog for the winter. We see for quarter four, we have 81% backlog, which I think is probably a record high backlog number for any quarter in many, many years. Of course, that gives, let us say, a good foundation to deliver a decent quarter four. A few contracts worth mentioning. I do not go through them all, but of course, the Skandi Feistein contract with Esso in Australia was important one for us. It was the first long-term contract we ever had in my history in DOF with Esso. That is something we are working for a long time. Of course, also rate wise, it is the best PSV contract we have done in many years, and it is not far away, the earnings on this contract, compared to the contract we had when the Dawn Star started in 2014. I am not saying that that is the market reference, but when you have the right tool and the right track record, and you find the right client, at least it shows that it is possible to do decent contracts. I am very happy with the recently announced contracts in DOF Subsea in APAC. There is going to be Skandi Hercules, 100-day contract starting in December and of course, covering then full first quarter at a very good rate. It is another example where when you have a one of a kind boat, and you get the right opportunity, you get the good rate. It is a very good rate that I am very happy with. APAC is a very good backlog for quarter one. Then we won a few contracts in West Africa, won for Skandi Skansen in Ghana, covering full winter and won for Skandi Seven in Angola, covering full fourth quarter and of course, a very important contract on the subsea fleet. The two latter, of course, are part of our North Sea fleet and to get good backlog for them in quarter four and in quarter one, of course, helps a lot. All in all, it looks like we will avoid too much bleeding, especially in quarter one and quarter four. Then, of course, we have a few weeks and months before we have to do what we need to do to get to or in quarter one. But of course, 67% backlog gives us a very good starting point. I hope we can get that a bit higher in the next few weeks. Some positive in the market, of course, and we have been, let's say, on a good track the last few months. I am happy with the backlog and of course very happy also because I think for the first time in a long time, we have been above 80% utilization and of course above 80% backlog for quarter four. Of course, I am very happy with that. Then, next one, of course, you have seen before, it is showing the map and number of employees a bit up and of course that is a reflection that we have been more busy in quarter three and also we have been fairly busy in October. So, it reflects that the high season and most of the increase is contractors that, of course, if it is slowed down, we will reduce again. Then, we have a few slides on ESG and, of course, for those of you that follow us closely, you see that we once a year issue a sustainability report, same time as the annual report. The thickness of the sustainability report is at the same level as the annual report. Last year, of course, of the 100 larger listed companies in Oslo, we were number 5 on reporting. So we spent a lot of time and efforts on it and continue to do that. So, a big drive in the organization to focus on this. We also have a few projects we are working on. Of course, for us the main focus is emissions and try to reduce fuel consumption. Of course, if you are best on this, of course, you have a competitive advantage compared to the competition in the market as well. So, it is twofold. It is not only because you need to do it, but it gives you also advantages towards your clients. A very interesting project we are doing always is the one on the EcoMeter, which is software and the ambition of that is if you succeed with this, we will reduce, depending on vessel type, the fuel consumption between 10% and 30% is the ambition on this. The investment itself on the board will be less than NOK 1 million. So it is a NOK 90 million project we do together with Kongsberg, SINTEF and a few others. Then we have got money from Innovation Norway to support us. So, I am very optimistic on that. It is an EcoMeter. It is like you have a new car, you see it assists you in how to plan the consumption on board a boat really. Also then looking forward. And of course, it means that if we can go to our clients with that, of course it's a big sell for us. Then, of course, we have been early on shore power on battery installations and also of course do have LNG vessels. The one on the first example, now the MARAS, it's a software system where we also see that we are able to reduce consumption and emissions. In this presentation, we don't often focus on this, but of course, it's important for you to know that on reporting, we are among the best companies in Norway, independent on what they do. And of course, in our industry, I think there is no doubt that DOF is market leader on reporting. And also then, I think we are in the forefront of driving the technology on this segment. And