Aker Solutions ASA

OSE:AKSO

Earnings Call Transcript 2018-Q4

[Tove Røskaft, Head of Umbilicals]

Okay. Good morning, and welcome to Aker Solutions' presentation of fourth quarter results for 2018. My name is Tove Røskaft, and I'm heading up Communication and Investor Relations at Aker Solutions.With me here today is our Chief Executive Officer, Luis Araujo; and our Chief Financial Officer, Svein Stoknes. They will go through the main developments of the quarter. We will also have time for some questions and one-on-one interviews with the press after their presentations.Please note that we have no fire drills scheduled today. So in case of an alarm, I'd like to point out the nearest emergency exits through the glass door behind you and to your left.Luis, I will now hand over 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 fourth quarter was yet another period of strong execution and solid order intake for Aker Solutions. So as usual, let me start with the main developments in the quarter. The market remained challenging due to the volatility in oil price. However, we do not see any signs of activity slowing down in our segments. We delivered another period of solid performance with our major projects progressing as planned. Breakeven costs continue to come down, and our customers remain pleased with the strong execution which has improved their projects' economics.So here are some of the project deliveries in the quarter. We delivered our last subsea tree on the Moho Nord developed in Congo for Total. In November, the Dvalin subsea production system reached an important milestone: the topside equipment delivery to DEA. Also in November, the Johan Castberg hardware topside control system was delivered 45 days ahead of schedule. This was the first delivery milestone on the NCS 2017 subsea production contract for Equinor, an important achievement.In December, the process platform for Johan Sverdrup Phase 1 was completed and delivered to Samsung ahead of schedule and under budget. Also in December, we started fabrication of the riser platform modification at Stord. It's part of the second phase of Johan Sverdrup.Our next-generation standardized 7-inch vertical subsea tree is nearing completion, only 1 year after the NCS 2017 award. This new standard tree was developed in close cooperation with Equinor. It has already been adopted by our other customers on projects on the Norwegian continental shelf. This tree is smaller, lighter and bring cost down by as much as 40%. Internally, we continue to make good progress on our improvement program. We see tendering activity remaining high, and we enjoy strong demand for our front-end engineering services. After the quarter, we acquired 30% of C.S.E., having bought the first ownership stake of 70% in 2016. This acquisition further strengthens our position in Brazil. And now for the main numbers. We strengthened our bottom and top lines compared with the year earlier. Our fourth quarter financial figures were revenue of NOK 7 billion, EBITDA of NOK 483 million, an EBITDA margin of 7%. Excluding special items, the margin was 7.1%, and EPS was NOK 0.63. We won NOK 5.3 billion in new orders, and this brings the current backlog to a healthy NOK 35 billion.For the full year, the main figures or the main numbers were revenue of NOK 25.2 billion, EBITDA of NOK 1.8 billion, an EBITDA margin of 7.2%. Excluding special items, the margin was 7.2%, and EPS was NOK 2.01. We had a solid order intake of NOK 25.4 billion, including several key awards in Angola, Brazil, China, Norway and the U.K. Our finance was solid at the end of the year with a liquidity buffer of NOK 7.5 billion. Even so, the board has proposed no dividend payment for 2018, still deeming it prudent to conserve cash.During 2018, we saw an increased order intake for Aker Solutions in the fourth quarter, confirming our international competitiveness. By year-end, we had significantly increased our international order intake, improving the geographical balance of our backlog.The highlight of the quarter was the NOK 1.7 billion Lingshui subsea award for CNOOC. Lingshui 17.2 is CNOOC's first deepwater project with water depths reaching 1,500 meters. The field is located in South China Sea. In addition, smaller contracts and frame agreements call-offs totaled more than NOK 3.5 billion. These new contracts included a subsea manifold on the Dalia phase 3 project and several umbilical contracts to be executed from our plant in Mobile, Alabama.We secured a groundbreaking sustainability win on the Northern Lights project, a commercial carbon capture and storage project in the Norwegian continental shelf led by Equinor and Gassnova with Shell and Total as partners. This contract will see Aker Solutions contributing to development of the world's first subsea CO2 storage facility capable of receiving CO2 capture from several industrial sources. This opens up new opportunities for our carbon capture technology and storage business, which is important to achieve the Paris climate laws. As we mentioned earlier, I'm happy to say that demand continues to grow for early-phase, front-end work. The earlier we get involved in a few development, the greater the potential to optimize overall project development.In the fourth quarter, we won 46 front-end orders, up from 27 in the same period the year before. This gives us a new record of 150 studies for 2018. Internationally, which is very important, we have won more than double the