Reach Subsea ASA

OSE:REACH

Earnings Call Transcript

[Jostein Alendal, executive]

Good morning. Welcome all to our presentation of the results for the third quarter of 2023 for Reach Subsea ASA. Our report and presentation were released earlier this morning, and I hope you have had the time to take a look at it. I am Jostein Alendal, CEO of Reach Subsea. And with me is CFO, Birgitte Wendelbo Johansen. Birgitte will present the financials shortly.

The third quarter of 2023 was another record-breaking quarter for us. And we have now experienced robust revenue growth for 9 straight quarters. On a rolling 12-month basis, our revenue now stands at NOK 1.85 billion. And over the past 2 years, we have nearly tripled our revenue on this same basis. It is good to deliver on our strategy and ambitions. And I do believe our results also in this quarter validate almost the progress. So it is our pleasure for Birgitte and myself on behalf of the whole team to present this report. We value your insight and questions. So please feel free to submit your questions through the webcast player. And we will provide answers during our Q&A session short after this presentation.

Before diving into the numbers, allow me to provide a brief overview of the past quarter and offer some insight into our position today and our strategy for sustained growth also in the years to come. So let's begin by looking at the key highlights for the quarter, starting at Slide #3. Last quarter was another record-breaking period for us. Without question, these past months have been the busiest time of our history. And we are continuing with a strong resource utilization and on the revenue side, we can again report a great year-by-year growth. Even more encouraging is the ongoing improvement in EBIT and bottom line. In Reach Subsea, disciplined growth is a guiding principle and I am pleased to report that we have achieved an EBIT margin of 17.3% this quarter.

Looking at the rolling 12 months perspective, we have exceeded 15%, and this is a marked improvement from our position just a year ago. The pricing environment is improving rapidly and together with the excellent execution of projects contributed to the solid margins. But most importantly, regarding our operations, I want to emphasize repeatedly and clearly, safety at sea is of utmost importance to us, and we have continued our excellent operational performance. And once again, I am happy to report zero incidents during also this quarter. All thanks, again, to all our people offshore and onshore.

The record high revenue level, not only this quarter, but also so far this year, reflects our more increased capacities and global footprint. And there is one after quarter event that is worth mentioning today. This October, we made a significant move to strengthen our global presence. The acquisition of the Australian marine survey firm Guardian Geomatics not only paves our way into the Australian and Asian markets, but also positions us to introduce our unmanned Reach Remote platform, both in Australia and in other international markets. I will come back with more details on this shortly. But overall a noteworthy surge in revenue and profitability isn't just by chance. It is the tangible results of our deliberate strategic choices. And we have not only enhanced our service offering with targeted acquisitions over the past 2 years, but also expanded our vessel capacity through new long-term charters, which takes us to Slide #4.

The order book, you see on the right-hand side of this slide is continuously increasing comparing year-by-year. And it is at a solid state going into the winter season. I have illustrated the added order book that comes with Guardian. At a typical cycle is that the order book will increase during the winter quarters for execution next season. And that said, we are in the final stages on several contracts for next year and also into the winter. So we expect that the coming quarters will show a similar trend in order intake as last year. And Contact News will, of course, be announced when firm.

There is a notable shift in our tender activity, also a big step from second quarter, the volume is now up to NOK 7.5 billion. This is a firm sign of our rapidly growing global market in general, but also naturally due to our increased capacity and the broadening of services and also international footprint. Our clients recognize and appreciate our increased capacity, and we get invited to bid on larger projects 2024 and beyond. It is also good to see that our tendering also includes services being enabled with Reach Remote already in 2024. So long our visibility on future tenders requires good control of core assets. So to the fleet overview, partly ownership of Viking Reach and the ownership of the Reach Remote fleet gives us a long horizon beyond 2027. Long-term charters on Deep Cygnus, Go Electra, Olympic Triton and Havila Subsea makes a core and flexible fleet for survey, IMR and light construction, the coming 4 years.

