Aker Solutions ASA

OSE:AKSO

Earnings Call Transcript 2024-Q1

[Preben Ørbeck, executive]

Hello, everyone, and welcome to Aker Solutions presentation of our first quarter results. My name is Preben Ørbeck, and I am the Head of Investor relations. Today, our CEO, Kjetel Digre; and our CFO, Idar Eikrem will give you an update of the main highlights of the quarter. Afterwards, we have time for questions. [Operator Instructions]So, with that, over to you, Kjetel, for the presentation.

[Kjetel Digre, executive]

Thank you very much, Preben, and a warm welcome to those of you who are following us online. We appreciate you dialing in. Let me start on the business update and the key highlights of the quarter.First of all, we keep up our positive development with increased revenues and improved profitability. Our first quarter revenue, excluding special items, was NOK 11.5 billion, which is a 61% increase from the same quarter last year.Our underlying EBITDA was NOK 987 million, with a margin of 8.6%. Our order intake was NOK 7 billion, and our backlog ended at about NOK 69 billion. More than half of our current backlog are projects under the Aker BP Alliance, with balanced risk-reward profiles and upside potential through shared incentives.In April, the Annual General Meeting approved the dividends for the fiscal year of 2023, as well as extended the mandate for the announced buyback program. In 2024, the total shareholder distribution will be around NOK 1.5 billion, or 60% of the adjusted net income, in line with our dividend policy.Second, we are progressing well on our project portfolio, with high activity across our locations. I am proud to see that Aker Solutions is engaged in some of the most interesting energy projects around, focused on solving energy challenges for future generations. This leads to a continued positive outlook for Aker Solutions.Our large order backlog gives a clear view of future activity levels. Our services are in high demand, and we have a strong pipeline of tender opportunities across our market segments. This applies to both oil and gas and renewables markets, and we continue to be very selective about which projects we take on. So a key message today is that we are in a good place as a company, which Idar and I will elaborate on in the following slides.Next, let me briefly take you through some of our operational highlights this quarter. As mentioned, we are progressing well on our project portfolio. For the Aker BP projects, activity levels at the yards are picking up. The projects are at the forefront of using new technologies within digitalization and robotization.For example, in Verdal, our fully robotic production line has completed the first sections of the Hugin substructure, which forms part of the Yggdrasil development. The production line is one of the investments we are doing to safeguard the delivery of these projects, improving efficiency, quality and safety in execution.On Equinor's Johan Castberg project, activity levels at Stord remain high, preparing the FPSO for sea trials. We are also working on 3 other FPSO projects at the moment, namely Rosebank for Altera and Equinor, the Skarv upgrade for Aker BP, and life extension of the SeaRose FPSO for Cenovus.SeaRose started operating in Newfoundland, Canada, almost 2 decades ago. Currently, the platform is docked at the Harland & Wolff shipyard in Belfast, undergoing modifications to extend its life on the White Rose Field to 2038.For this project, Aker Solutions is responsible for providing engineering and maintenance services as part of the long-term frame agreement with Cenovus. Johan Sverdrup has been an important project for Aker Solutions and the wider Aker family for more than a decade.From 2012 and onwards, Aker Solutions has played a key role in the design and execution of this development. In the first quarter this year, we completed the hookup and commissioning of Phase 2 of the project, and our involvement continues in the operations phase with our contract for Maintenance and Modification services to Equinor.In Offshore Wind, we are working on several HVDC projects for customers in the U.K. and North America. For the Norfolk Vanguard West project, fabrication has started at our partner yard