Aker Solutions ASA

OSE:AKSO

Earnings Call Transcript 2018-Q3

[Tove Røskaft, Head of Umbilicals]

Good morning. And welcome to our third quarter presentation. My name is Tove Røskaft. I am heading up Communication and Investor Relations at Aker Solution. With me here today is our Chief Executive Officer, Luis Araujo, and our Chief Financial Officer, Svein Oskar Stoknes. They will go through the main developments for the quarter. We will also have some time for questions and interviews with the press after their presentation. And as always, we have not scheduled any fire drills during this presentation, so in case of an alarm we have the exit through the door to your left, behind you. Luis, I will now hand the stage to you.

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Thank you, Tove. Good morning and thank you for joining us here today. I'm happy to say that the third quarter was another period of strong execution and solid order intake. We will start with the main developments in the quarter. And we have signed contracts in key markets such as Angola, Brazil and China. This development shows that our strategic ambition of international growth is progressing according to plan. We won NOK 5.9 billion in new orders in the quarter which more than doubled the same quarter last year. I will come back to these awards later in the presentation.We delivered yet another period of strong performance, making good progress on key projects globally. To give you a flavor, at the Kaombo field in Angola first oil was achieved. So far, we have installed about half of the trees on this large subsea project.In Brazil, the fourth deepwater manifold for Petrobras was also installed and with great customer feedback.In Norway, for Johan Castberg FPSO, global design was completed. Equinor applauded our team for its high quality engineering. The Johan Sverdrup hookup in Norway is also progressing as planned. We also contributed to the electrification project at the Johan Sverdrup along with our partners.The Njord project is progressing well. Prefabrication and installation of modules are ongoing. We are continuing to produce the umbilicals for the Equinor, Johan Sverdrup, Utgard and Bauge fields. An example of how we can standardize our technology for multiple fields.The Maersk Inspirer rig arrived at Egersund in September. As you can see on the top-right of the slide, an impressive sight with its legs rising 200 meters up in the air. Work has started on modifying the rig for the Yme field. We also see good continued moment on the second phase of our -- of operation improvement program.Now for the main numbers, our third quarter financial figures were revenue of NOK 6.5 billion, EBITDA of NOK 463 million, and EBITDA margin of 7.1%. Excluding special items the margin was 7.5% and EPS was NOK 0.6. We had an order intake of NOK 5.9 billion, bringing the backlog to NOK 36.1 billion.I'm pleased to say that our order intake in the last quarter more than doubled compared to a year earlier. As I mentioned, the highlight for us in this quarter is that we have secured more international work.New orders included 2 contracts from Petrobras. As you know, Brazil is a key growth market and we are strengthening our position. As such, winning the SPS contract for the phase 1 of the Mero field was perhaps the most important milestone in the third quarter.In Brazil, we also won a maintenance and modification contract from Petrobras at the Campos Basin. And this is a 5-year contract covering 9 offshore platforms.In Angola, we have earned the trust of BP with a 5-year brownfield service contract.China is another market of strategic importance where we are building our presence. We won an order to deliver power umbilical systems to Cnooc's Liuhua field. After the quarter has ended in China, we have just won a significant order to deliver the subsea production system to Lingshui gas field for the same customer. The contract is valued at NOK 1.7 billion. This is the first project for deepwater in the South China Sea. And it will be booked in the fourth quarter.In the North Sea, we got the continued confidence from Point Resources with an extension of the brownfield contract. Frame agreements are also important as we build close relationships with our clients. And in this quarter, we signed a global frame agreement with Equinor for current and future subsea projects. We also secured a frame agreement with Conoco Philips. It's actually 2 5-year frame agreements for possible future deliveries of subsea production systems and lifecycle services. And the second one for unmanned wellhead platforms at the oil and gas fields on the Norwegian Shelf.Well last but not least, we also saw good progress on our efforts with floating wind in California. The consortium which includes Aker Solutions and Principle Power submitted a lease application to move forward with the first commercial scale project for floating offshore wind in the United States. The 150 megawatt floating offshore wind farm is planned to be located more than 30 kilometers off the coast of Eureka in California and is