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Executives Tore Langballe – Head of Corporate Communications and Investor Relations Frank Reite – Chief Executive Officer Leif Borge – Chief Financial Officer Analysts Frederik Lunde – Carnegie Eirik Mathisen – DNB Eivind Tønnessen – Swedbank Haakon Amundsen – ABG Akastor ASA ( OTCPK:AKKVF ) Q2 2015 Earnings Conference Call July 15, 2015 3:00 AM ET Tore Langballe Good morning, everyone. Welcome to the presentation of the Second Quarter Results and the First-Half Results of Akastor ASA. My name is Tore Langballe, I am responsible for Corporate Communications and Investor Relations in Akastor. The presentation this morning is being webcasted and we also have a conference call running in parallel. You are free to submit questions online on the webcast and of course ask questions on the conference call. We cannot guarantee that we’re going to be able to answer all the questions though. [Operator Instructions]. For the audience present in the auditorium here, I’d like you to use the microphone and state your name and company when asking questions please. The presentation this morning will be given by CEO, Frank Reite and Leif Borge, CEO and CFO respectively. And then we’re ready to start. I’ll give the floor to Frank Reite. Frank Reite Thank you Tore and good morning, everyone. As you probably have seen from a separate release this morning Kristian Røkke will take over as CEO in Akastor from August. I will move on to Aker as their new CFO. Aker will then propose to the nomination committee that I should be elected as the Chairman of Akastor. So I will be quite involved in Akastor also going forward. Then let’s focus on Akastor today. The second quarter for Akastor can be summarized as followed. We see a challenging market environment for the oil services sector. However there are also interesting opportunities in the market. And I am very proud that most of our portfolio companies are delivering quite good performance through first-half of 2015. However, we see that MHWirth is significantly impacted by the rig market. But I can assure you that we are taking necessary actions in all our portfolio companies to adapt to the current market situation and that we go after all opportunities that is out there. If we look into second quarter, from a perspective at Akastor as an investment company, we have taken actions to focus on our operational improvements and have done a lot of cost savings and unfortunately we have to reduce the workforce. We expect that reduction to be around 1,500 people by the end of the year. As an investment company, one of our duties is to make sure that we have the right management teams in our portfolio companies. We have used first-half of 2015 to strengthen the teams and add necessary resources to attack the market and environment we are operating in. We’re going to continue to focus on long-term value creation for our shareholders and going to develop our current portfolio, we’re going to explore the opportunities we see in the market and we’re going to keep our financial flexibility. After the close of second quarter we have divested one property in Norway for around 28 million equal to book value. If we look into the numbers, if we add back one-offs to our EBITDA, we arrive at 173 million that’s in line with first quarter. However revenues are down with approximately 20% and activity in MHWirth explains basically also of the decline in the revenues. The net capital employed is stable, and MHWirth and AKOFS makes up close to 80% of the capital employed. The working capital has stabilized around 3.1 billion and if you summarize the remaining portfolio companies except MHWirth those are zero. Our order backlog is 18.7 billion; it’s down 1.3 during the quarter. Net interest bearing debt 6.1 basically at the same level as first quarter. If we look into the floater market, the utilization is around 87%, it’s the lowest level in more than 10 years. There are supply and demand gap around 39 floaters with additional 84 in the order book. However, we don’t expect that all the floaters that are in the order book will be delivered. The good thing here is that the market mechanism are working, so we have seen no new orders for floaters signed in first-half of 2015. And so far in the current down cycle there being announced removal scrapping of 36 floaters as of end of June and as yesterday there was one more announced. We see that rig owners are delaying deliveries of rigs and the yards are postponing the completion of the rigs. That is impacting us through our revenues or getting moved out in time and also require of more working capital than they like. The good thing at MHWirth is that lifecycle business and aftermarket the service business is performing very well. Revenues of 1.4 billion first-half is exactly the same as last year. And it continues to deliver a good margin with a slight decline compared to last year, but it’s still about 20% margin on the lifecycle. And as you all know the lifecycle business is very important going forward. We