Akastor ASA (AKAST) Earnings Call Transcript

Good morning, and welcome to the presentation of Akastor's third quarter results. My name is Oyvind Paaske, CFO, and I'm joined today by our CEO, Karl Erik Kjelstad. As in the previous quarter, our presentation includes less detailed coverage of HMH, which is a listed company and reporting independently. HMH's Q3 webcast replay and related reporting are available on their website. We will take questions at the end of the session, and you may submit them at any time through the online Q&A function. To start, Karl will take you through the key developments for the quarter and our ownership agenda. So Karl, over to you.

Thank you, Oyvind, and good morning, and thank you all for joining us this morning. I will start with the key highlights for the third quarter before taking you through the portfolio and our ownership agenda. Slide 2. We are pleased to announce that the Board has approved a cash dividend of NOK 2.50 per share, supported by the cash proceeds received in October this year from NES Fircroft and the sale of Skandi Peregrino. This brings the total shareholder distributions since July last year to NOK 5.65 per share corresponding to total NOK 1.5 billion. For HMH, the third quarter was clearly disappointing, particularly equipment order activity remained below expectations with several larger opportunities shifting to later periods. Revenue was USD 171 million, while adjusted EBITDA was USD 38 million. However, with an adjusted margin of 22%. Order intake was USD 191 million, corresponding to a book-to-bill of 1.1. Importantly, HMH continues to see healthy opportunity pipeline and remains confident in the underlying deepwater fundamentals and opportunities developed into 2027. Following the third quarter results and subsequent share price development, HMH is currently trading at levels we consider are not reflecting the longer-term potential of the company. As a major HMH shareholder, we will push for disciplined capital allocation and continued focus on creating shareholder value. Our view of HMH underlying longer-term potential has not changed. We believe the company is well positioned to benefit from the expected improvement in activity going into 2027. AKOFS Offshore continued to perform strongly with a revenue utilization of approximately 97% across the fleet. The company also completed its USD 300 million fleet refinancing and also exercised the purchase option for Aker Wayfarer, securing long-term financing and ownership of a core operating asset. For NES Fircroft, the refinancing and shareholder capitalization were completed after the quarter end, resulting in a USD 57.4 million cash distribution to Akastor in October. Finally, the sale of Skandi Peregrino was completed in October for USD 21.6 million with the disposal of its final vessel, DDW Offshore has now entered into a runoff phase with no remaining vessels in operation. Taken together, these developments demonstrates our strong commitment to convert portfolio values into cash and returning that capital to our shareholders. As shown on the slide, our net asset value ended at the quarter at NOK 4.3 billion or NOK 15.7 per share, with the reduction during the quarter, mainly reflecting the lower HMH share price and the shareholder distributions. Since the quarter end, HMH share price has declined significantly. Based on Monday's closing price, the isolated effect would reduce Akastor indicative NAV by approximately NOK 1 billion to around NOK 3.3 billion or NOK 11.9 per share. However, this calculation only updates the market value of HMH with all other items kept unchanged. So Oyvind will take you through the NAV development more in detail later. But before that, let us move to Slide 4, and let me briefly summarize the DDW Offshore journey. A good example of our active ownership approach and disciplined value realization through the cycle. Akastor started with a 50% interest in the 5 anchor handler vessels alongside DOF. The investment was financed with significant bank debt supported by guarantees from the owners. In 2020, the situation became challenging. DOF was no longer in a position to support its share of the guarantee obligations, leaving Akastor with significant downside exposure at that time when the offshore market and vessel values was weak. Rather than being forced into a realization at low values at that point, Akastor took full control over the business and worked with the lenders to restructure the balance sheet. Bank debt was reduced by 50% with the lenders retaining a share of future asset realizations. This gave us time and flexibility to protect value and position ourselves for better market conditions. Over the following years, we managed the fleet through the market recovery, settled the profit sharing agreements with the lenders and progressively sold the vessels as earnings and asset values improved. This year, the final 3 vessels were sold for combined proceeds of approximately USD 67 million, completing the disposal of the fleet. The sale of Skandi Peregrino in October completed the realization of DDW investment and DDW has now, as mentioned, enter into a runoff phase. Overall, the DDW story demonstrates the value of active ownership through the cycle. We took control of the distressed situation, protected the underlying values and ultimately realized the fleet into significantly stronger market. Let's move to Slide 5, turning briefly to the portfolio overview. Our portfolio is increasingly concentrated around HMH, NES Fircroft and AKOFS Offshore, which now represent the key remaining portfolio values. As already mentioned, DDW is now in runoff, while our other holdings represent a smaller part of the portfolio. Rather than spending time on this slide, let's move directly to HMH, which remains by far our largest investment, Slide 6. The third quarter was weaker than expected in terms of activity for