Reach Subsea ASA

OSE:REACH

Earnings Call Transcript

[Jostein Alendal, executive]

Good morning. Welcome all to our presentation of the results for the fourth quarter and full year of 2023 for Reach Subsea ASA. Our report and presentation were released earlier this morning, and it sums up the last quarter and the entire year of '23, quite good. I am Jostein Alendal, CEO of Reach Subsea; and with me is CFO, Birgitte Wendelbo Johansen.

The fourth quarter of '23 was another record-breaking quarter for us, and we have now achieved a robust revenue growth for 10 straight quarters. On an annual basis, our revenue now stands at NOK 2 billion, the next level, so to speak. Profitable growth is our guiding principle, and I do believe our results also this winter quarter validate our steady progress. It is good to deliver on our strategy and ambitions. So again, it is a pleasure for us, on behalf of the whole team, to present this report. Please feel free to submit your questions through the webcast player, and we will provide answers during our Q&A session shortly after his presentation.

So before Birgitte will present the financials, allow me to provide a brief overview of our position today and our strategy for the sustainable business and growth in the years to come. To get higher utilization of our resources and thereof, also high margins, we have 4 main pillars in our strategy: a wide range of services, a wide range of market segments, a wide geographical footprint and not at least, the fourth, introducing new technology. I will give you a picture of this in the coming slides, and in the end, summarize it all in 3 organic growth levers.

The first, let's begin by looking at the key highlights of the quarter and final year of '23. Starting with Slide #3. A record fourth quarter on year on and all parameters is driven by several elements. Growth, we have not only enhanced our service offering in the past 2 years, but also expanded our vessel capacity through new long-term charters, which gives us the capacity for growth. Improved pricing, the offshore market and pricing environment for subsea services is improving rapidly in all the regions. And there are clear signs that we are heading into our long cycle of rising market. Strong project execution, I use every opportunity to give credit to our team, excellent execution of projects contribute to the solid margins. And I also state the most important every time, safety at sea is our top priority. So once again, all credit to all our people offshore and onshore for excellent operations.

Fourth quarter has typically been a winter low season period, but this record high revenue level reflects not only our increased capacities, but surely also our increased global footprint. Operations in Brazil through the winter for Equinor with the Havila Subsea is a good example. A proof that geographical footprint gives the opportunity to achieve strong resource utilization throughout the whole year.

The good results comes also the ability to deliver on our dividend policy, and the Board will propose a dividend of a doubling per share from last year, and that is good. Birgitte will mention that, I expect. As mentioned, we are now at the next level, revenue, EBIT and order backlog is significantly higher comparing year-by-year. Holding and gaining market share is important but overall noteworthy surge in revenue and profitability isn't just by chance. It is the result of our deliberate strategic choices. So this report is a sort of proof of the pudding that we are in the right -- on the right track.

And I will start with the first pillar, our wide range of services, which take us to Slide #4. And in short, our services cover the whole subsea value chain from engineering and project management to final reporting. Our expertise and planning of complex offshore operations is vital for construction support during installation, where clients are typically the Tier 1 construction companies. Like, for example, Saipem and Technip. and through the lengthy period of inspection, maintenance and repair, where the clients are the asset owners, for example, BP, Equinor, Shell and the other energy companies.

Asset integrity and pipeline inspection is also a part of our regular activities for the asset owners, and we offer highly effective solutions on that. Our subsea equipment and technology methods gives us a competitive edge, survey and data processing. Data management and data analytics and in the end, final reporting, also a large part of our integrated services. We push also here technology boundaries. And artificial intelligence will, of course, also become an important part of our processing and reporting methods in the years to come.

I will also like to highlight our monitoring technology and expertise that is in the absolute forefront worldwide. Geophysical and environmental monitoring is a part of our services, together with gas reservoir and carbon storage management. In earlier quarterly presentations, I have shown some project examples of the gravity and seafloor deformation campaigns in the North Sea, Australia and Japan. 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 open space -- in the ocean space.

Let's move to the second pillar, a wide range of market segments that -- this brings us to Slide #5. Our globally recognized subsea services survey monitoring expertise, coupled with our more equipment and a core fleet of cost-efficient subsea spreads, we a deserve range of customers around the world. The oil and gas sector is expected to increase in the short term and to remain stable for many years to come, and due to high global investment levels. And on top of an aging asset base requires more maintenance.

That said, all our services, equipment, metrics and procedures are developed for the oil and gas sector. And we take this high standard of safety with regards to the other sectors. Offshore wind is set to see enormous growth in the coming years, and we already have a good position in that segment, both in early seabed mapping before installation and regular inspection and on existing wind farms.

