Aker Solutions ASA

OSE:AKSO

Earnings Call Transcript 2020-Q2

[Tove Røskaft, Head of Communications & Investor Relations]

Good morning, and welcome to the presentation of Aker Solutions results for the second quarter. My name is Tove Røskaft, and I'm heading up communications at Aker Solutions. With me today are Luis Araujo, Chief Executive Officer; and Ole Martin Grimsrud, Chief Financial Officer at Aker Solutions. After their presentation, we will have time for a Q&A session. I will now hand the mic over to our Chief Executive Officer, Luis Araujo. Luis, the mic...

[Luis Gomes Araujo;CEO]

Thank you, Tove. Good morning, all, and thank you for joining us on this call today for another quarterly presentation. This has been extraordinary 3 months for our work and through the COVID-19 pandemic countries have been locked down to prevent the virus from spreading. But for Aker Solutions, the top priority was to protect the health and safety of our people, and then we temporarily closed down some sites and implemented home office solutions for thousands of employees. As the quarter progressed, most countries in Europe and Asia Pacific started to reopen. A life in business could begin to return to some sort of new normal. In other regions, like Brazil and USA, we see a rising number of people affected by the virus. However, we managed to protect our people in these locations, and the impact on our business has been less dramatic than the worst-case scenarios that we were prepared for.In fact, I believe we managed this unprecedented situation quite well. We kept our productivity high, and we made key deliveries to our clients across the globe at the right time. This, as an example, included deliveries and successful installations to Equinor for Troll and Johan Castberg subsea projects. Also for Petrobras in Brazil, important project and to spinoff Lingshui development in South China sea. So I'm extremely impressed and proud of our employees who have handled a challenged situation so well. We have kept our commitments working in close collaboration with clients. We even broke new ground when we installed the first 7-inch vertical subsea tree to Equinor during the quarter. This is part of our intelligent subsea portfolio and a new standard for the Norwegian continental shelf, and we achieved this important milestone ahead of our competition. Back in April, we updated our targets to reduce costs by NOK 1 billion on annualized basis. Today, we are about 90% complete to reaching that target. This includes rightsizing of the workforce of about 5,000 people in the quarter and over 7,000 people since the end of 2019. That actually means over 30% of our workforce.In addition to the announced on our target, other ongoing measures to improve cash inflow include subleasing 1/3 of the Aberdeen business to an undisclosed energy company. We expect to finalize this agreement in the third quarter, and we are very pleased to be sharing our facility with a key client who should strengthen this key relationship. Three months ago, I said that this could be the most disruptive quarter ever in our industry, and this is probably still correct today on a global basis. But I also stated that COVID make a big difference by implementing new measures to boost activity. So the Norwegian Parliament in June agreed on a series of measures that had an immediate impact on sanctioning of new projects. This is quite positive for Aker Solutions due to our presence and track record in the Norwegian continental shelf. The new Norwegian government measures have already had a positive impact on our order intake in the second quarter. I'll come back to this when we go to the new orders slide. So now let's go to the key numbers for the quarter. Overall, operating revenue for the second quarter was NOK 5.4 billion, down 29% for the same period last year. Our second quarter EBITDA was NOK 232 million. Excluding special items, EBITDA was NOK 353 million, down from NOK 629 million a year earlier. This was due to an underlying margin of 6.6%. Order intake continued to evolve favorably and was strong at NOK 7 billion in the quarter. The order backlog increased to NOK 26.9 billion at the end of the second quarter. We also ended the quarter with a healthy liquidity buffer of NOK 5.5 billion, similar to Q1 liquidity. Afterwards, Ole Martin will take you through the numbers in more detail. Our order Intake in the second quarter was NOK 7 billion, giving a book-to-bill of 1.3x. Aker Solutions were awarded a letter of intent from Equinor for the delivery of a subsea system for the Breidablikk project in the North Sea. The scope of the project covers a complete subsea production system, including 15 subsea trees and manifolds in the first phase. The