Aker Carbon Capture ASA

OSE:ACC

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[David Phillips, executive]

Good afternoon, and welcome to the presentation for Aker Carbon Capture's results for the first quarter of 2024. My name is David Phillips, Head of Capital Markets, and I'm joined today by my colleague, Egil Fagerland, our CEO; and Julie Berg, our CFO. As usual, we will start with our main presentation. Then this will be followed by a Q&A with the audience. So firstly, Egil will take us through our main progress and achievements for the first quarter of this year. I will also run through a number of topics important for our wider strategy. Then Julie will take us through the key Q1 financials. And finally, after a short break for us to take our places, we will take you -- take the Q&A by the online system. Just as a reminder, you can post your questions into the system at any time. At the end, we will try to work through as many of them as time allows. So Egil, over to you.

[Egil Fagerland, executive]

Thank you, David. This is the agenda of our presentation today following a highly active first quarter. We will address the highlights of the quarter, our operations and business development, the financial highlights and then we move on to the Q&A. But first, before we start with the highlights from the first quarter, we have a short introduction to the company. Aker Carbon Capture is a pure-play carbon capture company, offering a modular and configurable carbon capture plants with the strength of the Aker Group behind it. Today, we're already delivering 7 carbon capture plants. We're making carbon capture happen. Our proprietary patented technology has been developed over 20 years and is validated through more than 60,000 hours of operations and verified across a range of industries. Our technology uses a biodegradable mixture of water and organic amine solvents to absorb the CO2. It's modular, cost and energy efficient, and as a market-leading HTC profile. Since 2020, Aker Carbon Capture is focused on the European market with Scandinavia, Benelux and the U.K. leading the way. Now we're entering North America on the back of increased policy support for CCUS, and we're already working on several engineering studies. Also, we're exploring our potential positions across the rest of Europe and the Middle East. We continue to prioritize 4 market segments with high market activity, cement, bio and waste to energy, gas to power, and blue hydrogen. And we're also seeing good engagement with a number of additional segments where our technology is well suited to capture CO2 such as refining and process industries as well as pulp and paper. Our test -- our technology has been tested and verified across these segments when we have concluded the upcoming test campaign on pulp and paper. Now to the highlights of the quarter. In March, we announced an agreement to form a joint venture with SLB. The new company will combine technology portfolios, expertise, and operation platforms to bring carbon capture solutions to the market faster and more economically. Overall, ACC has seen continued high activity and demand for test campaigns, pre-FEEDs -- FEEDs and studies in the first quarter. Looking more closely at the North American market, we've been awarded a mobile test unit campaign for the pulp and paper industry. We established a strategic alliance with CO280, and we signed an MoU with CO280 and Microsoft targeting large-scale carbon removal. Looking at our major projects, we have seen good progress. At hence, the system is in hot commissioning at Brevik, the second heaviest campaign has completed ahead of schedule. And Ørsted Kalundborg the groundwork has been initiated on both sides. Our backlog remained strong at NOK 2.3 billion, and I'm also happy to share that we've continued our revenue growth in the first quarter with an increase of NOK 279 million compared to the same period last year, while maintaining a solid cash position at NOK 902 million. Now on to some of our more recent highlights, including forming a carbon capture JV with SLB. As I said in March, on the 27th of March, ACC announced an agreement to form a carbon capture joint venture with SLB. New company will combine technology portfolios, expertise, and operations platforms to bring carbon capture solutions to the market faster and more economically. Following the transaction, SLB will own 80% of the combined business and ACC will own 20%. At closing, SLB will pay NOK 4.12 billion in cash to ACC for the purchase of 80% of the shares in Aker Carbon Capture Holding AS, which holds the business of ACC. In addition, ACC will retain NOK 0.4 billion in cash. In addition, ACC will be entitled to a performance-based payment of up to NOK 1.4 billion. The performance-based payments will be subject to the achievement of certain milestones, order intake, and margin targets. This gives a total potential consideration of NOK 5.9 billion. ACCH will receive a balance of cash above NOK 0.4 billion from Aker Carbon Capture ASA. SLB will fund the joint venture business plan during the lockup period and will fund the $50 million purchase of SLB's carbon capture business. The cooperation between Aker Carbon Capture and SLB as shareholders of the combined business will be governed by a shareholders' agreement. This will provide for a Board representation and certain other governance and minority protection rights for Aker Carbon Capture. After a lockup period of 3 years, Aker Carbon Capture will be entitled to sell its stake in ACCH to SLB. The put option price will be based on the fair market value of the combined business with a floor of NOK 1 billion for the retained 20% stake and a ceiling at 2x this price. Conversely, SLB will, after expiry of the put option and the right to purchase Aker Carbon Capture's 20% stake in the combined business. This call option price will be based on the fair market value of the combined business with a higher floor than the put option floor and the ceiling at NOK 2.5 billion. Then on to the industrial rationale of this joint venture. Decision to combine Aker Carbon Capture's and SLB's carbon capture business is underpinned by a strategic vision that reflects our commitment to accelerate the industrial adaptation of carbon capture. And we need to scale the International Energy Agency sees CCUS playing a critical role in the net 0 transition, estimating that over 1 gigaton of CO2 per year will need to be captured by 2030, scaling up to over 6 gigatons by 2050. This strong partnership brings together complementary technology portfolios, leading process design expertise and an established project delivery platform. By levering Aker Carbon Capture 's commercial carbon capture product offering and SLB's new technology developments and industrialization capability, it will create a vehicle for accelerating the introduction of early-stage technologies into the global market on a commercial and proven platform. By partnering with SLB, we will become a diversified and global carbon capture player positioned to profitably scale faster to the benefit of customers, employees, and shareholders. Now let's take a look at the market developments that we have seen in the past quarter. On our newly signed test campaigns in the U.S., they signify a milestone for a rapid expansion into this great market. We were awarded this test campaign by CO280 and a leading pulp and paper company for an undisclosed site on the Gulf Coast, enabling the full-scale implementation of multiple Just Catch 400 modular capture facilities. In March, we established a strategic alliance with CO280, which provides us with unique access to both pulp and paper industry players and the CVR markets. North America's pulp and paper industry represents a carbon removal opportunity of up to 130 million tonnes per year. After the end of the quarter, we signed together with CO280 a MoU agreement with Microsoft to explore opportunities for scaling the full physical and digital value chain of the carbon removal in the U.S. and Canada. Together, the 3 companies have the expertise, technologies, and resources to develop this market by creating a scalable model to deploy large-scale carbon capture projects quickly to meet the global net 0 targets. Further, in the quarter, we strengthened our foothold across Europe with a test campaign, a pre-FEED, and studies in Norway, Sweden, and for a number of other undisclosed sites in Northern Europe. The test campaign at WACKER silicon metal plant will provide valuable learnings for implementation of our carbon capture technology in the new industry. The pre-FEED and all studies are based on our standardized and Just Catch Modular -- Just Catch this quarter, a clear sign that there is a strong interest for our Just Catch product range in the market, further supporting the positive momentum we are witnessing for the CCUS market. Now we move on to take a more detailed look at our operations. In the Netherlands, a Twence Waste-to-Energy facility in Hengelo, the carbon capture plant is mechanically complete, and we have hot commissioning ongoing. This is the last phase before sellable CO2 can be produced by the Just Catch 100 units. Brevik CCS, we're making solid progress with now all heavy lift campaign successfully completed. When we complete the plant will be ready to capture 400,000 tonnes of CO2 per year. And at Ørsted Kalundborg CCS, we will deliver 5 modular and configurable third-generation Just Catch 100 and additional equipment such as liquefaction systems, temporary CO2 storage, and on and offloading facilities. All the critical purchase orders have been placed, and we started container fabrication. In March of this year, groundworkers started on both sides. Then I give the word to Julie, who will take us through the financials.

