Abl Group ASA

OSE:ABL

Earnings Call Transcript

[David Wells, executive]

Good afternoon, everybody. Many thanks for joining us as we give our Q3 results. Lots to report as ever as we made some good progress during the quarter. As usual, I'll be giving this update with Dean Zuzic, our CFO, and he will concentrate on trading numbers, whilst I focus mainly on ongoing operations. Once again, we're giving these results through a prerecorded webcast, which is not ideal, so we can't take live Q&A afterwards. Therefore, if you do seek any clarifications, please reach out to us, and we will respond to your query.

So moving to Slide 3. Just to remind you of our disclaimer, since we are giving some forward-looking statements during the presentation.

Okay. Moving to Slide 4. So let's give some details. We've had a satisfactory quarter. Q3 does tend to be a seasonally weaker quarter due to the effects of a cessation of marine activities offshore India during the southwest monsoon, and also due to heavy staff vacations. Revenues were USD 38 million, up 9% on pro forma results for Q3 2020 and more or less the same as for Q2. These were driven by a 30% pro forma growth in our renewables sector. Offshore Wind Consultants, our renewables arm, had the best quarter ever and a very healthy 70% increase in our engineering arm, Longitude. Both are very pleasing. Certainly, I watch the results from our engineering arm quite closely, but good performance indicates to me, a healthy market.

Our EBIT was USD 1.3 million, and adjusted EBIT was $2 million. During the quarter, a lot of hard work has continued with the integration of the LOC post merger, particularly in this quarter with the introduction of a single common ERP system to all entities. I'm sure Dean will comment on this later.

Cost synergies targets for the LOC merger remain at USD 4 million, and these will start manifesting themselves properly towards the end of this quarter. Cash stood at $23.2 million, a slight decrease on the previous quarter, following continued debt repayments and working capital requirements. I'm pleased to announce that the Board has approved a second dividend for 2021 of NOK 0.25 per share, in line with previous and should be paid in December.

So moving to the next slide. So for those of you who are not familiar with us, just to remind that we are a consultancy -- energy consultancy focused on the various energy markets. We record our trading into 3 different sectors, the renewables market, the maritime or shipping sector and the oil and gas markets.

Moving to next slide. Within that, we provide consultancy in various arms. The main part of our consulting and engineering is, it covers design engineering, it covers various analyses, it covers cable engineering, the site investigations and all our marine operations. So a good wealth of different consultancies.

And then we have our loss prevention arm, which is really focused on mitigating risk. A lot of it is on behalf of insurance companies where we act as marine warranty surveys, but also we do a lot of marine surveys, pre-inspections and pre-contract audits to ensure that marine assets are compliant with the operation they're going to be undertaking.

And finally, in loss management, we provide a 24/7 marine casualty support service. And also, we provide expert witness and litigation into the various markets to resolve disputes.

Moving to Slide 7. So our strategic vision is fairly straightforward. It remains the same. Continued expansion in the offshore renewables market and also in the sustainably -- sustainability-orientated services, oil and gas and maritime. We have an ambition of 50% of our revenues to be driven by renewables and the marine markets by 2025. We're making good progress on that front. We see no reason to change that ambition. It's a stretch target for us, but we think we're on track.

Secondly, we want to leverage our market-leading position within the more mature businesses of shipping and oil and gas to improve profitability. And finally, and very importantly, we are driving for capital efficiency, improve the capital efficiency and returning cash to shareholders on a regular basis.

Moving to the next slide. A quick look at our market sectors. Revenues of $148 million in the last 12 months, of which approximately 25% now comes from renewables, which is a good step-up over the last 12 months, particularly as we -- actually in Q3, we recorded a 30% growth rate in renewables. So we are making significant achievements in that sector. The remainder comes from shipping and from oil and gas.

If we look down -- looking down into breakdown of regions and business sectors, we can see that Europe and Asia Pacific are our 2 largest regions, followed by Americas and Middle East. OWC, our renewables arm with the various trading companies in renewables, covers around about 13%, and our engineering of Longitude is the remaining 5%.

Okay. So moving on into our global footprint. I'm pleased to say that we are continuing to expand. During the quarter, we've opened up an extra office in Cork in Ireland, which will be focused on the offshore wind markets and the renewables market. So we now have 63 offices in 39 countries. The global footprint is extremely important to us. It is the main -- one of the main selling points to our clients that we have offices around the world, and we're able to attend on-site always to be where that major operations are undertaken, and it gives us a good competitive advantage on our competitors. Number of employees during the quarter remained static at 922. And given that this is a slightly weaker quarter, that still reflects underlying growth, and I'll give a bit more detail as we move forward in this presentation.

