Saipem SpA

MIL:SPM

Earnings Call Transcript 2022-Q4

[Operator]

Good morning, this is the conference operator. Welcome and thank you for joining the Saipem Full-Year 2022 Results Presentation. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Alessandro Puliti, CEO, please go ahead sir.

[Alessandro Puliti, Chief Executive Officer]

Good morning, and welcome to Saipem full-year 2022 results presentation. I'm pleased to have with me Paolo Calcagnini, CFO, and our Chief Operating and Commercial Officers.

Today's session is on the results of last year and include a strategy update. Starting with quarterly financials, Q4 was another quarter of strong delivery with a robust growth in revenues, plus 72% year-on-year and an adjusted EBITDA at EUR150 million, driven by our Offshore businesses. For the sake of comparison, these figures [Technical Difficulty] no longer include Drilling Onshore, which was booked as discontinued operations and disposed to KCA Deutag at the end of October last year.

Order intake in the quarter was robust at EUR6 billion, contributing to an extraordinary full-year order intake of around EUR14 billion. Book-to-bill in full-year was 1.4 times. Finally, financial net debt pre-IFRS 16 was negative by EUR56 million. For this reason, we indicated it as net cash.

After lease abilities, we closed at the end of December, with a net debt of EUR264 million, slightly better than our guidance of around EUR300 million. In few words, Q4 results are the outcome of a continuous delivery on existing backlog, while we built our future with new contract acquisition, the bulk of which in offshore.

Before handing over to Paolo for the review of the financials, I would like to wrap up the delivery of our strategy, which, as you recall, was presented last year in March. As you can see from the slide, we delivered on all the promises we made. Revenue growth was very strong with EUR10 billion revenues in the full-year, growing by over 50% versus 2021. We returned to profitability with an adjusted EBITDA very close to EUR600 million, delivering on our guidance, also thanks to well over EUR150 million of cost efficiency delivered during the year.

As I said earlier, also the net debt at year-end delivered on the target. In terms of order intake, our record award at around EUR14 billion was over 70% in Offshore, both in Engineering & Construction and drilling. As you will see later, the mix has visibly improved year-on-year.

On the E&C Onshore, as promised, we remain very selective and EUR3.7 billion of awards were in line, consistent with the plans. Moreover, we leveraged on Offshore Drilling momentum. Our fleet had zero idleness during the year, and our awards leave us well positioned in 2023 and 2024, with respectively, 87% and 70% of bookings already secured.

In Offshore Wind, we mentioned several times the phased approach in order to first complete what we have in the backlog. We actually completed three offshore wind projects and the remainder of the backlog is proceeding in line with the revised schedules with clients. While we keep on delivering existing backlog, we will approach the market also leveraging on the commercial agreement we have announced with Seaway7 to jointly identify, bid and execute fixed wind projects. In terms of cash action to unlock liquidity, the milestone was the Drilling Onshore sale for $450 million cash along with a 10% stake in KCA Deutag.

And finally, on the risk in the business, we exited two projects in Russia, and we are exiting the remaining two, in full compliance with the sanctions. In a nutshell, all these achievements are the result of strong commitment from the management team, which I represent, and the organization, which has been able to deliver what I consider a very satisfactory performance in a challenging year.

I will now hand over to Paolo for the review of the financial of the year.

[Paolo Calcagnini, Chief Financial Officer]

Thank you, Sandro. Thanks, everyone. Thanks for joining the call today. Starting from page eight of the document. But before I go through the numbers, just a couple of quick reminders. First one is that these numbers do not include the Drilling Onshore anymore, while they were included in the reporting of the nine months of 2022. And second, is the last time you will -- we will report the numbers according to the old business units, because from the first quarter of 2023, the numbers will be shown according to the new organization.

Now moving to the numbers. The 2022 -- in 2022, we made an EBITDA of roughly EUR600 million, EUR595 million to be precise, with an EBITDA return of roughly 6% over revenues. And the adjusted net result was negative for EUR140 million.

Now two comments on these numbers. The first one is that the margins are still diluted by the backlog review, because those are projects whereby the margins, they contribute revenues, but they don't contribute to margins because the single project contribution to EBITDA is zero, and that explains the 6%.

The second comment is that we reported a small negative net result in Q4. This is due to two factors. The number one is that we paid a bit more taxes than one year ago, because -- in many cases, we pay taxes based on withholding taxes. That means that when revenue increases, then taxes increase as well before you register profits on the projects. And the second is the results from equity investments, but I will comment on equity investments later in the presentation.

Now moving to page nine. Let's deep dive on the business line and let's start from E&C Offshore. So, the E&C Offshore posted revenues for EUR5.1 billion in 2022. The positive trend across all regions that we recorded already in the first nine months continued with a positive contribution across all regions where we operate our Offshore business. The margin was 8.2% in 2022.

The comment that I made before, regarding the effect of the better review apply also in Offshore. As you know that the Offshore business include also the wind activity that was impacted the most by the backlog review. The overall 2022 returned a good set of numbers in the wake of both market strength and most important, the execution in line with the schedules, including Offshore Wind, but Sandro will comment on Wind execution later in the presentation.

Now moving to the 2023 perspectives. We expect revenue growth and EBITDA to be significant. And as market demand remains strong and the weight of the backlog projects become smaller and smaller and the execution moves on.

Now on the Drilling Onshore, you see the -- you can see that from the numbers, an increase of over 40% in revenues and 50% in margins. This is due to at least three factors, all positive. Number one is the fleet utilization, all vessels worked in 2022. Second is increasing market rates that we are consistently enjoying both in shallow water and deepwater vessels. Third is the fact that in 2022, we started the operations of the Santorini at the end of February. And then -- so there is a positive contribution, compared to 2021, where the vessel was not in operation.

And also a few other jackups that started the operation late in 2022, so they are contributing to 2022, but they will contribute even more in 2023. You will see a small decrease in margins in the last quarter. This is due only to the fact that we had to sustain the cost for preparing all the new jackups that will start or started to work or will start to work by beginning of this year or end of last year. So, we registered the cost, while the revenues and margins will be recorded in this year.