[Julie Berg, executive]

Thanks, Egil. So I will now take you through the key financial highlights of the fourth quarter before we move on to the Q&A. Bear in mind that all numbers that are mentioned are in Norwegian kroner. So let's start with the income statement. Overall revenue for the first quarter was NOK 566 million, which is up 97% or NOK 279 million compared to the same period last year. The growth in revenues is mainly driven by Big Catch and Just Catch projects. including the Ørsted Kalundborg CCS project, which has progressed well in the quarter. Our reported first quarter EBITDA before transaction and related costs was negative NOK 22 million, which is an improvement of NOK 29 million compared to the same quarter last year, driven by good contributions from our ongoing projects. The overall negative EBITDA continues to be driven by high commercial and tender activity, North America entry and R&D activity. Nonrecurring transaction and related costs of NOK 48 million were incurred in the quarter, resulting in a total EBITDA margin of negative NOK 70 million. Our first quarter net current operating assets ended at negative NOK 522 million, which represents a continued positive cash position on our key projects. Overall, operating assets and liabilities or net capital employed, which includes fixed and intangible assets, was negative NOK 257 million, showing that both our short-term and long-term business activities are currently funded by our net working capital position. We continue to have a healthy cash position at NOK 902 million. And finally, our equity remains strong at NOK 649 million. We started the quarter with NOK 1.1 billion in cash. During the quarter, we saw an overall cash outflow of NOK 210 million. The main drivers were procurement and installation activities on key projects, driving a net cash outflow of NOK 141 million in net current operating assets. We had CapEx of NOK 20 million, mainly related to product development and the upgrades required for the second mobile test unit as it is prepared for the U.S. market. And finally, a loss before tax of NOK 68 million. In total, cash and cash equivalents ended this quarter at NOK 902 million. These are the highlights of our historical financials, and now we will open for Q&A.