in Dubai. This is the first of potentially 3 units for the development, creating opportunities for standardization and industrialization.Finally, I also want to mention our achievements in the CCS portfolio. Together with Aker Carbon Capture, we continued our deliveries towards Heidelberg Materials' Brevik project. This is the cement industry's first full-scale CO2 capture plant, and will capture about 400,000 tonnes of CO2 yearly.During first quarter, we delivered several key modules and the disorder, and completed a second heavy lift campaign at the Brevik site. The CCS-Plant forms part of the Norwegian government's Longsheet program, which aims to demonstrate the capture, transport and safe storage of CO2 from industrial sources.Let us now look at the order intake in the period. In the Renewables and Field Development segment, we booked an order intake of NOK 4 billion in the first quarter. This mainly came from growth in existing projects, but also high activity in our energy consultancy business.In the Life Cycle segment, we recorded about NOK 2.6 billion in order intake. This was also mainly from growth in existing contracts and call-offs in frame agreements. In the first quarter, we have won several important FEED contracts and consulting service projects. This proves that our competencies and capabilities are relevant in emerging industries. Particularly in our energy consultancy, we are facing high demand for our services.In the first quarter of 2024, we have worked on more than 170 projects compared to around 300 projects for the entire year of 2023 and about 150 projects in all of 2022. This is the result of focus growth strategy where customers appreciate our broad energy capabilities, our project experience, and our holistic understanding of the value chains across several market verticals.Industrial decarbonization is a main concern for both policymakers and asset owners globally, and we have a key role to play. Aker Solutions is currently engaged in several studies to help design and integrate various technologies to reduce carbon footprint within power generation and refineries. We're also experiencing high demand for our specialist offshore design and marine engineering capabilities.One example is the 1 gigawatt Haewoori floating offshore wind project, currently under development by Copenhagen Infrastructure Partners. Together with floating foundation specialist Principle Power and our own marine engineering and execution provider, Windstaller, we are supporting the client in achieving this innovative floating wind development in South Korea.At the end of the quarter, our tender pipeline was about NOK 58 billion. Norway and Europe are still our biggest markets, with around 70% of the pipeline. We see a good mix between traditional oil and gas developments, decarbonization projects, and renewables opportunities in the pipeline.We remain highly selective on which projects to target. We only focus on projects with the right risk-reward balance, and therefore we target customers and strategic partners who see the value of working closely together over time with aligned incentives.We work in geographical regions we know well, and where we have established relationships with local incentives. We work in geographical regions we know well and where we have established relationships with local stakeholders. And lastly, we are focused on identifying scopes of work where we can contribute with the full breadth of our capabilities.This takes me to the general outlook for Aker Solutions. I am pleased that we keep meeting our financial targets, while positioning the company for profitable growth. We have a large order backlog, mostly from projects with Aker BP under the proven Alliance model.Together with our partners, we focus on delivering predictable project execution in balanced risk-reward models that have shared incentives. We are active in tendering across segments, which allows us to choose carefully the opportunities we pursue. Finally, our financial situation is robust. And this gives us a strong foundation to grow the company and generate stable and solid returns for our shareholders.And now I will pass the word to Idar, who will go over the numbers in more detail. Thank you.