In addition, we have the flexibility and capacity to take in project charters. One example this year is the Olympic Zeus for the FPSO pick up scope in West Africa second quarter and third quarter this year. Project charters will continue also in the years to come, and we are in the constant dialogue with several vessel owners in the early tender phases year-by-year. And our current core fleet is a good foundation for further growth. Expansion of the core fleet with more long-term charters and/or partly ownership is also constantly evaluated as the demand for our services is rising rapidly.

So let's move to Slide #5 for a quick look at our services. In short, our services cover the whole subsea value chain for all types of offshore and subsea installations and our wide and integrated offering and the capability to offer our services through the whole life cycle of an installation is well received by asset owners in the ocean space. From engineering and project management to final reporting, further expertise in planning of complete and complex offshore operations is vital, further to construction support during installation and further through the lengthy period of inspection, maintenance and repair. And also decommissioning and removal is a part of our services.

So whether oil platform, offshore wind farm, subsea template pipeline or power cable, they all require various forms of subsea services. Data-related products, including Surveying and inspection technology, data management and data analytics and final reporting are also becoming a larger part of our integrated services. Our core fleet, of course, efficient subsea spreads coupled with our globally recognized subsea services and survey and monitoring expertise. It is clear we are positioned to serve our diverse range of customers around the world for the coming years.

I would like to highlight the CCS, CO2, capture and storage industry that is also scaling up globally. Our monitoring technology and expertise in this is absolute -- in the absolute forefront. Last quarterly presentation, I gave you a couple of project examples from Japan and Singapore. And today, I want to give you a bit of insight into the gravity and seafloor deformation campaign we did for Equinor in the North Sea. And how our technology is highly relevant to the global markets.

So let's move to Slide #6. This is a highly attractive environmentally friendly alternative to traditional 4D seismic, traditional seismic activities experienced increased restrictions in many regions and countries when it comes to license to operate Producing the frequency and the need for seismic has a huge value for the vessel owners. And this technology is unique, proven and protected and developed over the past 15 years in the North Sea. And the project example shown here is from this year campaign for Equinor, covering numerous fields in the North Sea. These fields hold significant potential for gas production for a long time. And you can say that more than 60% of the Norwegian gas production is monitored by us. Simply said, the gWatch measures changes in the gravity field and seafloor subsidence with an accuracy far beyond the reach of any alternative technology.

This enhances understanding of these fields and their lifespan, enabling the optimization of production and strategies and maximizing resource extraction. So we have taken the technology and services with us outside Norway and experienced high interest from gas producers in all regions. One good example is our contract with Woodside in Australia for the next 9 years. And equally exciting is the future of carbon storage industry. The benefits will be the same, excellent technology and method for active monitoring of the reservoirs over time with no impact on the marine life. We see the same interest among the future storage reservoir owners across the globe and have several ongoing FEED studies for international clients. So our gWatch technology is set to be deployed for a massive gas field in Australia. That said, let's move to Slide #7 to have a look at the several reasons supporting our decision to enhance our presence in the Australian and Asian market.

Yes, first of all I just articulated our ambition of extending Reach Subsea's presence across all time zones, mostly with the Reach Remote in mind. The Reach Subsea Group are now today represented across regions from north to south of Norway, Sweden, U.S., U.K., Singapore, Trinidad and Brazil and also in Perth in Australia. The acquisition of Guardian aligns perfectly with our M&A strategy. It will bring us an established and ongoing business in a targeted region as well as access to new international markets for further expansion. This acquisition complements our strategy of integrating new technology into existing services and ultimately providing revenue growth. In simpler terms, it is a profitable venture.

Consequently Guardian's expertise in surveying and operations offers valuable synergies with Reach Subsea on a global scale, particularly within traditional services. Additionally, they are adding high competence and experience with unmanned and remote operations, which is an excellent fit with our global Reach Remote program and such, serve as an enabler for launching the Reach Remote platform in Australia and on the global markets. The DriX USV shown in the picture is a part of their assets and is currently in operations on a larger mapping project in the Middle East. This is a smaller 8-meter USV compared to the 24-meter Reach Remote units. Birgitte will come into more details around the transaction itself. And we have also all details around this in the quarterly report. But most importantly, they come with our team with the right attitude and ambition to make a difference. We share their belief in the growth and in the future, we can build together. And as a comparison on the M&A side, we bought 2 companies in 2022, Octio and iSurvey. People with the same right attitude, which gave us a nonorganic lift in revenue in 2022. But the organic lift, we have managed this year from NOK 1.1 billion to almost NOK 2 billion is a pure result of brilliant people. But from people to machines, let's move to Slide #8 for a quick look at the Reach Remote.

