Aqualis ASA (ABL) Earnings Call Transcript

Good afternoon, everybody. Thanks again for listening in as we give our Q2 results. I hope you've all had a good summer break and are ready for the year -- new year ahead of us. This will hopefully be the last time that we have to give a prerecorded webcast as travel restrictions are now starting to release, and hopefully, we can get back to live updates going forward. As usual, I'll be giving this presentation with Dean Zuzic, our CFO, and he will concentrate on the trading numbers while I will focus on operations. Once again, because it is prerecorded, it will not be possible to take Q&A at the end. So if you have queries, then please get in contact with us afterwards, and we'll be happy to respond. Moving to Slide 2. Just to remind of our disclaimer since there are some forward-looking statements within our presentation. Moving to Slide 4. So highlights. I have to say we've had an excellent quarter, not only with our trading but also with the behind-the-scenes activity that has continued after our merger. Both revenues and adjusted EBIT are the best that we have achieved, a significant achievement I feel given all the disruption from the effects of the pandemic. Our revenue is up 9% Q-on-Q, driven by excellent trading for our renewables, which is up around about 30% quarter-on-quarter, but also healthy trading from our other business lines. Adjusted EBIT of $2.8 million is strong and a $400,000 improvement from Q1. We ended the quarter with a cash balance of $24.5 million after paying a NOK 0.25 dividend per share and also paying off the first 2 installments of our bank loan. The merger has gone well. And as I stated at the last quarterly meeting, we started trading together from April. Currently, management focus is on the back office, mainly on introducing a common ERP reporting system, and we hope to have this largely in place by the end of Q3. We have now identified some $4 million of annual cost synergies, up from our original estimate of $3.5 million, and these will start to kick in from around about Q4 of this year. So all in all, I think we've had a good quarter, and we're quite pleased with these results. Moving to Slide 5. For those of you who don't know us, I'll just run quickly through our markets. We focus on 3 markets: The renewables, the maritime, which is a sector of shipping, and the oil and gas sectors. We'll break this into detail by moving to Slide 6. Our service portfolio is relatively simple and recorded under 3 service lines. First of all, consulting and engineering, which is related to a variety of activities such as engineering, design, maritime operations, technical due diligence, work associated with cables, T&I, construction monitoring of newbuild assets, site investigations and similar activities. Secondly, we cover loss prevention, which looks after inspections and audits and marine warranty work where we aim to focus on risk mitigation and reductions, mainly to the insurance markets and prospective charters and buyers of assets. And thirdly, on loss management, where we provide a 24-hour call-out service into casualty support and management and where we provide expert witness and dispute resolution capability and loss adjusting services for energy claims. Moving to Slide 7. Our strategic vision is minimalistic and straightforward and can be summarized in 3 simple areas of focus. Firstly, to grow both in the offshore renewable sector and within the energy transition space for the oil and gas and maritime markets. We have set ourselves an ambitious target of 50% of our revenues to be driven by the green sector by 2025. And this is clearly an area of focus. Secondly, to continue to leverage and expand our market-leading position in more mature markets of maritime and oil and gas and to improve our profitability. And thirdly and most importantly, to enhance our capital efficiency and to reward our shareholders through return of capital. Moving to Slide 8. If you break the sector down into the last 12 months, we can gradually see things are starting to change. On the left-hand side, by service line, we now see that our revenues are less than 50% for oil and gas. Renewables has now become our second most important sector with 22% of our revenues, followed by shipping and adjusting, making up the remainder. If we break this down into regions, Europe still remains our largest region at a little over 26%, with Asia Pacific, Americas and Middle East closely behind. 12% of our revenues is driven by our renewables dedicated companies, OWC, Innosea and EPG, with the remainder from Longitude, our engineering arm. I think what is quite important on this particular pie chart is 12% of our revenues are driven by our directly focused renewables companies, 10% of our revenues come from the regions where we're also doing renewable activities. Moving to Slide 9. Our global footprint. So during the course of the quarter, we've increased by 2 new offices, one in Marseille, which I'll talk about shortly, and the other one in Melbourne, Australia, where we're focused on providing services to the maritime market. So we now have 62 offices in 38 countries. Our global footprint is extremely important to us, particularly in these current markets. Having people around the world is extremely beneficial to our clients and reduces cost significantly. On top of where we have offices, we have approximately 300 locations around the world where we have people who represent us. In addition, during the quarter, we have increased the number of employees working for us as we ended the quarter with 922 full-time equivalents, approximately a 3% increase Q-o-Q. And I'll give a little bit more detail later on. Moving to Slide 10. So we've opened up an office in Marseille under our Innosea brand. which is the company that focuses on engineering design and R&D for the marine renewable market. The purpose of this office is twofold. First of all, we want to be fairly close to France's largest floating solar PV plant. And secondly, on the Mediterranean Coast, there are plans for 1.5 gigawatts of floating wind power to be developed offshore France, Italy and Spain, and we see this office as being close to those locations. We have found previously that by being ahead of the game and getting people in place before these activities really take off has proved beneficial for us, and we're there to service when the clients come in. Moving to Slide 11. And sticking to renewables, to give some ideas of some of the projects that we've been working on. This first one is also by Innosea, who have developed, with partners, a leading-edge software to design optimal solutions for floating wind