Aker Solutions ASA

OSE:AKSO

Earnings Call Transcript 2022-Q3

[Marianne Hagen, executive]

Hello, and welcome to Aker Solutions, and the Presentation of the Third Quarter Results for 2022. My name is Marianne Hagen, I head sustainability, HSSE and Communications.

With me here today is our CEO, Kjetel Digre and our CFO, Idar Eikrem, they will take you through the main developments of the quarter.

Our presentation today is a live audiocast and you can download the slides from our webpage. The audiocast will later today made available for replay. After the presentation, we do have time for some questions. Those of you who are following the audiocast can submit your questions on the online platform.

And with that, I leave the floor to you, Kjetel.

[Kjetel Digre, executive]

Thank you, Marianne; and welcome to everyone. Let me take you through the highlights of the quarter. Firstly, the overall message is that we delivered increased top and bottom lines in the quarter from the same period last year and that we are on track with our financial targets.

Our third quarter revenue was NOK 10 billion and EBITDA was NOK 749 million, excluding special items, with a margin of 7.5%. This included a positive effect in subsea related to starting margin recognition on the Jansz subsea gas compression project, which Idar will come back to later on. We delivered NOK 8.2 billion of order intake or 0.8 times book-to-bill. Our tender activity continues to be record high and we expect several large projects to be sanctioned both near-term and medium-term. Our backlog ended at NOK 50.9 billion, providing a solid foundation for our growth targets moving forward.

Secondly, we continue to progress well with our transition journey. During the quarter, we announced that we have agreed to combine the complementary subsea businesses of Aker Solutions and Schlumberger to create a strong and leading subsea company. Subsea 7 will also become an owner and a partner in the JV, enabling the JV to offer fully integrated subsea projects globally. This compelling combination will deliver an industry step-change that will significantly benefit our customers, employees and shareholders. And in our view, this will be one of the most exciting subsea companies in the world. In terms of our ongoing recruitment campaign, I'm happy to share that we have now welcome around 2,300 skilled new colleagues year-to-date across our organization globally.

Thirdly, in terms of outlook and recent developments, we continue to see increased activity levels. Looking ahead, the high oil and gas prices increased demand and increased focus on energy security is likely to continue. This is projected to lead to increased investments in high-value, low-carbon solutions; both in oil and gas and in renewables. And we are already experiencing this. For instance, through increased demand for solutions, enabling maintained or increased production at existing fields. On a macro level, the dynamic environment is continuing, where the pandemic and the war in Ukraine have amplified several trends, including inflation. We will continue to monitor and manage this situation and be proactive together with our clients. And we are now experiencing that some supply chain constraints continue to ease and that raw material prices have reduced from the highest seen earlier this year.

And finally, I'm sad to share that after quarter-end, we unfortunately experienced an accident at our Egersund yard that sadly resulted in a fatality. A driver from a supplier company, who was delivering scaffolding equipment to our yard lost his life after a tragic accident that occurred during the offloading of cargo on October 13. The yard's Medical Officer provided support within minutes of the accident and ambulance and police arrived quickly to the scene and the 25-year-old man was flown to hospital immediately. He unfortunately died in the hospital the following day. My thoughts and deepest sympathies are with his family, friends and colleagues at this difficult time. Both internal and external investigations are ongoing. At Aker Solutions, safety is our first priority and we all work hard every day to prevent accidents from happening. We will do everything in our power to learn from the accident and ensure that something similar never happens again at any of our locations.

Now, let's have a look at some of our recent operational highlights. Overall, I'm pleased that our main ongoing projects are progressing well. During the quarter, work has continued to progress at the Johan Castberg project. Earlier this summer, we have reached an important milestone when we had successfully completed all the lifting campaigns for all the main topside modules. During the quarter, we installed the flare tip on the FPSO, which was the final large unit to be lifted in place and installed on the project. Another important milestone was reached at the Jansz subsea gas compression project for Chevron in Australia, which was our largest order intake last year. During the quarter, we reached 20% progress, which means a great milestone has been achieved. And I'm happy to share that this landmark subsea gas compression project is progressing according to plan.

