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Earnings Call Transcript

[Mons Svendal Aase, Chief Executive Officer]

Good morning and welcome to today's second quarter presentation in DOF. I'm Mons Aase, and together with me is Hilde Drønen.So we start looking at the highlights for the group in quarter 2. And the EBITDA in quarter 2 came in at NOK 701 million, which is more or less in line with what we did in quarter 2 in '19. The average utilization on the fleet, 67%. And of course, the COVID-19 has had a major impact on the operations during the quarter. So we have had postponement of jobs, termination of contracts and operational challenges due to COVID onboard the fleet and also on very difficult changing personnel on the boats. By the end of August, we have had -- we have 17 -- or not end of August, but by August, by today, we have 17 boats in lay-up, mainly PSVs and small-sized anchor handlers. And I think also in the 17, we have one of the Subsea boats in lay-up. So on the Subsea side, most of the fleet are in operation right now. A few awards in Brazil, meaning that Brazil, hopefully, will perform better in quarter 3 than in quarter 2. And also, some project awards in the Atlantic region and the APAC region in -- on the service side in quarter 3. And on the -- resulting that, let's say, the backlog for quarter 3 is fairly decent on the service fleet. We have a standstill with banks and bondholders now until 30th of September, and of course, we're working on the restructuring, and I will talk more -- a bit more about that later in the presentation. On the contract side, we had 3 contracts on the anchor handling fleet in Brazil, Urca and Fluminense, 2 plus 2-year contract for Petrobras at, what I would say, decent rate levels and also Paraty, a 1-year contract at a decent level. So all in all, 2 of these boats were idling a bit in quarter 2 and are back working again, which is very positive. Contract also include ROV operations and -- by DOF Subsea. So it's important for all the group, these contracts. In APAC, we have a few important awards. Probably the most important award is we have had a 5-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 on engineering and all the services on top. So it's a very important contract for us. I'm very happy to continue the relationship with Chevron in Australia. Then we won a big project. This is in Southeast Asia. And so for Hercules and Singapore, so around 70 days of work for Hercules and 30 days for Singapore and at fairly decent margins.In the Atlantic region, we have Skandi Vega extended with Statoil for -- not Statoil anymore, Equinor, for 6 months and also at, what I will call, a very satisfactory rate level. Skandi Skansen, good job in ploughing. And then we also got a contract for one of the Subsea -- smaller Subsea boats with an international client. So all in all, not too much on the contract side, but some important events and giving a better backlog in Brazil and also giving the, on the Subsea side, good utilization in quarter 3. The backlog for the group in second half is around NOK 3.3 billion. And if we look at that compared to the income in the first half, NOK 3.3 billion is around 84% of the turnover in quarter -- in the first quarter this year. So it's a decent starting point for the quarter -- for the second half. So 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 to -- into quarter 4. This is an old slide, but I think it's more important than ever that we have this global network and a global placing power in the difficult markets around. As we are in Norway, it's important to be global and be a differentiator in the market. So 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. Yes, let's start on the COVID situation. On the operational side, we have had -- as we said, we have had some challenges, crew changes globally. We have had terminations and we have had to off-hire [ 2 vessels ] due to positive cases onboard the boats. But I think we have been able to manage this very well and limit, let's say, the consequences on the operations. So we continue to monitor this extremely close and we work on procedures, guidelines. And I think, so far, the organization globally has been able to, let's say, control and get the best out of the situation. So as we speak, we have no vessels off-hired due to the COVID around the globe. But it is challenging, and it really requires a lot of work from -- in all parts of the organization. DOF Subsea. It's also an old slide showing revenue in quarter 2 of NOK 1.2 billion and backlog of -- still of around NOK 12.4 billion, so still a very decent backlog in DOF Subsea. We have the 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. And as you know, we are -- DOF Subsea, we are integrated supplier of subsea services around the globe and controls the fleet of 27 vessels and 71 ROVs. Then I leave to Hilde to take you through the financial performance in the quarter.

[Hilde Drønen, Chief Financial Officer]