farms and improvement of efficiency. This focuses on turnkey solutions for defining the best mooring design and inter-array cabling. Floating wind is becoming increasingly considered around the world as being the cutting edge of the industry, and it's excellent to have software especially focused on this area. Moving to Slide 12. The next project that we have won is a marine warranty project on behalf of TenneT in Germany for the DolWin5 export cable installation. This cable have a capacity of 900 megawatts and is the first project where wind turbines are connected by a 66-kilowatt cable to the offshore platform. The interesting part of this project is this effectively does away with substations and significantly reduces the cost of the wind farm installation. Our work in this one will concentrate on the marine transportations and the cable installation including approvals of all the green spread. Moving to Slide 13. China has become a very dominant area for wind farm installation. As we can see on the right-hand side, 50% of the new installations in 2020 were positioned in the Chinese waters. And our Chinese offices are very busy at this time in support of that operation. As we talk, we're involved in 3; construction supervision, monitoring of newbuilds and jack-up conversions for units that will be used in the installation works. And on top of that, we're providing design, T&I and site supervision on the Qingzhou Phase III offshore wind farm for Guangdong power renewables. This is on top of all the additional marine warranty projects that we have been doing previously and ongoing at the moment. So I think you can see from these last 3 slides that our focus on provision of consultancy in the renewables market goes right across the spread of the industry. And it's one of the reasons why OWC and the other companies are now the first point of call for many of our clients. Moving to the next slide, on the oil and gas market. Oil and gas at the moment is in a very interesting juncture. The OpEx market is very busy with lots happening, whereas the CapEx market is still a little bit slow. We watch these 2 graphs with great interest because they're indicative of expectations. On the left, we can see the CapEx spending is expected to be significantly up in 2021 compared to 2020 and even further up in 2022. On the right-hand side, on the rig market, which is a very important business line for us, the statistics are confirming that the low point of rig utilization is now behind us and that things are improving. And we're certainly starting to see some of this in the jack-up rig market that we service. Moving to Slide 15. Most projects are not that frequent at the moment. We have just won a major project in Australia for provision of marine warranty services [indiscernible] that focuses on the installation of subsea facilities, including pipelines, production system and the SURF element. This project will last until 2024. One of the interesting things about this project is it will need to have site attendances in Australia, U.K., Norway, Italy, Malaysia, India, Singapore and Indonesia, locations where we are represented. I'd like to think that our global footprint, which I talked about earlier, was one of the driving factors for award of this particular project. And having won this project, we are expected of getting more awards on the same investment on additional work. It's a great piece of work for our Australian office. Moving to the maritime sector on the next slide. Our London office has just won a call out framework agreement with Transport for London for the provision of marine engineering consultancy services associated with various marine assets, piers and includes the Woolwich Ferry. This is a 3-year agreement with an additional 1-year option and will involve our engineers, our mariners and our naval architects. It's a good piece of work for our maritime sector. We tend to focus a lot on call out projects, but to have a framework agreement is also very useful. Moving to Slide 17. Our adjusting division has recently won a series of awards for a string of well losses around the world, including in China, Malaysia, Mexico, U.S. and Canada. These are located on both onshore and offshore locations and include both underground and surface blowouts. All of them are unfortunate incidences, likely to be quite expensive, and some of them are extremely complicated. Moving on to Slide 18. Backlog. I'd like to spend a bit of time talking on this particular slide. If we look at our backlog, it currently stands at USD 65 million, a 9% reduction since Q1. To put this in perspective, the reduction that we see in the first half of 2021 represents about 6% of our annual revenues. So it's not overly significant in the grand scheme of things. Our backlog really captures only the renewables and oil and gas market sectors. As we know already, the renewable sector is strong, and we have and we expect continued market wins. Oil and gas is an interesting place where focus is mainly on brownfield sites, which is mainly captured in OpEx. This we service and have always relied upon through framework agreements. The work is often fast and completed before we capture it in backlog and covers things like rig moves, vessel inspections, audits and those sort of things. All companies are as yet limited in the new CapEx aspirations. Some projects are coming to the market and I advised you about one in Australia already, but opportunities are limited. I should actually add here that I think we're very likely to win some major projects very shortly. And hopefully, in Q3, I can advise on those ones. So I think what I'm trying to say, whilst we've always captured backlog, I believe portrayed this as a metric for the quarterly meetings, is quite limited in what it tells us and gives a small window into our overall operations. I can add at the end of it that our pipeline of opportunities is extremely good, so we are confident for the future. Moving to Slide 19. With respect to our staff, we finished the quarter with 922 full-time equivalents, an approximate 3% increase on the previous quarter. For a company that's just been through a major merger, this is satisfying. It shows the good effects of both increased work and increased revenues that we've achieved in Q2, especially in renewables. These numbers also show an increase in number of subcontractors on our books and confirms that we're maintaining a flexible cost base such that we can easily follow market trends. At present, we're very focused on additional recruiting right across the group. So with that, I'd like to pass you across to Dean, who will give you some more color into our trading results.