We are also well underway with the Tommeliten and Eldfisk projects for ConocoPhillips. We are executing these 2 projects, combined. This portfolio approach provides synergies and benefits for both ourselves and the customer. And during September, we completed the manufacturing of the first 2 subsidiaries at our subsea manufacturing site in Brazil, out of the total 26 trees to be delivered for these 2 projects. We also delivered 3 subsea templates on the project, which has now been installed on schedule and before contractual milestones, which means that we achieved incentives agreed with the customer. We also delivered the first 8 wellhead systems for the field, and additional 7 arrived at our yard in Norway from Malaysia in September. The importance of our on-time delivery is demonstrated by enabling the customer to start the drilling campaign earlier than originally planned since we have now delivered all the equipment needed ahead of time.

At the Troll West Electrification Project, our work is also progressing well, and we currently have high pre-fabrication activity at our Asian yard. This project includes full electrification of the Troll C platform and partial electrification of Troll B. This means that both platforms' current power demand will be met from shore. In addition, 2 gas export compressors on Troll C currently driven by gas turbines will be replaced by electric motors. And the infrastructure will be designed for a possible future full electrification also on Troll B. The project will result in CO2 emissions being reduced by almost 0.5 million tonnes per year, and this means reducing as much as around 1% of total CO2 emissions in Norway.

Let's now have a look at our main orders during the quarter, where we won important contracts across our segments. The renewables and fee development segment is where we experienced the largest order intake this quarter. This included the unmanned wellhead platform for the large Jackdaw gas field in the UK for Shell. This platform is based on our standardized solutions for unmanned platforms, similar to the Hod B platform we delivered to Aker BP recently. This means we can reuse standardized solutions to reduce time, enhance efficiency and increase value. We also signed a notice to proceed contract with Vattenfall for the Norfolk Boreas offshore wind farm in the UK. Our role here in a consortium with Siemens Energy will be to provide the grid connection infrastructure for this large wind farm, which includes the EPCI of the HVDC converter platform, including the jackets substructures.

The order intake reflects the compensated work we will perform until the expected FID in the second quarter next year. And the project obtained the contracts for difference from UK authorities already in July this year. This project and the customers constructive approach is in line with what we said in the second quarter regarding the need for improved commercials and partnering, as well as working aligned for improved outcomes for all parties and with long-term thinking to enable industrialization and standardization. The development of the Norfolk Offshore Wind could require up to 3 HVDC platforms in succession, which would provide a more long-term predictability and positive repeat effects from standardization for the supplier industry.

In the EMM segment, order intake is lumpy in nature, driven by large long-term frame agreements and timing of larger project awards. This quarter we won modification contracts from Shell and Aker BP on the NCS at a combined value overall NOK 700 million. We were also awarded EPCI work from Equinor on the Halton East project and we experienced further growth on existing contracts during the quarter. These extension commitments demonstrates the value of our long-term partnerships and the quality of our deliveries.

In the Subsea segment, the main award in the quarter was Trell & Trine from Aker BP. This project is a subsea tie-back to the existing Alvheim FPSO. The scope covers a complete subsea production system, including trees, manifolds, control systems and close to 30 kilometers of subsea umbilicals, as well as associated equipment and installation work.

With energy security high on the agenda. We currently experienced very high demand for our subsea tieback solutions to enable maintained or increased production at existing oil and gas fields. This involves utilizing existing facilities and infrastructure and requires our strong engineering and topside modification capabilities in order to integrate these supply growth back to Hod platform.

Now let's have a look at our tender pipeline. The overall comment is that our tender activity remains record high with a good balance across segments and the outlook remains positive. Our tendering value is now NOK 115 billion and about 60% relates to future Aker Solutions after the subsea JV transaction. I would also like to emphasize that even though this is a very high tender value, we are committed to remain selective in what projects we take onboard, which I've also stressed in previous quarters and especially within renewables where the industry is still in early development. We are focusing on projects where we can deliver value both for our customers and shareholders. Given the high tender value, we continue to believe there is a potential for record high order intake this year. And looking further ahead, we see robust, multi-year market growth across areas where we are relevant; a substantial step-up in capital spending is projected in both oil and gas and renewables moving forward and energy security is very high on agenda, especially in Europe.