[Idar Eikrem;Executive VP & CFO of Kværner ASA, executive]

Thank you, Kjetel. I will now take you through the key financial highlights of the first quarter, our segment performance and run through our financial guidance. As always, all numbers mentioned are in Norwegian kroner.So let me start with the income statement. The first quarter revenue was NOK 11.5 billion, up from NOK 7.1 billion a year ago. This represents about 60% growth year-on-year. The underlying EBITDA was NOK 987 million, up from NOK 247 million a year ago. The EBITDA margin was 8.6%. This was driven by good progress on our project portfolio as well as oil and gas project reaching profit recognition milestones in the quarter.In addition, our share in OneSubsea contributed with NOK 195 million in the quarter. The underlying EBIT was NOK 723 million, up from NOK 98 million a year ago. Net income, excluding special items, increased to NOK 690 million from NOK 452 million a year ago, positively impacted by the increase in SLB share price during the quarter.Earnings per share was NOK 1.40 up from NOK 0.92 a year ago. In April, we paid out dividend of NOK 2 per share. In addition, we have continued with our share buyback program, having acquired about 1/3 of the announced volume at the end of the first quarter.Let us now look at our financial position. We start with our working capital, which at the end of the quarter stood at minus NOK 8.8 billion. As stated before, we expect working capital to normalize as we execute on the large order backlog, which is forecasted as a cash outflow of around NOK 4 billion in 2024.CapEx in the first quarter was around NOK 600 million. This mainly relates to the planned investment to safeguard execution of the large oil and gas projects. We continue to have a solid net cash position of about NOK 9.4 billion. This includes about NOK 6 billion of financial investments in liquid funds, which is not treated as cash under IFRS.Let us now look deeper into our cash flow development in the quarter. Operational cash flow in the period was NOK 1 billion, mainly driven by the EBITDA in the quarter. CapEx was, as mentioned, NOK 583 million, in line with our guiding.During the quarter, we made financial investment in liquid funds of another NOK 3 billion. Financial payments was negative NOK 373 million. This includes NOK 152 million in acquisition of treasury shares related to our buyback program. Lastly, we have also had a positive exchange effect of about NOK 153 million during the quarter.Now, over to our segments. For Renewables and Field Development, the first quarter revenue increased to NOK 8 billion, up from NOK 4.1 billion last year. The underlying EBITDA in the quarter was NOK 617 million, up from NOK 171 million a year ago, with a margin of 7.7%. This was positively impacted by project reaching profit recognition milestones in the quarter. However, underlying margins are still negatively affected by project yet to reach profit recognition and legacy renewable projects.The order intake in the quarter was SEK 4 billion or 0.5x book-to-bill. This was mainly driven by growth in scopes on existing projects. The secured backlog remains high at NOK 47.5 billion. Based on the secured backlog and market activity, we now expect the revenue in this segment to increase by about 50% in 2024 from 2023 levels.For the Life Cycle segment, the first quarter revenue was NOK 3 billion, which is slightly above the same period last year. The underlying EBITDA in the quarter was NOK 195 million, up from NOK 161 million a year ago and with a margin of 6.4%. And Order intake in the period was NOK 2.6 billion or 0.9x book-to-bill. The backlog remains solid at SEK 20.3 billion, dominated by long-term frame agreements and reimbursable modification project with long-term customers. We expect the life cycle segment to continue at close to 2023 levels also in 2024.OneSubsea entity reported revenues of NOK 9.8 billion with an EBITDA margin of around 18% in the first quarter. Net income for the entity was about NOK 1 billion before PPA adjustments. After these adjustments, Aker Solutions recognized NOK 195 million as our 20% share in the net income from the entity. OneSubsea has a solid backlog of about NOK 47 billion at the end of the quarter.Now, over to order intake and backlog. Our backlog remains high at almost NOK 70 billion, providing good visibility on future activity levels. More than half relates to the project to be executed in the well-proven alliance model with Aker BP. This is a very good position to be in. And as Kjetel mentioned, our focus is to continue delivering predictable and solid execution to harvest upside potential and incentives.Now to sum up. In the first quarter, we continued to deliver strong financial and operational performance. Based on our secured backlog and market activity, 2024 revenues is now expected to grow about 30% in 2024 compared to 2023. EBITDA margins are expected to be between 6% and 7% in 2024. In addition, OneSubsea will contribute to our financial performance through our 20% ownership.The CapEx for 2024 is estimated to be between 2.5% and 3% of revenues as we execute on our ongoing investment program to safeguard the large oil and gas projects in Norway, enabling us to utilize new technologies and digital solutions to enhance efficiency, quality and safety.Over time, CapEx is expected to be around 1.5% of revenues. Working capital is expected to normalize in 2024 with a forecasted negative cash impact of about NOK 4 billion during the year. And the outlook for the company and for our industry is very positive and Aker Solutions is in an excellent position to take advantage of the opportunities ahead. Thank you for listening. That was the end of our presentation. We will now open up for questions.

[Preben Ørbeck, executive]

The first question today comes from Kate Somerville in JPMorgan. Given that more than 50% of your backlog is from Aker BP, where should we expect to see future order intake being driven from? Do you have a good visibility from Aker BP in the medium term, and where else do you see growth?

