Earnings call transcript: Odfjell Technology Q4 2024 reports strong revenue growth

Odfjell Technology Ltd (OTL) reported robust financial results for the fourth quarter of 2024, showcasing a significant revenue increase to NOK 1.445 billion. The company's stock saw a positive reaction, with a 2.31% rise following the earnings announcement. According to InvestingPro analysis, OTL maintains a "GREAT" financial health score of 3.42, and current valuations suggest the stock is trading below its Fair Value. Despite a challenging market environment, Odfjell Technology's strategic initiatives and innovation in technology have positioned it for future growth.

Key Takeaways

• Odfjell Technology's Q4 2024 revenue reached NOK 1.445 billion.
• EBITDA for the quarter was NOK 191 million.
• The company secured a strategic agreement with WeWell for Power Pipe technology.
• Stock price increased by 2.31% post-earnings announcement.
• Anticipated market slowdown in early 2025 with a ramp-up expected later in the year.

Company Performance

Odfjell Technology demonstrated strong performance in Q4 2024, with revenue climbing to NOK 1.445 billion. The company's focus on innovation and strategic partnerships, such as the agreement with WeWell for Power Pipe technology, has contributed to its competitive edge in the offshore sector. Operating in 35 countries, Odfjell Technology continues to expand its market presence, particularly in the Americas and Middle East.

Financial Highlights

• Revenue: NOK 1.445 billion in Q4 2024
• EBITDA: NOK 191 million
• Cash generated from operations: $262 million
• Available liquidity: $1.1 billion
• Dividend paid: SEK 60 million (NOK 1.52 per share)
• Full-year EBIT: $825 million, including approximately $25 million in one-off costs

Market Reaction

Following the earnings release, Odfjell Technology's stock price rose by 2.31%, reflecting investor confidence in the company's strong financial performance and strategic initiatives. InvestingPro analysis reveals the company has delivered strong returns over the past five years, with a revenue CAGR of 17%. The stock's movement and fundamentals suggest potential upside, as indicated by InvestingPro's Fair Value assessment. Discover detailed valuation insights and 7 additional ProTips with an InvestingPro subscription.

Outlook & Guidance

Looking ahead, Odfjell Technology anticipates a market slowdown in early 2025, with significant activity expected to pick up in late 2025 and into 2026. The company plans to maintain a normalized capital expenditure of approximately $250 million annually and aims to improve margins through cost efficiency and digital process optimization.

Executive Commentary

CEO Simon Leung highlighted the company's strategic direction, stating, "We see a significant step up in the second half of twenty twenty-five." He also emphasized the impact of the Power Pipe technology, calling it a "breakthrough and a game changer." Leung reassured stakeholders that the company is not reducing its workforce due to market conditions but is enhancing work processes with digital solutions.

Risks and Challenges

• Market Slowdown: Anticipated in early 2025, which could impact short-term revenue.
• CapEx Management: Maintaining normalized spending while pursuing growth opportunities.
• Tax Dispute: Potential appeal process with HMRC could extend to 2027.
• Competitive Pressure: Sustaining competitive advantage in a rapidly evolving market.
• Geopolitical Risks: Potential impact on operations in key regions like the Middle East.

Q&A

During the earnings call, analysts inquired about the company's approach to capital expenditure, with discussions suggesting a focus on maintaining spending around $250 million. Questions also addressed the ongoing HMRC tax dispute and the company's strategies for margin improvement through cost efficiencies.

Full transcript - Odfjell Technology Ltd (OTL) Q4 2024:

Geerta Urglan, SVP Finance and Investor Relations, Otfield Technologies: Welcome to Otfield Technologies Q4 presentation. My name is Geerta Urglan. I'm the SVP for Finance and Investor Relations in Otfield Technology. I'm joined by our CEO, Simon Leung and our CFO, Joona Thorstensson. You will find the presentation on our website.