I won't spend much time on this slide. Just to repeat, our Reach Remote initiative that takes a huge step into the unmanned and robotic future. The advantages are many related to CapEx, OpEx, safety and not at least emissions. I say go free with the robotics. But before I give the word to Birgitte and the great numbers for the quarter, I will give a quick update on the building costs with Slide 9. Last quarter, a major milestone was reached. The hulls are now well placed at a Trosvik yard in Norway and where they are audited below all the remote technology. Also the -- on the equipment side, progressing well. ROVs and subsea equipment will be delivered later this year. And the plan and ambition is still as when installation are completed, we will be ready for an extensive full scale testing, certification and client verification.

And after that ready for operations and market in the main season. And as I mentioned earlier, we are lining up projects for the first units in different geographical regions. So in the deal with our customers, we experienced great interest in the concept. Still Massterly, our bridge and navigator gained more and more experience with the control center in Horten where they operate today, Yara Birkeland and the ASKO vessels. In parallel, all on aspects of the projects such as work towards clients and the international regulators continues with full force and is actually progressing well. And the best part, still in this market environment with a higher and higher cost of manned vessels, there is a remote business case with these savings is getting better and better. But so now, I will hand over the word to Birgitte with a good financial numbers.

[Birgitte Johansen, executive]

Thanks, Jostein. Good morning. First of all, please remember to write any questions you may have in the chat on the webcast. A key summary of the financials we presented this morning is another strong quarter with record high year-to-date figures. The third quarter was like the second quarter, characterized by high activity for all vessels, equipment and personnel. Revenue in the third quarter was NOK 651 million, a strong improvement from the NOK 365 million in the third quarter last year, with the increase explained by a higher number of project days, increased service scope on projects and higher margins.

After the M&A transactions last year, we are now one company with integrated solutions and projects, including gravimetrics, monitoring and survey services in addition to Subsea and Walk-to-Work. EBIT was NOK 112 million compared to NOK 58 million last year. And the improved EBIT is primarily a result of higher utilization with strong project margins as well as contribution from the acquired businesses. Pretax profit for the third quarter was NOK 92 million compared to NOK 67 million last year. So let's dig into the details and what lies behind the figures on the next slide.

As illustrated on the express, Reach has had a positive activity development the last couple of years, resulting in a substantial revenue growth. Reach has -- the revenue has increased by 195% over the last 2 years. And our revenue the last 12 months is now above NOK 1.8 billion measured per quarter end. Our operating results had -- has also had a positive development, as you can see on the graph to the right. The last 12 months, we have surplused NOK 250 million, and pretax profit reached well above NOK 200 million in the same period.

Next slide, please. Looking at the development year-on-year. To the left, we see that our third quarter turnover from renewables and other sector was about 29%, while projects in the oil and gas sector represents 71%. And the last year, the split was 10% to 90%. Our activity in the renewable sector has increased, but we still experienced that our revenue growth is driven by the demand from the oil and clients. The year-on-year EBIT development from the third quarter last year and to the same period this year shows an improvement of 93%. Pretax profit has improved by 37% the same period, and the improvements are primarily driven by higher activity, including strong performance on integrated projects within the group, combined with improved market conditions with higher pricing.

Next slide, please. Illustration to the left, split our revenue in our 2 major market segments. Solutions refer to a service project where we do installments, maintenance, repair, decommissioning, et cetera. And data is where we deliver a data package to the clients, typically a survey of a pipeline or a cable route positioning or an inspection of an infrastructure to mention a few examples. The data segment will become even more important when the Reach Remote enters the market as survey projects will be ideal for this type of equipment. In 3Q, 85% of the turnover came from solutions due to a few larger service and walk-to-work contracts, including a high number of vessel days, while 15% came from data. And the activity within data, which includes survey projects without vessel exposure is higher estimated to be around 50-50 to solutions measured in the number of project days.