[David Phillips, executive]

Thank you, Egil. Thank you, Julie. Thank you, everyone, as well for putting your questions into the system. We have a lot already. Please remember you can add your questions into the system at any time, and we will run through as many as we have time for today. So let's kick things off. First questions are from Victoria from RBC. What are the current intentions for the NOK 4 billion or so cash that we expect from the SLB transaction?

[Egil Fagerland, executive]

Yes. So for this question, and this age, what we can say is that Aker Carbon Capture Board of Directors. They've initiated a process to update the strategy of Aker Carbon Capture going forward, and we will return to the market with an update on that strategy in due course.

[David Phillips, executive]

And the next question from Victoria. Do we plan to remain listed and report progress on projects despite owning just 20% of the current business?

[Egil Fagerland, executive]

So yes, Aker Carbon Capture will remain listed on the stock exchange. And with regards to the detailed reporting post-closing, the Board will come back with an updated strategy, as I just mentioned in the prior question.

[David Phillips, executive]

And the last one for Victoria. Talking about the U.K., are we active or bidding in any of the remaining U.K. Track 1 Phase 1 projects?

[Egil Fagerland, executive]

In -- we continue to be active in the U.K. market in general. And of course, the projects that are ongoing there in detail, we are not disclosing all the details that we are working with, but we are quite active in the U.K.

[David Phillips, executive]

Moving on from Anders, when lasting about Brevik, when will the project in Brevik be moving towards completion?

[Egil Fagerland, executive]

So the planned delivery for the Brevik project is towards the end of 2024

[David Phillips, executive]

Moving on to [indiscernible]. Just -- I think we've come -- we've already covered this question a little bit, but maybe as a reminder, how do we intend to use the cash proceeds from the deal? And will -- can we comment about using this as some sort of dividend payout?

[Egil Fagerland, executive]

Yes, this particular moment, we can't comment specifically on that. The Aker Carbon Capture Board of Directors, they've initiated the process now to update the strategy of the company going forward, and we will return to the market with an updated strategy in due course, as I've just said.

[David Phillips, executive]

And from [indiscernible] from Pareto. Would you consider making investments into new companies related to the renewables space?

[Egil Fagerland, executive]

Again, I will have to refer to the strategy process that Board of Directors have initiated to update and that we will turn with details on that to the market when it's ready.

[David Phillips, executive]

I suspect the answer to this follow-on question is going to be a similar one, Egil. But in talking about collaboration across the Aker [ Ecosphere ] or the ecosystem, is there potential for more collaboration with the other renewable parts of the system going forward?

[Egil Fagerland, executive]

Can you just repeat the last part of the question, David?

[David Phillips, executive]

Yes, sure. Whether there's a potential for more collaboration across the renewable companies within the ecosystem going forward?

[Egil Fagerland, executive]

I think in terms of this question, we have to refer back to the strategy update that is ongoing with the Board of Directors in Aker Carbon Capture.

[David Phillips, executive]

And moving on from Bill Hanson, what are the chances in your view of receiving the performance-based consideration from SLB?

[Egil Fagerland, executive]

So this performance-based consideration is subject to achievement of certain milestones, but also order intake and margin targets. So this payment will be a function of these targets as they are met in the period from 2025 to 2027. And then it's weight towards the period towards the finalization of the statements in 2027. Some of the milestone payments could also be achievable in the period from 2025 to 2027. So there are several factors coming into play here. And also, I can mention that these potential payments can carry a market-based interest from the date of the closing until the payment is achieved. In terms of the probability of achieving them, I think that's an assessment that we are not going to go into detail on now, but they were linked to certain milestones and order intake and margin targets.

[David Phillips, executive]

Moving on, a question from David [indiscernible]. This is a more descriptive one around what the new company might look like. And I know there was a slide in the presentation pack that outlines some of the structure from a high level. But the question is what will remain within ACC ASA if all business is in ACCH?