HMH. Revenue was USD 171 million, down 21% year-on-year, while adjusted EBITDA was USD 38 million. Despite the lower activity, the adjusted EBITDA margin increased to 22%, demonstrating good resilience through the business mix, cost efficiency and disciplined execution. Order intake was $191 million, up 12% year-by-year and representing a book-to-bill, as mentioned, of 1.1. However, equipment order activity remains below expectations as some of the larger equipment and upgrade opportunities shifted to later periods and contract awards took longer time than anticipated. It is important to distinguish between timing and underlying market fundamentals. HMH continued to see healthy pipeline across its installed base and remains confident in the underlying Deepwater fundamentals and opportunities developing into 2027. In the quarter, HMH also completed the acquisition of Deepwater Riser Service, further expanding its aftermarket capabilities in the U.S. Gulf. At the quarter end, Akastor's HMH holding was valued at approximately NOK 2.7 billion. At the current share price of USD 10.72, the corresponding market value is approximately NOK 1.6 billion based on quarter and exchange rate illustrating the material negative impact of the recent share price development on Akastor's NAV. But from an Akastor's perspective, the IPO has provided liquidity and flexibility, but our objective remains to realize the investment over time at levels that appropriately reflects the underlying value of HMH. With the opportunities developing into 2027, we are comfortable maintaining that flexibility, and we will focus rather on value than timing. Then NES Fircroft on Slide 7. NES Fircroft continued to deliver a solid operational performance. Underlying EBITDA increased with 6% year-on-year to USD 43 million, while last 12 months EBITDA was USD 155 million. The diversification of the business also continues to deliver. Non-oil and gas sectors now account for 48% of net fee income compared with 42% a year ago. This is an important development in creating a broader and more resilient business. The most important development from Akastor's perspective occurred after the quarter end. NES completed its USD 650 million refinancing and shareholder recapitalization, resulting in Akastor receiving USD 57.4 million in cash in October. This represents another meaningful realization of the values from NES and it's an important contributor to the dividend we announced today. Our ownership agenda remains focused on supporting continued development of the business while optimizing value at a future exit. Then AKOFS Offshore on Slide 8. AKOFS delivered another strong operational quarter with revenue utilization of 99% of Aker Wayfarer, 97% of AKOFS Santos and 96% of AKOFS Seafarer. An important milestone for AKOFS during the quarter was the completion of the USD 300 million fleet refinancing and exercise of the purchase option for Aker Wayfarer. As mentioned, this strengthens AKOFS' long-term funding structure and also secure an important ownership of our key operating asset. Post the quarter end, AKOFS Santos enter into the yard for planned upgrades ahead of commencements of its new contract with Petrobras in the first quarter of '27, and this will also affect the revenue for AKOFS in the fourth quarter, while Santos will be at yard. Overall, AKOFS now have a strong contract coverage and improved earnings visibility across the fleet. Our focus remains on delivering on the backlog and continue to develop the strategic options for the company. Then short on DDW Offshore on Slide 9. Skandi Peregrino remained on contract in Australia until late September, delivering 91% utilization during the quarter. It was then after the quarter sold for $21.6 million. The disposal, as mentioned, represents the final realization and also shows that we have been able to convert DDW vessels into cash and contributing to the proceeds available for Akastor's shareholder. Then finally, let me summarize the -- in our ownership section on our strategy. Our strategy remains straightforward: maximize value, create liquidity and return capital to shareholders. Over the last 18 months, we have made significant progress on the second and third parts of this strategy. We have realized assets, created liquidity through the HMH IPO, completed NES recapitalization, sold the remaining DDW vessels and returned significant amount of capital to our shareholders. Including NOK 2.50 per share dividend announced today, distributions since July 2025 will totally -- have been totally NOK 5.65 per share or approximately NOK 1.5 billion altogether. There's still significant value remaining in the portfolio. As we look into 2027, our focus is clearly on further realization of our holdings and continued shareholder distributions with HMH, NES Fircroft and AKOFS representing the key remaining portfolio values. But I want to emphasize that value comes before timing. HMH is a good example. The share price has fallen materially since the quarter end, which has also had significant impact on the market value of Akastor's HMH holding. We are clearly not satisfied with that development, but our view of HMH underlying longer-term potential has not changed. Having created the liquidity through the IPO, we have flexibility in how and when we realize our position. At the current valuation levels, we believe it's important to remain patient and focus on underlying value rather than a specific timing of realization. The same disciplined approach applies across the portfolio. As values are realized, our firm intention remains to continue to return excess capital to our shareholders while maintaining a sound capital structure. The NOK 2.50 dividend announced today is a clear demonstration of this commitment. With that, I'm pleased to hand over to Oyvind, who will take you through the financial update in more detail. So Oyvind, the word is yours.