We also present our geographical distribution of turnover on the illustration to the right, to illustrate our strategic expansion to new areas as well as meeting new and existing client needs. And in the third quarter, the split between Europe, including Norway, to the rest of the world was about 50-50, like the second quarter. The growth and this development in international projects is currently strongly driven by projects in Brazil and the Ivory Coast to mention a few examples. As mentioned, we continue to grow our international expansion by the acquisition of 100% of the shares in Guardian Geomatics. The deal is expected to close in about a week. This transaction will increase our activity in Australia and the Far and Middle East. Guardian comes with a normalized working capital level. They own survey and position equipment and will upon closing, be free from financial debt. Yearly turnover the last couple of years has ranged from NOK 200 million to NOK 400 million with a strong EBIT margin. The business model is quite similar to ours with a combination of own and hired equipment and personnel and rented vessels. The key terms of the transactions can be found in the report.

Next slide, please. We continue our sustainable growth also in the third quarter, balancing cash and working capital and debt with a robust equity level. And at the same time, we have delivered to our shareholders with paying dividend according to our policy. We have a cash and working capital position of NOK 386 million and limited existing financial debt to credit institutions. We have increased our charter commitments, hence, our leasing liabilities. Our equity share is still above 30% of the total balance sheet. Reach is well positioned for the remaining investments in Reach remote and vessel and equipment mobilization for our fleet in order for us to have all vessels ready for integrated subsea and survey projects.

Next slide, please. Since our turnover, EBIT is strongly driven by the utilization of vessels and ROV equipment, we measure the number of ROV days sold and vessel days sold. And in addition to revenue and profits, it depends on -- strongly on the complexity of the projects and also the seasonal changes. Pure survey and monitoring projects are not reflected in these figures. For those who have read the full report already, the number of offshore man-hours has increased substantially year-to-date, and this reflects the general increased activity volume and gives some flavor to the increased turnover together with the increased number of sold vessel days, as you can see on the graph to the right. In 3Q, we had full utilization of all vessels. Utilization of our vessels is our #1 priority. And by growing into new areas such as Australia, Africa and Americas, we reduced the seasonal changes in the North Sea. And as illustrated on the graph to the left, the number of sold ROV days is highest in the second, third and sometimes fourth quarter. And then the second and third quarter of '23, we had 2 vessels in the walk-to-work segment and 1 vessel mobilized with diver spread, leaving a few RVs idle. Utilization was still 69%, which means the mobilized RVs have more or less full utilization.

Next slide, please. We report quarterly on our sustainability goals. Our ESG reporting is a combination of focus on emissions and the environment and being responsible employer worldwide and keeping a high governance focus. And the full report on our web pages, you can read more about how our report complies with the United Nations Sustainability Goals and also the GRI standard. Safety is always our utmost priority, and we are proud to have strong positive HSEQ statistics, especially combined with growth in project size and complexity. Reducing fuel emissions is of utmost importance. Regrettably, our year-to-date data for 2023 reveals an increase in emissions rather than the desired reduction. Modifications in our fleet, we're taking in more flexible and complex vessels have contributed to heightened fuel emissions. We always strive to reduce our footprint and upgrade with battery pack as an example of this.

Further, in this regard, the introduction of our Reach Remote USVs, holds promising potential and aligns with our long-term goals for emission reduction. And as you can see, there is a positive outlook on most of our 2023 ESG KPIs. And some of the activities are ongoing, and we expect to meet the majority of our goals also this year. Well, then I hand the word back to you, Jostein, for a summary.

[Jostein Alendal, executive]

Thank you, Birgitte. Let me sum up the last slide as backdrop. We have, over the years, built a strong reputation and solid operation and track record as a supplier of subsea services. And also, over the past 2 years, we have taken steps in expanding both our product range and services through M&A and also organic growth, in addition, reinforcing our long-term vessel capacity. Our financial strength is improving year-by-year and give a great flexibility to do the right investments and expansions going forward. Important note is that we will continue our growth plans well disciplined and shareholder friendly as we have done over the years. We will still continue to look at acquisition opportunities and corporation partners in other geographical areas. And also there important, we are looking for partners that will add value to our business. I believe that combined with the great execution from our team in a strong market, we will continue to deliver both excellent services to our clients and good financial results.