[Egil Fagerland, executive]

In the slide that we showed in the presentation, we are showing a structure where Aker Carbon Capture ASA remains the 20% shareholder of Aker Carbon Capture Holdings. So that's an important part of the continued business and management of that. There's also a put in a call option that the company is a part of. And then there is also a retained cash element of NOK 0.4 billion that is retained in ACC ASA. Further details around what this company will -- the strategy and how it will look like, we'll have to refer to the process that is ongoing with the Board of Directors and that they will return with more information in due course.

[David Phillips, executive]

Moving on. I noticed there are quite a few questions in the system around some of the future plans and also some of the -- maybe some of the definition details around how the new company will look, how ACC ASA will look and what it will own and so on. I'm pleased to have a look at the press release that came out the other week and have a look at the slides in the pack. And do feel free to reach out to me directly. And we can certainly clarify some of those details, but maybe I won't take all of them right now. But we will move on, though. We have a lot of questions to get through. So from all [indiscernible], 3 questions. Firstly, is there any need for potential equity contribution from ACC to ACCH in the future?

[Egil Fagerland, executive]

As we described in the slide where we were explaining the structure of the JV. The overall business plan and working capital fluctuations are funded by SLB during the lockup period. And that's the first phase. And then there's always, in any company, potential funding needs in the long-term future, but we described pretty clearly on that slide what the status is.

[David Phillips, executive]

And just one other one. In terms of timing, I know we've given the commentary in the press release around expected closing within Q2. When is the cash expected to be actually be received? Is the cash expected to be received exactly on closing?

[Egil Fagerland, executive]

Normally in these transactions, it's just after closing.

[David Phillips, executive]

Moving on from Ever Christensen. So Technip was awarded the FEED at Viridor in the U.K. last week and SSC [indiscernible] and Uniper and so on is further out in time. What do we see as the most imminent potential project awards now apart from [indiscernible] which we have previously talked about moving towards FID later this year.

[Egil Fagerland, executive]

Yes. So imminent, of course, as you mentioned, is one of the projects that are quite important is the [indiscernible] project. But of course, there are projects in the Track 1 expansion and Track 2 in the U.K. that are quite interesting. And there are also processes ongoing in Denmark and Sweden and other countries in Europe for funding of carbon capture projects that are now soon upcoming. And we also see quite a lot of traction in North America with our latest test unit campaign that have been started there and our latest MoU with Microsoft and CO280. So we think there is quite some potential in North America as well.

[David Phillips, executive]

And also from Ever asking about margins. Is the gross margin, 13% gross margin, is that due to a catch-up effect from the starting of any profit recognition on Ørsted?

[Julie Berg, executive]

Yes. I can take that one, David. So as usual, we don't comment on specific project results. However, the Q1 results do reflect positive contributions through the key projects in our portfolio, including new FEEDs and test campaigns.

[David Phillips, executive]

Moving on from Anders of SEB. Could you explain and quantify what the NOK 48 million one-off was spent on? Is there any management remuneration included in that number?

[Julie Berg, executive]

So as we stated in the report, the transaction cost consist mainly of adviser fees and other related costs, which are specifically related to the transaction and the process we've been through in Q1.

[David Phillips, executive]

So moving on from Bo Hanson again. This is asking about the Articles of Association, why did the Board propose to change these as we announced in the update for the AGM timing the other week?

[Egil Fagerland, executive]

The proposed articles of association for ACC ASA will secure the required flexibility for the new ACC Board strategy work and to cater for an efficient process in that regard.

[David Phillips, executive]

Moving on again. We have a question from Martin Thomas. Really asking around the structure of the deal. What is the reason for exiting the carbon capture market by trying to sell 80% now and offering a 20% call option in 3 years, leaving SLB with the whole assets and in the long term with investors for our side with possibly no exposure to the carbon capture world? What is the reason behind that structure?

[Egil Fagerland, executive]

If I may, let me start a little bit with the industrial rationale for a collaboration like this. Aker Carbon Capture, we've had quite an ambitious target to grow outside of Europe and joining forces together with SLB in this respect, increases the possibility to participate in the global CCS market that is coming. Together, we will offer industry-leading capture technologies and project delivery capabilities in new regions such as North America, but also elsewhere in the world. And doing that on a stand-alone basis is, of course, possible, but requires more time and more resources than when you can join forces and doing it with established complementary players. In addition, we see the potential benefits of accelerating emerging technologies together, in particular, the technologies that SLB have already invested in.