Offshore cables is another growth area. Numerous of cables will be laid in the coming years. And going forward, we are also here an important partner for all sort of installation and maintenance. Emerging sectors, subsea mining, or subsea minerals, as it is also called, this is a sector that will come in a few years with firstly the survey and mapping side. Also, fish farming is moving further offshore to deeper waters and [indiscernible] installations. And we also see a huge potential in the reservoir monitoring, especially CO2 storage, where our monitoring technology and expertise is unique.

I should add, the increasing ocean awareness, we will find new clients in the ocean environmental surveillance segment with our future in unmanned and robotic marine technology. So any installation or infrastructure in the ocean will require various forms of subsea services through the life span. So the global market for offshore and subsea services in one or the other form will be the firewall. Vessels are, of course, an important part of our services and capabilities and also our ability to grow.

So let's move to Slide #6 to see how we have prepared our fleet for further growth. Let me start with a tender volume. It is high and a firm sign that our clients recognize and appreciate our increased capacity. A rising market, longer visibility on future tenders require good control of core assets, namely, the vessels. So further on to the fleet overview, partly ownership of Viking Reach and the ownership of the Reach Remote fleet gives us a long horizon beyond 2027. And long-term charters, make a good core fleet and flexible fleet for survey, IMR and light construction in the coming years.

In addition, we have the flexibility and capacity to take in project charters. One example last year is the Olympic Zeus for the FPSO pick up scope in West Africa. And project charters will continue also in the years to come. And we are in constant dialogue with the vessel owners in the early tender phases year-by-year. As shown in our latest announcement regarding the Olympic Taurus and North Maria. The Offshore Surveyor is a vessel, we use in the Australian market, and it is new in the fleet this year. Expansion of the core fleet with more long-term charters and/or partly ownership is also constantly evaluated. And I will come back to this under the 3 organic growth levels.

The order book, you see on the right-hand side of the slide is continuously increasing comparing year-by-year. These figures do not include options and expected call-off extensions under frame agreements, which, from experience, can constitute a significant additional work, a good indication for [indiscernible] 2024. Compared with last year, where we started with NOK 740 million in February, order book and ended the year with NOK 2 billion in revenue.

The vessels are most -- the most costly part of our services, and it is important to get them utilized throughout the whole year. This brings us to Slide #7 for the third and fourth pillar, geographical footprint and new technology. We have for several years articulated our ambition of extending Reach Subsea's presence across all time zones, mostly with Reach Remote in mind. But it is also good for the overall resource utilization and business, as I mentioned earlier. Reach Subsea Group are today represented across regions from north to south in Norway, Sweden, U.S., U.K., Singapore, Finland and Brazil.

And last October, we made a significant move to further strengthen our global presence. The acquisition of the Australian marine service firm Guardian Geomatics not only paves our way into the Australian and Asian and the Middle East markets, but also position us to introduce our unmanned Reach Remote platform, both in Australia and other international markets.

Speaking of Reach Remote, the hulls are well placed in Trosvik yard in Norway, where they are being outfitted with all the remote technology. Testing on subsystems starting now in February, and the extensive full-scale testing, certification and client verification starting later in the spring. So far, all is looking very good and besides maybe that in start of the project some years ago, we aim for launch in '23, and now it's '24. But no surprise, actually, when introducing new technology, and we took this into account when we started.

In dialogue with our customers, we do experience great interest in the concept worldwide. And we are lining up a project for the first units in different geographical regions, already now in '24. We are currently operating smaller unmanned vessels with over the horizon control and Massterly, our bridge and navigator, still gain more and more experience with the control center in Horten and operations of Yara Birkeland and the ASKO vessels. Reach Remote will become solid part of our global footprint, and I will round off with the 3 organic growth levers before I give the word to Birgitte, which brings us to Slide #8.

We have been through the 4 main pillars in our business, a wide range of services, a wide range of market segments, a wide geographical footprint and not at least the fourth, introducing new technology, and this is good for business. We will further build on our business based on this, take advantage of a very attractive market outlook the coming years, and in parallel, establish next-generation services. So there was a lot untapped organic potential within the group, one, grown number of spreads, as I mentioned, under the fleet side. Currently, we are operating 6 long-term spreads, plus we add on project spreads when needed. And the core fleet could also be increased further by strengthening the offering in key geographical regions.

Secondly, increased service on spreads in the near term. There is a substantial business potential to bundle our new capabilities and vessels into more value-added integrated services, as well as utilizing the full capabilities on all our subsea spreads. A part of this is also constantly introducing new technology and improve methods and services. The last ROE, subsea sensor or data processing tool has not been invented yet.

