Earnings Call: Q1 2019

May 23, 2019

Summary

Operational EBITDA was NOK 541m, broadly level with Q1 2018, as PSV markets improved while anchor handling and IRM remained difficult. 2019 EBITDA was expected to exceed 2018, but bank rollover uncertainty created significant liquidity and covenant risk.

Okay. Then we start. Welcome to the Quarter 1 presentation for DOF. Nice picture, at least on the front page with the latest addition to the fleet, Skandi Recife, that was delivered now on hire to Petrobras on a long-term contract from mid-February. That is the end of a very long and, but a positive new building program of four PSVs all on AT contracts in Brazil at good margins. So happy with that. I think it is the first time in my history in DOF of, how many years is it? Around a bit more than 20 years that we have not had any vessels under construction. I think that reflects how difficult the market has been the last few years. So that is how it is, but at least a very good boat on hire and performing well so far. Highlights. We call it highlights. I do not know if highlights is the exact right wording for all the content here. But the first quarter numbers, NOK 541 million in EBITDA is according to our own expectations. Of course, our expectations are not very high. But at least we are meeting our own expectations, which of course is okay. So a start according to plans in the year. On the market side, as we all read in the press and see, of course, the PSV market in the North Sea is good. We also see, of course, that prices are ticking up other places on the globe as well. So that is looking promising and good rate levels. Of course, it will take time before you are able to move the whole PSV fleet to new earnings as you have contracts and so on. But gradually, of course, if that market continues, we will improve the earnings. So internally on our own expectations for 2019, for our PSV fleet, of course, we have adjusted that upwards. So that is good. What is not that good is the anchor handling market and start with that. Because we read a lot about the North Sea spot market, and of course, it is up and down and up and down. Of course, the average was a very nice month in March, then before that, it was not that good. So it is impossible to predict how that market will continue. Internationally, of course, we see the bids we are doing and agreements we are entering into. Of course, it is not rate levels that you need. So of course, it is still very challenging in the anchor handling market. What we see, of course, is that demand is increasing a bit some places, and so we have been able to take a few boats out of lay-up in the quarter. But it is not that big move in rates compared to what you see on the PSV side. Of course, how to predict, especially the North Sea market, is extremely difficult. I see some analysts are positive on the market over the summer, and of course that we are really hopeful, but so let us see. But we see on tow-in business, globally, it is still low rates, perhaps a small movement upward, but of course, not enough to make it sustainable longer term. But it has to start with some increased utilization. So the positive is, of course, that we have had a couple of boats out of lay-up and into work. On the IRM market, it's heavy competition in the North Sea. It is still an oversupply on the IRM market in most areas. Because we have been struggling with utilization and then, of course, as a result of that, earnings in quarter one. We would have hoped to have a better backlog in some regions for the remainder of the year. The summary, I think, on the IRM side is that, yes, the activity is picking up a bit, but it's still an oversupply that makes it. It will take more time before that market is coming back. It might be, of course, that we are always a bit actually pressed after quarter one. It's always a tough ride for that type of business. But it looks challenging. We have a new atmosphere or surroundings or climate on the banking side. Of course, we have had all balloons. If you take away, of course, the DOF Rederi, we have restructured a debt. DOF Subsea and Norskan, of course, have both paid normal amortization, of course. But we have experienced, I would say last month or so, that some banks are much more reluctant to support refinancing in the OSV space. We see a few banks stating that they won't go to the sector, and of course, that makes it challenging for us on some renewals. So what we see is that risk has increased for us and that we are, let's say, close to not being able to do rollovers and as such, then be in the risk of coming into breach of covenants. So that's the summary of the first page here. On the contract side, I don't go through it all. I'm very happy with the 13 months contract for the Skandi Rio in Brazil. It's with Total. The vessel has been idle from mid-January until now. So of course, it's very good to get that back in work. Of course, it's also very good to see that the international players are taking boats in Brazil, which is a trend we expect to continue. Then, although, of course, we probably mentioned that earlier, the three RSV contracts in Brazil, there have been no mobilizing, and we expect them to go on hire then mid-June on average. So a few weeks more before they are on hire to Petrobras. So of course, also that will help, of course, on the earnings in the second half compared to the first half. I mentioned earlier some boats out on lay-up. Skandi