contract also includes options for the second phase and also includes increasing south development. Value of the options will be booked when they are called off by the client. Also from Equinor, we signed a letter of intent to deliver the subsea production system for the next phase of the Askeladd natural gas development in the Barents Sea. The scope includes 1 template with manifold and 2 subsea production systems and control systems. For Aker BP, we signed a 2-year contract extension for maintenance and modifications for Aker BP Ula, Skarv, Valhall and Tambar fields offshore Norway. And thanks to the oil incentive package in Norway, Aker BP Hod field is now up for sanctioning, and we have been awarded the engineering work for development phase to be executed under the existing alliance model. In the North American market, we signed 3 important contracts: an umbilical contract for Murphy's King Quay project through Subsea 7. For Husky in Canada, we signed a 4-years asset integrity management contract. And finally, for ExxonMobil, we signed a 1-month extension on the Hebron EPCM project, in anticipation for a 5-year renewal expected to be signed in the third quarter. We also achieved an important milestone for our 2025-'30 strategy. Aker Solutions in Norcem, a subsidiary of Heidelberg Cement, have signed an agreement as a firm step towards the engineering, procurement and construction, delivery of a CO2-capture plant at Norcem Cement factory in Brevik, Norway. We expect the contract award for this project to be booked in the first quarter of 2001 (sic) [ 2021 ] after sanctioning by the Norwegian government.Growth in existing projects, driven especially by life of fieldwork in Norway, also contributed to the strong order intake, showing the resilience of our service business.Our global front-end teams remain busy as we now won another 47 new studies in the second quarter. This totals 89 studies for the first half compared to 74 in the first half of 2019. Eight projects have during the first 6 months turned to FEED and 5 materialized into full-fledged projects. Even during a severe downturn, like this one, we continue to see this as a sign that our strong position in front-end is a key differentiator. The focus on low carbon and renewable solutions was reinforced by the number of studies where CO2 reduction is either part of the scope or the main purpose of this study. A total of 20 out of 89 studies were related to renewables and low carbon, showing that our 2025-'30 strategy is progressing well.Now to the market update and outlook. The list on the right of the slide shows an overview of all the projects that you could see come through in the next few years boosted by the temporary Norwegian tax measures. We are already working on Breidablikk, Askeladd Vest, Troll Electrification and the Hod projects. Another project we are very excited about is the NOAKA field development that Equinor and Aker BP now have agreed to develop. We believe we are well positioned to take a key role on this development. To the front-end studies already performed by Aker Solutions, through our digitalization effort as well as our existing alliance.Projects to the carbonized oil and gas are high on the operators' agenda, and these include electrification of assets, possibly also by wind for oil solutions.Aker Solutions aim to take our fair share of the projects on this list due to our technology position and track record in the Norwegian continental shelf. It is fair to say that no similar schemes have been introduced in the rest of the world. So we are in a very good position having the North Sea as our whole market. A large part of our execution engine is located in Norway, but also supports our global delivery model. Sanctioning activity in international market has yet to pick up, and the impact of the pandemic is still uncertain. But the preservation of our capabilities in Norway to the incentive scheme positions well for when the markets recovers. The same reasoning apply to the low carbon and renewable segment that rely heavily on our talented workforce for the forecasted energy transition. At the end of the second quarter, the outlook and discussions with the customer are more constructive than a few months ago, supported by oil prices that are back above $40. Aker Solutions is currently bidding for contracts totaling over NOK 40 billion, even after the strong session in Q2. So to sum up, we ended an extraordinary quarter with a strong order intake, a reduced cost base and a solid liquidity buffer. Uncertainties and volatility remain in international markets, but we are optimistic about our future. Now Ole Martin will take you through the numbers in more details, and we'll come back for questions later. Ole Martin?