number of studies for the overseas market, and that equals to 35% of the total.Pleasingly, in 2018, we secured studies in FEEDs for several larger and more complex projects in Africa, Asia Pacific and North America. It remains clear that early involvement put us in a strong position to secure work in the next phase of development. The number of front-end studies show that, one, that the market is improving; and two, that we are well positioned to capitalize on these future opportunities. Well, now let me spend a few minutes on Africa as this is an important market for us. The region has great potential for business growth, and we have made strategic investments there over the past 2 decades. We have delivered more than 1,000 kilometers of umbilicals and more than 150 subsea trees to major developers such as Dalia, [ Kimboa ], Moho and Kaombo. With this large installed base and heavy investment in local infrastructure and capability, we are well positioned to deliver subsea production and production asset services for our different locations in the African continent.Last month, we heard the announcement of successful drilling operation in Ghana, confirming our global size deepwater discovery. This news, together with our involvement in the ongoing FEED, signals another great opportunity for growth. Our continued focus in the African region has unlocked further opportunity. It enabled us to secure a breakthrough contract such as providing brownfield services in Angola for BP, one of our key global clients.Remaining in Africa over to another big achievement for Aker Solutions in 2018. Kaombo, operated by Total, is the world's largest subsea development located approximately 150 kilometers offshore Angola. Reserves are estimated at 660 million barrels at water depths reaching almost 2,000 meters. Last summer, we helped our customer, Total, to achieve first oil on this key development. Aker Solutions' scope on this project was to provide 19 subsea manifolds and 65 subsea trees as well as associated equipment. And of today, we had successfully installed 34 of the 65 Christmas trees in all the 19 subsea manifolds.We are progressing as planned, and we have delivered 60 out of 65 Christmas trees so far, all to ensure we help our client achieve first oil in the second FPSO later this year. In order to support this major development, we have invested in our Angola subsea facility, supported local technology development and education in Angola. Part of the development includes the first hyperbaric test facility for subsea controls in the African continent.So why I mentioned Angola and Kaombo? Partially because I'm proud for what we have achieved so far on this important project, but also because I want to use this as an example of how Aker Solutions have the competence and capability to deliver on time to the right quality and cost globally.At Aker Solutions, we are also pursuing energy solutions that minimize the environmental footprint and promote the shift to a low carbon energy future. This is good news, good business, it makes sense for future revenues.In late 2017, we announced our entry in the market for offshore floating wind. In 2018, we have made good progress on this growth ambition. Offshore in demand is increasing in a global scale, and we predict that our skills and technology will help drive further growth.It's expansion outside Europe that will be key -- the key driver to this energy source. By 2027, China is predicted to be the market leader. And the U.S. and Southeast Asia are rapidly increasing the number of planned offshore wind installations.Through our investments and partnerships with Principle Power, we are 1 of the only 2 companies with a tested and proven offshore floating wind concept. We have strong competencies within project management, industrialization of floating structures, dynamic power cables, mooring systems and digitalization controls. The list is long.This position us well to capture opportunities in every offshore region around the world. Together with Principle Power, we are now involved in a project offshore in Northern California. Upholding our commitment to forging a sustainable future, we recently increased our investment in Principle Power to reach an 11.8% stake.The outlook for oil field services remains competitive, but there are increasing signs of a recovery in the global market. Despite the recent volatility in oil prices, we see more projects being sanctioned. Improvement measures across the industry continues lowering breakeven costs.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. We continue to see that our front-end capabilities generate new opportunities.All in all, we believe that Aker Solutions is well positioned to capture opportunities that are coming with an upturn in the market. Long term, we are also optimistic demand for energy in every form will increase globally. This is where building on existing capabilities, strong project delivery and continued trust from our clients, we will secure new opportunities. So in summary, we closed the year with a solid order backlog, heightened activity and continued strong execution on our projects and services. Our awards outside of the North Sea in 2018 prove that we are competitive in a global area and confirm our strategy of international growth. These elements are supporting our margins amid continued signs of a market recovery.Thank you for listening, and Svein now will go through the numbers in more detail.