Atlantic is one of the medium-sized anchor handlers we have had in lay-up in Singapore for a while, and now awarded 135 days contract in New Zealand, commencing one of these days in November, which is very positive, of course, that we get them back to work again. Of course, we are a bit optimistic that we will continue to trade off some leads after that contract. So it is, as I said, it's not completely black in the anchor handling market. There are signs of higher utilization and more activity, which is positive. Also very happy with the Geoholm contract. Vessel struggled a lot with last year, and now, I think it was 10th of March, she went on hire on this two-year contract in the Red Sea, which is positive. In the Atlantic region, Skandi Vega with Statoil anchor handling, it's They took a 6-month option they had on the boat, on the frame agreement. Of course, the positive is that the utilization on the Skandi Vega has been much higher so far this year than it was last year. Which also, of course, is a positive. That's what I was planning to say on the contract side. This you have seen before. Nothing really new on this. Still the same fleet. Of course, the biggest exposure for the group is subsea and anchor handling and the 16 PSVs. Of course, we need more earnings on the anchor handlers and IRM. The backlog, of course, is still high, NOK 20 billion and around 3,500 employees. I guess most of you have seen this a lot of times before, so I don't spend more time on that. Hilde will do the numbers. Yeah. Main highlights is that we had an operational EBITDA of NOK 541 million, which is more or less in line on first quarter 2018. This EBITDA is also impacted by the IFRS 16, which is approximately NOK 20 million. Average utilization, 70% of the total fleet, so it's still high. It's slightly lower than the previous quarter of 71%. 78% on the PSV segment, 68% on the anchor handler, and 67% on the subsea, and that includes our project fleet. You can see no change in split. The majority of our earnings and EBITDA comes from DOF Subsea. If you split those number, it's NOK 365 million in EBITDA from DOF Subsea included in the consolidated accounts and NOK 176 million from DOF Supply and Norskan. If you take the utilization on these two main subsidiaries, it's 68% on DOF Subsea and 71% on DOF Supply. By end of this quarter, we had three vessels in lay-up and as a reduction from six by end of the year. So we have actually taken out three vessel out of lay-up this quarter, which I will come back to. Already mentioned by Mons, there are variable utilization and earnings from the subsea IRM fleet, and that mainly has impacted the Asia-Pacific region and the Atlantic region. Stable in Brazil and North America. We see improved markets from the PSV. However, this quarter, the result from the PSV is pretty weak, mainly due to mobilization to new contract. Variable utilization on the anchor handler fleet in the North Sea and stable in Brazil. However, if we see the utilization on the anchor handler compared to same quarter last year, previous year, it has increased. So we hope that that is a positive sign, but still high uncertainty. On the PLSVs, all new builds are delivered and in operation. If you see the P&L, the total revenue is 1.7 billion NOK, approximately more or less in line on the same quarter last year. We had a backlog of 21 billion NOK by year-end, and today it is 20 billion NOK. If you compare on what we have eaten from the backlog, we have actually built backlog this quarter. 541 in EBITDA compared to 520, and if we deduct from the hedge accounting from the Brazilian activity is 496 compared to 479. What we have experienced but not really impacted in the result on the PSV side is that we have higher rates and utilization on the fleet. Based on the fact that we took out a vessel of lay-up, so we have no PSVs in lay-up, as we speak, that has impacted the numbers. We expect second quarter for this segment to be better than what we have seen in first quarter. Again, several vessels in addition to that has mobilized new contracts. For example, two vessels sailed from the North Sea to Guyana this quarter, and we have had some vessels prepared for two firm contracts in the North Sea. Three, actually. On the anchor handler side, 68% utilization. The variable earnings in the North Sea, that has not highly impacted our numbers because most of the anchor handlers that we have is vessels that we have under management, and we own a minority share in one vessel in addition to that. If we look at the deepwater fleet, of which we own 50%, which has impacted our numbers, we have taken one vessel out of lay-up in Asia Pacific due to a contract at New Zealand. That fleet has now one vessel in lay-up. Skandi Rio has very low utilization this quarter and had one short-term contract in January, but will hopefully this month start a contract in Brazil. On the subsea, 67% utilization. Again, variable earnings in two of the regions and stable in two others. Good performance from the PLSVs and Skandi Olinda, which was delivered in January, went on hire mid-February. She has one and a half month impact on our numbers. Two PLSVs in lay-up, that is Skandi Niteroi and Skandi Vitória. As you saw on our press release yesterday, we are now mobilizing Skandi Niteroi for a contract in Brazil. If you look at depreciation and impairment, you can see that it is a reduction. What we experience is that the fair market value of our total