This is to say that in 2023, we expect to have a solid improvement in both revenues and margins. And for the same reason, I mentioned before, in addition to the fact that now the fleet is fully booked for this year, and we already paid for the start-up costs of most of the fleet.

Now moving to page 10. We are -- you see the numbers for E&C Onshore. Now the messages here are a bit different from the other two businesses. For the reason being that it's a mix of positive and negative factors.

Now let's start from the negatives. As you may remember, the Mozambique project was interrupted in April 2021. And so, it accounted for a significant part of 2021 revenues and margins, while the contribution in 2022 has been very limited, both in terms of revenues and margins. And second, although for different reasons, we terminated all the activities in Russia during 2022. So again, 2021 recorded the effects of the Russian projects, while the effect on 2022 in terms of revenues and margins are close to zero.

Now despite these two effects, so Mozambique and Russia, most of the remaining projects in E&C, particularly, in the Middle East and Latin America recorded a very strong performance, both in terms of revenues and in terms of margins. Now you see a number which is close to breakeven, and the reason being that E&C is the business -- Onshore is the business where the backlog review accounts the most in terms of relative weight on total revenues. And thereby, the result is that those projects bring the margins close to zero.

The good news is that the pace at which we are delivering on those projects is significantly derisking the portfolio of the company. Obviously, we have better expectations for 2023 as long as the backlog review projects weighed less and less on the total business of the E&C.

Moving to page 11. You see the P&L of the company. I think we went through the -- already through the important figures, but just a couple of additional comments on these numbers. Number one, is that the difference between reported and adjusted figures is getting smaller and smaller. This is good news, because it's a strong signal that the effects of the COVID and other non-recurring items is becoming less relevant to the total group numbers.

Second comment is that we went through it already, but it's worth going through it second time, is that below the EBITDA, there are a couple of things to keep in mind, the first one is the net financial expenses that were higher than Q3 and higher than 2021. The reason being that the company went through an important restructuring of the -- of our balance sheet and then we delivered the entire financial package in 2022, even though the last part was signed, if you expect, and that accounts for a big part of the increase in financial expenses.

The second is that we recorded a negative result for the -- from the equity investments. It's quite a few items, but the biggest part being the closure of the Russian activities. We had four projects, two have been closed almost three. And on those investments, the exit recorded a small loss that weighs on Q4 numbers.

Now moving to the cash flows and net debt evolution. So, I'm referring to page 12 of the presentation. You will see a bridge between the net debt at the end of December, the net debt at the end of December. And I think it's worth highlighting the area in blue in this chart, and especially the first two items that are the net results and the evolution of the working capital. Because if you sum up these two numbers, the EUR75 million and the EUR47 million, you get a positive cash flows from the operations of roughly EUR120 million.

Now this number includes all the effects of the backlog review that were roughly EUR150 million in Q4 and the reversal of the advanced payments. Now the reason why I'm mentioning these two factors is because you know that the backlog review was accounted for in 2021, but the cash out is still happening. And because we -- as we progress on those projects, we use the funds that have been provisioned, but we also have the cash out to complete the works. So the EUR150 million should be added to the EUR120 million, if you want to get a pro forma number, so getting rid of the backlog review effects.

And then you have the reversal of the advanced payments and -- which is negative -- was negative in Q4. The reason being that the acquisition of new projects in E&C Onshore, which is a business where you traditionally get the advanced payments, was lower than in the previous quarters and in the previous year. And so by that, you are -- we are using the advanced payments that we got on the backlog without a replacement in full of the amount.

So -- and then you have on the net debt evolution, the proceeds from the Drilling Onshore sale, which is the EUR497 million you see in orange in the chart. And the CapEx where you may remember, the CapEx includes EUR220 million of the Santorini that we acquired in December 2022. But all the other effects are a small -- relatively small, so I wouldn't go through them. All in all, these numbers allow the company to get to a final net financial position, it was EUR269 million in terms of net debt was better than the guidance we shared in end of November.

So my last comments will be on page 13, where we summarized the liquidity position of the group vis-a-vis the debt maturities we will be facing in the next few years. Now on the left side of the chart, you see the liquidity position as of December, we had EUR2.6 billion -- almost EUR2.7 billion of liquidity composed by EUR1.4 billion of available liquidity and EUR1.3 billion, which is in JVs or other countries.

And in addition to this position a few weeks ago, we signed two new facilities. The first one is a new RCF for roughly EUR500 million. And the second is a term loan of EUR390 million, which is 70% guaranteed by the Italian export credit agency. While on maturities -- these are clear lines available for the group, we're just waiting for the ministry decree to be signed.

On the debt maturities on the right side on the slide, you will see that we will have maturities for roughly EUR800 million this year and less than EUR100 million in 2024. So, what -- I guess the key message of this chart is that we see the liquidity position to be very healthy and very adequate to face the maturities for the next at least 24 months.

But if you look at the numbers, we can be even more optimistic about the maturities where we have already covered to the financing signed so far. And we also believe that the improvement in the credit rating is reflecting the better perspectives in terms of financial strength of our group.

Alessandro, back to you.

[Alessandro Puliti, Chief Executive Officer]

Thank you, Paolo. Moving on to the business performance. I want to draw your attention to the last year positive commercial momentum and the relevant order intake that we have been mentioned earlier. The bulk is Offshore, which have historically been high margin. And the level of awards has been so meaningful that in full-year 2022, we have already achieved over one-third of the acquisition expected in the 2022-2025 plan. We can call it a good start.

Looking at the next slide. Last year, we increased the backlog from EUR23 billion to EUR24 billion. Within the EUR24 billion, the non-consolidated backlog amounts to less than EUR400 million as a result of the cancellation during 2022 of around EUR800 million of the two non-consolidated project for Artic LNG 2 in Russia. The orderly exit from these two projects is ongoing, consistently with the provisions and the time frame of the sanctioning framework.

There is a clear trend in our backlog. We went from 34% Offshore at the end of 2021 to over 50% at year-end 2022, including both Engineering & Construction and Drilling. This trend is fully in line with our strategy and also reflects our strategic decision to dispose the Drilling Onshore business. Our backlog is well diversified across geographies, with large exposure to national oil companies, which not only have been quite resilient in their spending during the downturn, but also are expected to keep deploying their robust CapEx plans in the near future.