I would now like to share with you how we will ensure capacity and safeguard execution moving forward. First of all, we have known about this activity increase for a long time already, and our work with capacity starts with our unique front-end engineering capabilities. With front-end, we started work on the projects through early phase concept development and studies, already one to 2 years before the project is sanctioned and plan ahead. After the study phase, we move into the so-called front-end engineering and design phase; this typically happens about one year before the project is sanctioned. Through this FEED phase, the project is matured towards final investment decision. In this phase, we reduced our own risk by maturing the project and getting to know it in detail and we plan our capacity and availability for the execution phase in a controlled manner.

The second way we handle capacity is through prioritization and planning. We do this with a portfolio approach where we discuss and plan the timing of upcoming projects in close dialog with our customers. This allows us to optimize our utilization levels and timing of peaks in activity at our yards. And we align this with our customers portfolio of projects. This way we aim to plan the projects in a controlled and predictable way by agreeing on schedules upfront with our customers. The third way we handle capacity is through partnerships. An important part to our strategy is to work in partnerships and alliances and we do this on most EPCI projects with sub-contracting or parts of the scope.

So we have now proactively reserved capacity at reputable yards in Norway and internationally for upcoming activity. These are partners that we have worked with previously and where we have a good relationship. This long-term planning and partnering provides good predictability. So handling capacity at different cycles of activity levels is something that Aker Solutions has decades of experience with and we will continue to do this in a planned and controlled manner and together with solid partners.

Now, let's talk about our strategy moving forward. Following our recently announced subsea JV transaction, the message is that our overall strategy remains firm and we are continuing to develop Aker Solutions into a digitally driven engineering and project execution Company. Moving forward, we see strong growth in energy spending across the energy landscape. This is further boosted by increased focus on energy security and the transition to renewables over the longer term. With customers transitioning over-time we are supporting them in developing new commercial models through our strategy of working in partnerships and alliances. And as investments into sustainable solutions are increasing, there's a great need in the market for the strong engineering and project execution competence that we provide.

Our focus in the near-term, will first of all be to safeguard and deliver on our current project portfolio and the upcoming wave of project sanctioning we expect to take place in the oil and gas industry in the near to medium term. At the same time, we will continue to build and scale our digitally-driven engineering consultancy business. And we see significant potential for growth and shareholder value creation through this business moving forward. The energy transition is a tremendous undertaking and the massive amount of capital will be invested in new energy verticals over the decades to come. As a part of this, the roles and commercial delivery models are evolving and we aim to capture growth and meet customer needs by continuing to accelerate our own transformation, commercial offering and execution levels.

To continue on this point, let me now tell you a bit more about how our engineering consultancy business is gaining momentum and growing at rapid pace. As I mentioned, the energy transition will unlock large investments across multiple industries. We experienced a massive demand in emerging and rapidly growing industries for support to design, evaluate, optimize and bring holistic energy transition solutions to the table. We experienced this both from existing and new customers, as well as from policymakers and government organizations. And our ambition is to position Aker Solutions engineering consultancy business as a leading engineering powerhouse driving this energy transition.

We aim to become a truly broad-based engineering consultancy player, supporting customers at the earliest phases of project origination and throughout the full asset life cycle. And we are already experiencing strong growth. So far this year, we have delivered a 52% year-on-year increase in the number of energy transition studies we are engaged in. And it's rapidly expanding part of our overall studies portfolio, growing to 44% of the studies we have executed so far this year from only 27% last year. This demonstrates that we are already starting to position Aker Solutions for interesting growth opportunities moving forward. And within such high-value services, we should be positioned to deliver double-digit EBITDA margins over-time.

Our engineering consultancy business is engaging in new markets with a broad set of scope. For example, in areas such as electrification, hydrogen, carbon capture and storage, offshore wind, as well as in combinations of these in new integrated energy systems. Through earlier engagement in these emerging industries, we are already gaining new market insight, new customers and growing our market share. Let me give you a few examples of studies we are doing. In the carbon capture value chain, we are currently providing a countrywide assessment of the largest CO2 emitters using our own bespoke digital assessment tool populated with our own valuable benchmark data. This gives our customer the power to predict the future impacts of significant decarbonization efforts.