have initiated significant cost improvements program and we expect the workforce to be reduced with at least a 1,000 people by the end of the year. Definitely we’ll have a contract with Jurong for delivering of seven complete drill packages for drill ships going to Brazil. The progress has been we have slowdown the progress in agreement with Jurong and we are awaiting the final outcome of the refinancing of certain. However, the signals are quite clear that all the seven units from Jurong will be completed. However the timing is a bit uncertain. Based on this we also expect weak results for MHWirth in second half of 2015. If we look into MHWirth going forward, with short-term they need to execute on the backlog continue to secure the lifecycle business. The lifecycle business is basically their license to operate and it’s also what’s bringing us closer to our customers. The feedback I am getting from MHWirth customers is that they are more and more happy with the lifecycle services from MHWirth. Continue to run after all the costs, cut costs and do operational improvements. They need to bring down their CapEx and going to complete the plant in Brazil when that one is completed we’ll bring down CapEx to bear minimum and we need to reduce the working capital level. Going forward we need to be willing to invest into the future. We could probably cut cost more than what we are doing, but we will like to keep the competence in MHWirth. We will the company to be ready, to sit around the table and compete when the new drilling contract will be signed in the future. So therefore, we are willing to invest in resources and technology throughout this down cycle. If we take a look at AKOFS Offshore, Skandi Santos is back in operation after five years classing was back in mid of April, has performed very well, AKOFS was back in operation and also in April it started on its second five years agreement with Petrobras. The Wayfarer have had excellent operation, a 100% utilization in first-half and we were able to extend the contract of vessel around throughout October this year. Then it will go to the West Coast or Norway and be prepared for a five years contract in Brazil starting second half of 2016. The Seafarer was idle during the quarter. We are continuing to cut cost and we’ll cut the cost to a bare minimum when it’s at the dock. There are challenging market situation, but AKOFS are running at after whatever opportunities there are in the market. So for AKOFS going forward, we can divide the business into two, there is the long-term business in Brazil, we will have two vessels on good contracts on five year terms in Brazil and AKOFS need to secure work for the Seafarer. If you look into our remaining portfolio companies and the second quarter highlights for them Frontica has steady operation. They have been performing very well to adjust their cost base towards that activity and they’re delivering a decent margin and the really good thing is that they won two strategic important niche contracts during the quarter. These contracts are not significant when it comes to revenues but this will important customers and that it shows that Frontica are competitive in their business landscape. Fjords process secured three different contracts related to the U.S. oil field; it’s really good to show that they’re competitive in the international market. The management team of Fjords has done a great job to adjust their operating model and they’re improving their competitive position. There are solid prospect list for Fjords, they are involved in quite significant bids but the timing of awards are uncertain. Then I need to congratulate Gordon and his team in Singapore, they’re delivering a record margin of 23% in the quarter. They have taken a lot of actions, they have increased efficiency as it plan significantly, they have been able to cut raw material cost, they have reduced a number of employees at the factory of around 100, and even with that they have increased the capacity of the factory. And they have renewed a very important strategic contract and they’re going into new markets. And then we divested a property as I said, in the beginning of the presentation. So, what are we doing, well, we are attacking the challenges. We see oil, we see a weak oil price, reduced spending and we started the year with cost base that reflects that higher activity level than what the current situation could support. So, we have taken immediate cost cutting actions and we are continuing to ramming after costs. We are maintaining our financial flexibilities with increased financing lines. We are strengthening the teams and the management teams in the portfolio companies. We are continuing to focus on long-term value creation for our shareholders and we are pursuing opportunities that we see in the market, both for our portfolio of companies but also for cost store as an investment of company. Then Leif will walk through the numbers for you. Leif Borge Good morning. As you have probably already seen from the figures of revenues 3.7 billion in