We are in the forefront when it comes to technology and our internal technical systems give us a huge competitive advantage. Surveyor Interceptor, our high-speed survey already is a good example, where we increased the speed of subsea data collection at 3x faster than traditional systems and methods. Also, we're monitoring technology, as I mentioned, is unique and world-leading accurate monitoring of gas fields and future carbon storage reservoirs without seismic, is not only extremely nature-friendly, but also very cost efficient. Then for sure our robotic future Reach Remote will be another growth driver of us, and leading the way into more efficient and climate friendly and sustainable future. We are looking very much forward to the coming quarters and years. First 9 months of 2023 was great. And the market is very strong, both in oil and gas and renewables. And we expect this to continue for years. So on this positive note, let me sum up the presentation with our saying, Everything within Reach. Please continue to submit questions in the webcast player, and we will be back to answer your questions shortly.

[Birgitte Johansen, executive]

Okay. So we have a few questions. The first one, comparing the outlook for the winter season for 2023, '24, the corresponding outlook 1 a year ago, how do you describe the outlook for utilization and profitability?

Well, we don't guide on profitability. We've set some -- given some information and report on utilization for Q4. As always, the horizon is a little shorter in the Q4 and also in Q1 than in Q2 and Q3. But we see a strong market. So there's definitely potential there.

The next question, that's for you, Jostein. How long was Triton in dry dock in October?

[Jostein Alendal, executive]

In October, Triton was in dock the whole month, and she's nowhere at work. So it's not only the dry dock of the vessel, but also mobilization of the -- of ROV systems and everything. So she's not ready for a good construction work the next years.

[Birgitte Johansen, executive]

Yes. And the same -- and that next question is in the same area. How long will Deep Cygnus be out in Q1 '24?

[Jostein Alendal, executive]

That's estimated to a month, I think, with -- including a battery pack installation and so on. So it's 4 weeks.

[Birgitte Johansen, executive]

Yes. The tender pipeline is massive, can you provide some color on the type of projects that you are now able to bid on, on 2024 and onwards?

[Jostein Alendal, executive]

Yes. That's a good thing. Our tender activity covers everything from construction support to high-tech data-collecting activities and survey and mapping and everything so I call on this some big construction support tenders, and there are some interesting seabed mapping tenders, quite big ones in that number. So hopefully, we will win work in all sort of our services. That's the target. So...

[Birgitte Johansen, executive]

Yes. And when full year utilization in Q3, are you seeing clients being concerned about availability of people, ROVs and vessels for the higher activity levels scheduled for the upcoming years? And if so, how is this being handled by clients?

[Jostein Alendal, executive]

Obviously, an increased sort of worrying about the supply chain from our clients, of course. And that's a -- in a rising market, there will be some tension on lack of resources, of course. But -- and that will give us a longer visibility in the end. Pricing is good and then you have the longer visibility coming after that. So -- but it is on the agenda from our clients as well. They see the same picture. So...

[Birgitte Johansen, executive]

Yes. Can you say something about when you will build more vessels for the Reach Remote?

[Jostein Alendal, executive]

We have the offerings for up to 10 units, and I guess we have to make a decision after we have got the 2 first ones into action. So I guess some time in the -- in late or after December next year, I guess we will start evaluating that.

[Birgitte Johansen, executive]

Yes. And there's a question about Brazil. You mentioned it in the presentation, will you be moving any more vessels to Brazil this winter?

[Jostein Alendal, executive]

That could be, I hope the Brazilian market is really picking up. So hopefully, we can supply them with more vessels down there. If it's the next months, but definitely for the next years, there will be many opportunities in the Brazilian market.

[Birgitte Johansen, executive]

Yes. I think that was all. Thank you very much for submitting questions and don't hesitate to be in touch with us if there should be anything else. So thank you very much.

[Jostein Alendal, executive]

Thanks. See you next quarter.