Okay. Moving to next slide, and we start looking at the market. Let's start with renewables as ever. This remains a very buoyant market. And I think this slide here gives a very succinct summary of the trends. Looking at these bar charts, if you look at the right-hand side, you can clearly see how the market is expanding. In 2020, offshore installation by numbers were focused mainly in Europe and a growing segment in China. But by 2025, we expect a significant increase in other global markets, such that greater than 50% of installations will now be outside of Europe. And by 2030, it significantly increases yet again. And looking at the left-hand side, we can see the expected steep upward growth measured in gigawatts, such that by 2030, new installations will triple in number from an enhanced 2021. So it's a fairly steep growth in that. And this is what we're seeing in the market as we service them.

So moving to the next slide and give a bit of detail about what we're doing. This one here covers some technical due diligence that we did on behalf of BASF in Holland. It is the first significant investment that BASF have made into renewables, and it covers the wind farm offshore in Holland, which will -- on completion, will be the largest wind farm in the world. 140 11 megawatt wind turbines and will be operational in 2023.

Our work in this consisted of analyzing the design to supply and construction contracts and assessing technical risk. It's just the high end consultancy work that we like to win. And I think by covering projects like this, it just demonstrates our position as one of the leading renewable consultancies in the world.

Moving to Slide 12. I thought here that we would cover exactly where we stand in the market. So if we go back a year, we were very focused as a company on the fixed and floating wind. And with the acquisition of LOC, we expanded our services, particularly through LOC into R&D, particularly on wave and tidal and solar energy and also increasing amount on emerging technology. So we had a very good foundation from which to build. And during this quarter, we've expanded our services wider with some new recruitments, and we will start to put our nose into onshore wind also into hydrogen, which we see great upside in the near future, and particularly on battery storage, which I think of all the segments that we are covering at the moment, battery storage represents the one with the most likelihood of increased growth. And it's something that the industry is desperate to have.

Okay. Moving to the next slide. In oil and gas, we see continued optimism in the market, both on spend, which increased spend is being predicted year-on-year. And also, we focus again on the rig front because that drives a lot of the markets that we service. Again, looking at the top -- the right-hand side, on the light green, we can see that we have definitely passed the lowest point of jack-up utilization, and it continues to head in the right direction.

And we'll also start to see some increased day rates on rigs in various pockets around the world, which is a good sign for us. And second, floaters. Floaters have also passed their low point, and we're starting to see an increase there. So I think in general, we concur with our analysts are telling us that the market is hardening. And in 2022, 2023, we should see some -- start seeing some significant upside.

Moving to the next slide, into specific projects. Last quarter, we focused very much on Australia and some wins that we had down there. This time, we're going to focus on Brazil. This first project is a marine warranty project that we have won with Saipem on the Buzios 5 project. It's located in deepwater, 1,500 to 2,000 meters offshore Rio de Janeiro and involves the installation of subsea facilities that will connect 15 wells to the FPSO through various rises, flow lines and other subsea architecture. Work on this will start in this quarter, Q4 of 2021, and will continue for a couple of years into late 2023. So it's a good win for us.

Moving on to the next page. This again is another project, also offshore Brazil, the Mero 2 project, where we're working as marine warranty surveyor for TechnipFMC. This is a follow-on from the Mero 1 project that we had previously won. The work consists of installation of FPSO, together with all the collection of associated subsea facilities, including rises and umbilicals and flow lines. Work on this project will start in 2022, and the field should be operational in 2023. So by offshore standards, this is a fairly fast track project.

But I think both these 2 projects are showing the significance of Brazil and the expectations in the near future. We do think Brazil is going to be a very strong market once again as we come out of this recession.

Moving to the next slide. On the maritime front, I'm very delighted with this project. This has been won by Longitude. Our engineering on has been -- is an R&D development of a green hydrogen production barge, which will be installed in Poole Harbour in Southern England. We won this through a competitive open tender in the market. And essentially, it will be a barge that will be moored in the harbor that will generate, store and provide hydrogen for bunkers within the port. The hydrogen will be produced from electrolysis powered by onshore renewables. So it's a very green facility all through.