[David Phillips, executive]

Moving on. From a question -- 2 questions from Damien from Poland. Can we give any indication as to what a quarterly or yearly cash burn for, if you like, a new ACC might be after the transaction?

[Egil Fagerland, executive]

Again, I think this is linked to the strategy update that has been initiated by the Board of Directors, and they will return with an updated strategy in due course.

[David Phillips, executive]

Moving on to Charlotte. Can we talk about any details around synergies or overlap that we have with SLBs CCS business that could benefit the JV?

[Egil Fagerland, executive]

Definitely, David. I touched upon it just in the prior question as well. I think the technology angle is quite interesting to accelerate and industrialize emerging technologies. The regional expansion element is quite important to work together into regions and then, in particular, North America, which has been high on our agenda. We're complementary in that fact. We are in ACC, quite strong in Northern Europe with an established project portfolio there and then partnering with SLB, which is, in my view, second to no to expand into North America is going to be a very good strategy for us. What we also can point to is that both companies have a high focus on digital capabilities and believe that we can lean on each other's competence in that regard. And for the aftermarket services, SLB, of course, has a local presence in geographies across the world, and we believe that we can leverage some of that capability in the future.

[David Phillips, executive]

And one last one from Charlotte. In the press release around Julie's move, we talk about the ACC Board assessing the management of sources needed to manage ACC ASA after transaction close. Are we able to say any more about any other potential changes that could come through?

[Egil Fagerland, executive]

I think this, again, David, goes back to the comment I made around the Board of Directors who have -- who are now working on an updated strategy for ACC going forward and that they will return in due course.

[David Phillips, executive]

And moving on, I just want to second -- or a follow-up question from James from Berenberg. To clarify, given with Viridor Runcorn, given the award of the FEED to Technip and so on, should we assume that, therefore, ACC is no longer involved in this project?

[Egil Fagerland, executive]

That is correct to assume.

[David Phillips, executive]

Moving on to Sky from [indiscernible]. A few questions here, mostly around some numbers. So the backlog -- how has the reported backlog of NOK 2.3 billion, split over '24 and '25?

[Julie Berg, executive]

So that is split approximately NOK 1.4 billion in 2024 and 0.9 in '25.

[David Phillips, executive]

And moving on also from Sky, thinking about 2025, how are we now thinking about this pipeline development towards the 10 million tonnes per year in 2025?

[Egil Fagerland, executive]

We are continuing to work ambitiously towards 2025. I think what we now are starting to see is quite an increase in activity in the CCS industry. There is no secret that there have been certain delays, in particular in the U.K. Now we see many markets starting to move quite ambitiously forward. So we are positioning in the core markets where we are already present, Northern Europe, Benelux and the U.K., but also going forward, now even stronger into North America.

[David Phillips, executive]

One more from Sky. Really talking about the deal rationale. Looking at large projects, was it becoming difficult for ACC to win or deliver these types of larger project awards and therefore, needing to have a larger balance sheet or larger backer behind it?

[Egil Fagerland, executive]

I think normally, these large-scale projects are complemented with EPC players who are delivering the overall execution and technology players like ourselves are delivering process design, license, and key equipment into those projects. So I don't think that's the case. We've seen now the few first projects moving forward into a FEED phase on that Megaton scale, our million tonne scale. But there are several others, and we are involved in many of them. So I think that's a bit early to conclude. And I think we are well positioned for many of these projects going forward.

[David Phillips, executive]

And we're down to last few questions here. So do remember if you want to ask a question, there's still time. But if you -- once we finish, then we'd have to chase us individually afterwards. So please do put some questions in if you have any remaining. Back to Ever again. In the press release, it says that both parties, and this is back to the press release of the deal, both parties have customary buyout rights in the event of a change of control. Does this mean that the lockup period of 3 years and the sales price and so on no longer applies?

[Egil Fagerland, executive]

I think those are regular customary rights that are there. But normally, the focus would be on the lockup period and the put on the call, but there is also other rights as described in the press release.

[David Phillips, executive]

There are no more questions in the system right now. So we've concluded in some good time. So I think it's -- it just remains for us to, firstly, thank you for your strong interest in Aker Carbon Capture. And if you have any follow-ups afterwards, you know where we are. My details, David Phillips details are directly on our website. So please do drop me a line or e-mail if you have further qualifications or clarifications to run through. And thank you again for your interest with our first quarter results today.

[Egil Fagerland, executive]

Thank you.