Thank you, Karl. I will then take you through the financials, starting with a more detailed overview of our net asset value. Our fair value adjusted NAV was NOK 4.3 billion at 30th of September, corresponding then to approximately NOK 15.7 per share. This compared with NOK 4.7 billion and NOK 17.3 per share at the end of the second quarter. As per Q2, HMH is valued at market value based on the closing share price at the end of the quarter with all other investments remain reflected at book value. The reduction in NAV during the quarter was, as Karl mentioned, primarily driven by NOK 284 million reduction in the market value of HMH investment and the NOK 136 million cash dividend distributed to shareholders in September. The value of NES decreased slightly by NOK 15 million, mainly driven by FX, while DDW increased by NOK 37 million, primarily reflecting working capital movements during the period. At the end of the quarter, HMH represented NOK 2.7 billion of NAV based on the closing share price of USD 17.52. NES Fircroft represented NOK 669 million, while DDW represented NOK 129 million. The equity investment in AKOFS remained carried at 0. In addition, we had NOK 477 million of interest-bearing shareholder receivables, primarily related to AKOFS Offshore as well as cash and liquidity fund investments of a total of NOK 397 million. Gross asset value amounted to NOK 4.6 billion with net debt of NOK 39 million and other liabilities of NOK 267 million, resulting then in the NOK 4.3 billion net asset value. As Karl mentioned, based on Monday's HMH closing share price, indicative NAV would be approximately NOK 3.3 billion or NOK 11.9 per share with all other items unchanged at this point. Then moving to the next slide, showing the development in the net interest-bearing items during the quarter. Our total net cash decreased from NOK 550 million at the end of the second quarter to NOK 357 million at September 30. The main driver again was then the NOK 136 million dividend distributed to shareholders in September. Our consolidated net cash position included DDW Offshore, which moved from a net cash position of NOK 24 million at the end of the second quarter to a net debt of NOK 13 million at the end of the third quarter. This development then mainly reflected working capital movements. Interest-bearing receivables amounted to NOK 477 million, primarily related to AKOFS Offshore. Including these receivables, total net interest-bearing items amounted to NOK 835 million of a cash position compared with approximately NOK 1.0 billion at the end of the previous quarter. Post quarter end, we received then USD 57.4 million of cash distributed from NES Fircroft as well as proceeds from DDW sale of Skandi Peregrino of NOK 21.6 million. These proceeds then support the NOK 2.5 per share dividend announced today. Moving on to the next slide, which shows an overview of our financing facilities and liquidity. At 30th of September, cash and liquidity fund investments amounted to NOK 397 million, including then NOK 370 million invested in the liquidity fund and NOK 27 million of cash, of which NOK 26 million was held within DDW Offshore. Our liquidity then increased significantly post quarter end as cash was received from NES and DDW. DDW Offshore's reducing revolving credit facility had a total size of $7 million with $4 million drawn at 30th of September. That facility was fully repaid after quarter end following the sale of Skandi Peregrino and the remaining cash proceeds were transferred to Akastor. As previously communicated, we are continuing our work to establish a new USD 30 million financing facility secured by HMH shares, which is intended as a contingency liquidity source only and would supplement our existing cash position. Then turning to the income statement. Again, as a reminder, most of our investments, including HMH and AKOFS are not consolidated, and these consolidated revenue and EBITDA figures, therefore, only represent a limited part of our values and activities. Consolidated revenue and other income amounted to NOK 34 million in the third quarter, primarily reflecting the remaining operations in DDW Offshore. DDW delivered an EBITDA of NOK 11 million during the quarter as Skandi Peregrino remained in operations until her contract was terminated in late September. While the vessel sale was completed after quarter end and will then be recognized in the fourth quarter. Other EBITDA amounted to a negative of NOK 18 