Please take notice of the disclaimer on Page two. We will start with Simon presenting the key highlights and talk about the market outlook, backlog and the contract status. You will now go thereafter, go through the final financial figures before we conclude with a Q and A session. You can submit your questions through the webcast portal or by using the dial in numbers. I'll now hand it over to Simon for the first part.

Simon Leung, CEO, Otfield Technologies: Thank you, Kurt. Good morning, everybody. Thank you for calling in. My voice is a little rusty today, so excuse me for that, but I'll manage. I'll start with the key the highlights and the key financials.

We have in the quarter revenue of NOK 1,445,000,000.000. EBITDA NOK 191,000,000. EBITDA, all these numbers will be more detailed presented by you a little later. We have a stable in line good order backlog of SEK 30,300,000,000.0. We have a strong balance sheet, we have available liquidity of SEK 1,100,000,000.0 with a very comfortable leverage ratio.

And we have also this quarter decided to pay dividend of SEK 60,000,000, which is NOK 1.52 per share. Go to the market outlook. I think we have for a while said that the last part of 2024 and into 2025 is a little more slow in the market. But however, we see a significant step up in the second half of twenty twenty five. I will come back to why we see that and how we're going to how we'll reach that and stand behind that statement.

We still Norway is a good market, has been for quite a while with the Norwegian oil and gas business supporting Europe and other areas for with the gas and hydro problems in this very unstable situation in the world. The forward in the Norwegian market is strong. It's going to be quite a lot of drilling activity, quite a lot of well construction activities and also coming more P and A protege impediment activities. That goes also within The UK sector. So Norway is a good market to be in.

It's the biggest offshore market in the world, and we have a very good position there. So that's a very strong and stable market. We see also U. K. As a good market, more kind of our operations over there.

We see growth within we are getting a lot of tellers regarding plug abandonment and also well served services and drilling operations. What I think is maybe the areas we are focusing more at now is The Americas. We have recently established our office up in down in at Houston in Texas. We have I was there a couple of weeks ago when we have met. We are now in engagement with local companies to establish local partnership for the Gulf Of Mexico.

We also are very actively in tendering activities down in South America, especially within Brazil. Over major clients back there, down there is really a main service provider like typical Baker and Halliburton (NYSE:HAL) and Schlobacher, SLB. So we positioned ourselves for growth in those areas. And even though the deepwater market has a slowdown now currently in maybe 2025 and maybe into 2026, clearly, there's a ramp up of activities both in South America and West Africa. We expect that coming late twenty twenty five or into 2026.

We are close to both of those markets, both within our sister company and also drilling. So we have a quite good overview of what's going to happen with with the drilling activity, and we kind of we tag along on that information and knowledge. We also have a significant raise in tender activities in The Middle East. I can highlight Kuwait, Qatar and Saudi Arabia. We also expect in the future, we are in a very, I would say, nice position in Turkmenistan at the Caspian Sea, where we provide the services to Dragon Oil.

And we also expect not to find future extension of the contract we already have there, which is a very important contribution to our services within well services. What's What's quite interesting is that we also see more activity in the Asia Pacifics. We have already established ourselves with Shell (LON:SHEL) contract in Brunei with the workover project down there, but we also see more activity in Brunei coming with major clients. And we also see Indonesia and Australia actually as an interesting country for servicing our webhook cleanup tools, our weak stock tools and more on that. Also, we see plug abandonment activity ramping up more in those areas.

So by being present in the area with both tools, people and contracts, we feel that we are quite well positioned for the raise in activity coming, I guess, late twenty twenty five into 2026. So these are the reasons for us to say that slow start of '25 to late twenty four into '25, which is quite commonly frequently commented upon by all our competitors and peers. So that's not a surprise. But we but our position is that we see that over services will be we expect a raise in activity level late second half of twenty twenty five. So just an overview on the backlog.

We have a stable and good backlog. So we feed more activity into the backlog. So it's kind of stabilized 13,000,000,000, 13 billion, 13 point 5 billion. Of course, quite a lot of these are based on operations, long term contracts. But this it's quite good to see that also where the services are picking up more activity.