of course, when we talk about, let's say, the green side of DOF, of course, the award of the Hywind Tampen contract together with Kværner earlier. This amount was very important for us. So let's say it's the first big floating windmill project, and we are going to install, do the marine operation and tow out and install the foundations and the mills. And of course, we see that as a growing market and we think that's going to be a very interesting segment for us. And of course, we focus a lot on that side of the business. So we expect to win more contract in that segment. And especially on these floaters, of course, we have a unique background for doing that with the fleet we have and the track record we have on mooring operations in the oil and gas. So, very important win and as I say, when we look at the prospects in that market going forward, we think it's going to be fairly big business the next 10 years. Then, as we said, we bought the remainder of shares in DOF Subsea, and it's now owned 100%. And we paid, as you saw, 20 million NOK for 35%. And so we believe it's a good deal for us, and hopefully, we're going to make good money on that going forward. And if you look at DOF Subsea, of course, we had a good run in quarter three, 550 million NOK in EBITDA for DOF Subsea on a standalone basis in quarter three, and I think that is. What was that, Jon? It was the best number since 2015. 2015. So let's hope that trend continues. And so the rest of this, you can read yourself. Then Hilde will take you through the financial side. Yeah. You have to have this for You have the reverse. You don't have the same slide for the finances. Got it. A special quarter. Already mentioned by Mons that the operational performance is actually very good. It is the best performance since second quarter of 2016. If you take QoQ, the comparable number is 587 for the same period last year. However, on the rest of the numbers, due to the financial refinancing situation we are currently working with, and there are some uncertainty, we had to do some more conservative valuation of all our assets. Value in use has been thoroughly done on all the assets, all the tangible and intangible assets, and also on the deferred tax. That has hit the numbers substantially this quarter. NOK 917 million in total impairments, of which NOK 209 million is on goodwill and NOK 709 million is on the vessels. We have also done some deferred impairments of deferred tax assets of a total NOK 763 million. The main portion of the deferred tax assets is actually the impact on unrealized currency on long-term debt, especially in our Brazilian activity. The third number is high number on unrealized loss on currency debt due to weak Norwegian kroner and Brazilian reais to U.S. dollar. We have also released a hedge accounting position, has no impact on the equity, only on the financial result. That is due to that we have some contract renewals in Brazil, and we cannot document good enough the U.S. dollar portion on future contracts. This is an accounting issue that we have done for this quarter. All these things has highly impacted the result this quarter. If you look at the operational EBITDA, it is good, and it is actually high utilization and good performance on all segments, 94% on the PSV. None vessels in layup. All has been in operation. 75% in the anchor handler segment, and especially good performance on the vessels working in the North Sea and stable utilization for the Brazilian fleet. 81% on the subsea, of which 86% on the project fleet. That is substantially higher compared to first half. If you split DOF Subsea and DOF Supply, you see that for third quarter, the portion of DOF Subsea represents 68% of our total EBITDA, and the rest of the business is 32%. By end of this quarter, we had five vessels out of 67 in layup. If you look at the vessels on long-term charters, the utilization has been good. If you look at the P&L, you see 800 compared to 587. If you take year to date, it is NOK 2 billion. I am pretty sure that 2019 will be better than 2018. If you see the number on 2018, it was 2246. Adjusted by hedge, it is 759 compared to 535. Year to date, it is 1.9 compared to 1.6. The impairments, I will come back to the various segments, but the main portions done here is on the subsea assets. In total, NOK 917 million compared to NOK 124 million. If you look at the financial cost, you see that the payable interest is 329 compared to 292, so it is slightly higher, and it is 952 compared to 791 in the first quarter. Main reason for increased interest cost, that is FX, and it is higher debt because we had one vessel delivered in January this year. If you take unrealized currency loss, it is 944, of which approximately 500 is release of a hedge accounting. Again, it is an accounting we have done. It has no impact on the equity. The rest of close to 400 million NOK is unrealized loss on currency on USD debt in DOF Subsea and Norskan. Having a negative number of 1.9 billion NOK and a negative tax, that is due to impairment