[Kjetel Digre, executive]

Yes. First of all, Aker BP as our sister company, we have a very close interaction with long-term frame agreements with the Alliance setup and we are running a huge and interesting portfolio together with them now. So, and then the visibility with Aker BP as a forward-leaning operator with focus on the Norwegian continental shelf is similar to the development of the overall direction for the Norwegian continental shelf. A lot of sort of lifetime extension kind of projects that will be part of our lifecycle segment tasks and also an increased activity around sub-C tiebacks where we are also then handling the topside modifications and in that we are working very, very closely with our Aker BP.And then to where we are seeing opportunities in addition is obviously across our segments. It's a balanced opportunity set. We have close to NOK 60 billion in our tender pipeline. And beyond that, we're also working on a lot of prospects in all segments, which not yet shows up in our tender volume. And I think some headlines to the kind of projects that we have on the opportunity radar is classical oil and gas projects. There are some in Norway and also elsewhere where we are globally present, particularly in Norway and also now growing in the U.K., the electrification projects, which will be a huge portfolio.Tiebacks, I mentioned, and lifetime extensions. And then also in our lifecycle segment, we see long-term frame agreements with our key clients that are up for renewal, which is really looking many years ahead.And then within the renewables, offshore wind is -- is moving and we are highly selective on which kind of projects and which clients we work with. A lot of opportunities there, not only then isolated around offshore wind, but also in connection with electrification initiatives for oil and gas projects.So all-in-all, a very balanced, interesting set of opportunities across our segments and across our global setup. And again, just to repeat, we are very selective on which projects that we take on.

[Preben Ørbeck, executive]

That takes me to the next question from Martin Karlsen in DNB. The total value of tenders is down around 20% compared to last quarter, with a 40% reduction in the North Sea. Would you provide some background on the reduction of value of outstanding tenders?

[Kjetel Digre, executive]

Yes, you win some and you lose some. So that is the direct explanation to that. We were engaged in a net zero T-side FEED, but that was won by Technip. So those forecasts are out of our number, but then if you look at how we define our tender pipeline, some of the bigger and interesting prospects that we are working on in close collaboration with potential clients are not yet showing up in the tender -- in the tender number.

[Preben Ørbeck, executive]

Moving on to 2 questions from Victoria McCulloch in RBC. Within the tender pipeline, what is the rough split between oil and gas renewables and has this mix changed? And the second one, Renewable Field Development, EBITDA margins increase materially in 1Q. What do you expect to see from this margin for the remaining quarters based on the current backlog?

[Preben Ørbeck, executive]

Yes, I can just start with 1 comment. You know how this has changed. We are mainly stable within the proportional renewables and energy transition projects. But lately then, our oil and gas projects have increased and also that has shifted the split somewhat. But again, Idar, you can give me some numbers.

[Idar Eikrem;Executive VP & CFO of Kværner ASA, executive]

Yes, it will vary from 1 quarter to another depending on which ones comes in and which ones goes out. And I think the most important one is also that to it's -- it shows that we are demonstrating our ability to be selective on what to take on board and what not to take on board. When it comes to the second part of this and the margins going forward for the renewable and field development you see uptake in the margin in the quarter. It's positively impacted by the fact that we have now started profit recognition of a project within the Aker BP Alliance. There are 4 projects and 2 are still to come, when it comes to margin recognition.So we are happy with the underlying performance in the quarter. And as I said, the margins is positively impacted by a positive one-time effect in this quarter. However, it's also lower than sort of a full run rate on all these projects due to the fact that some of the project has not started recognizing profit yet. And as well, our legacy renewables project is a drag on the margin.

[Preben Ørbeck, executive]

Yes. Maybe following up with a question from Martine Kverne. First, say, congratulations on the results. I think you've already answered the question, the first part of that question, Idar, on elaborating on the margin developed in Renewable Field Development. But there's also the question on the Life Cycle, which had an improvement in margin, if there's any extraordinary elements affecting the margins.

[Kjetel Digre, executive]

I think the answer to that is that within Life Cycle, we work with key clients year-on-year, and we are now focused on making sure that there is a good and solid margin level in the frame agreements as a basis. And then many of these projects are also linked to performance-based incentives. And this segment in Aker Solutions is really known for delivering. And more and more, we are actually achieving these incentives. So I think that's a way of working that we like because we want to work closely with clients. We want to understand all the risks and also upsides and the risk and upsides that we handle we can we can be we can actually have incentives and achieve that through well executed projects.