And what is also good is that we have been able to renegotiate the extensions on existing contracts in the North Sea with better terms and conditions. So this also will improve our margins in those areas where we have seen in the mix of the services we are providing, we have seen that some areas has dropped margins, but we have also been able to kind of pick up on the execution of the options to pick up a better terms and renegotiate some of that to improve our margins. I'm quite pleased to say that we have next, please. We have I'm delighted to say that we have gained we have entered a corporation a strategic cooperation agreement with the company called WeWell. We have been asked frequently why we why NOV over the agreement with NOV has been terminated.

We still do we still run well wire pipe drilling on several over rigs. But NOV has decided to do all by themselves and has entered the same agreement with AKA BP (NYSE:BP). I said back then, there are other opportunities in the market, and this is clearly one of them. This is not just a wire pipe, it's also a power pipe. We know we were well from the history.

They started actually to develop this technology back twenty years ago. And now it's proven. Now it's running in onshore U. S. And we are sorry, sorry, this mute and coughing.

Sorry for that. We have entered this agreement with that company. And this is the only wide drill pipe to leverage digital real time telemetry wellbore power and better reliability downhole, which is actually resulting in a much better well and more efficient well construction. And also, we can reduce impact on climate by reducing needs for downhole batteries and also less emissions. So in that aspect, this product actually tick off all the right elements.

Our strategic cooperation so far has been that we have won the first contract with WAR Energy with one power pipe. And there are several other options as we speak, where we can easily, I say, if clients tick off what they want, we can also increase these numbers with more than one strength. This is replacing really the observed uncertainty in the so called high margin product line we have. This is the same and even better. So with the exclusive agreement we have in Norway for a time being that all power pipe strings shall be delivered by Ortfel Technology for the next five years plus five one year options in the future.

And Norway is going to be the market where this is going to be tested fully offshore. It's going to be typical Equinor clearly, water energy, also, Aker BP, even though they have a frame agreement with NOV. We will see that if this product works, they will be very difficult for anyone else to replace it overnight. So it's a long term development and all these technologies are protected by IPs. And we also have got quite significant interest from major clients back in the Gulf Of Mexico, in Brazil and all over the world.

So we clearly see that a slow start could be a great future on this. We very much believe in what we see here. And with the formal agreement with RealWell and the close cooperation we have established, we will be the one, together with them, provide this new product into the market. And we see this clearly as a game changer for downhole operations. Power pipe means that you can power tools without having batteries downhole.

You can do much more efficient and much quicker construction activities. You can do more accurate horizontal drilling. And typical major service providers like Halliburton, like Baker and SLBs are enthusiastic about this tool that actually give them the right, in a way, connection between topside drilling and their own tools down the hall. Meaning, bottom hole assemblies may can be made much more efficient and shorter and less vulnerable. So there's a lot of websites here, and we look forward to engage with Ward on the first ring offshore, and by the excellent railway references we have got from The U.

S. By one of the players that used this today is Neighbors of Onshore Drilling. We clearly see that their experience from onshore drilling is fantastic. They're gonna order more, We're going to bring this into the offshore era and offshore market will be done by Odfjell Technology. This is you heard me quite enthusiastic about it.

It's a breakthrough and it's a game changer regarding the product and technology. We have also decided to keep up our dividend policy. We have strong balance sheet. We are ticking off all the elements on the incurrence tests. We have decided to continue to pay NOK 60,000,000 in dividend in Q4.

Frequently, I'm asked, what about the future? If we deliver on what we have in our strategy, this number is at least not going to be lower. I also said last time about over when we saw back in first half last year that the market will be more slow in 2025 late '20 '20 '4, '20 '20 '5, we initiated what we call a performance and improvement program, which is actually in our legacy. This is how we operate. This is how we work.

And we established that program in March, April last year. This is to improve financial performance. This is improved margins. This is improved competitive edge. We have a very structured and systematic approach to the whole thing.

We have done it before. We have been through crisis before. This is absolutely not the crisis, but we use the same systematic and the same models. So what's going to happen here is that we will reduce organization where that fits in. We have already identified areas where we're going to make it more efficient.