And now I would like to provide an update on the Offshore Wind projects currently in backlog. We are committed to complete these projects in line with the schedules agreed with the clients, and we are progressing well along this way. In fact, the overall physical progress at the end of last year was around 85%.

Briefly, Saint-Brieuc T&I for Formosa 2 and Fécamp projects are completed. On Seagreen, we have installed 106 jackets over a total of 114. The fabrication of the two OSS jacket for Dogger Bank project has been completed. The jackets are now sailing to the North Sea, and the offshore installation will start late March.

In Scotland, the work on the foundation for NNG is progressing. The first batch of 10 jackets has been delivered and installed offshore. And the two new substations are now both installed. Further 10 jackets have already reached the North Sea, while additional 14 are on their way. Finally, the manufacturing of monopiles at the Courseulles-sur-Mer in Normandy is at good stage of progress in view of the installation campaign in late this year.

Before moving to the strategic update, let's see what's next in terms of commercial opportunities for the next few quarters. We have in front of us a meaningful volume of near-term opportunities worth EUR51 billion, with a 24% growth versus EUR41 billion we projected at the end of October last year. And within these opportunities, around 65% is Offshore, which we like. This is the tangible sign of the solidity of the super cycle, which results in a growing addressable market for us.

And now we move on to the strategic update. First of all, I would like to highlight that we are progressing along the strategic plan path outlined one year ago. How we want to do that? Through a new organization deployed last year, which is organized in the following business line. First, asset base, which includes E&C Offshore, Drilling Offshore and Offshore Wind; second, but not for importance, energy carriers, which includes the E&C Onshore and finally, sustainable infrastructure and robotic and industrial solutions.

As Paolo said before, going forward from the first quarter, the reporting will follow the new organization. At the bottom of the slide, in the blue area, we have indicated the weight of the expected awards for each business line over the 2023-2026, horizon and the percentage over the total. If we do a quick math, it is clear that we expect over the period of 2023-2026, a further increase in the weight of Offshore Wind of Offshore activity. While we are developing new segments that will contribute to increase our low carbon for Net Zero activities volume. I will comment more on this later.

So, let's now analyze in that the strategy for each business line. Starting from the asset-based services and in particular for the Engineering & Construction Offshore. In this segment, we want to continue to grow, taking advantage of the positive demand cycle, strengthening our positioning in the high-margin subsea area. For the subsea, the key markets are West Africa and Guyana, while the large sized platforms in shallow water will remain our focus in the Middle East, West and North Africa.

Trunkline opportunities are more widespread worldwide, and we will go after them, including trunklines, but also platforms linked to CCUS and hydrogen ammonia hubs. To secure capability to win and execute large projects, we have signed a new charter contract for our latest generation deepwater, heavy lift and pipelay vessel with cutting-edge capabilities. Furthermore, we want to consolidate our position in the reeling market.

In the integrated projects, we will remain commercial, flexible and remain open to cooperation, while strengthening commercial alliances. From this strategy, we expect an order intake over the plan horizon for Engineering & Construction Offshore of around EUR24 billion or 50% of the overall group volume of acquisition with the SURF more than EUR11 billion and conventional close to EUR13 billion.

Before moving on, a brief courses on the concrete actions we are taking to meet our Net Zero targets. A few days ago, we signed the MoU with ENI Sustainable Mobility for use of biofuels on site and construction and drilling offshore fleets that should allow us to significantly reduce emissions.

Coming to Drilling Offshore. We want to keep on exploiting the positive market momentum. In order to do that, we intend to further expand our capacity and rejuvenate the fleet mainly through a capital-light strategy in both deepwater and shallow water units. With the recent investment in the Santorini and the new leases of three jackups and the DVD drilling ship, the average age of our fleet has been reduced to 13-years. We are targeting an average fleet age at 11-years by 2024, which means eight year lower than 2018 when the average age was 19-years.

In terms of geographies, we plan to strengthen our presence in the West Africa, the Norwegian market and the Mediterranean. As of today, the fleet is already booked at 87% for the current year and 70% for the following one, which is a very promising starting point. We plan to further improve the utilization by winning an order intake of around EUR2.8 billion from 2023 to 2026. Finally, while reinforcing our position in these businesses, we remain open in considering opportunities of asset monetization, especially in the shallow water segment through agreements with financial or industrial partners.

To conclude the asset-based services, let's move to the Offshore Wind. First and foremost, we must keep our focus on the execution of the current backlog according to the schedules agreed with the clients. Going forward, we will be much more selective on commercial opportunities and leverage on past lessons and our capabilities to build the foundation to become a stronger player in the segment.

First of all, we will target transportation and installation and EPCI for formulation of large substations. Secondly, we are joining forces -- last week, we announced the commercial alliance with Seaway7 for fixed offshore wind that will leverage the complementarity of our fleets, combining site, and heavy lifting and efficient fabrication and Seaway7 heavy lifting transportation and cable laying. This will allow us to target megaprojects with higher volumes or extra-large turbines.

For [Dammam] (ph) we will continue investing in floating technologies, primarily our proprietary design STAR 1 and HexaFloat and exploring alliances with major shipyards to improve the EPCI proposition and better manage risk. The expected order intake of Offshore Wind is EUR3.6 billion or 7% of the overall acquisitions.

Coming now to energy carriers. We will be commercially selective further positioning Saipem in the energy transition, while managing the execution risk to strengthen our role in the energy transition, we will focus on LNG and gas monetization at the same time continuing to explore partnership and M&A to enrich our portfolio of high-tech solutions. Over the plan, we will try and increase the share of recurring revenues, growing in the operation and maintenance and in the engineering services.

Finally, to drive value and manage risk of execution, the ingredients will be the following. First of all, front-end design since the very preliminary phase of engineering; second, increasing their share of cost plus and hybrid contracts over our portfolio; third, maximizing the pre-award agreements with our suppliers and establishing partnership for securing resource capability, gaining competitiveness and enhancing the geographical presence. The expected order intake on the horizon of the plan for Engineering & Construction Onshore is EUR14.4 billion or 30% of total acquisitions.