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 NOK 701 million, 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 handler fleet. We have done impairment of close to NOK 780 million this quarter. And year-to-date, it's NOK 2.3 billion. The financial cost is NOK 336 million compared to NOK 224 million. What has happened this quarter is that the Norwegian kroner has strengthened towards U.S. dollar. 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 NOK 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 the operational -- 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, for which the project fleet represent a utilization of 64%. If we start with the PSV segment, this is actually 20% down from first quarter. So for us to have this low utilization for the PSV segment is actually not normal. First, it is an impact on what happened in first quarter due to COVID-19 and drop in oil prices. And in fact, we took several vessels into lay-up. If we look at the anchor handlers segment, impacted by the same, but also that vessels in Brazil have been idle between the -- between contracts, and 2 vessels went into lay-up in this region as well. If you look at the spot market this quarter, which has not much impacted our results. But if we 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%. So all the 6 PLSVs owned by the DOFCON JV 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 equity -- the EBITDA portion has increased compared to same period last year, 75% to 25%. So 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, is we had 17 vessels in lay-up. And today, it's actually the same number. If we look at the total P&L, utilization already mentioned. So 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. So if we take the segments again, the PSV segment is, of course, impacted by 6 vessels in lay-up and 9 vessel is actually working on firm contracts has done this period. And when we come to the anchor handlers, I've already mentioned the low utilization for parts of the fleet in Brazil and also low utilization for the North Sea fleet and 2 vessels working in the Asia Pacific. And by end of this quarter, we had 9 anchor handlers in lay-up. After balance date, we have actually sold one of these anchor handler, just to mention that. On Subsea, if we look at the region, Atlantic region, Asia Pacific and North America, the utilization declined this quarter. Brazil was pretty stable, and it's mainly firm contracts this period for this region. And the main reason for reduced utilization is actually postponed tenders and termination of contracts. By end of the quarter, 2 vessels were in lay-up. One of these vessels is today prepared for operation. Impairments, a substantial amount also this quarter of NOK 780 million. So if we take the accumulated numbers, it's NOK 2.3 billion. No big impacts on the financials, even though the Norwegian kroner strengthened a lot. However, the Brazilian reals continued to drop. So the unrealized impact in this quarter was pretty low. So that gives a loss before tax of NOK 689 million and after tax of NOK 675 million. If we take accumulated numbers, there's an EBITDA of NOK 1.5 million (sic) [ NOK 1.5 billion ] and a negative profit -- operating profit of NOK 1.389 billion and a net loss before unrealized currency of NOK 2.4 billion (sic) [ NOK 2.6 billion ], highly impacted by high impairments. And if you take the profit before taxes, close to NOK 5 billion. And 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 and Subsea, and here you see the reduced activity reflected in the numbers. PSV is NOK 17 million (sic) [ NOK 16 million ] in EBITDA compared to NOK 43 million. And the anchor handlers, NOK 140 million compared to NOK 183 million. But on the positive side, you see Subsea, which is close to NOK 100 million more -- higher EBITDA compared to same period last year. So that gives a total number of NOK 701 million. And here, you also see the split in depreciation and impairments. So 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 strength in Norwegian kroner. If you see the cakes below, you can see that PSV segment is now only 2% of our total EBITDA, while anchor handler is 20% and the Subsea segment is 78%. So if we look to DOF Subsea Group, which is split in 2 segments, the first one which we call subsea IMR project and then long-term chartering. And the subsea IMR project, 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%. And 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 fairly high and also in line of the previous quarters. And here, you see the largest portion of the group's backlog, which is NOK 9.3 billion, representing operation from 9 vessels. If we go to the historical performance. And if you look at the EBITDA number, you can see that this quarter, if you take the file last quarter, it's actually on average. So -- and it's an increased EBITDA, especially since '18 and in line of '19. 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 that's -- the main reason is the huge losses that we took in first quarter. And the other thing which is worth mentioning is the split between noncurrent debt and current debt, whereof the noncurrent debt basically represents the debt in the DOFCON JV. Noninterest-bearing debt of NOK 22.64 billion. So if you look more into the balance sheet and if you take tangible assets, mainly the vessels, this is, of course, impacted not only by depreciation but also impairments. So the main difference there is actually the impairments in this period. The goodwill is written down to 0. On deferred taxes, which was more or less written down in 2019 for the group, excluding the DOFCON JV, so what you see here is deferred taxes on our joint ventures. So that gives the total current assets of NOK 22 billion compared to NOK 24 billion the same period last year. If you look at -- compared to year-end, sorry. If you look at the current assets, it's 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. And the noncurrent liabilities of NOK 4.6 billion compared to NOK 9.8 billion previous quarter. So the changes down there is that we have moved all group debt from short term to long term due to increased financial risk for the group and the standstill period that ends in end of September. So what you see on noncurrent interest-bearing debt is actually debt in the JVs. It's 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. So 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 financing activity is NOK 176 million. It's also fair to say that this quarter, from end of March until end of June, has been positively impacted by the 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. So then we go to next. 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. And 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. We have -- it's 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.

[Mons Svendal Aase, Chief Executive Officer]

Yes. A few words on the market. And of course, I guess, most of you know that, of course, after the COVID, our outlook for the overall industry has been weakened a lot. And due to, I would say, the short-term effects that COVID have had on operations, several regions have reduced the activity a lot, and hopefully, part of that gradually will come back. Well, of course, the oil price drop has led to postponements of projects. And of course, the activity level, even if the operational side stabilizes after COVID, we expect the activity level to remain low in -- lower than we expected before COVID. So it's -- and we see here that on the indicators that it's more -- lower rig utilizations, more rigs in lay-up, with anchor handler utilization and PSV utilization is lower. And of course, the TC rate illustrated here by the PSVs are dramatically down 40%. So 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. On -- so on the next slide, we -- it's showing where we -- 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 in a lot of, of course, big projects in the pipeline with Petrobras but also with the international companies. And so I think we see -- or at least 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. So it's -- I think it's going to be tough in all places, but some of the regions we operate in, there might be a bit more opportunities than others. So let's see, but I think it's important that -- Brazil will be important for us. Australia impact will be important for us going forward. On the outlook, we have talked about COVID and drop in oil price. And as we say, we expect that will influence negatively the market in 2020 and also into 2021. And of course, we see less activity partly due to COVID, partly due to lower oil price. And of course, utilization is down, rate levels are down. And so it's challenging in most segments. For quarter 3, we have a coverage of 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 you all, the activity in Brazil is expected to improve and partly, of course, due to the awards we just got on the anchor handling side.We have had a discussion whether we could guide on the EBITDA as we normally do in quarter 3. We do think we have -- we can and -- but of course, the uncertainty is still high. But we -- as we see it now, we expect quarter 3 to be more or less in line with -- the operational EBITDA to be more 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, it's -- as Hilde say, is that ourselves, 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 risk -- financial risk in the group has increased. So we are hosting a call at 9:30 Norwegian time. So you're very much welcome to call in on that, and we will try to answer any question you might have as good as we can. So thank you very much for listening, and we hope that you call in on the call. Thank you.

[Hilde Drønen, Chief Financial Officer]

Thank you.