the second quarter dropped to 39% compared with last year. However, the second quarter last year was — especially strong quarter with regards to revenue, so year-to-date revenues went down 25% compared with last year. It’s especially the revenues and MHWirth that has declined and we expect now revenue level to level out going forward. The EBITDA are 141 million, it’s impacted by around 20 million on restructuring cost in MHWirth and 12 million in negative result from hedges not qualifying for hedging accounting. So the more recurring EBITDA in the quarter was around 173 million. Net financial items negative 183 million includes 100 million negative effects from the impairment of the extra shares due to the drop in the share price during the quarter. Pure interest cost was around 44 million in the quarter and the financial lease on the vessel Wayfarer was 72 million in the quarter. The tax rates was only 8%, but this is explained by some of the losses like extra shares in did not have tax effect. So based on these figures the net result ended on minus 298 million in the second quarter. Also as we have seen in the net capital employed, how the investment portfolio remain on same level as seen in the first quarter, just below 15 billion. And net working capital increase slightly and we invested around 270 million in the quarter, mainly in MHWrith and AKOFS offshore. With regards to the capital structure, net interest bearing debt increase is around 200 million to 6.1 billion in the quarter. Cash flow from operations was around zero, while as mentioned investments are around 270 million. The liquidity reserve at the end of June was around NOK1.35 billion including cash of 850 million and undrawn credit facilities of 500 million. Then let’s have a look at the portfolio companies, starting with MHWrith revenue level went down to 1.6 billion in the second quarter. For the first-half of the year service revenues are more or less spot-on the level of 2014. So the decline in revenue comes from the projects and single equipment. The explanation is of course low order intake during last year. However it’s also due to the reduced progress on the year on contracts which is in line with what we’ve agreed with the clients. There are no further cancellation of contracts in the second quarter of this year. The EBITDA of 3 million then is impacted by another 20 million our restructuring costs these cost relates to the second round layoffs that was executed in the second quarter which will impact around 250 people. The implemented workforce adjustments will reduce the total workforce in MHWirth during the year with close to 1,000 people. We see some effect of this in the second quarter numbers, but we will not have full effect of the cost cutting before the end of the year. Thus we expect weak results in MHWirth also in the second half of the year. Order intake in MHWirth was 932 million and backlog ended on 7.1 billion. AKOFS Offshore had revenues of 186 million; Santos was in full operation from mid April after the five year classing. Wayfarer was into operation through the quarter, while AKOFS Seafarer was idle for the total quarter. In the third quarter both Santos and Wayfarer will be in full operation as the contract for Wayfarer was extended throughout October. In regards to AKOFS Seafarer, we hope to get some work but the market for stock work is very challenging. AKOFS is not taking down the burn rate on AKOFS Seafarer from around $50,000 a day to roughly half that level by the end of this year. This is the standby OpEx rate for the vessel being ready to operate as a third vessel, but it will take longer than to mobilize divestment to do deep water well intervention services. Frontica business solutions have the revenues of 1.3 billion, declining 12% compared with the second quarter last year. This reflects lower activity level of the key clients especially then Aker Solutions, Kvaerner, MHWirth. This also impact margins on what the EBITDA margin was 4.5% in the second quarter. During the quarter, Frontica has implemented downsizing around 130 staff which will have somewhat positive effect on the margin going forward. The order intake was relatively weak with 804 million in the quarter. However this is explained by the reassessment of expected volume from the existing frame agreements for the next 12 months. Fjords Processing had revenues of 475 million in the second quarter with an EBITDA of 16 million. The margin is still not on an acceptable level, however at least we’re now further losses from the project that destroy the numbers in 2014. So that has been stable on last two quarters. Order intake of 500 million brings the backlog up to 1.2 billion. KOP had a strong quarter profit wise, revenue actually dropped around 7% in real terms because this is a U.S. dollar business. However due to the fact that this or the translation effect and the U.S. dollar has strengthened compared to Norwegian crowns the reported revenues in our numbers show some increase of 17%. KOP delivered a record high margin as presented by Frank 