Regarding sustainable infrastructures this is a business that in 2022 was accounted and included in the E&C Onshore, and we are now projecting in a separate line -- on a separate business line. First and foremost, in this business, we will leverage over 30-years of experience in railway infrastructures starting from Italy, where we want to target the National Recovery and Resilience Plan investment part expected at around EUR15 billion solely for strategic transportation infrastructures.

Moreover, we see opportunities for high-end services in smart infrastructures and technology solutions. In parallel to targeting our domestic market, we will try and win projects internationally, thanks to our global geographic footprint. Sustainable infrastructure is expected to bring EUR1.6 billion in awards in the fourth-year plan.

To extend the support to the energy transition and decarbonization to clients beyond the traditional oil and gas segments, we are developing industrialized solution along a variety of verticals. For carbon capture, we added to our portfolio, the Bluenzyme 200 product based on a proprietary and enzyme-based capturing solution. This is an ideal solution for small and midsized emitters.

In plastic to liquid, we will invest in innovative technologies and design modular plant for chemical plastic recycling, starting from the most common PET to support utilities and waste management companies in serving the growing demand for chemically recycled PET. In hydrogen, the focus will be mainly on green hydrogen and its derivatives like green ammonia and green methanol.

Under the sea, we trust our combined solution, integrating the EPCI phase with the maintenance and repair using resident drones. This will enable further cost efficiency in decarbonization efforts for all our future subsea development of energy clients. Finally, we are well positioned in the emerging market for subsea asset integrity, emergency subsea intervention and security surveillance of pipelines. All in all, for this business, we expect EUR1.9 billion of awards over the plan horizon.

Wrapping up, the overall order intake we are projecting for Engineering & Construction is EUR46 billion. 61% will be Offshore. And as you know, this is high in the mix in terms of potential margins, while 39% will be Onshore, lower margins, yes, but far less capital intensive. And the good thing of this order intake is that a quarter of it will be made by low to zero carbon activities, including Offshore Wind, sustainable infrastructure, plastic recycling, carbon capture, and robotics and industrialized solutions.

Since we are mentioning activities to support our clients' journey in the energy transition, I'd like to close before moving to financial targets with our plan to reduce our carbon footprint. In this diagram, you can see our journey toward Net Zero. We have set clear targets. I want to point out that this road map should be considered a leading picture since all actions are systematically updated, taking into account the latest development in technologies. The road map start with the application of existing technologies. Our initial focus will be on the retrofit of assets and improving efficiency of our operations.

Moreover, a key action to achieve our targets will be the use of biofuels in particular, HVO for our vessels in partnership with our clients. In this respect and to boost this crucial action, we have signed MOU with ENI Sustainable Mobility for the use of such fuel on our offshore fleet, in particularly in the Mediterranean Sea. This fuel can potentially lead to a reduction of emission by around 550,000 tons of CO2 equivalent per year or 60% of our annual Scope 1 emissions. We are positive on our ability to achieve the targets. As the more we undertake these, kind of, actions, the closer we get to them.

Let's now conclude with the guidance for this year and targets of the plan. In 2023, we expect revenues over EUR11 billion and an adjusted EBITDA of around EUR850 million. CapEx are expected in the region of EUR550 million, driven by the preparation of the new leased vessels to meet the growing demand from customers.

Bottom line, 2023 free cash flow should be at breakeven, leading to a positive net cash position pre-IFRS 16. Post-IFRS 16, we expect a net debt at year-end at around EUR500 million. And the year-on-year increase will be solely, due to a step-up of lease liabilities from the rental of new offshore construction vessel.

In 2025, we expect to get a double-digit adjusted EBITDA margin. For 2026, which is the last year of the plan, we expect revenues over EUR12 billion, adjusted EBITDA over EUR1.2 billion, free cash flow higher than EUR600 million, a positive net cash position over EUR700 million post-IFRS 16. Finally, on investments, we expect a cumulative CapEx over the full year at around EUR1.2 billion.

And at this point, I will turn the floor to the operator to open the Q&A session.

[Operator]

Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Alessandro Pozzi with Mediobanca. Please go ahead.

[Alessandro Pozzi, Mediobanca]

Hi, good morning and thank you for taking my questions. I think it's good to see another set of results. And I guess, it goes a long way in rebuilding the trust from investors after a difficult 2022. I have two questions from me. The first one is, can you provide more color on the pricing environment in Offshore and in particular, for E&C activities? I think it feels like that you're maybe getting close to full utilization capacity and possibly that will push up pricing in 2023? And maybe that's also why the reason why you've -- you are leasing more vessels in the E&C segment as well? And on this point, I was wondering, within your plan, are you planning to lease more vessels going forward in order to achieve the -- around EUR30 billion of orders in the Offshore? That's the first question.

The second question is on the backlog review. As you pointed out, you've taken all the impairments, the write-downs in ‘20 last year in ‘21, but the cash out was out in ‘22, but also will be out in ‘23 as well. So how much of the backlog review will be left at the end of 2023, in terms of cash outflow? Because when I look at the capital employed, there is still a fairly large negative working capital position at the end of ’22. And I guess, probably a part of it is the provisions that will be reversed out in 2023? That's all from me.

[Alessandro Puliti, Chief Executive Officer]

Okay. Thank you. Thank you for your questions. So to give you more color on the E&C Offshore activity, certainly, what we can surely state is that the market demand is larger than the current capacity that all the E&C Offshore contractor that can offer at this time. So certainly, there is tension in the utilization of the shore fleet. Our fleet is fully booked, and projects are coming one after the other with basically zero idleness for the fleet.

And this is the reason why we are leasing a new pipe lay vessel and -- this is a vessel that has both capabilities, pipe laying and also heavy lift because it is equipped with a crane of 5,000 tons of pulling. So this definitely will help us to serve our clients in their subsea developments that is -- this is the most part of the demand that we see ahead of us. And this is the answer.