[Svein Oskar Stoknes, Chief Financial Officer]

Thank you, Luis, and good morning. I will now take you through the key financial highlights of the fourth quarter and for full year 2018 and go through our divisional performance and run through our financial guidance before we move on to Q&A. As always, all numbers mentioned are in Norwegian kroner.So as usual, let's start with the income statement. Overall operating revenue for the fourth quarter was NOK 7 billion, up 8% year-on-year, supported by recent solid order intake and continued good progress on a number of key projects.In our Projects reporting segment, a higher activity level in field design was offset by lower subsea revenues compared to the same quarter last year. Overall, Projects was up 8% year-on-year.Our Services segment was up 13% year-on-year, reflecting our strategy to grow our world-class Services business. This was primarily driven by the production asset services subsegment.Our reported fourth quarter EBITDA was NOK 483 million. This included net NOK 12 million of special items, primarily related to onerous leases. For your reference, we have, as usual, set out the table in the appendix that further specifies these special items.Excluding special items, EBITDA was NOK 495 million, an increase from NOK 482 million a year earlier. This was equal to an underlying margin of 7.1% compared to 7.5% in the same period last year.We continue to deliver stable underlying margins, a solid achievement as we are progressing our newly awarded work which was won in a very competitive market. It is a clear evidence of our continued strong execution and good momentum on our continuous efficiency improvement program. Fourth quarter depreciation was down year-on-year at NOK 196 million, 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 fourth quarter EBIT or operating profit increased year-on-year to NOK 287 million from NOK 105 million. Excluding special items, EBIT was NOK 305 million and the margin was 4.4%, up from 4.3% the previous year. Net financial items were minus NOK 62 million in the quarter, excluding a minor unrealized hedging gain of NOK 2 million. We continue to see our net financial items on an annual basis around NOK 60 million per quarter going forward. This excludes the effect of currency and non-qualifying hedges. Our tax charge was equivalent to a rate of 22% in the quarter. This was primarily related to reduced deferred tax liabilities in Norway, following the recent change in the corporate tax rate from 23% to 22%. The full year effect of this change was implemented in the fourth quarter. Going forward, we continue to expect average P&L tax rates to be in the low to mid-30% range.We ended the quarter with a net income of NOK 178 million or earnings per share of NOK 0.58. Excluding special items, the earnings per share were NOK 0.63, up from NOK 0.55 last year. For 2018, overall, we had revenues of NOK 25.2 billion, an increase of 12% from the previous year. Underlying EBITDA increased to NOK 1.8 billion with a margin of 7.2%. And our earnings per share, excluding special items, ended at NOK 2.01, up from NOK 1.54 a year earlier.As Luis mentioned, the board has proposed that no dividend payment should be declared for 2018, still deeming it prudent to exercise caution and to position the company to fully take advantage of the recovery.Now moving to our balance sheet and cash flow performance. Our net current operating assets or working capital increased by NOK 271 million from the third quarter and ended at a still solid minus NOK 753 million. This position is a result of continued solid project execution, ongoing initiatives to optimize cash flows and timing of some milestone payments at year-end.Working capital is likely to fluctuate around large project work, and we continue to expect the level to gradually trend towards 2% to 4% of group revenue towards the end of 2019.We had net interest-bearing items or net debt of NOK 347 million at the end of the year, down from NOK 405 million at Q3, reflecting good capital discipline and strong cash collection.Our net debt to EBITDA ended the quarter at a very solid 0.2x, and our financial position remained strong with a total liquidity buffer at a healthy NOK 7.5 billion. This includes our 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 fourth quarter was positive NOK 113 million, primarily reflecting our strong operational performance and cost discipline. Our investing cash flows totaled a net negative NOK 160 million in the quarter, and we continue to expect overall CapEx and R&D at roughly 2% of annual revenue going forward with flexibility. Cash flow from financing was negative NOK 26 million in the quarter, reflecting a minor change in our external borrowings. For 2018, overall, our net cash flow from operating activities was NOK 921 million. And including investing and financing activities, we ended the year with a net cash flow of NOK 495 million.Now onto Projects where fourth quarter revenue was up 8% year-on-year, driven by the field design subsegment. This resulted in an underlying Projects EBITDA margin of 6.2% in the quarter versus 7.8% last year. The EBIT margin, excluding special items, was 3.9% versus 5.3% last year. The lower margins are primarily driven by the phasing in of new work