[Ole Martin Grimsrud;CFO]

Thank you, Luis, and good morning. I will now take you through the key financial highlights of the quarter of our segment performance and run through our financial guidance. As always, all numbers mentioned are in Norwegian kroner, and we will start with the income statement. Overall, operating revenue for the second quarter was NOK 5.4 billion, down 29% year-on-year.The revenue decline was mainly driven by impacts of the coronavirus and from the field assigned segment following the record activity level last year. Our reported second quarter EBITDA was NOK 232 million. Excluding special items, EBITDA was NOK 353 million, down from NOK 629 million a year earlier. This was equal to an underlying margin of 6.6% compared to 8.4% in the same period last year, reflecting the lower activity level and the impact of the coronavirus, partly offset by swift implementation of the NOK 1 billion fixed cost reduction program. We have included restructuring cost of NOK 117 million in the quarter related to additional rightsizing of the organization following the lower activity level. Depreciation and amortization was NOK 294 million, in line with our previous guidance. We continue to expect underlying depreciation, including the effects of IFRS 16 to be around NOK 1.2 billion per year. Our reported second quarter EBIT or operating profit decreased year-on-year to minus NOK 63 million from NOK 98 million. Excluding special items and impairments, EBIT was NOK 62 million, and the margin was 1.1% versus 4.3% in the previous year.Net financial items were negative NOK 132 million in the quarter, excluding a minor annualized hedging loss of minus NOK 11 million. We continue to see our net financial items around NOK 100 million per quarter going forward. Our P&L tax charge was equal to a rate of 17% in the second quarter related to the negative income before tax. We continue to expect average P&L tax rates to be in the low to mid 30% range over time. We ended the quarter with a net income of negative NOK 171 million. Excluding special items, the net income was negative NOK 56 million and earnings per share minus NOK 0.23, down from NOK 0.56 last year.Now moving to our balance sheet and cash flow performance. Our working capital or net current operating assets, ended the second quarter at NOK 920 million. We continue to have a strong focus on cash collection. In addition to other measures to improve working capital performance.Following the normalization of our working capital during last year, we expect that working capital will continue to trend around NOK 1 billion going forward.Our cash flow from operations in the second quarter was NOK 48 million, and our investing cash flows totaled a net negative NOK 156 million. The investments were mainly related to finalization of already committed project-related investments. And as communicated, CapEx and R&D will be significantly reduced to about NOK 500 million for this year, which implies a low investment level for the second half of the year. For next year, we target a further reduction by another 30% to around NOK 350 million. Excluding IFRS 16, we had net interest-bearing debt of NOK 2.4 billion at the end of the quarter compared to NOK 2.1 billion at the end of the first quarter. Our net interest-bearing debt to EBITDA ended at 2.1x. And as a reminder, the leverage covenant on both bonds and revolving credit facility are at 3.5x pre-IFRS 16. Our total liquidity buffer at the end of the quarter was at a healthy NOK 5.5 billion, including our revolving credit facility.In the current environment, our main financial priority remains on cash flow performance and protecting the company's balance sheet.Now on to projects, where our second quarter revenue was down 33% year-on-year, driven by the field design subsegment, following the record activity for brownfield projects last year as well as the impacts of the coronavirus. This resulted in an underlying projects EBITDA of NOK 268 million, with a margin of 6.6% for the quarter, down from 7.9% last year. EBIT, excluding special items, was NOK 72 million, with a margin of 1.8% versus 4.5% last year. The margins in the second quarter reflected swift actions related to the coronavirus outbreak. And in particular, achievements on the cost-reduction program. Second quarter order intake in projects was strong at NOK 6.3 billion with a book-to-bill at 1.6x, increasing our backlog coverage moving forward. Now some further details for subsea and field design within the Projects reporting segment. Revenue from subsea projects decreased 90% year-on-year, driven by the finalization of certain ongoing projects as well as the impacts of the coronavirus. Revenue from field design projects decreased 41% year-on-year, a normalization we have previously guided for. Following the record activity last year from significant brownfield modification and hookup projects in the North Sea. Second quarter order intake was strong with NOK 3 billion in subsea and NOK 3.5 billion in field design.The backlog in Projects increased to NOK 16 billion, further improving our visibility going forward. In Services, activity decreased year-on-year in the production asset services subsegment, primarily related to adverse impacts of the coronavirus. However, this improved towards the end of the quarter. Activity in the subsea life cycle services subsegment remained more resilient. Underlying EBITDA in Services was NOK 126 million, with a margin of 9.8% versus 14% in the same quarter last year. This resulted in an EBIT of NOK 63 million with a margin of 4.9% versus 9.8% a year ago. Second quarter order intake in Services was NOK 614 million, with a book-to-bill of 0.5x. And as a reminder, in addition, a part of the Services order intake is short-cycled or book-and-turn in nature. The backlog in Services ended the quarter at NOK 10.9 billion.Now over to the order intake and backlog performance for the group overall. We had a strong order intake in the second quarter of NOK 7 billion, equal to a book-to-bill of 1.3x, increasing our backlog coverage moving forward. Our backlog increased to NOK 26.9 billion, and we have now a strong coverage for the expected full year revenues. Our second quarter order intake was significantly better than expected than a couple of months ago, driven by the recovery of the oil market and the Norwegian government incentive measures. The outlook for order intake has improved, and we now see encouraging signs for order intake during the second half of the year and into next year. Finally, over to our guidance. During the first half of this year, the activity in our industry has been significantly impacted by the coronavirus and steep decline in oil prices. Now as we are exiting Q2, the situation has improved. During the second quarter, Norwegian authorities implemented incentives for oil companies to start projects. We expect this will result in a number of interesting opportunities, where Aker Solutions is well positioned. This, combined with the recovery of the oil market, makes us more optimistic about the outlook moving forward. At this stage, we expect revenues for 2020 at around NOK 21 billion to NOK 22 billion. Secured 2020 revenues in the backlog are at the moment close to 90%, excluding the book-and-turn revenue in Services. Margin guidance is still challenging and uncertain. But at present, we expect full year underlying EBITDA margin of around year-to-date levels, excluding special items, supported by the cost-reduction initiatives.We have secured a strong order intake during the second quarter, which improves our visibility going forward. We have implemented swift and decisive cost-reduction measures to mitigate the impacts of the coronavirus and the low oil price in 2020, and we have cut CapEx by 40% this year and target another 30% reduction next year. We have progressed well on our restructuring plan, where the target is around NOK 1 billion in annualized fixed cost reductions versus 2019. About 90% of this target has already been implemented in actions, and we target this to be fully implemented during the second half of the year. These fixed cost reductions are mainly on overhead costs, including headcount reduction and optimizing our manufacturing footprint. These measures should provide a good foundation for cash flow performance and for protecting the company's balance sheet and financial performance moving forward. And with that, I would like to thank you for listening. That was the end of our presentation, and I hand it over to Tove.