[Idar Eikrem;Executive VP & CFO of Kværner ASA, executive]

And just to add that, there is no single sort of one-time positive effect it's demonstrate continuous improvement in this segment that we have been working over time, and the margin have been sort of between 5% and 6%, and now we see 6% plus in this segment, which we are very happy of?

[Preben Ørbeck, executive]

Moving on to a question from Christopher Mollerlokken in Sparebank 1 Markets. You upped your revenue guidance for 2024 today would you say it's a reflection of expected work in '25 and '26 moving forward or is it more of a reflection of planned 2024 work increasing in scope?

[Idar Eikrem;Executive VP & CFO of Kværner ASA, executive]

It's a combination of that. And as you see, we have announced order intake of NOK 7 billion, mainly coming from growth in the existing portfolio, and as well as some adjustment in the forecast year of execution.

[Preben Ørbeck, executive]

And then I think a follow-up there in a similar topic from Kim Uggedal in SEB. How much of the increased 2024 revenue guidance will you say is projects moving forward from previously anticipated 2025 execution?

[Idar Eikrem;Executive VP & CFO of Kværner ASA, executive]

It's mainly growth in existing one for 2024. Yes.

[Kjetel Digre, executive]

Yes. Just to be more specific, this is not projects that are accelerated from 2025 to 2024. It's growth in tasks planned for 2024.

[Preben Ørbeck, executive]

Moving to a question from Mick Pickup in Barclays. What has changed in your view for the renewable field development revenues, taking it from 25% to a 50% increase in the guiding for 2024?

[Idar Eikrem;Executive VP & CFO of Kværner ASA, executive]

Yes, it's when we see the activity level and update our forecast, we see that based on both growth that you have seen this quarter and what we see coming in the pipeline, then and maybe combined with slightly conservative estimate at the year end, we now see and more confident that this will be at a 50% growth level compared to 2023.

[Preben Ørbeck, executive]

Moving to a question from Daniel Thompson in BNP. Are there still one-off integration costs included in the NOK 195 million OneSubsea contribution? And should we expect the same level of margin and pass-through from OneSubsea EBITDA?

[Idar Eikrem;Executive VP & CFO of Kværner ASA, executive]

Yes, they are still in the early phase. So some sort of startup and integration cost is to be expected in the numbers in the first few quarters.

[Preben Ørbeck, executive]

Moving next question, thank you, Idar, from Russell Searancke in Upstream. 170 projects in Aker Solutions engineering consultancy. What's the geographic spread, the type of work and are they mostly oil and gas?

[Kjetel Digre, executive]

Well, this is a reference to the activity within engineering consultancy. And there we have a very good balanced activity across the different energy verticals. And I would say more and more into the segments like hydrogen, carbon capture and storage, offshore wind and the likes. But then also core activities within classical oil and gas projects.The geographical spread follows the strategy of Aker Solutions, where we are focused on obviously a home market in Norway, but also the hubs we have globally, where we have good presence and good control over a long time, being then U.K., Canada, et cetera.

[Preben Ørbeck, executive]

Next question comes from Lukas Daul in Arctic. If you can describe more in detail scope of activities within Carbon Capture and how will the JV between Aker Carbon Capture and SLB impact you?

[Kjetel Digre, executive]

Well, we have a close relationship with Aker Carbon Capture, obviously through the projects we are executing in Brevik and now have started at Klemetsrud in Oslo. So that's sort of a main collaborative partner. We are in, for instance, consultancy also looking at tasks where we are handling other technology providers.So as we are technology agnostic, but a close relationship with Aker ACC. Our task in these projects is to integrate that technology into a larger industry setup. So when, for instance, we do that for some existing cement factories, it's about bringing the Carbon Capture technology from ACC into that plant and integrate it with both process systems and utility systems so that they have control over the totality. So really having an integrator and system provider role in this.And then to the agreement between ACC and SLB, we have had good discussions with the new stakeholders. And our plan and strategy together is to continue this good cooperation and look for growth opportunities.

[Preben Ørbeck, executive]

Next question comes from Erik Aspen Fossa in Carnegie. A few questions there. You lift the guidance for 2024. Do you expect to continue growing into 2025 and 2026? Second part of that, can you explain the decline in EBITDA for OneSubsea? And what is a fair quarterly EBITDA level expected going forward? If you can start with those, Idar.