expected to be online in 2024.There is a lot of global momentum in the floating wind. But I wanted to be clear that we are part of building a new industry. However, we are well-positioned with our technology and know-how. And by the way, please check out our cool movie about floating wind in our site.In front end, demand has continued to grow for early phase work. Last year we had several FEEDs for tie-ins in the Norwegian shelf. This year we are seeing that the studies and FEEDs are for larger and more complex projects, including several outside the North Sea. In the quarter, we won 33 front-end orders and this give us 107 studies for the first 9 months of the year.I said it before but also is -- also worth repeating. Early involvement is a sign of activity to come. And it put us in a strong position to secure more work.Now let me spend next few minutes in Brazil. I have said earlier that this is an important market and now I want to explain how strongly positioned we are in this market. The Brazilian market is seen as one to pickup. Next, it's open to operators, evidenced by the recent licensing rounds.On September 28, Brazil sold all 4 areas on offer in the country's presalt fifth round. The presalt area is the dark blue shady area on the map in our slide. And in this round that -- that happened in September, Chevron and Shell won the huge the Saturno prospect in the Santos Basin. And ExxonMobil and Qatar Petroleum won the production sharing rights over the neighboring Tita prospect. BP and Ecopetrol and Cnooc took the promising Pau Brazil area.So you see that our key clients are moving into this important market which is a good sign for us. But even before the new fields are developed, there are many opportunities.Brazil presalt area contains some of the biggest and most prolific offshore oil and gas basins in the world. It also has some of the highest achieved drilling rates globally, success rates. And more -- and we see that more than 100 trees are estimated be awarded in Brazil from 2018 to 2022.Services and maintenance contracts for current infrastructure is another major opportunity for our C.S.E. and for subsea lifecycle services business.The strong presence of Aker Solutions in Brazil gives a great advantage. We had been operating in Brazil for over 40 years. Today we are more than 3,600 employees at 6 different locations. We actually have more than 260 Christmas trees in over 100 subsea control modules installed subsea. And with this large installed base, we are a leading provider of subsea equipment and services in the presalt. In fact, we're the first company to qualify equipment for the Brazilian presalt back in 2011.On the manufacturing side, we have the world's only purpose-built subsea manufacturing facility. We have a solid relationship with Petrobras. And the recent contracts just mentioned today with Petrobras are clear indications that we are seen as a relevant partner in this market. In our facility at the São José dos Pinhais we also started producing the 47 subsea control modules for the Equinor project, Johan Castberg, Tore and Askeladd. This is our first export from Brazil.Importantly, our safety achievements in Brazil are second to none. I'm proud to say that our Rio das Ostras service facility has recorded 17 years with no lost time incidents. And our new plant in São José dos Pinhais is celebrating 3 years with no lost time incidents, quite impressive. It's still a period of uncertainty and caution in Brazil but we are optimistic about the progressive recovery. The Brazilian offshore potential remains one of the largest in the world. And we are very glad to see that our key global clients are increasing their position in Brazil.So to conclude, let's look ahead. While the outlook for oil field services remains competitive, there are continuous signs of recovery in the global market. Improvement measures across the industry are lowering breakeven costs. Oil price is stabilizing at higher level. And supply and demand is moving closer to balancing. And of course, we are seeing more projects being sanctioned.Tendering activity remains high in our main markets and we are currently bidding for contracts totaling about NOK 45 billion. About 2/3 of this is in the subsea area. And we anticipate key projects to be awarded over the next 6 to 12 months.All-in-all, we believe that Aker Solutions is well positioned for an upturn in the market. Longer term, we are optimistic because demand for energy in however form will increase globally. And this is where our push for sustainable energy solutions will truly payoff.We closed the third quarter -- just rounding off [indiscernible] quickly just to recap the main points of my presentation. We closed the third quarter with a strong order intake, higher tender activity and continued solid execution of projects and services.These are supporting margins amidst continued signs of a market recovery. Our awards outside the North Sea in the third quarter proves that we can compete in the global arena. Thank you for listening. And Svein will now go through the numbers in more details.