[Tove Røskaft, Head of Communications & Investor Relations]

Thank you, Ole Martin. Moderator, we will now open the lines for questions.

[Operator]

[Operator Instructions] We will now take our first question from Amy Wong from UBS.

[Amy Wong]

A couple of questions from me, please. The first one is just a bit of housekeeping to understand how the split of the cost savings were achieved in Projects and Services? And how much was the realized cost saving during the quarter? As you implemented 90% of the initiative, but just to understand how much of those savings actually in your 2Q numbers? And then I'll ask my second question.

[Luis Gomes Araujo;CEO]

Yes, Amy, thank you so much for your -- for questions. As we said, we have a really good progress now on our fixed cost-reduction program, which boosts the Q2 margins and also then the margins into the remainder of the year. We do not give a split between our segments on the cost-reduction program. However, I would say what's achieved in Q2 equals approximately what we have implemented.

[Amy Wong]

Got you. Okay. And then my second question is a bit more strategic. Of course, the big talk over the last couple of years have been the integrated model, integrated solutions, SPSs and installation. Just wondering kind of where we are now with that debate, especially with the oil price collapse again. What are you hearing from customers in terms of what they really want in the current environment? Are they going to integrate it? Or are they going back to kind of the separate or the more conventional way of bidding for projects?

[Luis Gomes Araujo;CEO]

Okay. I don't think things have changed since last year in terms of the amount of -- the quarters going to split or integrated. As you can see, we have won several subsea projects this quarter, which is very good, and they are not integrated. But we're still following this strategy. We work with Saipem and a global alliance. We see less projects right now, but that probably reflective of the -- of just massive curtail in CapEx by clients. So we believe that the trend will continue going forward as long as we present lower cost by that. So we work with Saipem. When it comes to the alliances with Aker BP, we also work with Subsea 7, and we have several projects to be sanctioned here in Norway for Aker BP, some tiebacks that are actually included on my list of projects in the last slide.So that's how we see it. And so certain clients we have preferences, and some clients would be preferred to just award accounts where they can control. So I think it will be both. And I think we're prepared to serve the clients on both sides. But at the moment, there are less integrated contracts in the market.

[Operator]

[Operator Instructions] There are currently no more questions in the queue. I will turn the call back to your host.

[Tove Røskaft, Head of Communications & Investor Relations]

Thank you.

[Operator]

We will now take the next question from Mick Pickup from Barclays.

[Michael Brennan Pickup, MD & Senior European Oilfield Services Analyst]

Obviously, not a busy call. You've mentioned the Heidelberg cement project in your presentation, you didn't mention much about wind, and obviously, Norway has moved ahead with licenses of floating wind. Can you just talk about any changes you're seeing on that floating wind side, please?

[Luis Gomes Araujo;CEO]

Yes. Thank you, Mike. Good to hear from you. And I was surprised not to hear a question from you. So I'm sure you're there. So good to hear from you. And a good question as well. And one that actually brings you to a very interesting subject for us, which is the renewable and low-carbon activity. I think the cement factory in Brevik, that's going to be the first industrial-scale project. And I would say that everything is agreed and organized. We've done a very large FEED for that. So identify the costs, and we're ready to do the execution of the project and the EPC with some sort of cost protection as well. What we're waiting for now is for the government budget to be approved because there are some, of course, incentives there. And that's going to be around, I think, October this year -- October, November. So the idea is to start the project, this full-scale project, 400,000 tons of CO2 captured from January next year. So the revenue we booked probably the order intake will be booked in Q1 next year. I think it's a great progress. I think it's going to be -- and there are several other opportunities we have, quite a few opportunities on carbon capture, and the pipeline of projects has increased, for example, from NOK 5 billion to something like NOK 12 billion or NOK 13 billion now. And we see that in scale growing a lot. And as we know, CO2 capture is of significant importance to achieve the Paris goal. So we are really very happy about that. We think that this is going to be a big market for us, and that's just the beginning. So we have 2 projects now concrete. And the next is, I guess, [indiscernible] is going to start to move on that direction, not only in our industry but in several industries, including some carbon capture on FPSOs who believe we want to have some, what I call, green FPSOs going forward. So we're developing that together with them as well.Yes. I think your second question was about offshore floating wind. And there's no -- we have seen no changes in the intention of companies to develop that. In fact, we have seen -- probably noticed as well, some of our key clients making big investments on offshore wind. So I think we are well positioned, and the strategy remains. And my view is that to the pandemic, there's no change on the CO2 discussions, and we expect to see big growth on offshore wind as well.