In offshore wind, we have several studies ongoing, where we are leveraging our existing capabilities and expertise from the oil and gas business that are transferable into offshore wind solutions and offerings. We have unique offer experience and competence to advise strategies for success in planning large-scale offshore wind developments. In the hydrogen value chain, we have for instance, being studying the repurposing of gas infrastructure for hydrogen production being changed makers to deliver lower carbon solutions. And within energy systems, we integrate our knowledge from areas such as offshore wind, hydrogen, power generation and high voltage distribution to help our customers optimize projects for green energy systems, serving both offshore and onshore facilities.

We are also developing an owner's engineer offering, which will give us a way to derisk our involvement at an early stage in renewables verticals. Our experience as a systems integrator, combined with our own in-house benchmark data and digital capabilities means we have a solid foundation. And this puts Aker Solutions in a strong position for helping customers to navigate and accelerate their energy transition journeys. We will continue to grow our engineering consultancy business in a step-wise approach moving forward, both organically and inorganically, and ensure learning and the ability to adapt to a rapidly changing market environment.

Now, to sum up, I'm pleased that we delivered another quarter with increased top and bottom lines and that we remain on track with our financial targets and growing and developing our organization. Looking ahead, Aker Solutions is well-positioned and the outlook remains positive. We see clear signs of multiple years of spending growth from our customers across areas where we are strongly positioned with our solutions and expertise. We expect increased project sanctioning both near and medium-term, but we will also continue to be selective in our approach to tendering. And as I mentioned, we will ensure learning from the Egersund accident that sadly occurred with the supplier at our yard.

Overall, Aker Solutions will play an important part, both in the current cycle, and over the longer term structural changes in the energy markets. The energy transition is a massive undertaking requiring significant investments. It will require new ways of working across industries and in partnerships and with authorities in order to succeed. In this, we will play an important role by continuing to develop Aker Solutions into a digitally driven engineering and project execution company.

And with that I will hand it over to Idar, who will take you through 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 third 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 third quarter revenue was NOK 10 billion, up from NOK 7.3 billion a year ago. This was driven by continued good progress on our project portfolio across segments. The underlying EBITDA was NOK 749 million, up from NOK 459 million a year ago and the margin increased to 7.5%. In our subsea segment, the margin was positively impacted by starting margin recognition of the Jansz subsea gas compression project, after reaching 20% progress. This led to a catch-up effect in the period. The underlying EBIT was NOK 476 million, up from NOK 178 million a year ago. And the net income excluding special items increased to NOK 265 million from NOK 101 million a year ago and earnings per share increased to NOK 0.58.

Now moving to our balance sheet and cash flow. Our working capital remained unchanged at minus NOK 2.3 billion at the end of the quarter and we delivered a solid cash flow from operation of NOK 769 million. Our cash flow from investing activities was minus NOK 70 million in the quarter and we continue to have a strong net cash position, which increased to NOK 3.5 billion in the quarter, with a leverage ratio of minus 1.7 times. Our total liquidity buffer was NOK 9.5 billion, where NOK 4.5 billion was cash.

Now, over to the segments. For renewables and field development, the third quarter revenue increased to NOK 3.6 billion, up from NOK 2.5 billion last year. The underlying EBITDA was NOK 124 million, up from NOK 89 million a year ago and with a margin of 3.5%. And as a reminder, several projects are still in early phase of execution. The order intake was solid at NOK 4.9 billion or 1.4 times book-to-bill. This was mainly driven by the Jackdaw and Norfolk contracts. The tendering activity is high and we continue to expect several large projects to be sanctioned in the near-term. And our backlog remains solid at NOK 16.3 billion. We now expect the revenue in this segment to increase by more than 35% in 2022.