Whether we will take a further vessel to support our fleet? We don't have further plans for the time being. But certainly, if the market will continue to push and push, then we will see which opportunities we will come -- that will come in front of us. Certainly, the basis is what I said at the very beginning of the answer. Demand is greater than capacity generally, not only for Saipem, but for all the E&C offshore contractors.

Backlog review. What is left, end of 2023? I leave to Paolo to give you the precise number.

[Paolo Calcagnini, Chief Financial Officer]

Thanks, Alessandro, for your question. So, the largest part of the backlog review will be executed this year. So -- and that explains why we foresee a breakeven in terms of free cash flow, even though the margins are north of EUR 800 million. There is going to be a small bite remaining in 2024, which we are talking about less than EUR 200 million in terms of cash out.

[Alessandro Pozzi, Mediobanca]

All right. Thank you. And maybe one more for me. In terms of assumptions for Mozambique for 2023, how much do you have in the backlog? And also, can you provide us maybe an update on the renegotiations for the Onshore E&C projects? Because, I think on one side, we have Saipem saying, look, we need to have a look at the cost structure if you want to go ahead with the project. On the other, you have Total saying, hey, we don't want to be held hostage of contractors before we're starting the project. So I was wondering where we are in the negotiations of repricing for those contracts.

[Alessandro Puliti, Chief Executive Officer]

Okay. So, let's start from the last point you mentioned, and even you didn't mention Mozambique, it's clear referring to Mozambique, your question, so let's call it with its name. So first of all, I would say that we expect to gradually restart the project according to the information received by our clients starting from July this year, progressive restart. Regarding the terms and condition and what Saipem has mentioned and what the client has mentioned.

What we can state is that the Saipem mentioned this opportunity as the agreement on the principle for the renegotiation of certain sections of the contract has been achieved already with Total Energy. This principle and condition as agreed with Total will contribute to the risk, the initial phase of the project resumption in the best interests of Saipem and Total prior to the return to the fixed contract for project completion. So we will have -- we are in a situation where we will have a restart that is currently considering the new situation. We will work together with Total. And then we will continue the project later on following the agreement on a new fixed price for the project. So, this is the situation. Then I may missing something as the first part of the question or I fully answer. Okay. Thank you.

[Alessandro Pozzi, Mediobanca]

And sorry, just a clarification, how much do you have in the backlog for Mozambique in ‘23?

[Alessandro Puliti, Chief Executive Officer]

Sure, the entire backlog, not just for ‘23, but for the entire project is $3.5 billion. We are expecting to restart, as I said, in July with a piece of around $300 million per quarter.

[Alessandro Pozzi, Mediobanca]

Alright. Thank you very much. I’ll turn it back.

[Operator]

The next question is from James Winchester with Bank of America. Please go ahead.

[James Winchester, Bank of America]

Good morning. Thank you. Two for me, please. Firstly, your 2023 guidance is implying about a 7.7% EBITDA margin. And your 2026 is about 10%, so could you provide a bit of color on what you're assuming to reach this 10% target? And the reason I ask is because it looks relatively conservative given by this time, the majority of your offshore drilling backlog could be repriced higher with the drilling rates that we're seeing?

And b, kind of your dilutive offshore E&C contracts that you won in 2020 and 2021 will have rolled off? And just on that front, what are you seeing in terms of the contracts you're bidding for today in terms of pricing for both drilling and offshore E&C. And then sorry, if I can add one final one here, similar to last year. Could you provide EBITDA to free cash flow bridge for ‘23? Thank you.

[Alessandro Puliti, Chief Executive Officer]

So, Paolo will answer you to the first part, and then I will comment on the pricing and rates.

[Paolo Calcagnini, Chief Financial Officer]

Yes. So, your first question was on the evolution of the EBITDA. So we shared in the guidance that we foresee a double-digit margin by 2025 and starting from 6% today and then growing over time. Now what happens in terms of EBITDA is the following that once we deliver on the legacy portfolio, calling legacy, both the backlog projects and those projects that had been acquired in a different market, so with lower margins. The more we deliver on those projects, the higher the EBITDA becomes, because the relative weight of the new acquisitions becomes higher. So you don't get the numbers wrong if you just draw a line between the 6% today and the double-digit in 2025. And you probably get numbers that are realistic from my point of view.

Now on the EBITDA bridge to cash for this year, we will have an EBITDA of EUR850 million, then you have to deduct around EUR450 million of CapEx. And then we expect roughly, say, EUR190 million of financial charges, maybe a bit less than that number, and then taxes for EUR160 million. And most of them will be withholding taxes, so paid on revenues rather than on profits.

And the remaining is working capital swings. And you get to the close to 0 free cash flow that we are showing in the slide. Then inside the working capital, the -- say, ordinary working capital will have a positive contribution to the cash flows, while the negative piece will come again from the backlog review because it's mostly use of funds.

[Alessandro Puliti, Chief Executive Officer]

Thank you, Paolo. I will provide you the answer regarding the drilling market evolution. Certainly, we share with you the fact that rates are increasing, especially for seven generation deepwater units. But I would say that the results are very -- another interesting trend in the market that is regarding jackups for shallow waters, where, especially in the Middle East, where we have most of our fleet. Besides the increase of rates, we see also an important increase in terms of duration on the contracts that are offered.

Believe it or not, we are currently in negotiation for a jackup, a drilling contract that has had 10-years duration with a very good rate. So I would say that the drilling is supported by both robust rates, but also willingness of the clients, especially with the jackups to sign contracts and ensure the utilization of the unit for a very long time, to be honest, I never saw something similar in the past years. This is, I would say, is the most relevant trend in the drilling.

[James Winchester, Bank of America]

That’s very clear. Can I just quickly check then. Does your kind of 2025 double-digit EBITDA margin take into account this uptick in drilling rates and duration? Or are you, kind of, being conservative on what you'd win? So, I guess, could you see upside to the guidance?

[Paolo Calcagnini, Chief Financial Officer]

Well, I'll take this. Well, the extension in terms of duration of our contracts is a derisking of our projections rather than purely increasing margins. The margins we are projecting are the best knowledge as of today in terms of commercial opportunities. But it's a good piece of news. The fact that we can get five years or hopefully even longer commitment by clients, because it gives us a lot of visibility on how to manage our fleet. And it makes the cash flows way more predictable than in the past.