as well as revenue mix, as field design makes up a larger portion of overall Projects revenue compared to the same quarter last year.We had yet another quarter of solid operational performance, and we are increasingly ramping up execution on newly awarded work. We continue to realize significant benefits from improvement programs in our Projects portfolio. Order intake in Projects was NOK 4.4 billion in the quarter, down from a very strong NOK 9.7 billion in the year-earlier period, with book-to-bill at 0.8x versus 1.9x a year earlier. The backlog in Projects ended the quarter at a healthy NOK 25 billion. This is equal to about 15 months of Projects revenue. Now let's take a look at the key figures for subsea and field design within this reporting segment. Revenue from subsea projects decreased 17% from the same period last year, mainly as a consequence of the high activity level in Africa in the same quarter last year.Revenue from field design projects was up 28% year-on-year, mainly driven by recent order intake and several ongoing modification and hookup jobs. Fourth quarter order intake in Projects was mainly driven by the subsea subsegment with an intake of a strong NOK 2.9 billion, equal to a book-to-bill of 1.4x.The field design subsegment had an order intake of NOK 1.6 billion or a book-to-bill of 0.4x. Despite the competitive market, tendering activity is still healthy, and we're currently tendering for around NOK 40 billion of work overall in projects with the majority in Subsea. Our Services revenue increased 13% year-on-year, mainly driven by international growth in our production asset services subsegment. In the fourth quarter, production asset services accounted for 56% of Services revenues, up from 48% in the same period last year. Underlying EBITDA was NOK 194 million with a margin of 14.6%, an increase from 12.9% in the same quarter last year. EBIT was NOK 154 million with a margin of 11.6%, up from 8.4% a year ago. The higher margins were due to good performance on a number of contracts as well as increased activity level versus last year.Fourth quarter order intake in Services was NOK 0.8 billion, down from NOK 3.6 billion a year earlier, and we booked a significant 5-year frame agreement. This resulted in a fourth quarter book-to-bill of 0.6x, 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 solid order intake for the year, tendering activity is healthy, and we are currently tendering for around NOK 5 billion of service work globally.Now over to the order intake and backlog performance for the group as a whole. Overall fourth quarter order intake ended at NOK 5.3 billion with a healthy activity level of unannounced awards in key regions globally. We saw a good combination of greenfield, brownfield, services and growth on existing contracts. The order intake was equivalent to book-to-bill of 0.8x in the quarter, and we ended 2018 with a book-to-bill of 1x.Our backlog totaled NOK 35 billion at the end of the fourth quarter, which is equivalent to around 1.4x our 2018 revenue.During the second half of 2018, we successfully increased our international order intake. Our backlog is now considerably more geographically balanced despite phasing out some major projects in Africa. As we move into 2019, our visibility for the year ahead has improved compared to the same time last year.Order intake continues to be somewhat uneven caused by large contracts. But as mentioned earlier, tendering activity is still good with some key projects likely to be sanctioned over the next 6 to 12 months. And we're currently engaged in tenders with an estimated sales value of around NOK 45 billion. As a reminder, our backlog does not include part of our Services business or potential growth or options on existing contracts.Then finally, over to our guidance. As Luis mentioned, we see an uptick in activity levels. We continue to see our overall 2019 revenue slightly up year-on-year, with growth in both Projects and in Services on the back of our solid order intake in 2018.The 2019 underlying EBITDA margin is still seen remaining around the 2018 level for the year overall. In addition, we expect the effects of the new IFRS 16 accounting standard to lift the underlying EBITDA margins in the range of 240 to 320 basis points. And for your reference, we have set out a table in the appendix that further specifies the effects of the implementation of IFRS 16. As previously stated, to defend our underlying margins moving into 2019, a continued relentless focus on quality execution and operational efficiency improvements are needed. We will also continue to leverage or differentiate in front-end capabilities to capture opportunities and engage with our customers at an early stage. And as activity levels further picks 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 as we are moving into 2019, and this continues to give us increased flexibility and financial headroom to position Aker Solutions to fully take advantage of the recovery. We ended the year continuing to deliver strong project execution with good underlying financial performance and by securing solid international order intake that has further improved our visibility moving forward.Thank you. That was the end of our presentation here today, and we will now move on to Q&A.