23%. This is explained by favorable product mix, strong aftermarket services with high margin in the second quarter. But management of KOP has also done a good job working on the cost specs. During the quarter, around 100 people they are laid off that plant in Burton. The order intake was weak with 138 million reflecting a weak market in Asia and the key clients are reducing their inventories rather than ordering new surface for the time being. This will of course also impact the revenue level going forward. In regards to the margin, you should not expect the second quarter level going forward, but we hope that KOP can maintain a relatively good margin also in the coming quarters even with somewhat lower revenue levels. Finally real-estates and other holdings, negative EBITDA of 25 million of which 12 million is the negative effect from hedges, not qualifying for hedging accounting. The real-estate portfolio delivered 15 million in a quarter, while the two portfolio companies First Geo and Step Oiltools had total EBITDA of 5 million, slightly better than previous quarters and the rest of the result is in this segment comes from corporate and some separation cost of the IT infrastructure. And so that concludes my presentation and I guess we open up for the Q&A session. Tore Langballe Then we open up for questions both from the audience here and we’ll later take questions from the conference call and from the web. Do you have any questions here to kick off? Question-and-Answer Session Q – Frederik Lunde Frederik Lunde, Carnegie. You mentioned that you expect some of these floaters and the construction not to be delivered, is that a reference to contrast in your backlog or more for competitors? Frank Reite Through this opposite ratio, there are 29 of sectors in the backlog worldwide. We expect all the seven, but we’re going to deliver equipment to be deliver, but I think the indication from Brazil, is that there on 15 of the 29 will be concluded. So, that’s some more — it seems like our backlog is pretty robust, but there will be delays or postponement. But at end of the day, I expect them, to be delivered. Frederik Lunde Do you expect any contracts for new projects in MSWrith for the next year to? Frank Reite Yes, all of these speculative projects out there and they’ve been there, for a while and none of them materialized, but suddenly there will be something. But I don’t think, we expect — just have a look on that, there might be one or two, time we saw. Frederik Lunde But no equity investment from your side in those projects? Frank Reite I think, we’re willing to participate with favorable terms to facilitate some projects. But I don’t see us as a significant equity investment into any of the projects. But we might be willing to be flexible in payment terms, especially on amounts of to our margin in these kind of projects. Eirik Mathisen Eirik Mathisen, DNB. When should we expect working capital in MHWrith to come downwards again and what is the risk for impairments to the working capital in MHWrith? Frank Reite The working capital there is two folded, approximately 1.5 billion is tied up into the service in after market. And that’s an investment into that business. I think you will see a reduction of the working capital when we start to release some of the projects and we have finance deliveries from the project execution. Eirik Mathisen Then on Brazil, is there any risk for lower day rates on the vessels, you have on long-term charter contracts in Brazil? Frank Reite Well, I think we have received same lesser stuff a lot of other players but as long as Santos is some performing as well at it is. I think we have a — I think, we’ll basically maintain the same level. Eivind Tønnessen Eivind Tønnessen, Swedbank. Obviously you’re talking about MSWrith being soft in second half. Would you elaborate a bit on the numbers in terms of EBITDA? I mean, you had a break even first half, could we see this type of similar level in second half or should we see some improvements, any color? Frank Reite We expect to see gradual improvements in the numbers as the cost savings comes through. I mean, we have now concluded two rounds of layoffs. We’re up to 1,000 people, around 600 people of those have left the company by June and the remaining will leave during the second half of the year. So as I said, gradually improvement in the results. And revenue level was 1.6 billion are in the second quarter, most likely we will also see a revenue level, on that level going forward, little bit depend on what happens for the year on projects? Eivind Tønnessen And just follow up on the Songa and Cat D rigs, I mean there seems some turmoil between Songa and DSME now recently. Can you just describe your potential exposure with MHWrith with the remaining key packages and how much working capital is tied to those three? Frank Reite I think Leif can go more into the details but the first Cat D rig was delivered right before end of second quarter and first week of July we received significant payments from DSME on that one. Leif Borge I mean