of tax assets in the period. If you look at the segments, here you can see that the EBITDA on the PSVs is slightly better than third quarter 2018. As we speak, we have none vessels in the spot market. All vessels are firm. However, we have had a few vessels in the spot market parts of the quarter. By end of the quarter, all vessels were working firm. If you look on the anchor handler fleet, it is 140 million NOK compared to 110 million NOK. Again, we have seen better performance and earnings on the fleet in the North Sea and stable utilization of the Brazilian fleet. Here you have DOF Subsea, which is the subsea segment with 583 million NOK compared to 392 million NOK. This does not only account DOF Subsea. We have some subsea assets in DOF ASA as well. All in all, you see that from the subsea segment, you see that the performance is much better compared to same quarter last year. In total, 759 million NOK compared to 535 million NOK. Other important number here is the impairment. Here you see a smaller impairment on the PSV fleet compared to last quarter, substantially higher on the anchor handler and on the subsea assets. Again, due to financial uncertainty, we had to do a more conservative approach on the value in use of all the assets. That has impacted the numbers. If you see on this segment, you see that the subsea part is the main portion of our EBITDA. On the balance, no major impacts on the tangible assets and goodwill. That is mainly impairment and write-downs. All new builds are delivered. If you see on the operational cash flow, if you look at the changes in the cash this period, we had an operating cash flow of 386 million NOK compared to 117 million NOK last year. We had investments of 95 million NOK compared to 119 million NOK. On the financing, it was negative 341 million NOK compared to 312 million NOK. Of course, the most negative on the balance sheet is the equity, which has been reduced from 5.6 billion NOK last quarter to 3.5 billion NOK. That is highly impacted by impairments done in the quarter and also unrealized currency loss on long-term debt. If you take short-term debt, what has happened there is that we have an amortization of 570 million NOK and new loans drawn of 305 million NOK and reclassification on loan to current of 555 million NOK. That is changes in non-current liabilities. If you take short-term debt, which is the number of 5.287 billion NOK, that is a bond loan of 467 million NOK. It is the next 12 months amortization, which is above 2 billion NOK. It is balloons of 1.8 billion NOK, and it is revolving credit facilities of 650 million NOK, and others, which is short-term interest payments. If you take the historical performance of the group, of course, it is good to see that the EBITDA is increasing and also the margin. However, it is negative on the equity, which is going down due to impairments and unrealized impacts. Long-term debt has increased from 2018 to 2019, and that includes one new build delivered in January this year. Net interest-bearing debt of 22.4 billion NOK. If you take the key financial, you see the revenue is going up. This is a 12-month rolling revenue. You see the same on the EBITDA. Twelve months rolling EBITDA is going up, and the firm backlog is slightly down. This is comparable numbers from 2013 until the last 12 months. If you look at the debt maturity profile, what you see here, that is DOF excluding DOF Subsea. The dark blue, that is normal amortization, and the light blue is balloons. What you have here is the maturity of the DOF Rederi facility. The same on DOF Subsea. Here you have bank debt, you have balloons, and you have bond debt, which is the light gray. We have secured a short-term solution extension on three balloons until end of the year. However, we have ongoing discussions on deferral of installments in DOF Subsea. Due to the situation we are in, we have to treat everybody equally, so that is why we have to have this solved in addition to extension of the three balloons, which is in place. However, a long-term solution is necessary to keep this as a going concern. The board and management have stated in the financial report that they do believe that that is obtainable before end of the year. We are done on outlook. If you look at the winter, which normally is the most challenging time of the year for us, as I mentioned, we have 81% backlog for Quarter 4 and 67% backlog for Quarter 1. If you look at the PSV fleet, for the rest of the year, we have 100% backlog. Then for Quarter 1, all boats apart from one have contract for Quarter 1. So we have one boat that can be exposed to the North Sea spot market towards end of the year or early in January. So I am very happy with the chartering team. After Quarter 1, we have boats coming off and that is the plan that we want to be exposed and rather do new contracts in the spring than during the winter. That means that the PSV fleet will have quite a different start to 2020 than we had last year, and better Quarter 4 than we had. On the anchor handling