[James Winchester, Bank of America]

Okay, that’s very clear. Thank you.

[Operator]

The next question is from Guillaume Delaby with Societe Generale. Please go ahead.

[Guillaume Delaby, Societe Generale]

Yes. Good morning. Thank you for this very interesting presentation. One question, if I may. Basically, you are talking about M&A, which is basically somewhat a new word in -- for Saipem. So, my first question is, at this stage of the cycle or ahead of this energy transition, why rather focusing on M&A rather than, I would say, capital-light partnerships? Are there some advantages which M&A can provide, which cannot be provided by partnerships and alliances?

My second question is what could be the envelope, the annual average envelope, not sure it makes a lot of sense, about which you will be using for M&A. And have you also already identified some targets?

[Alessandro Puliti, Chief Executive Officer]

Okay. So, our M&A strategy, it is an opportunistic basis. And is driven mainly from -- on two sides. The first side, as I was mentioning, will be to extract value from our drilling activities that they are growing values, and this will be certainly part, not a dismissal, but maybe a partial reduction in the total ownership of the drilling activities, and this is under consideration.

And this is really to extract and anticipate part of the value that I was highlighting you before that is deriving from the higher rates and the longer contract that clients are willing to sign. And this is along the path we set last year that we said we were looking after EUR1.5 billion of cash actions out of which EUR750 million were delivered in 2022, and the remaining will be delivered through to the remaining of the plan, so this is one part.

Then there is also opportunities that are instead regarding improving our capabilities in delivering the project in being more effective, in being more synergy. And this is -- will be evaluated on a case-by-case situation. And I don't have anything to disclose more on this matter.

Regarding the budget, whether or not there are provision inside, I would say that very clearly that the numbers you have seen, they do not include any of those actions. So they will come when they will arrive as additive to the numbers you are seeing in the presentation.

[Guillaume Delaby, Societe Generale]

Okay, thank you. I’ll turn it over.

[Operator]

The next question is from James Thompson with JPMorgan. Please go ahead.

[James Thompson, JPMorgan]

Great. Good morning. Thank you very for taking my call and the presentation. I've got a couple, if I may. First of all, would you be able to just help us out a little bit in terms of understanding the 2023 EBITDA guide? I mean kind of, maybe some expectations by division in terms of margins? Are you assuming a kind of more positive margin in E&C Onshore, for example? So just some color in terms of how we should think about it breaking down that EUR850 million first of all, would be helpful if you can provide that.

[Paolo Calcagnini, Chief Financial Officer]

Sure. So, in terms of business units, let's use the old business units just to make it easy. We expect the largest growth in terms of margins coming from Drilling Offshore. We went through the presentation through the Offshore -- Drilling Offshore business, that's the first business that reacts to the positive cycle. And then E&C Offshore, because the projects we are getting now have higher margins than the backlog. While the E&C Onshore moves lower in terms of margin recovery for two reasons. Reason number one is the length of the projects is lower -- sorry, higher than E&C Offshore and Drilling, obviously. So, the portfolio reacts later in terms of margin improvement.

And the second is that the relative weight of the backlog review project is higher in E&C Onshore, compared to E&C Offshore, where it's mostly limited to the wind projects. And those are the two reasons why we expect the EBITDA increase coming mostly from Drilling Offshore and E&C Offshore in 2023.

[James Thompson, JPMorgan]

Okay. Thank you. I mean, maybe this is not necessarily a question actually, but more of a quest maybe from all of us would be great now that you're sort of scaling up in the drilling business, if maybe kind of in the quarters going forward, we could have a little bit more color in terms of day rate disclosure and things like that on certain units where you are able to provide it. That would be very helpful, I think, in terms of understanding the kind of magnitude of the changes that we're expecting in this better market environment.

So, the second question would be just on cash returns. I mean, obviously, the balance sheet is now repaired in good shape. You do have some significant debt maturities in ‘23, and obviously, there's still some of the underperforming projects to work through. But can you maybe sort of lay out the framework about how you're thinking about starting to return cash to shareholders that have stuck with you through the challenging time of last year and actually also to kind of give us confidence in that market outlook. So some sort of framework and maybe some expectations on timing about when you might start paying a dividend would be very helpful.

[Paolo Calcagnini, Chief Financial Officer]

Yes, so on the Drilling business, we can share is what we -- what Alessandro Puliti went through in the presentation. So we are planning to increase the number of assets in our drilling fleet. In fact, we're already doing it. And we added already three new jackups in -- by the end of last year and beginning of this year, in addition to the Santorini and one additional deepwater drilling vessel. So we may consider additional two vessels for deepwater and harsh environments this year, but we will do it only if we can match client contracts with lease agreements with the vessel owners. And this is the core of the asset-light strategy.

Now to your questions on the dividend. Now the way we see at our financial strategy is the following. The first decision we need to make on what to do with the cash is whether there are investment opportunities that offer in terms of return and pay back a good opportunity. And to make it concrete, is the decision we made in -- at the end of 2022. We had the opportunity to buy the Santorini, we commented the decision in the past. Just to recall, the reason why we did it is because the return was double-digit and the payback was below five years. And so, we had enough visibility and the fact returns that brought us to decide to buy the vessel, and we will follow the same approach in the next few years. And that's the first step.

Second step is once the asset side is -- the decisions on the asset side are taken, what we are going to do on the capital structure. Now to be very open, I think that we will be possibly able to define, let's call it, a dividend policy, not before 2024 because 2023, as you see from the numbers, will still be a positive year, but where we would expect to get the backlog completed. And so -- and by that, increasing visibility on future cash flows. In any case, this is an industry, and this is a company that still requires to deleverage the balance sheet to be able to face the challenges that this industry is posing to all players.

So, we will keep leveraging the company. We want to reach a zero net debt position and consistently solid cash flows before we decide any distribution to the shareholders. We will hopefully happen, but it's too early to give any more information or guidance on what we're going to do.