fleet has more or less stabilized, and we have also seen that on the PSV segment, the value is slightly up. Hopefully we touch the bottom by year-end, and we see some changes going forward. On the financials, not much to say. Increased financial cost, that is mainly due to that we have hired that because we took delivery of a vessel. No other major changes and no big changes on unrealized gain loss on financial instruments on long-term debt. Here you see the number on the PSV, so it is negative, and that is, again, due to the mobilization which we have done this quarter, and that has impacted our costs. Going forward, we are actually positive to this segment. If you look at the anchor handler, it is no big difference compared to first quarter 2018. The drop is mainly due to lower utilization of one vessel in Brazil. On the subsea, it is slightly higher and of course, partly impacted by more PLSVs on contract and in operation. If you look at the balance sheet, and if we compare the balance by year-end, the main difference is that we took delivery of Skandi Olinda this year, and that has impacted the long-term assets. We also have this famous IFRS 16, which is a lot of work for the Group. All this work impacted the balance sheet with its gross up with 500 million NOK. So it is not much if you take the total balance of 32 billion. If you look at the cash flow, the operating cash flow reduced by interest is 43 compared to 207. Investments done, and that is of course mainly the new build delivered, is 900 million compared to 117. Finance activity is positive by 520 compared to 500. You see the impact on debt, that has increased and mainly due to a new loan drawn on the Skandi Olinda. Normal amortization this quarter has been 532, and we have grossed up the balance sheet by this IFRS 16 scheme of 418. So our interest-bearing debt has actually increased by 518 due to that all lease contract has to be classified as interest-bearing debt. If you look at the short-term debt of 4.3 billion NOK, we have a bond that is due this year. We have amortization in the next 12 months of approximately 2 billion and balloons of 1.3. The others are credit facilities and this famous IFRS 16 scheme. If you look at our key figures, and this is the group numbers from 13 and the last 12 rolling month, you see that on revenue, it is more or less at the same level. If you look at EBITDA, it is slightly up. If you look at the backlog, it is actually slightly down, but no big differences. If you look at our debt maturity profile, we have split it in DOF and in DOF Subsea. If we first go to this cake here, you see how we are funded, and that is export credit facilities, it is banks, and it is bonds. As already mentioned by Mons, which is a new situation for us, is that we have experienced that a few banks here are reluctant to do regular rollover. The balloons that we have, which is due in 2019, it is approximately 900 million NOK in DOF Subsea first half and second half this year and in Norskan 460. Both these subsidiaries has paid normal installments through the downturn. To do regular rollover, that is part of our normal activity. If we have banks not willing to do rollover, that means a very challenging liquidity situation for us, because if we are going to repay, I am not saying that this full amount, but if we are going to pay balloons when they are due in full, that is extremely challenging for us. That is why we are stating that if this happens, we are in breach of covenants, on the liquidity covenants. Again, this is actually a surprise for us, and it's a new situation. For 25 years, we have had a very strong and good relations with our bank and still believe that we have a very good group of banks to support our activity. It's obvious that we need supporter banks because this is a heavy leverage business. It's expensive assets. Based on the fact that everybody believes that we see a recovery coming, I don't understand the timing why this should be a problem at all. We have to state the facts in our report. That is why we have done that. Well, I think as Hilde says is that, of course, it's important to emphasize that, of course, most of our banks are very supportive. As Hilde says, of course, which is normal in the banking business, is that when you have a rollover on a loan that somebody has had for many years, and they have got interest and installments according to plan, is that the normal is to roll over with the same amount. Of course, in a challenging market environment, it's of course, I would say, almost impossible for us to start to repay balloons or part of balloons, because that can get effects that we don't foresee. That's just a comment. I think it's important to emphasize that I would say almost all our banks are very supportive and helpful. You have a few that has communicated that they want out of it. Of course, then they are more difficult to handle than we have seen up until very recent. If you look at the outlook, I think we said when we presented Q4 2018 that we expected an EBITDA to be slightly better than 2019. As we said at the start, the Q1 is according to our expectations. So we still believe that the EBITDA operational in 2019 will be slightly better than 2018. As we mentioned also in Q1 was that, I guess we normally give a number, a range, and this year we haven't done that. Of course, that is partly because the uncertainty is high, and it still is. So we have, as we say, 64% backlog for the remainder