[Michael Brennan Pickup, MD & Senior European Oilfield Services Analyst]

Okay. And can I just do a follow-up? Obviously, in the, I'd say, the last 2 to 3 months, your traditional clients have all gone down a net 0 decarbonization route. I'm just wondering if they're contacting the companies like you and your traditional suppliers to see what you can offer? I wonder if that has accelerated during the last few months.

[Luis Gomes Araujo;CEO]

It did. I think you probably saw the studies table that, for me, is one of the key tables in our presentation every quarter because it shows -- it's almost a moment to say what the temperature out there with clients. So they certainly increased. They have 20 studies that were actually directed to decarbonization or renewable CO2. And we see a lot of traction on that. And of course, because of our position in terms of technology, reminding you that we probably confirm that our technology in carbon capture is one of the only 2 has been proven. And our is the only one large scale. So we're pretty well positioned for that and clients are coming to us. It's a huge push. That's not going to go away with COVID-19, as you probably noticed. And I think we are -- the dialogue with clients are actually increasing, not only for traditional, but also for implementing wind for oil. You probably noticed that Aker BP has mentioned they're considering that even for NOAKA to do some wind for oil. So I think that's quite a change. And you also noticed that in Norway, the government has decided to allocate some offshore areas. And that should be very important for us due to our presence and also to build a new industry we're just starting now. So we are quite bullish about that.

[Operator]

We will now take our next question from Michael Alsford from Citigroup.

[Michael James Alsford, Director]

I've just got a couple really more around the cash flow. You mentioned a little bit of the efforts to try to improve cash generation for the business with the subleasing of Aberdeen. I just wondered if you could give some indication of where you see sort of the net lease payments on a sort of quarterly basis trending towards with those measures that you're putting in place? And then secondly, you've done a very good job of quickly cutting costs. So I'm just wondering, often you go first to cut costs, is there any, I think, more you can be doing to, again, to reduce that sort of operational cost base? Are there other initiatives or other areas that you could potentially see that saving target increase?

[Ole Martin Grimsrud;CFO]

Thank you for the question. On cash generation and in particular lease payments as we say during the presentation, we have now -- we are now 5,000 less people out of Q2 versus Q1. Obviously, that will have an impact on number of office seats, we need facilities. We have been successful in subleasing in Aberdeen and other places around the world, and that will obviously reduce other lease payments going forward.In addition, we are working on our manufacturing footprint, which also is a driver for the cost reduction program, and that would also potentially give us lower lease payments going forward. Second part of the question on the cost-reduction initiatives, I would say that NOK 1 billion cost reductions -- and as we said, we have already achieved 90% of it during the quarter. And there are multiple other initiatives that could boost that target into the second half of the year. And we saw that the second quarter performance was strong on the cost reductions, and that should also provide a good basis for margin expansion going forward.

[Luis Gomes Araujo;CEO]

Just want to complement to what Ole Martin said, that on the cash flow, we see some projects with certain NOCs, who are pretty negative on cash flow, working capital, and we are delivering those projects. So we expect that also have an impact going forward.And on cost, is a good question, it will keep -- we're going to continue hunting costs, I guess, in the system. So yes.

[Operator]

We will now take a follow-up question from Amy Wong from UBS.

[Amy Wong]

Guys, well, I didn't wish you a happy summer, but -- so I thought I'd go back in the queue. I was just going -- just 2 more questions from me. On the cost savings, perhaps I'm just going to ask this way, the NOK 900 million of cost savings implemented, would you say it was more kind of achieved at the beginning of the quarter, which would be quite interesting, but -- or more kind of towards the end of the quarter that you were able to achieve that run rate?And then my second question, I know it's a little bit early to be talking about 2021, but for you guys, it's -- you had a very interesting quarter in terms of the sentiment change drastically over the last 3 months or so. So your order backlog for execution in 2021 is NOK 29.7 billion, almost flattish compared to the same time last year. And arguably, the order intake pipeline is still looking quite good over the next few month or so or in the near term, I would say. So at this point, would you -- is it conceivable that 2021 revenue can actually be higher than 2020? What are your thoughts on that?