that we have delivered all the equipments on those rigs, what remains of cost for MHWirth is on the final commissioning on the last three ones. There typically remains 10% to 15% of the contract value in the late phase like that. So yes there is some remaining payments and some working capital still in the Cat D rigs. So far the client has paid say as planned, but as in all projects, at all of this discussions on variation orders that at the end of the project. So that will also probably be the case for some of the remaining rigs here. Eivind Tønnessen Just the final from me, do you have any leads now on long-term contract for the Seafarer or are you focusing on spot working to serve marketplaces only? Frank Reite Realistically we’re focused on the spot market. However, there are dialogues with oil companies also more long-term projects. But I don’t expect any of those to materialize this year. Unidentified Analyst This is [indiscernible]. Is it possible to get some more split on the Brazilian, what went through as revenues in the quarter from MH? Frank Reite Revenues from the Brazilian — from the Jurong project? I mean in the slide on MHWirth we have shown the split of the revenue on services, on projects and on products. And you can easily calculate that revenues from the projects around 500 million, 600 million in the quarter roughly 50% of that comes from the Jurong project and roughly 50% of it comes from other projects as a guideline. Unidentified Analyst And then you’re able to hold capital relatively stable due to some offsetting from the other projects instead how we should view that? Frank Reite The working capital in MHWirth was quite stable from first quarter to the second quarter. There has been progress on the Jurong project; there I spent money on the project. We’ve also received money from Jurong from the client, but not everything that we should ever see according to the regional contract. So there has been some of the increase in working capital tied up in those projects. However, the Jurong project is still cash positive meaning that the working capital on the project is negative. So of course the working capital has increased somewhat on that project, it has reduced on some of other projects. Unidentified Analyst [Indiscernible] Securities. I was just wondering could we expect any further restructuring charges in the second half of the year? And can you provide some guidance on that? Frank Reite No or to put it this way, you shouldn’t expect any further restructuring costs linked to the initiatives that we have already made. We may of course see that we have to do further cost adjustments in some of the portfolio companies and that could trigger researching cost. Unidentified Analyst And then just on the second question on AKOFS, on the Wayfarer, on the extension has the day rate come down to what you guided at your CMD? Frank Reite No, it’s a same day rate. Tore Langballe Then I think we open up for — we have one more question here before we take questions from the conference call. One more question. Haakon Amundsen Haakon Amundsen from ABG. Just a question on the aftermarket in MH it’s holding off in H1 despite quite big cost reductions announced by the drillers. Can you put some color on that maybe on the profitability and the outlook for H2? Frank Reite I think we are chasing cost as well. So I think basically we have seen some reduction in the prices towards the driller, but MHWirth has been able basically to push it such supplier and I think we also have a more efficient operation than we had last year. Haakon Amundsen And H2 any indications? Frank Reite Currently it seems like it’s going very well. Haakon Amundsen And just to put you on the spot on H2 for MH is the underlying result for Q1 with slight improvement, what we should expect? Frank Reite Yes. Tore Langballe Then we have one more questions from the conference call. Operator can you please assist us . Operator Thank you. [Operator Instructions]. At the moment, we have no questions in the queue. I’d like to turn the call back to you for additional comments. Tore Langballe If there are any additional — I have one additional question in conference room. Eivind Tønnessen Yes, Eivind Tønnessen, Swedbank again. Just on your interest coverage ratio covenant of above 4, do you see any risk of that being breached by year-end and if so do you see any problems renegotiating or receiving waivers from your banks should that be the case? Frank Reite I think, it’s fair to say that yes, it’s a risk that we could be in breach by the end of this year or beginning of this year of course depending on how the results end up in the third and fourth quarter, that’s of course something that the people have a dialogue with the banks, I will be surprised if it will not get the waiver but it’s probably always price discussion. Tore Langballe Then we thank you all for participating at this morning and have a nice summer going forward. Thank you. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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