[James Thompson, JPMorgan]

Okay, that’s helpful. Maybe just last one for me. On that point around the kind of strength of the balance sheet and the sort of cyclicality of the business, what's the current plan in terms of the debt maturities in ’23? Do you expect to sort of pay those off at maturity? Or are you going to look to extend?

[Paolo Calcagnini, Chief Financial Officer]

So, if you remember the numbers, we have already covered 2024 -- 2023 and 2024 maturities possibly a big part of the 2025 already. So we will be very opportunistic in pushing refinancing opportunities. If the markets will allow the company to refinance the remaining part of the debt expiring in 2025. The bond expires in January 2025, we will do it, but we are not in a rush. So we will do it if the market conditions turns to be attractive for the company. Otherwise, we are sitting on roughly EUR2 billion of available cash, including the two new facilities. And it covers a big part of the future maturities.

So we've seen during spring, if there are opportunities or not to do some early refinancing and possibly some liability management, but it will really depend on the market and it's not entirely on us. It's going to depend on interest rates, inflation, et cetera.

[James Thompson, JPMorgan]

Alright. Thanks very much for the answers. I’ll hand over.

[Operator]

The next question is from Mark Wilson with Jefferies. Please go ahead.

[Mark Wilson, Jefferies]

Hi, good morning. I would like to ask about the Offshore Wind side of the strategic plan and the recent agreement with Seaway7, quite focusing on that Offshore Wind, Offshore segment, although with the change of risk. Is there a difference in the installation pricing you will receive for your Offshore Wind vessels. As I imagine, there will be pretty much the same heavy lift-type vessels that could be used in oil and gas. So, is there a difference in the pricing between those two markets? And indeed, if there is, why do you feel you have to be in both markets? Would that suggest your market outlook suggests there is -- you wouldn't be fully utilized if you just focused on oil and gas. Thank you.

[Alessandro Puliti, Chief Executive Officer]

Okay. So just to give you the flavor of our -- of how much is important to do offshore wind business. I will let -- I will be very clear, our flagship vessel in terms of heavy lifting vessel, Saipem 7000 has spent almost constantly the last three years working 100% for the offshore wind. And the rates with which this vessel is offered are similar, at the same rates we are offering the vessel for the traditional oil and gas projects. So, there is no difference in the rates. And it is a very important market. It's a market very much developed in OECD country, especially for the North Sea and North America. This is where we see the majority of the utilization of our fleet.

Joining forces with Seaway7 in this commercial effort, it is very important because we complement both fleets. And so together, we can have a more complete offer for the client and having the possibility to be much more complete in terms of EPCI offers. For example, Saipem doesn't have to date capabilities for cable laying. And as you can imagine, this is very important for cables, interconnected a generator with the offshore stations. On the other side, Subsea 7 does Seaway7 doesn't have the lifting capabilities we do have. So the two things that will complement very well, very well together with the ability we developed in the last two years in terms of expertise in foundations for the fixed offshore wind turbines.

Moreover, we are offering also on the table of this commercial agreement, our fabrication capabilities. Just to give you an example, all the NNG jackets are built in our yard in Karimun in Indonesia. The jackets to support the offshore substations for the Dogger Bank, they have been built in Arbatax in Sardinia in our yard. So this is the kind of offers we are offering fabrication, expertise on foundations, heavy lifting, and we're joining with the Seaway7 capabilities in cable line and heavy transportation vessels where they are extremely, extremely good, and they have a very important fleet. So together, we will be definitely able to make competitive offers.

[Mark Wilson, Jefferies]

That’s great. Puliti. Thank you very much for that. And so, I suppose the follow-on question then is, there has been questions, from other folks on this call, regarding drilling and the tightness in the market and the trajectory of pricing. Could you speak to a similar trend in the heavy lift segment, particularly if the Saipem 7000 has been fully utilized on offshore wind in the last few years? How does that market look going forward for wind and more conventional oil and gas heavy lift? Thank you.

[Alessandro Puliti, Chief Executive Officer]

But it is a different -- there are two different -- completely different markets the way they are priced to clients, while the drilling is all offered in daily rates the offshore wind, like the E&C offshore in the traditional oil and gas segment, the cost of the vessel is within the entire offer for the client. So, there is no clear and official disclosure of the daily rate of the vessel, so that you can make an immediate comparison. What it is offered to the client is a total EPCI cost for the activities that are contracted.

What I can tell you is that clearly, the increasing demand on both markets, I mean, traditional subsea oil and gas and offshore wind are clearly putting on strain the capacity of serving both markets. In fact, many, many companies involved, for example, for the offshore wind, are engaging plans to build new vessels for this kind of activity. This is giving you immediately the measure of the fact that the market is under strain. So clearly, overall, the marginality also of the offshore wind is going to growing as per effect on the tension of the market.

[Mark Wilson, Jefferies]

That’s great. Thank you. I’ll turn it over. And goodness [Indiscernible] good luck with the coming years in the strategic plan. It is a New Year. Thank you.

[Operator]

The next question is from Nikhil Gupta with Citigroup. Please go ahead.

[Nikhil Gupta, Citigroup]

Hi. Congratulations on the good set of results. Most of my questions are covered. Just one on divestment. You had a EUR1.5 billion divestment target. And I think with the onshore drilling and some FPS you have achieved like maybe more than half of it. What -- is that target still holds? And what are the assets that you have identified or if we can get any announcements near-term on it?

[Alessandro Puliti, Chief Executive Officer]

Okay. So -- last year, we presented a strategy in which we were highlighting around EUR1.5 billion value of what we call at that time and cash recaptures, but that they are -- they can be translated into divestments. Now as you said correctly, half of it was achieved with the action done during 2022. The most important one was the sale of the onshore drilling activity to KCA Deutag. Now for the remaining part, so we are speaking around EUR750 million to achieve the total target of EUR1.5 billion at that time, so one year ago, we were envisaging a strategy based on sale and leaseback of certain units. But when we were presenting that was March 2022, financial markets that were completely different from the current one. And also, I would say, certain markets like the offshore drilling and the shallow water drilling, they were not as booming as they are now.