[Luis Gomes Araujo;CEO]

I would let Ole Martin answer the cost-saving questions. I can say that we took very swift measures, extremely good to roll operation with the management team. So I think I'm very proud of what the guys did here. It's something that we don't like to do. We don't like to, of course, lay off people, that's the worst thing a manager can do, but it needs to be done. So the guys acted very quickly and Ole Martin can give a bit more perspective on that. On the order intake in 2021, I guess if you ask me this -- if you had asked this question, Amy, on -- in March, then I could never give you an answer. And it's still pretty much the same when it comes international market. It can go anywhere. But what we see is that we have some key differentiation. And of course, our whole market has actually provide some good backlog for us and good support. And I mentioned there are several projects on the list that you see in my last slide, that I think we are incumbents to alliance and so forth. I mentioned NOAKA, for example, and it would be a pretty large development, probably the last -- at least in the list of one of the large developments in Norway remaining to be done unless we find more oil and also [ Wisting ] so -- which is pretty similar to Caspian. So there's a few projects we think we are very well positioned to achieve going forward and should support 2021. Several of the large -- if you remember back at the end of -- when I'd done end of '19, early in the year, I mentioned several projects that we talked to be sanctioned going forward. And it's still out there, for example, Troll Electrification, whether we won the FEED with an option for an EPC even that's converted to a project that will be a significant -- a sizable project for us. I also mentioned some projects in Africa. And quite frankly, everything was put forward at least 12 to 18 months. So as the market stabilizes and the balance of production eases out, then I think we will see some of those projects coming back, and some of them are still -- we just, for example, this month concluded the FEED. We are concluding now in the quarter the FEED for Jansz. So now it's about waiting for sanctioning and people being cautious, of course, with the CapEx cut. So I think things can be good, but it's very hard to predict as usual. So we take one quarter per step every quarter. So -- and Ole Martin, on the cost, it was early or late?

[Ole Martin Grimsrud;CFO]

Yes. On the cost reduction side, as said by Luis, we are proud of what we have achieved now during the quarter. We have done 5,000 less people after 3 months, which is an achievement. We kicked off this program early in the quarter. We saw quite good progress early. Average for the quarter, 90%. And then I would expect into second half of the year to have 100% achievement should be more in the third quarter versus fourth quarter. So...

[Operator]

[Operator Instructions] We will now take our next question, a follow-up question from Mick Pickup from Barclays.

[Michael Brennan Pickup, MD & Senior European Oilfield Services Analyst]

Again, given not many people, I'll jump in again. A very quick one. You mentioned about subletting of buildings in Aberdeen. I assume that you're doing rationalizations of other footprints, given you have such a big IFRS 16 impact on your balance sheet. Does any of this rationalization mean that will come down?

[Ole Martin Grimsrud;CFO]

Yes. You're right, Mick. When we sublet, we will then have also the opportunity for lower IFRS 16 impact on our balance sheet. So you're right, it will come down.

[Luis Gomes Araujo;CEO]

Yes. It's fair to say, though, of course, the market is tough and that's why I'm so pleased about the Aberdeen, which is, of course, one of the most affected locations, I would say, with too much capacity for people. And then -- but the most important part here is that we're going to be sharing the office with the key client, and that's important for us to be close to that client. That is a growing client for us. But one thing that we can discuss, of course, for hours will be the fact that how many offices we're going to need going forward? But we still have, right now, a large number of employees working from home, and they are producing quite well, I might say so. So we are analyzing what's going to be the future footprint of the company.What we noticed that some of the more creative tasks are done better than face-to-face, and we are allowing these people to come back. But in certain offices, we still only have 25% of the people back. And that's okay because people are producing -- actually productivity has gone up comparing to when people were in the office in certain cases. So...

[Operator]

There are currently no more questions in the queue. I will turn the call back to your host.

[Tove Røskaft, Head of Communications & Investor Relations]

Thank you. Then we can start with some of the typed questions. The first question is from Nick Konstantakis from Exane. I believe the first question he had has already been answered regarding the cost cutting, but he had a second question. Also, you had NOK 60 million impact from COVID-19 in the first quarter, any such impacts during second quarter?

[Ole Martin Grimsrud;CFO]

Thank you for your question, Nick. You are right, we had NOK 60 million as we said as a part of the Q1 presentation. Revenue impact in second quarter is even higher. So I would say slightly above NOK 0.5 billion is the revenue impact in the quarter related to the coronavirus as we had restrictions in most locations around the world. So...

[Tove Røskaft, Head of Communications & Investor Relations]

Thank you. Next question is from Haakon Amundsen. He has 2 questions. I believe you have answered part of it, but I can ask them, so you can complete with the pervious answers. On the wind -- offshore wind strategy, could you give a little more update with respect to both principal power and the offshore wind farm ownership operation? Is the first question. And the second question is with your current market outlook, do you expect to reduce your capacity further beyond the current NOK 1 billion cost reduction plan?