[Svein Oskar Stoknes, Chief Financial Officer]

Thank you, Luis. And good morning. So I will now take you through the key financial highlights of the third quarter, our divisional performance and run through our financial guidance before we then move on to the Q&A session. And as always, our numbers mentioned are in Norwegian kroner. So as usual, let's start with the income statement.Overall operating revenue for the third quarter was NOK 6.5 billion, which was up 21% year-on-year, supported by continued good progress on a number of key projects.In our projects reporting segment, both Field Design and Subsea increased the revenue from the same period last year. Overall, projects was up 25% year-on-year.Our services segment was up 10% year-over-year, reflecting our strategy to grow our world-class services business. This was primarily driven by the PAS subsegment or production asset services.Our reported third quarter EBITDA was NOK 463 million. This included net NOK 30 million of special items related to optimization of our UK footprint and services in Norway. For your reference, we have as usual set out the table in the appendix that further specifies these special items.Excluding these special items, EBITDA was NOK 492 million, an increase from NOK 421 million a year earlier. This was equal to an underlying margin of 7.5% compared to 7.8% in the same period last year.We continue to deliver stable underlying margins. This is a solid achievement as we are progressing our newly awarded work won in a very competitive market. It is clear evidence of our continued strong execution and good momentum on our continuous efficiency improvement program.Third quarter depreciation was slightly down year-on-year at NOK 181 million. This is in line with our guidance. And we continue to expect underlying depreciation to be around NOK 750 million to NOK 800 million per year.Our reported third quarter EBIT or operating profit increased year-on-year to NOK 282 million from NOK 217 million. Excluding special items, EBIT was NOK 313 million and the margin was 4.8% up from 4.5% last year.Excluding a minor unrealized hedging loss of NOK 3 million, net financial items were minus NOK 46 million in the quarter and included some positive elements under financial income.Following a debt settlement in Brazil last quarter we now see our net financial items on an annual basis around NOK 60 million per quarter going forward as compared to between NOK 60 million to NOK 70 million previously. This excludes the effect of currency and nonqualifying hedges.Our tax charge was equivalent to a rate of 34% in the quarter, and we continue to expect our average P&L tax rates to be in the low to mid 30% range going forward.We ended the quarter with an adjusted net income of NOK 155 million, earnings per share of NOK 0.50. Excluding special items, the earnings per share were NOK 0.60 which was up from NOK 0.41 last year.Now moving to our balance sheet and our cash flow performance. Our net current operating assets or working capital increased by about NOK 400 million from the second quarter. But still under the quarter at the strong minus NOK 1 billion. This strong position is a result of continued solid project execution, ongoing initiatives to optimize our cash flows and timing of some milestone payments.Working capital is likely to fluctuate around a large project work. And we expect the level to gradually trend toward 2% to 4% of group revenue towards the end of next year.We had net interest bearing items or net debt of NOK 405 million at the end of the quarter which was up from NOK 247 million at Q2, mainly reflecting this increase of working capital.Our net debt to EBITDA under the quarter at very solid 0.3x. As previously communicated, we still expect to be somewhat closer to our targeted level of net debt to EBITDA of about 1x toward the end of 2018.Our financial position remains strong at the end of the quarter, with a total liquidity buffer at healthy NOK 7.4 billion. This includes a revolving credit facility with leverage covenant at 3.5x net debt to EBITDA.Our solid financial position continues to give us flexibility and good financial headroom going forward. Our cash flow from operations in the third quarter was a negative NOK 44 million, primarily reflecting our outflow of working capital.Our investing cash flows total net negative NOK 59 million in the quarter including an inflow of NOK 90 million from realization of some financial assets. We still expect to see overall CapEx and R&D at roughly 2% of revenue going forward with flexibility.Cash flow from financing was positive NOK 108 million in the quarter, reflecting a minor change in our external borrowings.Now onto projects where third quarter revenue was up 25% year-over-year with growth in both Field Design and in Subsea. We ended the quarter with an underlying projects EBITDA margin of 7.2% versus 7.7% last year. The EBIT margin excluding special items was 4.9% which was the same as in the year-earlier period.We had yet another quarter of solid operational performance. And as we are increasingly ramping up execution