Thirdly, roll out Reach Remote, here is the foundation for the next generation services. We can offer clients same services at lower cost, lower HSE risk and at low and no carbon footprint. First two units in '24, with option for 8 more makes a good start to expand the global service offering based on unmanned operations.

So with this roll up, I will hand over the word to Birgitte with the financials.

[Birgitte Johansen, executive]

Thank you, Jostein. Good morning. The first slide. Before we start, just remember that you can ask questions in the chat on the webcast.

Our first quarter '23 was our best fourth quarter ever, both in turnover and profits. And this is mainly a result of high activity for all vessels, equipment and personnel with strong margin projects. Revenue in the fourth quarter was NOK 474 million, a strong improvement from the NOK 327 million in the fourth quarter last year, with the increase explained by a higher number of project days, increased service scope on projects and higher margins.

EBIT was NOK 80 million compared to NOK 35 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 fourth quarter was NOK 81 million compared to NOK 19 million last year. 2023 was the first full year with integrated services within all our business segments. Gravimetrics, monitoring and service services in addition to subsea and Work to work. And revenue for the full year was almost NOK 2 billion compared to NOK 1.2 billion last year. Total comprehensive income was NOK 225 million compared to NOK 70 million last year. The Board has proposed a dividend of NOK 0.36 per share, which is a double since last year.

So let's look into the details and what lies behind the figures on the next slide. These graphs illustrates Reach's financial journey in the last 6 years. We've had a substantial revenue growth, a result of increased activity level, with expansion to new business segments and regions with increased asset base. Revenue has almost -- increased by almost 200% over the last 2 years, which is now close to NOK 2 billion, as I mentioned. We are focused on sustainable and profitable growth, and our operating result has improved with 320% for the last 2 years. Pretax profit reached NOK 290 million in 2023, which is a 300% decrease over 2 years.

Next slide, please. So let's look at the quarterly development year-on-year. And to the left, we see that our fourth quarter turnover from renewables and other sector was about 40%, while projects in the oil and gas sector represents 60%. And last year, the split was about 10% to 90%. Year-on-year, the growth mainly came from renewables, as you can see in the graph. And for the full year, the growth figures in the segments are almost the same.

The year-on-year EBIT development from the fourth quarter last year to the same period this year shows an improvement of 130%. Pretax profit has improved by 331% in the same period. And these improvements are primarily driven by higher activity, including strong performance on integrated projects within the group, combined with improved market conditions and higher pricing.

Next slide, please. The illustration to the left splits our revenue in our two major market segments. Solutions refers to a service project where we do installments, maintenance, repair, decommissioning, et cetera. And data is where we deliver a data package to the client, typically a survey of a pipeline or a cable route, positioning or an inspection of infrastructure, to mention a few examples. The Data segment will be even more important when the Reach Remote enters the market, as survey projects will be ideal for this type of equipment.

In 4Q, 68% 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 32% came from data. The activity within data, which includes several project without vessel exposure is higher, estimated to be around 50-50 to solutions measured in project days.

We also present our geographical distribution of turnover in the illustration to the right, to illustrate our strategic expansion to new areas as well as meeting new and existing client needs. In the fourth quarter, the split between Europe, including Norway, to the rest of the world, continued to be about 50-50. And the growth in Asia Pacific is expected to increase as a result of the acquisition of Guardian Geomatics, the transaction that we closed in the fourth quarter '23, as Jostein mentioned.

Next slide, please. We continue our sustainable growth also in the fourth 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 331 million and limited existing financial debt to credit institutions. We have increased our total commitment, 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 Remotes and vessel and equipment mobilizations for our fleet in order for us to have all vessels ready for integrated subsea and survey projects.

Next slide, please. Since our turnover and EBIT is strongly driven by the utilization of vessels and ROV equipment, we measure the number of days our assets are sold to a project. And in addition, the revenue and profits depend on the complexity of the projects and also the seasonal changes. Pure survey and monitoring projects without vessels through our P&L are not reflected in these figures. So those who have read the full report already, the number of offshore man-hours has also increased substantially over the last couple of years. And this reflects the general increased activity volume and gives some flavor to the increased turnover together with the increased number of sold vessel and ROV days, as you can see on the graph.

In 4Q, we had close to full utilization of all vessels. Utilization of vessels is our #1 priority. And by growing into new areas, such as Australia, Africa and Americas, we reduced the seasonal change in the North Sea. As illustrated on the graph to the left, the number of sold ROV days is highest normally in the second and third quarter. And in large part of '23, we had two vessels in the Walk to work segment, and 1 vessel mobilized with a diving spread, leaving the few ROVs idle. Utilization was 65%, which means the mobilized ROVs had more or less full utilization.