[Luis Gomes Araujo;CEO]

Okay. I can start with offshore wind. First, I think PPI continue progressing. And as I, I think, reported early in the year, the complete installation of this 8-megawatt turbine, which is the largest we implemented in north of Portugal, so they are progressing well. Recently, they have another -- got some -- capital influx from a Japanese logistic company, so which is good. That opens another avenue for them and for us, consequently.We're still working very closely with EDPR. EDPR is actually together Engie, one of the largest offshore floating wind, and then we have a very tight and nice partnership with them going to more projects. So that's actually what generated our ownership in projects. That's certainly -- we are there not because we want to be electricity company or a developer, it's because we believe we can capture some value, some real good value, and I'm sure you're going to hear more from that in the future, but also because we can derisk those projects for them, and we can also guarantee our supplier role for that project, both on engineering, front end and so forth.So in terms of how this is developing, I think there's some similarities with oil and gas as people do -- first of all, what people do is to do front end. And then after doing front end, we need data for the front end, so we usually -- like we did in Korea recently, it was a nice achievement, we put a leader boy, so we can manage the wind. And that's another similarity with oil and gas is the more wind you have, every percent more wind will affect your NPV. And so we have our models that I think is quite good because it's based on knowledge of technology as well as the knowledge of the wind itself.We also tied very well with our digitalization. So I think it's progressing quite well, and I'm actually excited about this and pleased. And as I said, I'm sure you're going to hear more about that in the future.The second question was about reducing cost further. I think, since -- yes, since 2014, we proved that we can reduce costs quickly, and we prove that again now. But we have to take -- we have a backlog to execute. We have a very skillful and trained workforce that has proven to deliver. We have the best delivery this company ever had in the last few years. So I'm very proud of what we are doing.And again, one important point about the package in Norway, it's not only about the backlog, it's also very welcome and needed, but it's also the fact that we're going to protect our execution muscle, which is largely located in Norway, supporting especially the engineering side, planning, project management is located in Norway and supports the international location. So of course, that had also an impact of people we put on temporary leave and so forth. But the nice thing about having this workforce now working on those new projects is the fact that, one, we're going to have a muscle to execute projects in international market, offshore market when they come back and they will. And also to help us in this transition because this is going to be the execution muscle that will also develop the offshore floating wind and the carbon capture, that's where we take our knowledge and so on. So I think that's my comment on that. We have no plans. And -- but we're going to take measures if required.

[Tove Røskaft, Head of Communications & Investor Relations]

Thank you, Luis. And we have 2 questions from Vlad Sergievskii. The first one, you're guiding revenues in second half of '20 to be broadly stable at the second quarter levels, while margins declining by roughly 1 PP versus second quarter level despite full impact from cost savings. What is driving this sequential margin decline in the second half? That's the first question. The second question, are you able to roughly quantify the positive impact from government furlough schemes around the world on your second quarter financials?

[Ole Martin Grimsrud;CFO]

Okay. Thank you, Vlad, for good questions. Margin guidance for 2020, as we said, it's still challenging to provide specific guidance at this stage, given the quite high market uncertainty, also volatility, in particular, outside the Norwegian continental shelf. Having said that, we -- as you say, we saw a significant impact of the cost reduction measures in the second quarter. And at this stage, we wanted to be conservative and guide them around year-to-date levels for the remainder of the year if we then continue to deliver our projects flawlessly and with a continued level of fixed costs. Then a second part of the question, impact of the furlough and temporarily of programs around the world for us, mainly in the U.K. and in Norway in the second quarter, that's included in our cost reduction program of NOK 1 billion, which is then -- I commented on how much was impacted in the second quarter, but we will not guide on the specific amount related to the furlough or temporarily of programs.

[Tove Røskaft, Head of Communications & Investor Relations]

Thank you, Ole Martin. Next question is from Frederik Lunde. Do you think it is realistic to achieve growth in 2021? If so, where would you expect margin to trend up, down or flat?

[Luis Gomes Araujo;CEO]

I think we had a similar question from Amy. To talk about growth when we are just exiting the most disrupted quarter ever in the industry when oil price was negative, I guess, is a bit too ambitious, in my view. But as I said, we are very well positioned for the projects in Norway. And I also think we're very well positioned for the renewables growth, and we mentioned a few contracts today.In terms of margins, I mean, we never guide on minus -- on the next year margin. So I won't start doing that now. But certainly, challenging times, and there will be strong competition. There's no question. But I like -- what I like about the orders we just got this quarter is that they are repeat orders in terms of technology and engineering. So it means that we won't require a lot of investment on that. And that should reflect a better margins on the Subsea project we just won comparing to the ones we won through the last cycle.