We are not reducing the organization because of lower market. No, we are replacing in my work processes with more digital solutions, meaning that we can actually free up capacity to be more efficient and do more. I expect that the results from this program will be significant regarding bottom line effect. I will not say any number, but it's a the potential is a very high number. So when that happens, I will share more.

But we expect the contribution to the second half will be partly done by this program in this year, especially late Q3 and Q4 and into 2026. I think this is a way to adjust and sharpen up the organization and our tools and deliveries, investments and where we focus to be to deliver on what we actually are saying here. Well, when I'm saying that we got a step up significant second half, this is part of it, on top of what we see coming from tender markets and activity in the markets. Remember, we are operating in our 35 countries. Some of the countries we see a slowdown, but most of them we see a ramp up.

As I mentioned, Middle East is coming up more, Asia Pacifics with the countries I mentioned, and of course, also Americas with Gulf Of Mexico and South America. So these areas are of interest and the program we talk about here is paramount to the liver on and we have high attention from the organization and is implementing all business years where that has been affected. And I see a lot of energy and enthusiasm to make this happen. Okay. With this, I think, Joonen, you can take over on the digging down into the more detailed financials.

Thank you.

Joona Thorstensson, CFO, Otfield Technologies: Thank you, Simon. I will give an update on the financials starting with the group financials. Results current quarter versus same quarter previous year was a revenue growth of $108,000,000 with higher activity of operation and well services. EBITDA dropped with 32,000,000 driven by shift in product line mix in well services, impacts of no renewed CCS contract in well services and reduced bonus achievements in operation. Cash generated from operation in Q4 twenty twenty four is $262,000,000 and available liquidity is $1,100,000,000 The results current quarter versus previous quarter revenue growth of $116,000,000 and EBITDA reduction of $10,000,000 The year end EBIT figure of $825,000,000 dollars includes one offs of approximately $25,000,000 covering legal costs related to HMRC tax case in UK, other personnel related costs, at Zetta.

Some words about the dispute with HMRC relating to OT UK North Sea drilling operation. The dispute concerns whether OT UK is liable for secondary class national insurance contribution for drilling crews operating in the North Sea based on its classification as the host employer. The ruling received in early January was in HMRC favor. Legal advisers as first and King Council have recommend appealing to upper court. Both OTL and its legal adviser maintain the view that OT UK has a good case, and we expect that appeal will be in our favor.

Let's have a look on the business area, starting with Well Services. Result current quarter versus same quarter previous year. Revenue has increased slightly, driven by higher revenue in Middle East, increased activity on wellbore cleaning in Africa and Norway and great activity in Europe. EBITDA decreased to $49,000,000 due to changes in product mix globally. The EBITDA margin in the quarter is 29%.

The EBITDA margin in 2024 is 33%, excluding pass through revenue of $211,000,000 adjusted EBITDA margin for 2024 is 36.4%. Next (LON:NXT). Operations. Result current quarter versus same quarter previous year. Revenue increased with $103,000,000 mainly driven by higher activity level in UK and Norway.

EBITDA decreased with $8,000,000 due to lower bonus achievement and cost related to contract closing handover on Heidrun and Bargain. For the current quarter versus previous quarter, we increased the revenue with 80,000,000 due to change in product contract portfolio. EBITDA decrease was 12,000,000 impacted by contract close handle of Piedron and Marguerite. Next business is Project Engineering. Results current quarter versus same quarter previous year.

Revenue decreased with $9,000,000 mainly driven by project postponements. EBITDA decreased of $5,000,000 due to lower utilization. Results current quarter versus previous quarter, revenue down with $6,000,000 and EBITDA up with $6,000,000 due to higher utilization. For the cash balance sheet, balance sheet is robust with high financial flexibility. The equity ratio is now 33% versus 29 at N23.