So we will deliver the same amount, but in a different manner, no longer on a sale leaseback base of certain units, but by partially selling equity of our shallow water, for example, drilling business or in the future, we can think also partially selling equity of the -- also the deepwater drilling business. So this is the way we will deliver the promise we made last year. Definitely, we will deliver, but in a slightly different manner.

And this is clearly driven by the financial condition, the markets are closing now. Today, sale leaseback would be having no meaning clearly owing the current interest rates. While the fact that the drilling market is very robust. Clearly, the value of this activity has certainly increased compared to last year.

[Nikhil Gupta, Citigroup]

Thanks. That’s clear. Thank you.

[Operator]

The next question is from Massimo Bonisoli with Equita. Please go ahead.

[Massimo Bonisoli, Equita SIM S.p.A.]

Good morning, Alessandro and Paolo. I have two questions. One, on your free cash flow outlook by 2026. Your former 2025 plan forecast was more than EUR1 billion in EBITDA with more than EUR700 million free cash flow or free cash flow conversion of 70% with a slightly different consolidation perimeter. Current plan forecast in 2026 is EUR200 million more in EBITDA, while it is EUR100 million less in free cash flow for -- free cash flow conversion of 50%. So could you give us some color on such a change in cash conversion assumption by the end of the plan?

The second question is on CapEx. Your implied average annual CapEx over the 2024-2026 period is about EUR250 million, which is well below the current depreciation considering the expected volume and mix of order intake over that period, do you believe there could be the need to increase the budget on CapEx to follow the increased demand? Or maybe the business is becoming so light in terms of capital intensity. Thank you.

[Paolo Calcagnini, Chief Financial Officer]

Yes. So, I'll take the free cash flow question. So the 2025 numbers from the previous business plan included the drilling onshore business that accounted for more than EUR100 million of free cash flow in 2025. And this is a business we don't own anymore. So, the two figures are not fully comparable.

And the second reason is that we had in the previous business plan, a robust cash flow from the Russian activities that have been closed down, due to the Russian situation. And that explains the largest part of the difference. And my comment on the 2026 free cash flow is that the risk profile underlying these cash flows is significantly lower than the previous business plan, because of the mix of business in terms of geographies and client base.

Now your second question was -- Alessandro will take it.

[Alessandro Puliti, Chief Executive Officer]

Okay. Regarding CapEx and the potential need to increase CapEx. So now the CapEx in the plan are the CapEx that are necessary, first of all, to maintain our fleet, so all the CapEx related to the renewal of the five-year certification of all the vessels. And those they are coming as a sort of mandatory CapEx. And then on top of that, we have a peak in 2023. Because we have an intake in 2023 of several leased units, as Paolo was highlighting before, both in terms of jackups and also in terms of reported units that has to -- that they have to be served with -- although they are leased, they have to be served with an initial amount of CapEx to make them operative and creating also a certain, for example, spare parts warehouse.

And those are the kind of CapEx we do need. So since we have this intake in 2023 and then in the following years, we do not envisage, in this plan, further significant intake of leased units. This is the reason why you can easily calculate then the CapEx started from 2024, they are less than the one in 2023. Since we have an overall for the plan of around EUR1.2 billion. So, this is the reason why we see this the collage of CapEx, but this is part of the asset-light strategy we are implementing.

[Paolo Calcagnini, Chief Financial Officer]

And if I may add to your question, to your answer. You mentioned EUR250 million as average CapEx over the next, I guess, you're taking three years, but…

[Massimo Bonisoli, Equita SIM S.p.A.]

Correct. The last three years.

[Paolo Calcagnini, Chief Financial Officer]

Yes. But actually, you should probably sum the five years, including 2022 because if you sum up all the numbers, you would get an average CapEx of around EUR350 million rather than EUR250 million, because we made CapEx for more than EUR500 million in 2022, and we are planning to do around EUR450 million this year. And then the CapEx will go down as we are not planning to buy any new vessels or invest as we are doing this year in best preparation for the job we are taking. So it's more EUR340 million, EUR350 million rather than EUR250 million, if you want to make a fair comparison, which is, we believe, more than enough to increase the in a selective way our fleet and maintain the existing fleet in operation fully in operation.

[Massimo Bonisoli, Equita SIM S.p.A.]

Very clear. Thank you very much.

[Operator]

The last question is from Haris Papadopoulos with Bank of America. Please go ahead.

[Haris Papadopoulos, Bank of America]

Hello, hi. Most of my questions have been answered. Just a quick follow-up. The first one with respect to your debt maturity profile. So, I was wondering, on the back of the recent credit value and the fundamental improvement, could you perhaps see a refi this year, the 2023 opportunity, but could you perhaps set a level good enough for you to come to market?

Second question, would you target invest-grade rating as part of your financial policy? And then thirdly, a follow-up again on your midterm 2026 targets. If I remember correctly, you had a double-digit target last year when the Drilling and E&C Offshore [Indiscernible] were much lower. And this is now still at 10%. Is that conservative, you think?

[Paolo Calcagnini, Chief Financial Officer]

So, in terms of debt maturities, I think I made a few comments on our debt profile already. But we -- as we speak, we have already enough cash to cover 2024-2025. So what we're going to do is whether we are going to see opportunities to go to the market and possibly do some liability management, we will do it, but we are not in a rush to do it. And then especially if market conditions are not as expected.

And then your question on rating. Well, I'll be very, very open. We just went through a quite a complicated year. And so, we don't have an explicit target rating. And what I can say is that if we are focused on delivering on the plan and we're focusing on delivering this company as I shared quite a few times in our calls. And then we will see if delivering something better than the current rating is a viable option or not. You know our ratings, so especially when it comes to S&P rating, it's a big step to get to investment grade. And it takes time. It takes time because we are coming from a -- quite a peculiar 2022.

And so, let's see, quarter-after-quarter. We remain committed to increasing the financial strength and financial resilience of this company. And then as we deliver results, we will -- we may consider an explicit target rating in the future. Did I answer or missing anything.

[Operator]

So, this closes the Q&A session. Ladies and gentlemen, the conference is now over, and you may disconnect your telephones.