of newly awarded work we continue to realize significant benefits from improvement programs in our projects portfolio.Order intake in projects was NOK 3.8 billion in the quarter, up from NOK 1.8 billion a year earlier with book-to-bill at 0.7x up from 0.4x a year earlier.The backlog in projects ended the quarter at a healthy NOK 25.7 billion. This is equal to about 16 months of projects revenue.Now let's take a look at the key figures for Subsea and Field Design within this reporting segment. So revenue from Subsea projects increased 15% from the same period last year. And this was on the back of our recent strong order intake revenue.Revenue from Field Design projects was up 33% year-on-year mainly driven by a recent order intake and several ongoing North Sea modification and hookup jobs. The solid order intake in projects was mainly driven by field design with a book-to-bill of 0.9x for the quarter.The Subsea order intake increased to NOK 1.1 billion from NOK 0.5 billion a year earlier. With book-to-bill ending the quarter at 0.5x. Despite a challenging market, tendering activity is still healthy and we are currently tendering for around NOK 40 billion of work overall in projects with the majority in Subsea.Our services revenue increased 10% year-on-year which was mainly driven by international growth in our production asset services subsegment. In the third quarter, production asset services accounted for a about 55% of services revenues which was up from about 45% in the same period last year.Underlying EBITDA was NOK 190 million with a margin of 14.9%, an increase from 13.5% in the same quarter last year. EBIT was NOK 148 million with a margin of 11.6%, up from 10.2% a year ago. The higher margins were due to increased activity levels versus last year, good momentum on our continuous improvement program, as well as incentives realized on the back of strong performance.Third quarter order intake in services was strong at NOK 2.1 billion up from NOK 0.7 billion a year earlier, resulting in a strong third quarter book-to-bill of 1.6x mainly related to international awards. I would like to remind you that a part of services order intake is short cycled or book and turn in nature. Despite the competitive market and our recent solid order intake, tendering activity is good and we are currently tendering for around NOK 5 billion of services work globally.Now over to the order intake and backlog performance for the group as a whole. Overall third quarter order intake was solid at NOK 5.9 billion with several key international awards secured during the quarter. We saw a good combination of greenfield, brownfield, services and growth on existing contracts and frame agreements. The order intake was equivalent to a book-to-bill of 0.9x and year-to-date we have a solid book-to-bill of 1.1x.Our backlog totaled NOK 36 billion at the end of the third quarter which is equivalent to around 1.6x our 2017 revenue and is up from NOK 27 billion a year ago. With the recent strong international order intake visibility has significantly improved for parts of our business. Order intake continued to be somewhat uneven caused by large contracts. As mentioned earlier, tendering activity is still good with several key projects likely to be sanctioned over the next 6 to 12 months. We're currently engaged in tenders with an estimated sales value of around NOK 45 billion. And as a reminder, our backlog does not include part of our services business or potential growth or options on existing contracts.And finally, over to our guidance. As Luis mentioned, we see an uptick in activity levels. And we continue to see our overall top line up close to 10% in 2018 versus a year earlier. We see revenue growth in both projects and in services and across subsegments. And we will continue to leverage our differentiating front-end capabilities to capture opportunities and engage with our customers at an early stage.We still expect our underlying 2018 EBITDA margins for the group overall to remain around year-to-date levels with Q4 one-offs likely in the same range as in the third quarter. On the back of our strong order intake year-to-date and continued high tendering activity, we see our overall 2019 revenue slightly up year-on-year with an underlying EBITDA margin remaining around the 2018 level.To defend our margins, moving into 2019, a continued relentless focus on quality execution and operational efficiency improvements are needed. And as activity levels pick up it will be important to harvest scale effects from our very fit and streamlined organization and asset base.So to sum up, we have a healthy backlog and a solid financial position. This continues to give us increased flexibility and financial headroom to position Aker Solutions to fully take advantage of the recovery. We ended the quarter continuing to deliver strong project execution with good underlying financial performance and by securing solid international order intake that further improves our visibility moving forward.Thank you. That was the end of our presentation here today. And we will know move on to questions.