million. With that, total consolidated EBITDA was negative NOK 7 million for the third quarter. Then to the final financial slide. Our net financial items amounted to negative NOK 31 million in the third quarter. The main negative item was a noncash FX loss of NOK 62 million, primarily reflecting the strengthening of the Norwegian krone against the U.S. dollars during the quarter. That was partly offset by positive contribution from financial investments and net interest income. Our equity accounted investments contributed positively by NOK 10 million in the period, of which HMH contributed NOK 14 million. The HMH contribution reflects our share of HMH net income under the equity method, partly offset by dilution from new shares issued in HMH during the third quarter. AKOFS delivered positive net income in the quarter, but no contribution was recognized by Akastor due to the accounting treatment following previously unrecognized losses. Overall, Akastor then reports a net loss of NOK 16 million for the third quarter. With that, we are through the presentation, and we move on to the Q&A session. We will take a brief pause to allow listeners to provide their questions. We'll be right back.

Then we'll start the Q&A session with a couple of questions received. One related to NES, and I can start with that. NES Fircroft, what stands in the way of a full realization event? And what is the latest update on the most likely realization venue? Just to comment on that, it's a little bit limited what we can say, of course, but the recent recapitalization of the company was an important step for Akastor, but not necessarily the final step, of course. We continue, as Karl also mentioned, to see meaningful value in our remaining position in NES. In terms of a full realization, we continue to evaluate all options and remain focused on achieving the best outcome for ourselves and our shareholders. We are not in a position to comment on any specific process, but we will provide an update when that is appropriate. I think we'll leave it at that for now. Then one question on AKOFS. What does the runway to the targeted profitability level for AKOFS look like? Or what steps remain before we can start expecting development similar to DDW? I can also comment on that. As we've said multiple times, we expect a significant earnings improvement in AKOFS from next year as the new Petrobras contracts commence. First, for AKOFS Santos in Q1 and then Aker Wayfarer in Q3 and especially AKOFS Santos will be on a different level than what that vessel is contributing today. That will provide both higher earnings and improved -- of course, also has improved visibility across the fleet. When it comes to value realization, I think Karl has mentioned this several times, but we do see AKOFS differently from DDW. We're not planning on a vessel-by-vessel realization here. Our focus is developing the value of AKOFS as a company and evaluating strategic alternatives as then this improved earnings profile has become visible. We are working on that and assessing a range of options. With that, I'll jump to other different questions regarding HMH. Maybe Karl, I can pass this on to you. What gives you confidence in HMH going into 2027? And how do you think about capital allocation at the current valuation?

As mentioned, the Q3 equipment order activity was significantly below expectation. But at the same time, HMH continued to see healthy opportunities in pipeline, but these have shifted to the later periods, but they have not disappeared. Also HMH communicated they are confident in the underlying Deepwater fundamentals, and they are also well positioned for opportunities that will develop into '27. Based on that, we remain constructive on the longer-term outlook while recognizing that the timing of customer awards can be uncertain. At the current valuation levels, capital allocation will be particularly important. As a major shareholder, our focus will be on long-term shareholder value. We believe that alternative use of capital should be assessed very carefully against the objective. This will include maintaining a discipline around both organic investments, but also M&A. But specific allocations of capital is, of course, a decision of the HMH Board. We don't decide everything in HMH. We are a 36.2% shareholder. Given our position, we also have the flexibility to focus on underlying value rather than specific timing for realization of our position in HMH.