[Tove Røskaft, Head of Umbilicals]

We also have online audience today, but we will start with the questions from the people in the room. So if you please state your name and the company you represent before asking your question.

[Luis Antonio Gomes Araujo, Chief Executive Officer]

I hope you enjoyed the special effects of the sun.

[Tove Røskaft, Head of Umbilicals]

It was just...

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Prepared for you this morning.

[Tove Røskaft, Head of Umbilicals]

Yes?

[Chr. Frederik H. Lunde]

Frederik Lunde, Carnegie. I'm just curious on dividends. I think you promised a year ago that for 2018, you will pay dividend as you could have paid for '17, but didn't. And you have a strong visibility, strong backlog, good balance sheet, you make money. So it would have been a symbolic dividend, but is there anything in particular you're waiting for? Or is it just being cautious and hoping for M&A opportunities?

[Svein Oskar Stoknes, Chief Financial Officer]

Yes, I remember the comments, Frederik. I don't think it was a promise, but there was an indication that we might return to a dividend in 2019 for 2018. But we have had a discussion, and I'm sure you would agree, a strong balance sheet continues to be extremely important. And we see several interesting investment opportunities ahead of us. I mentioned the normalization of our working capital, which we have been able to push out in time, but 2019 is probably be the year where we will see that moving up towards the range we have been guided on towards the end of the year. And then we have a bond maturing in October this year. So all in all, the board decided to exercise caution. So that's the recent conversation.

[Chr. Frederik H. Lunde]

And also, on the contract side, are there any update on Sverdrup Phase 2? I would assume you're working on that already. Will that be going into backlog? Or is it just the scope?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Through the year, we announced the modification of the riser platform module that we are doing in JV with Kvaerner, and that's Phase 2 already. And we expect the Phase 2 subsea to be tendered this year -- sometime this year. There's no -- it's not out there yet, but that's Equinor's expectation. Our expectation is that it will be a tender for the subsea scope soon.

[Tove Røskaft, Head of Umbilicals]

Okay. Any other questions? Don't be shy.

[Luis Antonio Gomes Araujo, Chief Executive Officer]

It's very clear.

[Tove Røskaft, Head of Umbilicals]

Okay. Then we can take some questions from the online audience. Let's see. Amy Wong from UBS. You have a very strong cash generation during the year and hinted that a dividend could have started as early as 2017. So you more or less answered that one just now, Svein.

[Svein Oskar Stoknes, Chief Financial Officer]

Yes. I think Amy was late for the question.

[Tove Røskaft, Head of Umbilicals]

Yes. Then there's a question from Aasen Augestad at Arctic. Can you please disclose the top 5 projects you expect to be awarded the coming 6 to 12 months that will have substantial contribution on 2020 activity?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Okay. Actually, we don't disclose projects, so that I'm going to have to jump the response on the projects. But what I can say is that we do see a lot of projects coming in 2020. So of course, things can change. It's never a promise, but there's a lot of projects in the pursuit list. And actually, our front-end reflects that. If there's more activity, the clients are looking how to develop those projects. We expect more balance in the production supply. So I think 2020 can be a very good year for us, but I will not list the projects.

[Svein Oskar Stoknes, Chief Financial Officer]

Very good geographical spread of that tender list. So it's Southeast Asia, it's Australia, it's India, it's Africa, it's Brazil, it's North Sea both the U.K. and the Norwegian side. So a very good spread.

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Absolutely. I think that the increase in offshore activity proves that things are getting better. And they are basically 50 more rigs, just announced this week by the survey of Baker Hughes, GE, that there are 50 more offshore rigs compared to last year, so very positive.

[Tove Røskaft, Head of Umbilicals]

Yes? Another question from our online audience, [ Sahad Islam ] asked, you talk about the market remaining competitive. Can you give us some more color on the competitive dynamics for awards you're bidding on right now? Is pricing better or worse versus last year? On the international FEED studies you have won, which regions are these in? And are there any particular themes and the types of work customers within these wins?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Okay. I think there are several questions. Also...