[Tove Røskaft, Head of Umbilicals]

Okay, I think we'll start with the audience in this room before we go to our online audience. We have two microphones. So please start asking question. The gentleman, yes.

[Chr. Frederik H. Lunde]

Frederik Lunde, Carnegie. Can you just give some flavor on the strong margins in services this quarter, was exceptionally strong.

[Svein Oskar Stoknes, Chief Financial Officer]

It's high activity level, it's solid execution, it's a good activity mix, and it is also driven by some incentives that were awarded in that quarter.

[Chr. Frederik H. Lunde]

And also it looks like you will have very strong end to the year based on the backlog you have in place. So should you then expect margins to benefit from the same [indiscernible] scale as you saw this quarter?

[Svein Oskar Stoknes, Chief Financial Officer]

As I indicated, we see our margins continuing around a level that we are currently delivering. So we see our margins for 2018 overall around the level we have delivered underlying year-to-date. So I think if you do the math that would give you what Q4 would look like. And then for next year, as I'm saying, it's still a little bit early to be more specific on the top line. We see a good reason to expect growth. But we are careful in our guidance saying we're going to see slight growth moving into next year. And we indicate that we should be able to continue to deliver margins around the level we are delivering in 2018 which is quite an achievement.

[Chr. Frederik H. Lunde]

And final question, could you just comment on Sverdrup phase 2 and how much has been booked in terms of options for phase 2 or if anything?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Yes, I think what we -- I think what we booked to the modification of the riser platform in a joint venture with Kvaerner, 50-50, I think was in the second quarter, I think. So that has been the phase 2 for us. Plus we also have the responsibility for being the integrator. So our transition between phase 1 and phase 2 is also part of the scope in phase 1.

[Chr. Frederik H. Lunde]

So we shouldn't expect a big announcement in terms of Sverdrup phase 2, it's more of gradual increases in scope or?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Correct, I think what -- in Sverdrup, what's still to be awarded is hookups for the next two platforms in order to be hooked up of one platform, our competitor is doing for another one, so there are two more to be awarded that's not included on the orders today [indiscernible].

[Tove Røskaft, Head of Umbilicals]

I think we need to let some other people ask questions as well, yes?

[Haakon Amundsen, Lead Analyst]

Haakon Amundsen from ABG. Just digging a little bit more into your '19 margins, if you can give some more color on the different moving parts. I mean, if revenues are up you should have some scale effects, you have good execution, what's keeping the margins at the current level? Is it worse pricing on average in the ex-'19 backlog for execution than '18 or?

[Svein Oskar Stoknes, Chief Financial Officer]

Yes, I think it's pretty obvious that we are, you know, we're phasing in a lot of a new backlog which are tendered in a very different competitive landscape than the outgoing backlog. Despite that, we're indicating that we should be able to maintain our margins. And in order to do so we need flawless execution and we need continuous focus on our operational efficiency improvement program.

[Tove Røskaft, Head of Umbilicals]

Okay. Any more questions? Okay, then I think we can move on to the online questions. And it doesn't seem like our online audience had any questions. So then I think we say thank you. And we have time some -- for some interviews after. Thank you for coming.

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Unless [indiscernible] wants more more questions [indiscernible] or just to clear the presentation, I guess. Okay.

[Svein Oskar Stoknes, Chief Financial Officer]

Okay.

[Tove Røskaft, Head of Umbilicals]

Okay. Thank you.

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Thank you very much.