Next slide, please. We report quarterly on our sustainability goals. We recently started preparing for CSRD and ESRS reporting with an updated double materiality analysis and KPI discussions. Our ESG reporting is a combination of focus on emissions and the environment, being a responsible employer worldwide and keeping a high governance focus. In the full report on web pages, you can read more about how our report complies with the United Nations' Sustainability Goals and also the GRI standard.

Looking at 2023, we have achieved just below 70% of our ESG KPIs. Most of these, we will continue to work with throughout 2024. Safety is always our utmost priority, and we are proud to have strong positive HSEQ statistics, especially combined with the growth in project size and complexity. In the fourth quarter, we recorded 1 LTI, a hand injury during mooring operations. Employee is well recovered, and lesson learned exercises have been held.

Reducing fuel emissions is of high importance. Regrettably, our data for 2023 reveals an increase in emissions rather than the desired reduction. Modifications in our fleets, where taking in more flexible and complex vessels have contributed to heightened the fuel emissions. We always strive to reduce our footprint and upgrade with a battery pack is an example of this. For example, on the Cygnus.

Further, in this regard, we -- the introduction of Reach Remote USVs, holds promising potential and aligns with our long-term goals for emission reduction. And on the compliance and governance side, we have continuous improvement projects to ensure that we always operate within the highest industry standards.

I hand the word back to you, Jostein, for a summary.

[Jostein Alendal, executive]

Yes. Thank you, Birgitte. Let me sum up with the last slide, #18, as a backdrop. We are in a position for continued growth and value creation. The market outlook is very attractive. High investments in the main markets for the coming years, Reach will be a part of this. Reach Subsea has over the years, built a strong deputation and solid operation and track record as a supplier of subsea services. And I believe that combined with great execution from our team in a strong market, we will continue to deliver both excellent services to our clients and the good financial results.

We are at the forefront when it comes to technology, and our internal technical systems give us a huge competitive advantage. And overall financial strength is improving year-by-year, as Birgitte showed, and this gives us a great flexibility to do the right investments and expansions at the right time going forward. Important note is that we will continue our growth plans and well-disciplined and shareholder-friendly, as we have done so far.

I've shown the 3 organic growth levels. And let me repeat, we will further build our business based on a wide range of services, a wide range of market segments, a wide geographical footprint and constantly introducing new technology. In short, take advantage of a very attractive market outlook in the coming years, and in parallel, establish the next generation services.

So with this, let me sum up the presentation with our saying, Everything within Reach. Please continue to submit questions in the webcast player, and we will back to answer your questions shortly.

[Birgitte Johansen, executive]

Yes. We have quite a few questions coming in. You can still send the questions in the last couple of minutes, and we'll try to answer as many as we can. The first question is for you, Jostein. Congratulations on a great quarter and an even better year. Can you give some color on vessel utilization in relation to ROV utilization? How are the two correlating and can ROV utilization still increase even though the vessel utilization is at the level it is today?

[Jostein Alendal, executive]

Yes. That's a good question. And yes, the ROV utilization is linked to the vessel utilization. But as I mentioned in the presentation, getting more integrated projects on board, vessels will increase the ROV utilization as well. So hopefully, we will have all the ROV systems in diving operations the whole year this year. So...

[Birgitte Johansen, executive]

Yes. Good. Would you say that the demand for Reach's services are more correlated to offshore rig utilization rather than directly to the oil prices?

[Jostein Alendal, executive]

I think -- well, in the oil and gas sector, well, everything is linked to -- directly linked to the oil price. So yes. So everything is linked to oil and gas prices. Also overall activities, of course.

[Birgitte Johansen, executive]

Yes. And how much of the NOK 1.2 billion backlog are you expecting to be realized in 2024?

[Jostein Alendal, executive]

I think...

[Birgitte Johansen, executive]

Most of it.

[Jostein Alendal, executive]

Yes, most of it...

[Birgitte Johansen, executive]

We have some backlog in '25, but most of it is...

[Jostein Alendal, executive]

Yes, 95%, I mean, must be the correct answer. Yes.

[Birgitte Johansen, executive]

Yes. And there's a question on Guardian. Guardian Geomatics had 2023 revenues of approximately NOK 150 million, down roughly 50% versus approximately NOK 300 million in the fiscal year ending June '23. How do you expect the business to generate going forward?

[Jostein Alendal, executive]

Yes. In Australia, we have big plans there. So I guess it's hard to estimate. But as we have said, the accusation of Guardian is a part of the long-term strategies and so on. And there are some short-term, very interesting opportunities in that area. But hard to predict early in February. But...