Available liquidity is above $1,100,000,000 The working capital in Q4 has improved $81,000,000 compared to Q3 'twenty four. We have spent $365,000,000 in CapEx in 2024. Well services part of that is $350,000,000 mainly driven by high replacement of equipment and contract wins. We have increased the dividend payments during 2024 from $35,000,000 in Q1 up to $60,000,000 in Q3 and Q4. The RCF of USD 50,000,000 is still unused undrawn.

Finally, the last twelve months development for OTL. OTL has demonstrated consistent revenue growth since it established Mint, while EBITDA has declined slightly over the last two quarters and an improvement is expected in 2025. To sum up, OTL remain focused on its strategic direction, strong cash flow and improved working capital in Q4, Order backlog remains robust, ensuring significant revenue visibility. Hotel secured a strategic cooperation agreement really well and led the first contract with Boer Energy. And finally, the performance and improvement program is on track, aiming to deliver higher margin in 2025.

Geerta Urglan, SVP Finance and Investor Relations, Otfield Technologies: I think that concludes the presentation and we will take a few questions and we'll start with the calling questions. Thank you. There are no questions coming through, so I hand back over to you, Geert, to take questions from the webcast. Okay. We have a few questions.

The first has to do with HMRC and the timeline. Maybe you can answer that, Jonas?

Joona Thorstensson, CFO, Otfield Technologies: Yes. The first has been on the first quarter level now. There is two or in worst case, three additional levels, which can be appealed to. So if we go the whole way, it could end up in 2027. And the point is, there's no cash out before final decision.

Geerta Urglan, SVP Finance and Investor Relations, Otfield Technologies: Yes. Another question is on the CapEx. In light of the higher CapEx in 2024 than we initially guided or estimated, what can we say about the CapEx in 2025 and 2026?

Joona Thorstensson, CFO, Otfield Technologies: Yes, I can start and maybe Siben can follow. As we said that we have said that it has been a lot of CapEx this year and explained why. What we set as a normalized cash for a year is approximately SEK $250,000,000. If we have additional extraordinary business opportunity with high margin, we will do that, and that example of that is real well. So we expect SEK $250,000,000 going forward for the next two years on

Geerta Urglan, SVP Finance and Investor Relations, Otfield Technologies: the

Joona Thorstensson, CFO, Otfield Technologies: ordinary

Simon Leung, CEO, Otfield Technologies: operation.

Geerta Urglan, SVP Finance and Investor Relations, Otfield Technologies: Okay. We also have a normal question, which goes to buyback of shares instead of dividend. And I think that's a discussion that has been going on for a while and I think it is something that will be considered. And for right now, we have focused on the dividend, but it is something that will be discussed in each board meeting. And I think that's all we can say at this point.

We have questions about the revenue in Q3 and Q4 or for Q3 and Q4 for Well Services when it comes to pass through. And I think what we saw in Q4 in 2024 is that the pass through was very high and the total figure for the year was SEK $211,000,000, but SEK 80,000,000 to SEK 90,000,000 of it ended up in Q4, which pulled down the margin significantly for Vela services. This is a typical part of the business where we have contracts, where we see the risk of high maintenance costs is handled through making the customer responsible for it. And we have agreements saying they will pay for the maintenance and repairs and it fluctuates a little bit. We have not specified this before, but have brought it up this time.

And I think we can say that it was much higher in Q4 than it was both in Q3 and Q4 the year before. So I have a questions on the start up of the Brunei contract. I think there's no big changes, but it will be early Q3. So I think the estimate right now is still for July 2025. What's the main contributor to the anticipated margin improvement in 2025?

I think the focus is going to be on cost initiatives quite clearly. It's improving the efficiency in the organization. And of course, we're not basing it mainly on the revenue growth. It's about making us more cost effective and making sure we have the right headcount compared to the activity level, but mainly focusing on improving our processes. I think we actually have some technical issues with SIEMEN and I think we've been through the main questions And we'll conclude the Q and A here.

I thank you all for joining today's call. Please contact me if you have additional questions that were not answered today and have a nice

Joona Thorstensson, CFO, Otfield Technologies: weekend.

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