[Ole Martin Grimsrud;CFO]

On Luis' comment it's too early to provide guidance at the moment. But if the market continues to improve, in particular, outside the Norwegian continental shelf, and we see a high level of project sanctioning in the second half of the year and into 2020 and we continue to have a low level of fixed cost that should provide a good foundation for higher margins in 2021.

[Tove Røskaft, Head of Communications & Investor Relations]

Thank you. Next question is from Sahar Islam. Can you talk about the competitive landscape for the upcoming tendering pipeline? And have you seen more pricing pressure? And the second part: what should we expect for special items in the second half of the year? And is this excluded from the EBITDA guidance?

[Ole Martin Grimsrud;CFO]

So I'll start with special items, and then Luis could comment on the tendering pipeline. We had a high level of special items in the first half of the year related to our restructuring programs. I expect now that we will see a very low level of special items into second half of the year. And as we said that our EBITDA margin guiding is excluding special items.

[Luis Gomes Araujo;CEO]

In terms of tendering, I think I gave a precise number. We are over NOK 40 billion right now. And that, again, is good to recognize. This is not the whole pipeline of projects, this is the snapshot of what we are tendering right now. That's what we are giving price for clients who negotiate directly if the alliance and so on. So it's still solid there. And again, I also said it's not -- for international projects, it's fair to say that a lot has slipped between 12 and 18 months in the beginning of the year after we saw the masses we were supplying the market that has been reduced, but still some there. So I think that we have to be cautious here and wait for the response of the oil price as well as demand.

[Tove Røskaft, Head of Communications & Investor Relations]

Thank you. Then we have the final questions from James Thompson at JPMorgan. The first question, you have outlined a number of potential projects in Norway benefiting from the tax changes. After the initial wave of announcements, do you see more in 2020 or a majority of the list you provided likely to progress in 2021? Please, can you talk about whether or not you are facing any recent logistical issues in Brazil, given the later appearance of the virus in country?

[Luis Gomes Araujo;CEO]

Okay. I'll take the first one. I think the list we have there, and I probably noticed that even the list with Askeladd was not included because that was taken straight from one of the reports out there. I think those projects will all be sanctioned. They have to be sanctioned between before 2022 to be able to capture these significant tax advantages and incentives. So we expect all this to be awarded actually in the next 3 years. I mentioned a few important ones like NOAKA. This is one that we are extremely excited about because we've been working on that development for both these studies -- for both operators in the North Equinor and South, Aker BP. We know that we have a successful track record with Aker BP in the alliances, both subsea alliance as well as the platform alliance together with Kvaerner and ABB. So I think we are very well positioned considering what is the layout of the field.And Aker BP yesterday also mentioned that they expect that field to be the new model, how to execute projects, not only about the alliance, but also about digitalization. And I have to say that iX3 software house has been working very closely with the front end and digitalizing Aker from the front end study. So we're very excited about that to prove that we can do fields even more cost-effective than the rest of the world. But that's -- so we expect those projects to be awarded and to take our fair share of the list going forward. So we expect more in 2021 and 2022. I guess the second question was about -- you mind again?

[Tove Røskaft, Head of Communications & Investor Relations]

Yes. Logistics...

[Luis Gomes Araujo;CEO]

Logistics? Yes, okay, about Brazil. Actually, I'm actually extremely impressed what we managed to do across the globe in term of logistics. Our supply chain, people had a fantastic performance. We maintained -- the same way we maintain contact with our clients. Our supply chain people had direct contact with all key suppliers and maintained absolutely contact on that. So we didn't see as much as impact as we thought. We saw some impact in the beginning, not in Brazil, but Brazil, also, we also import from all locations, Italy and so on. That was what impact a little bit. But we did have quite a lot of buffer. We had some things ongoing, stock. And we managed to deliver to the clients. So I'm extremely proud of what we saw. And we delivered even installed trees in China in the mid of the pandemic where people have to be in quarantine. And I said, I'm so proud about the workforce. We had people who are in some of these countries for over 40 days because you couldn't get someone in before quarantine. And these people really came through to the company and to the clients. And we delivered a very good performance in our SLS business, which is actually quite resilient. So I'm very proud, and I think we are managing well.

[Tove Røskaft, Head of Communications & Investor Relations]

Thank you. That was the final question. So thank you to everyone listening in, and have a good summer.

[Luis Gomes Araujo;CEO]

Thank you. Before I close, I'd like to thank Ole Martin for his last quarter for us here and wish him good luck in his new ventures. Thank you very much for your service.