of the year. Of course, that means that there is still quite some uncertainty on the last 34%. So that's why we are not more precise than we say we expect 2019 to be better than 2018. Of course, backlog of 64%, a lot of our peers and competitors would be willing to kill for that. So of course, the system is working. Perhaps it's wrong to say that, when you are given the news we have given today. I have to say, I'm proud of a lot, the people we have in DOF and the system. We are seeing that we are doing contracts globally. This quarter with the New Zealand contracts, the Brazil contracts. It is working, and we are able to keep the boats going. This morning I was thinking, how many of the people in the industry have four or five medium-sized anchor handlers as we have in DOF Deepwater working in the market? It's not many. I think we still are, as we said before, we are close to being best in class when it comes to operations and client relationship. But of course, when you are in the special operation class, it's still a challenge. As we say, we have 16 PSVs, and that market looks good. Both on term and in the spot, it's promising. Of course, we expect to enjoy that a bit during summer. The PSV side, we expect to make more money going forward. Of course, it's not like that you take all 16 from a bad rate to a good rate in one day. It will take time gradually, but we have a few boats at the moment that are exposed to the uptick, and gradually that will improve. I think the PSV market will continue on this level, which is good. Of course, we also see now that we have a few bids around the globe and that we are bidding North Sea base tonnage. It might be that we also see demand for North Sea tonnage going out of North Sea. On the anchor handling side, as I said, on the one hand, you can say that the utilization is coming up. We mentioned Skandi Rio being idle almost first half on new contract. We mentioned Skandi Atlantic. They've been in lay-up for a couple of years, now going on a contract. Of course, that is positive. The demand is increasing, but of course, the rate levels are not where they need to be. Skandi Atlantic, I think we have around, roughly speaking, on this contract, we have around, oh, let's say $5,000 or $6,000 US dollar a day in EBITDA on that contract. Of course, it's much, much better than being in lay-up, but of course, it's not good enough for what we need. Then, of course, you struggle, of course, to get high enough utilization. We saw we had 68% roughly in first quarter, and of course, there is a way to go before you can say that the anchor handling market is on the same level as you see the PSV market being. But small sign of improvement, but we cannot say today when we can stand here and say that we are really happy with the anchor handling market. The utilization is improving, and it will improve, hopefully, going forward as well. But how quickly and, of course, how it will really impact the earnings in a positive way is uncertain. In the subsea IRM segment, of course, there are still a few interesting bids and some long-term opportunities that we are working on. Of course, was very happy last start of the year when we got the Geoholm and Skandi Neptune on term work. Of course, I hope that it should be possible to do that with a boat or two also later in the year. But we are struggling in the project market to get high enough utilization. We see that as we write in the report, we have had both Geosea and Geograph idle in the whole first quarter, and of course, then you don't make money. They are going out now, both of them, but of course, the margin on those jobs are not fantastic. Then in APAC, we have expensive vessels, Skandi Singapore and Skandi Hercules, where we also have been struggling with utilization. So I guess we probably have on those two boats, we have had an average utilization not much higher than 50%. So that is the challenge we see. We might be lucky, but we might be unlucky. So the uncertainty is high, and of course, there is also a way to go on the IRM side before we can say that that is where it needs to be. Then we are back again to refinancing of the bank balloons. And of course, a challenging market in combination then with higher risk on refinance balloons is not a positive development. We are where we are, and it's more described in the quarterly report. We are not in breach of any covenants as we speak, but we are saying that it's likely, or at least not unlikely, that we will be in breach due to a rollover that we have not been able to land. So of course, we'll have a dialogue with all involved parties, and hopefully, we will try to fix that. But of course, there is no guarantees that that will be possible to do. As we say, up until now, we have been able to, in Norskan and in DOF Subsea, pay all of our installments, and all banks has been supportive, and balloons have been rolled over and refinanced. As we say now recently, it's a new situation where we have not been able to. So it's a tougher climate for refinancing. And that's why we all had to notify the market about what is likely to happen. So let's say we have to do some work, and of course, we'll update the market as this moves along. As we say, it's fairly new to us, and that's why we don't have all the answers today. But we will do our best to solve it, and we'll, of course, keep the market updated on how it develops. So I think that was what we planned to say today. So thank you very much.