[Birgitte Johansen, executive]

Yes. And another one, international carries as well. Americas contributed with close to NOK 130 million in Q4 '23 revenues. Is it more than the Havila Subsea vessel in this region?

[Jostein Alendal, executive]

Yes. We had some operations both in monitoring division and also activities with the Olympic Delta in U.S. So yes, so it's more than Havila. But operations in Brazil through the winter, that's a good thing.

[Birgitte Johansen, executive]

Can you explain in more detail while the data segment had a lower revenue in Q4 '23 compared to Q4 '22. Is it the reallocation of capacity? I guess, I can answer to that. Most of all, it's more a matter of turnover, which is the projects including vessels and projects, not including vessels. So in activity, we haven't reallocated from data to services. It's more a question of the amount of turnover and vessel days included in the projects.

Yes. And could you describe in more detail what the activities within the data segment are and potential scope additions for growth in the segment?

[Jostein Alendal, executive]

Yes. There's a huge potential in the data segment, of course, and also combining that with the vessels, as I mentioned earlier, the getting more integrated services on to the vessel fleet. That's a huge potential. So -- and we will see more of that in the coming years. And so...

[Birgitte Johansen, executive]

Yes. There's other question on, if you could give some insight in day rates for vessels and ROVs for the development for the last year, the market question.

[Jostein Alendal, executive]

Yes, I can answer that. The rates and pricing and everything is significantly upper for the past 2 years. And that's back to a rising market and all that. So the day rates for both vessels and equipment and everything is going up. You see that in all segments. So I don't have any exact numbers, but it's definitely a difference in rate from '22, '23 and what we see going into '24.

[Birgitte Johansen, executive]

Yes. There's another question here. When do you expect commercial contracts for the Reach Remote? Are you looking for a long-term deployment, or will Reach Remote be operated on a project-by-project basis?

[Jostein Alendal, executive]

We haven't decided that yet. We have some in the order book that we can utilize the first units. But it's -- we are trying to establish and decide where we put the first ones sort of globally. So we have some alternatives going forward. Exciting times this spring, of course, all the testing and certification. So we -- I guess, some time in May, we will decide where we move the first units. So until then, it could be anywhere.

[Birgitte Johansen, executive]

Yes. Are there any weather limits on the new Reach Remote vessels that we can't say anything more about at this stage?

[Jostein Alendal, executive]

Weather limits? Designed for what we call HS 3.5, and that's the limit for quite big vessels also. So it's quite high, and it made for quite a tough Norwegian North Sea weather.

[Birgitte Johansen, executive]

Yes. There's also a question on Northern Maria. For the sake of [indiscernible], please confirm whether the Northern Maria is indeed firm for 3 years plus options, as described in the press release. Or if she is, as indicated by your slide, optional for 3 years plus further options thereafter?

[Jostein Alendal, executive]

Yes. Sorry about that. And maybe I'm too polite because it's still pending as on bank [ prevail ]. I think I'm too polite. But we're going to have that lifted quite soon, I guess. So -- sorry about that confusion.

[Birgitte Johansen, executive]

Yes, thanks. Finally, there are some questions about the remaining investments in Reach Remote. And I think the easiest answer to that is to look in the notes. There are specific notes that say something about the CapEx and remaining investments for Reach Remote. Quite a few questions about that.

There is one final question. How much was the oil and gas segment impacted by the weather in Q4? I guess we have most day rate contracts, so then we're not that exposed to weather in general.

[Jostein Alendal, executive]

Yes. In Q4, I don't think we have any major sort of weather issues, not to my knowledge. There are always some bad weather during the wintertime, but not much in the...

[Birgitte Johansen, executive]

Yes. There are some questions popping up here. I will give time for at least 1 or 2 more. How about the Middle East markets? Did Reach have a plan to explore the Middle East market?

[Jostein Alendal, executive]

Yes, indeed, we are in the Middle East through Guardian, of course. We have operations in Saudi Arabia, and that's the mapping project. And also there, we are using unmanned remotely operated vessels. So it's quite exciting area. So definitely, yes, it's a good area to be in.

[Birgitte Johansen, executive]

Yes. Good. Finally, where will the next Reach Subsea office pop up?

[Jostein Alendal, executive]

Hard to say, I guess, we have to build up the offices, we have currently. Next, I guess, we'll be somewhere in the U.S., I guess.

[Birgitte Johansen, executive]

Yes. I think we will have to round up there. Thank you, everyone, for active chat questions session. And we'll see you in the next quarter.