Akastor's (AKKVF) Q2 2017 Results - Earnings Call Transcript

AKASTOR ASA (OTCPK:AKKVF) Q2 2017 Earnings Conference Call July 12, 2017 3:00 AM ET

Executives

Tore Langballe - Head, Communications & IR

Leif Borge - CFO

Analysts

Tore Langballe

Representing Akastor's Second Quarter and First Half Year Results for 2017. My name is Tore Langballe, Head of Communications and IR in Akastor.

The presentation today will be given by Akastor's CFO, Mr. Leif Borge. The presentation is being audiocasted, and we're running a dial-in conference in parallel. Leif will be referring to slides in the presentation. The presentation is available on akastor.com. Following the presentation, we'll do a Q&A session and the operator will give the instructions required.

Finally, I would like to draw your attention to the cautionary statement at the very back of the presentation. Please study that carefully.

And by that, it's my pleasure to give the word to you Leif.

Leif Borge

Thank you, Tore and good morning to all of you. Of course, the most important topic for Akastor in the second quarter was the announced divestment of KOP Surface Products like the divestments of Fjords [from Skandi Santos] examples last year, we achieved a decent price from and industrial buyer that was willing to look through the cycle and who will have synergy effects from the transaction.

The transaction is expected to be closed in the third quarter, but all financial numbers of Akastor have been restated based on KOP Surface Products being discontinued operations.

After the transaction, we have two major portfolio companies left in the portfolio, it's MHWirth and AKOFS Offshore, as well as the three smaller ones; Step Oiltools, First Geo and Cool Sorption.

With regards to MHWirth, the rig market in general starts to show some signs of improvement with more drilling activity. The newbuild market is still very challenging due to the huge oil capacity of drilling rigs in the market, but there are some tenders out there mainly for more nonstandard drilling rigs and drilling equipment.

With regards to AKOFS Offshore, there is not much new to report. Skandi Santos is in its seventh year of operation in Brazil. Wayfarer is preparing for a five-year contract to commence end of this year, while outlook for Seafarer is still very uncertain. There are ongoing discussions with potential clients, but mainly for work in 2018 and later.

Then let's move on to Page 3 in the presentation, the financial numbers. As we can see from the slide, revenues of NOK873 million is down 34% from last year explained by lower order intake on products and projects in MHWirth over the last couple of years.

The EBITDA of NOK18 million includes restructuring costs in MHWirth of NOK52 million related to further layoffs mainly in Germany and some other countries. Thus, the recurring EBITDA was NOK70 million in the quarter.

Financial items of negative NOK258 million contain three main items. First of all, it’s the financial lease costs on the Wayfarer vessel and interest on bank loans, in total around NOK100 million.

Secondly, further impairments of the five Anchor Handler's in DOF Deepwater give a negative result of NOK54 million for a 50% equity share of Akastor. And finally, MHWirth with NOK98 million loss from currency hedges on revenues in Brazilian Reals that are still not been paid.

The issue here is that we have decided to stop hedging the Brazilian Reals of revenues, so not to U.S. dollar of revenue, but Brazilian Reals revenues on all of the seven drilling packages.

This was done some time ago for the last three, as a matter of fact to all hedging for the last three are stopped when we took out those projects that are on the backlog, but now in the second quarter we also stopped hedging on the first four with regard to Brazilian Reals.

This is of course due to the uncertainty with regards to completion of the drilling packages and consequently whether or not MHWirth will actually receive further payments in Reals.

With all of these numbers, we ended on a net negative result in the second quarter of NOK321 million or NOK132 million for the first half 2017.

Then moving on to Slide 4 in the presentation, Akastor Portfolio, total capital employed in Akastor was on same level as in the first quarter NOK8.7 billion of which NOK4.3 billion is tied up in AKOFS Offshore and NOK3.2 billion in MHWirth.

Around NOK600 million of capital is invested in other holdings down the portfolio companies. This relates to the shares in NES Global Talent, the shares in modern drilling, shares in [occu] pension fund and the 50% shareholding in DOF Deepwater.

The capital employed in KOP Surface Products that we are now selling to Weir for US$114 million, it was NOK411 million as of second quarter.

Then please move to Slide 5 in the presentation. Net interest-bearing debt increased with around NOK200 million to NOK3.2 billion of which NOK1.6 billion relates to the financial lease of Wayfarer and the remaining NOK 1.6 billion is the net bank debt.

We are well above the minimum EBITDA covenant that was established earlier this year. Actually, the divestment of KOP Surface Products has a positive effect on the covenant due to the fact that KOP Surface Products was lossmaking in 2016.

Then please move to Page 6; revenues of MHWirth dropped to NOK 550 million in the quarter. The service revenues were slightly up from the first pool, which means that lower order intake in products and projects of loss three years and declining backlog is causing the decline in revenues.

Actually, in the second quarter service revenues represented 78% of the total revenues in MHWirth. If you go a couple of back -- a couple of years back, the service revenues represented around 20% of the overall revenue of MHWirth.

MHWirth booked another NOK 52 million in restructuring cost in the quarter. Most of this is linked to further layoffs in order to reduce the cost base. Total number of employees in MHWirth has been reduced to around 200 to around 1500 as of June.

The new initiatives, which are mainly in Germany, U.S., Malaysia and Brazil will reduce the workforce with another 130 people in the second half of the year. The order intake for MHWirth was slightly better in the second quarter than in the first quarter with NOK 614 million.

Then with regards to AKOFS Offshore Page 7 in the presentation, revenues was on the same level as the previous quarter, NOK 187 million likewise with regards to the EBITDA NOK 37 million more or less same level as in the previous quarter.

Santos had a somewhat low at time due to a planned docking and maintenance work of 14 days, but this was to some extent compensated by very high uptime in the rest of the quarter and the vessel was in operation.

As already mentioned, not much new to say with regards to the other two vessels. Wayfarer preparing for startup of the contract with Petrobras at the end of this year, while Seafarer is still calls back.

Then other holdings Page 8 in the presentation, the three small portfolio companies; Step Oiltools, First Geo and Cool Sorption had revenues of NOK 151 million with an EBITDA of NOK 0 in the quarter. The negative EBITDA in this reporting segment thus comes from corporate costs.

So, to sum up on Page 9 in the presentation, we're now working hard to close the announced transaction with Weir selling KOP Surface Products for US$114 million. The cash generation from the transaction will be the mentioned US$114 million or around NOK 970 million and we expect to close the transaction in a few weeks.

The transaction will have an accounting effect of around NOK 700 million net of tax. Thus, we continue to sell assets well above big values. In general, the markets are still challenging with huge overcapacity in drilling rigs, offshore vessels and production capacity in general.

However, the fact that some oil companies start to make investment decisions will eventually generate more business for MHWirth and other suppliers to the oil and gas industry.

Thus, we continue to focus on managing the cost base of our portfolio companies, but also to a greater extent focus more on the possibilities for companies whenever the market starts to grow again.

With that we are ready for some questions, please Tore.

Tore Langballe

Thank you, Leif. That concludes the presentation part this morning and we open up for questions. Operator, kindly assist us on that please.

Question-and-Answer Session

Operator

[Operator instructions] There are currently no questions over the phone lines at this time.

Tore Langballe

No questions. We conclude on that note and thank you all for joining us this morning and with you all a nice summer. Thank you.

Operator

Ladies and gentlemen, that will conclude today's call and you may now all disconnect.