[Idar Eikrem;Executive VP & CFO of Kværner ASA, executive]

Yes, take the OneSubsea first. I think detailed questions about the performance you need to address to SLB. We see that revenue-wise, close to NOK 10 billion each quarter and a margin that is slightly lower than 20%. We are happy with that type of performance and they have also good growth possibilities going forward. Then it was the guidance for 2024. And if we expect to continue growing it into 2025 and 2026, based on what we are working on, et cetera. And when we conclude both the tender pipeline and update of revised forecast going forward, we will be happy to come back and provide that. But we are confident that, sort of the guidance that we have now lifted the top line from a 15% growth to a 30% growth is well within reach.

[Preben Ørbeck, executive]

Moving to a question from [ Oskar Jönlov ] in Kepler. Given the increase in revenue guidance with CapEx guidance remaining unchanged at 2.5% to 3% of revenues, this implicitly expected CapEx spending has gone up. Please elaborate on the reasons behind the increase.

[Idar Eikrem;Executive VP & CFO of Kværner ASA, executive]

I don't think you should read it in that way. There is a range of 2.5% to 3% of revenue. And based on the increased top line, you should rather see that we are coming in closer to the lower level of the range.

[Preben Ørbeck, executive]

One question from Daniel Thompson from BNP. If you can please update us on the formation of the financial vehicle mentioned in the fourth quarter. Provide us any further color on the timing of the return to shareholders of the NOK 3 billion in transaction proceeds and receivables from the OneSubsea JV.

[Idar Eikrem;Executive VP & CFO of Kværner ASA, executive]

Yes, I think there's a couple of other questions related to the same topic. It's about capital allocation. We revised our dividend policy and communicated that last quarter. 2024 is a year where we are going to collect most of the money from the Subsea deal. Only 621 was on our balance sheet at year-end. And the rest is coming in now over the next 12 months to 18 months. So we will collect those. We will handle the working capital reversal and the cash outflow related to that. And we will complete our investment program. And then we will come back to you and everybody else when it comes to dividend and dividend policy update and capital allocation at year-end.This entity that we announced at year-end, I think some of you and maybe us put too much into it. It's not a permanent setup where we are going to be a capital sort of entity for the long run. So happy to come back and update you with the forecast next time we are discussing dividend policy and capital allocation.

[Preben Ørbeck, executive]

Then a question from Emil Vatnøy. What are your thoughts on the world macro at the moment? Energy prices and conflict in the Middle East could lead to interest rates being higher and longer and you could see a decline in demand. How would such a scenario impact our solutions?

[Kjetel Digre, executive]

Well, if you zoom out, it's obviously a really high degree of volatility. And secondly, if you add that to the energy trilemma that we are working on, all of us, it obviously is quite a lot to handle for all of us. But then if you zoom or translate that to our solutions and which topics that is for us, first of all, it means that our strategy and tactics of being very selective on what we do, with whom and where, that really fits that volatility.Secondly, we have a strong global system around things like supply chain and an awareness of which kind of contracts we are entering into and how they sort of honor the volatility through indexes and the likes.And then thirdly, we are a solution provider. We are not producing any of these products, so our solutions fit several energy verticals. And when we are now moving forward, we are present in most of the energy mix. And that gives us an optionality. It gives us a relevance and it's an excellent sort of starting point for selective and controlled growth.

[Preben Ørbeck, executive]

A question from Russell Searancke at Upstream. If you can comment on the outlook for the FPSO market and do you see new builds coming up or will it be more redeployment?

[Kjetel Digre, executive]

Well, the split there is obviously a bit difficult to predict, but we see it coming in all parts of the FPSO market and different geographical locations. And we are involved in redeployments through our engineering capabilities at the different locations and in our partnerships with yards like the ones we have in Dubai, but also looking at new build tasks, which we are more sort of known for through the big projects like Castberg and the likes. So this is a market we are following closely and we have different ways of entering into it, depending on whether it's redeployment or a new build.

[Preben Ørbeck, executive]

That concludes the Q&A session and today's presentation. Thank you all for listening in. And from all of us, we wish you a good day.