Thank you, David. Let me just run you through the numbers quickly. If we go to Page 21. Our revenue has increased. Let me just mention to start here that we consolidated LOC from Q1 of this year. So all numbers that were reported prior to Q1 of this year do not include LOC. If we look at the reported numbers, we can show an increase of 99% in revenues last year second quarter compared to this year. Second quarter pro forma adjusted with LOC revenues, we can show a healthy 9% increase. Revenues up 4% quarter-on-quarter on total comparable numbers. So we're obviously satisfied with that. Our adjusted EBIT came in at a healthy $2.8 million, which is equivalent to a 7.2% margin, up $400,000 from Q1 following the normal seasonal pattern results that we are satisfied with. Page 22, please. If we look at the underlying revenue growth across our segments, it's obvious that all of our segments are growing, particularly renewables, which David has already mentioned, which in Q2 of this year comprises almost 30% of our overall revenues. Single-digit EBIT margin across Europe OWC, which is a renewables arm, and Longitude; double-digit margin in the Americas and Middle East. Both Americas and Middle East had very strong -- had a very strong quarter this year. America a bit influenced by some special effects related to tax reversals in Brazil, but even adjusted for this shows a very healthy performance. Worth mentioning here is Asia Pacific, which has seen a decline in the adjusted EBIT, Q1 to Q2. Asia Pacific has been a difficult region -- difficult part of the world in Q2, mainly due to the restrictions related to COVID -- to COVID-19, where basically the whole region is closing down again. It's been impossible to transfer people between countries and to travel. So we have had to use subcontractors in some of the countries in order to deliver on the projects that we have ongoing. This again leads to higher costs and to lower utilization on our own staff since they cannot get out to the projects and work there. We don't really know what to expect in the second half of this year. We think that the Far East is still going to be a very difficult region given that more and more countries are actually closing down and tightening restrictions related to COVID as we speak. OWC, the renewables are also worth mentioning here. We -- margin, we have an increase in EBIT, which is a -- which was a bit lower increase on what the revenue increase is. The reason for that is that we are investing in the future in the renewables business. It's the fastest-growing business in line. We opened 4 new offices and have increased staff with 50% people in order to be positioned to work on the increasing activity that we see coming, as we do believe the growth in the renewables will continue going forward. So we are building the organization and building presence. Next page, please. The income statement. A lot of this has already been commented. 99% increase in revenues -- in reported revenues, up to $38.3 million this year, up from $19.2 million. Report -- the reported growth, of course, driven by the consolidation of LOC. Adjusted revenue is 9% up pro forma. EBIT -- reported EBIT of $2.3 million, meaning that we would have adjustments of $500,000. There is a table in the back of the document that shows what the adjustments are. But let me mention quickly, we have some relatively minimal integration costs. The bulk of this, almost $400,000, is related to share option awards or warrant awards to the LOC employees that were charged in Q2. In addition to this, we also have around $100,000 in amortization related to the acquisition of LOC and customer contracts that were booked on the balance sheet. The integration costs, as I mentioned, were -- I mean relatively -- were relatively small during the quarter. We -- approximately $0.6 million of the depreciation is related to the right-of-use assets which will continue to stay at that level. You could expect it to actually be reduced somewhat going forward as we do mergers to organizations and reduce the number of offices, which will be the bulk of the synergies that we expect to take out in Q3 and Q4 of this year. Next page, please. We have a strong financial position, $24.5 million in cash at the end of the quarter, which is a slight reduction from the $28.3 million that we had at the end of Q1. The reasons for the reductions are partly payment of dividends and the repayment of debt, which totaled almost $4.5 million in Q2, but we do have a negative cash flow from operations, which is seasonal, of $1.2 million. You can expect the operating cash flow to be positive in the second half of the year. $13.3 million in bank debt, down from $15.1 million at the end of Q1, as we have paid an installment of $1.7 million. Capitalized leases have also reduced somewhat, as we are not renewing rental contracts on, I mean, offices, they're down at $3.5 million at the end of the quarter. Our working capital has increased to 93% of core revenue. This -- of course, we are not satisfied with this. There will be continued focus on pushing down