For the EMM segment, the third quarter revenue was NOK 2.9 billion. This was up from NOK 2.4 billion a year ago, driven by continued good progress on ongoing work. The underlying EBITDA was NOK 146 million, up from NOK 126 million last year and with a margin of 5%.The order intake was NOK 1.8 billion or 0.6 times book-to-bill. And as a reminder, the order intake in EMM is lumpy in nature, driven by timing of larger projects awards and long-term frame agreements. The backlog remains strong at NOK 19.5 billion, which is more than 2 times the annual revenue in this segment last year. We now expect the revenue in EMM to increase by more than 25% in 2022.

In the subsea segment, the third quarter revenue was NOK 3.5 billion. This was up from NOK 2.4 billion a year ago, driven by increased progress on ongoing work. The underlying EBITDA was strong at NOK 603 million with a margin of 17.5%. And as mentioned, the margin was positively impacted by the Jansz project. And we now expect margins around 16% in subsea for the full year 2022 due to continued strong performance. The order intake was NOK 1.6 billion or 0.4 times book-to-bill. The tendering activity remains very high and we continue to expect several large projects to be sanctioned in the near-term. The backlog in subsea remained solid at NOK 14.9 billion. We now expect revenue in subsea to increase by more than 25% in 2022.

Now over to order intake and backlog. In the third quarter, we delivered an order intake of NOK 8.2 billion or 0.8 times book-to-bill. Our backlog is currently NOK 51 billion and provides a solid foundation moving forward. And as Kjetel mentioned, our tendering activity is record high and we have a strong position to significantly increase our secured backlog moving forward.

Now, to sum up, the third quarter result demonstrate that we continue on track with our targets for revenue growth and cash generation and we have a strong financial position. Based on our secured backlog for the fourth quarter, we are now very likely to reach NOK 40 billion of revenue this year. We therefore increased our full-year revenue guidance to be up by more than 35% in 2022. And at the same time, we continue to expect our EBITDA margin to increase in 2022 compared to last year. The outlook for project sanction is very positive and Aker Solution is in a good position to take advantage of opportunities ahead.

Thank you for listening. That was the end of our presentation and we will now open up for questions.

[Marianne Hagen, executive]

Thank you, Idar; thank you, Kjetel. First question is from Mayank Lumber. Just to understand the subsea profitability in third quarter, if we adjust for the Jansz project, how was the underlying EBITDA margin?

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

Underlying EBITDA margin was in line with solid performance as we have presented before, meaning in a range of around 15%.

[Marianne Hagen, executive]

Second question is from James Winchester. He says, are we at peak subsea margins. And if not, what are the main moving parts fixed cost absorption pricing et cetera?

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

We will continue to focus on strong performance in subsea and we are now capitalizing on the work that we have done over several years with the standardization and bundling of project creating win-win situation, both for ourselves and our customers and we will continue to focus on strong performance also going forward, producing healthy margins in the quarters to come.

[Marianne Hagen, executive]

Next question is from James Thompson and he has asked, can you please provide some more color on the expected step-up in revenues in the renewables and field development divisions in the fourth quarter. It looks like a material step-up with regards to expectation set back at the second quarter results.

[Kjetel Digre, executive]

Yes. First of all, we are at the end of what I called in my presentation, the FEED phase. We've been working closely with a lot of different projects with all our key clients and delivered matured and healthy project foundations and definitions for the upcoming investment decisions by our clients and now in fourth quarter and perhaps slightly into the 2023 they will assess the business cases and take these investment decisions as they see fit in a way.

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

Yes. And as we also pointed to in my presentation, some of these projects are still in early phase and when they are ramping up, the topline will also increase as indicated in our forecast for fourth quarter.

[Marianne Hagen, executive]

Thank you. Next question is from Haakon Amundsen, he has 2 questions. The first one is, has the proposed changed to the temporary tax system led to more uncertainty among your clients for sanctioning of projects. Let's start there.

[Kjetel Digre, executive]

Yes. I think back to our role and this is really to work on the design and engineering and maturation side of these projects. We've done that at record high level with our key clients both in Norway and with partners into both projects from Europe, as we mentioned. And now it's really up to our clients to assess the effect of these tax changes to their own business cases. We will be obviously be affected indirectly if they don't choose to alter either concepts or timelines renewables, but so far, we are looking at a record high sanctioning level in the fourth quarter.