What's pleasing about this project is it comes close on the heels of a previously announced contract design that we have won to build Europe's first emission-free hydrogen seagoing ferry that will work in this cottage waters. So I think this demonstrates our growing competence in hydrogen, and we hope this will lead to other opportunities in the short term.

Moving to the next. So superyachts, this is a business line that we rather under report, and I thought it's about time that we put something together to show what we're doing. It's actually a very buoyant market at the moment. We have -- we are bound by some strict confidentiality agreements with our clients as we, therefore, can't identify all the work that we're doing. But we can say that the market is very buoyant.

And if we put in line all the superyachts that we have inspected during the course of 2021 so far, the length would exceed 1.2 kilometers, which I think gives an indication of where that market is, given the size of these vessels. It's a good niche market for us. It's a well-respected market, and the margins are quite strong in this area, which is obviously good for us as well.

Moving to the next slide. On adjusting front, we have continued to expand our focus away from simply upstream energy. And this is a foray here into the renewables market. I'm pleased to say that we have won an instruction in the Arabian Gulf for a solar plant in the construction site there. And this follows on the heels of some wins that we've had in Vietnam earlier on in the year in the same segment. So it's nice to see that we are getting some success now in new areas in those markets.

Okay. So I think this completes some of the work that we've been doing. And looking at our staffing numbers. So as I said before, we ended the quarter with 922 full-time equivalents, more or less the same as the end of Q2. Q3 being seasonally weaker, means that we use less subcontractors in our work. And so therefore, you can see that the light gray parts of the graph has decreased slightly. But what's important here is that the dark blue, our permanent staff, continues to grow, and we now stand around about 700 equivalent -- full-time equipment staff in the permanent market. I think this is good. It's a good reflection on us so soon after a merger to continue expanding is good, and it shows that we are making progress in how we service the market. And to some extent, it gives an indication of the health of the market.

So with that, I would like to pass across to Dean, and he will give some extra color into the financial performance during Q3.

[Dean Zuzic, executive]

Thank you, David. Let me just run you through the trading numbers for Q3. If we take Page 21, we see that revenues can be at $38 million this quarter, which we are very satisfied with in a normally what should be a weaker seasonal quarter. Q3 is always our weakest, I mean, season. And the fact that revenues are flattish compared to what we had in Q2, shows, again, the high growth that renewables are experiencing nowadays. Revenue is up 106% compared to what we reported last year of 18.4%. On a pro forma adjusted basis, we are up 9% this year, very satisfied with that.

Our adjusted EBIT came in at $2 million, which was up significantly from $0.6 million last year. Just to mention again that we are consolidating LOC from Q1 of this year. EBIT margin, 5.2%, which is up 2% from the same period of last year. The results were very satisfied with.

Next page. If we look at our segment revenues, here you see the difference between the different regions in the world. Asia Pacific had a strong Q3. This was also the result of some of the COVID measures loosening up. But mainly, again, driven by an increased utilization in the quarter. The Asia Pacific region was the one that was most severely affected with COVID restrictions in Q2 and Q3, but we have seen towards the end of Q3, some of these restrictions loosening, but we'll see what happens now in Q4 given the increasing number of infections. Middle East, seasonally weak due to the monsoon season. We have a reduction in revenues compared to Q2 and a comparable reduction in EBIT.

Europe, Americas a holiday season, which has the same effect, flat to -- flat to increasing revenues and lower EBIT, which is, again, very normal for Q3. OWC and Longitude are the bright spots with the renewable business increasing by 30% and the engineering business by 70% pro forma year-on-year, which we are very satisfied with.

Next page, please. The ballpoint figures. Revenues, as I mentioned, are up 106% compared to Q3 of 2020, came in at $38 million compared to $18.4 million reported growth driven by the consolidation of LOC, which we are doing from the -- from Q1 of this year. Adjusted on a pro forma basis, were up 9% compared to Q3 2020.

EBIT of -- a reported EBIT of USD 1.3 million; adjusted EBIT, $2 million. There is a table showing adjustments at the back of the presentation in the appendix. We do have adjustments of $0.6 million, the largest part of $0.55 million thousand related to share-based compensation to employees. Adjusted EBIT margin of 5.2%, which is up 2% compared to the same period of last year. We did see an increase in depreciation, amortization and impairment, which is partly a result of us being a larger company, of course, this year, but also the fact that we do that it does include approximately $0.6 million -- $0.8 million of immaterial assets related to the acquisition of LOC last year. This is something that we will be amortizing over a 10-year period with $0.8 million every quarter going forward.