side, the spot market has been better so far in Quarter 2. It has been decent utilization and rate levels not where we want them to be, but a bit better than last year. The spot market is still far from being sustainable. I think if you look at the average earning for last North Sea boat in the spot market without any frame agreements, it is not big money on top of the OPEX. I think you probably see people reporting anything from close to zero or then 50,000 to 100,000 NOK a boat. So that is where we are. So of course, we need that market to improve further. For us, we have a very good backlog in Q4. Then, of course, we saw that Equinor, they have had the frame agreement on Skandi Vega, where they have guaranteed a minimum number of days. Now during the winter, we changed that to a full utilization contract. I think that reflects a bit on the market that, especially for the large anchor handlers, the supply side is shrinking and the activity picking up a bit again. Of course, next year, we are, I wouldn't call it excited, but we are a bit, let's say, curious on how that market's going to play next year. Then I'm talking about vessels doing pre-lay and about 300 ton bollard pull. We see that two of Solstad's boats are going to South Africa for most of the year next year. Of course, that leaves a very limited number of boats, about 300 ton in the North Sea. It's not any much science, but the stomach feeling tells me that it's reason to be a bit more optimistic on 2020 for the large anchor handlers than what we have seen in 2019. Of course, it's needed. For us, of course, on the anchor handling side, the main challenge next year is in Brazil. We have had all the big boats in North Sea on long-term contracts, and towards end of the year, the first of these boats come, the firm contract and has to be renewed. That's where I think the main risk for us is next year is in Brazil and what we are able to achieve on renewal of this boat. Then we have one boat coming off in the spring. So that's where we see, let's say, the main risk on the fleet. On the subsea side, it's a mixed bag. I would say the North Sea is almost dead this winter. The activity is very low. Of course, part of our North Sea fleet is parked for the winter, and we are not alone on that. But then for the spring and season in the North Sea, the feedback I get is that it looks like it's going to be a bit more activity and also it could be reason to think that the pricing will go up a bit. The winter is going to be tough for us. Of course, we see that we have succeeded to get a few of the North Sea boats to West Africa in the winter. We have had a good second half in U.S. and looks also, we sent a release on the Neptune the other day and on GOM. So it looks like the start of 2020 in U.S. or it's not only U.S., of course, it's Trinidad, it's Guyana and Canada. But the North America, as we define the region, will also get a good start on 2020. I mentioned Asia, where we did a few deals. Also, we see we're going to have some idle time now especially in December, but then from January onwards, it looks okay. So it's a mixed bag. The market is still on the subsea IMR side is still difficult. But of course, looking at the earnings in quarter 3 and also on the backlog for quarter 4 and the bookings we have started to do for quarter 1, of course, it can indicate that the worst is behind us. But of course, it is too early to conclude on that, but I personally am a bit more optimistic than I have been in a long time. So all in all, for the reminder of the year, it is easy, of course, to conclude that 2019 will be substantially better than 2018 on operational EBITDA. And I guess it is easy to see when you compare what we have delivered the first three quarters with what we delivered full year in 2018, that will happen. And how much better remains to be seen. As I said, we have done October, and October was a decent month. Then it is November and December. So we are talking several hundred million NOK better EBITDA in 2019 compared to 2018. Backlog for the next 12 months, 61%, and it is a good start, and of course, we are looking how to continue to build that. So of course, the dream is to continue above 80% utilization, and of course, then we know the numbers will not be that bad. But as I say, my main worry for 2020 is on, let us say, on the contract side is Brazil on the anchor handlers. Because we do not have any reference. We have not done any big anchor handlers in Brazil for years, I think. So it is difficult to predict the outcome of that. As Hilde say, on the financial, on the cost down is we are in the process, in a discussion with all stakeholders. As we write in the report, we do believe it is possible to get that in place before end of the year. But of course, there are still a few issues that is not solved, so we cannot guarantee it, but the progress is positive and of course, we believe the solution we discuss is best for all involved. So let us see. But we hope to conclude by end of the year. That was the presentation.