[Marianne Hagen, executive]

Thank you. And then I go to the second question. Can you give some color on the margin expectation for renewables and field development for '23?

[Kjetel Digre, executive]

Before we take numbers, I guess, just pointing at how we are working, it was you and me, Idar mentioned that the way that we are selective on the choice of type of projects the clients [indiscernible] having the right kind of both maturation, but also dialog on commercial models upfront to our commitments is really the way to progress in this area. And we see that the right clients are responding in the right way and I think the Norfolk project together with Vattenfall is a really good example of how this should develop.

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

Yes. And when it comes to margins, it's probably too early to comment detail about margins and we have also on a policy for not commenting on that segment by segment. But what we see is that due to the tendering activity that is ongoing, there will be and we expect that in this segment there will be a quite a lot of new projects that we will onboard in 2023. And as you know, we have a internal rule and policy within Aker Solution that we normally don't take out margins before we have at least reach 20% progress on those project to be a bit careful in the start. So with that, I think we will revert in later when we are closer into 2023.

[Marianne Hagen, executive]

Thank you. And then, James has added a third question. He says, You talk about agreeing schedules with clients already through 2027. Is this just in Norway or are there other regions, where similar length planning decisions are ongoing.

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

Yes. I think [indiscernible] into too much detail we have regions where both the strength and volume to call it out of our client relations are similar, but then also the horizon opportunities is clearer and more long-term; obviously Brazil with our efforts there on the subsea side is one of those. And there we are working on portfolio approach when we, for instance, look at how to invest in tooling and different aids to actually support different projects that are coming up as opportunities in close dialog with our clients.

[Marianne Hagen, executive]

Next question is from Daniel Thomson. Regarding the subsea JV, do you anticipate any pushback from clients or regulators in any regions, given the reduced number of subsea equipment providers?

[Kjetel Digre, executive]

I think I answered to that. I would say is best described by the immediate response. It was met with curiosity and as soon as we have been in good and close dialog with both authorities and clients. They are really positive to this change to see that out of this we are really building most likely the best combination of expertise and competence into a world-leading subsea player in this market. So it's deemed as a interesting and exciting move by our key clients.

[Marianne Hagen, executive]

Daniel has another related question. He says what are your longer term intentions regarding your remaining share in the subsea equipment JV?

[Kjetel Digre, executive]

First of all, we are still subsea. We are working closely in the current organization and we will follow that new company with both the great interest and look for opportunities to collaborate from that new subsea JV in towards our own Aker Solutions initiatives and then obviously we will have to see how that will develop going forward. Yes.

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

Just want to add to that one that partnerships is a vital part of our strategy and this joint venture and establishment of that one is just another example of how we continue in our businesses and work in partnerships and with a 20% stake in that joint venture, it provides a solid foundation also for results and cash generation for us going forward, as well as collaborating on other topics as with our 2 new partners on the subsea joint venture.

[Marianne Hagen, executive]

Next question is from Nikhil Gupta and he has 3 questions and I'll take them in that order. Could you please give us some more colors around the bidding pipeline, especially for Aker Solutions' remaining business?

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

Yes. I think, the current numbers tells us that we are attending NOK 115 billion [indiscernible] 60% is related to how we are planning the future Aker Solutions and the strategy for it. And then also I would say the clear growth area where we are seeing continuous growth and the large interest is, as I mentioned, into the engineering and consultancy business that we are growing, particularly, aiming them at the energy transition kind of tasks for us.

[Marianne Hagen, executive]

Next question is about, again, some more color around the margins for renewable projects, wind CO2 capture versus oil and gas projects.

[Kjetel Digre, executive]

Yes. I think when it comes to margins, our job is to make sure that when we bid and take onboard new project we are going to do that with healthy margins and as we communicated in the second quarter, we will be very selective on who to team up with and make sure that we onboard new project with healthy margins and what we announced in this quarter is just a good example at we are finding partners out there in this segment that have that right attitude and we'll like to work together with us, and create win-win situation in the renewable industry.

[Marianne Hagen, executive]

Thank you, Kjetel. Thank you, Idar. That's the questions that we had time for today. So I thank you all for listening into this audiocast. Bye-bye.