Next page, please. Strong financial position. We had $23.2 million in cash, which is down somewhat from $24.5 million in Q2, positive cash flow from operations affected -- of $0.5 million affected slightly negatively from the increase in working capital and tax. We have implemented a new ERP system and where the last entities came on board in September of this year, resulting in somewhat late invoicing for some of our entities and that influenced working capital. Of course, you can expect this to normalize as we enter Q4.

Financing came in at $1.4 million negative cash flow, $900,000 repayment of debt, $100,000 in interest and the rest was related to lease payments. Our bank debt stood at $12.5 million at the end of the quarter and capitalized leases of $3.1 million, down from $3.5 million. The reduction, the right-of-use assets for the capitalized leases is partly -- is part of the fact that we are -- that our rental contracts are maturing, but also the fact that we are not renewing some of the leases as we are taking out synergies from the acquisition. We are reducing the number of offices we will operate.

Net working capital, $35.2 million, which was somewhat up from $34.7 million, but we do see that the working capital percentage has stabilized around 92%. We have full focus on freeing up working capital that will continue going forward. And in spite of the working capital increase we had in Q3 related to the ERP implementation and late invoicing, we do -- we have managed to [indiscernible] at around 92%. You can expect that to be reduced in the coming quarters.

Next page, please. Dividend, the Board declared a dividend of NOK 0.25 per share, which is the same dividend we had in the first half of this year, bringing total dividend for the whole year up to NOK 0.5. It will be paid out about December 3 to shareholders that own shares at the end of 29 October 2021. So the stock will be traded ex dividend on November 1. For distribution, the distribution of the dividend will for tax purposes be considered as a repayment of paid-in capital. And our focus will continue to be on returning capital to shareholders. That is and will remain a strong strategic priority for us.

Then I think I will give the word back to David to do a summary.

[David Wells, executive]

Good. Thanks, Dean. Appreciate that. So moving to the last slide, and I'll conclude with our outlook and summary. So I guess, to reiterate, I think we had a satisfactory quarter. Both revenues and EBIT were broadly in line with expectations, and we achieved year-on-year growth in revenues. Indeed, just to remind that OWC, our renewables arm, had a record results in this quarter.

We've made good progress on the final stages of the integration with LOC, especially as Dean just talked about with respect to the introduction of a single ERP system. So efficiency in our financial reporting should be much better going forward. And by the end of Q4, we expect the last of our major offices to be co-located, which will be the final stage of bringing the 2 companies together. We may maintain our expectation that -- of cost synergies of $4.0 million per annum to be realized and -- from the LOC acquisition. And that these costs will largely be recognized in Q4 onwards.

We feel that we're in a good place with respect to the short to medium-term in the outlook of the various markets. As I've discussed earlier on, the renewables market remains particularly strong, and we're expanding into new areas. Of course, we've made some investments into new areas. We bought on a lot of extra new staff during this quarter, which obviously takes a little bit time to turn around and to make a good progress. But I think we're in a very good position, and that market is looking extremely good, not only in Europe, but globally. And that's what we set ourselves out for the global expansion.

The maritime sector is trading very strongly globally. High utilization of ships, high charter rates and so on, and we think this should benefit us going forward. And the oil and gas market is improving. Oil and gas prices are very high at the moment, which is -- which kind of feeds on to the rest of the market. And we're very busy at the moment. We've called out contracts in the OPEC markets and brownfield sites. And I think overall, we concur with analysts expectations that there will be quite a large upside in 2022 and 2023. So I think from that point of view as well, that we're in a very good position now that we completed our integration with LOC to service the markets as when they expand.

Again, I'm pleased to announce the intention to pay a second dividend for this year. As Dean has mentioned, will be paid in Q4. Finally, we still have more supply in the market than demand in our consulting areas. There are likely to be opportunities for further consolidation in the market. And if we identify anything of significance, which will help our business offering and which gives shareholder value, we'll certainly be interested to look at those opportunities.

So with that, I would like to conclude. I thank you for listening. Just to remind you that you do have any queries, please reach out to us, and we'll address those as soon as we can. I'd like to thank you for listening, and I look forward to presenting Q4 results in a few months' time. So thank you very much.