the working capital percentage as we go, I mean, forward. This is a [indiscernible] for us. Next page, please. Dividends. We paid out a dividend of NOK 0.25 in Q2, which is up from NOK 0.2 in the same period of last year. Returning capital to shareholders remains a priority for AqualisBraemar. We have gone over to semiannual dividends. We had 2 payouts of NOK 0.2 last year, with one in the first half of this year, NOK 0.25. The Board has an authorization to approve a second dividend in the second half of this year based on profitability and on improved working capital. So you can expect a second dividend, but in the second half, but no decisions have been taken. I mean, as I said, NOK 0.2 first half last year, we paid out NOK 0.25 in the first half of this year. Next page, please. After the reporting period, should -- I also need to mention that we have issued 1 million warrants to Braemar. They had an agreement that could have awarded them with a maximum of 6.5 million warrants based on the performance of the Braemar business acquired. This negotiation was -- the award of warrants was renegotiated related to the LOC acquisition, where a minimum vesting of 1 million warrants was given to Braemar. We have settled now the warrant exercise and the result is that Braemar did get about 1 million warrants awarded. They are to be subscribed at a subscription price of NOK 0.10 per share. Their registration is around the corner. They have been paid. We are just waiting for the register office to register the option. So the amount of shares related to these warrants will increase with 1 million up to almost 97 million shares. Relating to the other outstanding warrants, there are 2 million warrants to LOC sellers that have been awarded that vest in June '22 and December '23, respectively, at an excise price of NOK 0.10. And the deferred settlement to East Point Geo, which also vested an exercise price of NOK 0.10 between the years of 2024 and 2028, 664,000 options there. That would add up to a total number of diluted shares of 98.9 million. We have also issued employee options, 7.8 million, at an exercise price of NOK 3.4, vest in June '22, and 11 million with an exercise price of NOK 5.9 that vest in December of '23. Then of course, all in the money, to the outstanding options to employees add up to 18.8 million shares. Next page, Please. Now I give the word back to David to run us through the outlook.

Thank you, Dean. Much appreciated. Okay. So just to close out, this one to -- there's no little time expressing how we see things in the short term. So to start with, just want to reiterate, we are pleased with our Q2 results, not only financially but also with the progress that we've made internally following our mergers with not only LOC but also the smaller acquisition of East Point Geo. To achieve record results in this crazy market is quite satisfying, I have to say. I would point out that Q2 tends to be our seasonally strongest quarter. And going forward, Q3 does tend to be affected and disrupted by holidays and the effects of the monsoon in the Indian subcontinent. Looking forward, we believe that there's a positive outlook in the market. Renewables remains strong, and we see no reason that, that's going to change in the short term. And we are increasingly going to be focused on energy transition. We do believe that the effects of COVID, which are particularly restricting in Asia Pacific at the moment and seem to be going in the wrong direction, we do believe they will gradually reduce and return the market to some semblance of normality. This will be good for us if this happens because it means that we can increase the utilization of some of our permanent staff who are having difficulty traveling and have less reliance on subcontractors around the world that we have to hire to help us do some of the work. We believe that the oil and gas market is starting to strengthen, though we believe that the CapEx side of it involving major new investments will continue to be slow until 2022 or perhaps even 2023. Having said that, as I've talked before, we do see a lot of activity in the brownfield sites and a lot of work in the OpEx market. Our focus remains on capital efficiency and returning cash to shareholders. And as Dean has just briefed you, we do expect to maintain our semiannual dividend subject to Board approval. Finally, to close out, again, there is still overcapacity in the consultancy market. We do expect that there will be opportunities for further consolidation in the short term, and also for expansion for the company. So if we see opportunities that give great shareholder value or very beneficial to us, we will be considering those. So I will conclude here. Many thanks for listening. As I said right at the beginning, we can't take the Q&A now. So if you have any questions, please contact either myself or Dean or drop us an e-mail. And we'll be pleased to give any clarifications that you may be seeking. Otherwise, we look forward to talking to you in Q3, hopefully, face-to-face, and many thanks for listening in and we'll see you then.