[Tove Røskaft, Head of Umbilicals]

Yes. So let's start with the first one with the competitive dynamics.

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Yes, okay. Well, I think it's not only for our scope of delivering subsea and so forth. There are quite a lot of capacities still available in the market. Our plants are becoming busier now, but we're still running those plants well below their capacity, which is positive because we can deliver more if the market picks up. But it's not only for us. I think everybody took capacity out in terms of people running their facilities, but they also reduced facilities. So I think things can improve if activity goes up. But right now, people are still looking for work, and that's the nature of the business. But I'm actually very positive, and we proved that by winning contracts in very competitive markets during the year. So I think what the worker has done to the cycle of reducing cost, improve efficiency of the standardization programs and so on, that places us in a very good position as well as our technology developments for the future. So it's competitive. We had a lot of discussions about supply chain coming up and costs. And there are some more talks than actually a reality. And of course, it's also available capacity in the markets. But of course, as time goes, we could expect some inflation coming back. But on the other hand, we also expect better pricing. And we expect to take more efficiencies out of the supply delivery. So we see that's still a lot to be gained. And that's what we're doing to get the clients healthy for that. I think second question, Tove, was about the front end, right?

[Tove Røskaft, Head of Umbilicals]

Correct.

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Yes, I mean, front end, I used to make that comment that the front end was one of our best-kept secrets because we're very strong in Norway, but we're not taking the full potential internationally. Now we start to grow that. We have front-end teams in London, Kuala Lumpur, Brazil, Houston, so we have people located in several regions. And you see that's paying off now. We see activities in Asia Pacific, some interesting and important studies that we believe are leading to projects coming soon. We see activity in Africa. So it's a spread -- it's a global spread, as I said. We do studies in Brazil. We do studies across the whole -- the main regions that we operate, so that's very nice to see. And the last part was?

[Tove Røskaft, Head of Umbilicals]

The -- no, I think you answered it now. So -- and our next question is from James Evans from Exane BNP Paribas. It's for you, Luis. Can I ask about Brazil? 2018 have seen a lot of delays on multiple contracts, including FPSO awards, which eventually will impact the supply chain, including yourself. What do you think has been behind these delays? And do you see any signs of improvements to this situation?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Okay. Well, I think Brazil is, of course, a long story. I think I like what I see there not for the short term but for the long term. We see our clients -- key clients coming in, people that work with us across the globe like Equinor, BP, Shell and others. So that's very positive. And Brazil is opening and there is also divestment of assets. So I think that's going to be important. And that's the country that we have today over 3,000 people. So we are very well positioned there. And we just made -- completed the acquisition of a local company. So that -- we bet on Brazil for the future. In terms of delays, I think that that's natural to the complexity of the deepwaters that we have there. But things are moving now, and we announced the Mero 1 award earlier this year, which is really important for us. It shows again that we are competitive. And it also shows that we have unique capabilities on the country and a lot trust for the main operator there, Petrobras. So I think that that's the nature, so I think that's for us. Of course, the earlier the awards come, the better. And we are now [ standing ] Mero 2, for example, and we expect that to be resolved during the year. So I think there's more coming. But in the short term, it is the Petrobras and the pre-salt and the existing projects. But for the future, I think we have a lot of opportunities there.

[Tove Røskaft, Head of Umbilicals]

Yes. Then we have 2 more questions from Amy Wong. Flattish underlying EBITDA margin is a great achievement, which is even more impressing, giving you have issued that guidance 3 months ago. Can you please provide a bridge how margin mix in the order book is developing versus cost savings?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

First of all, thank you, Amy. We are very proud of what our team is achieving in terms of cutting cost and so forth. And now we are facing new contracts that, as we said, was won in very competitive terms. Yes, I think that we weren't -- as I said, since day 1, the name of our improvement promise is called #thejourney. So it is a journey. We won't stop ever reducing costs. Right? This is my famous phrase about cost: like nails, we have to be cutting all the time. It keeps growing if you don't watch. So we're doing that. We've not only cut the nails, we're actually hunting more. So I think that's the balance. Of course, we cannot rely only on reducing cost in the supply chain. I actually believe that not only for us, but for the whole supply chain, we have taken enough from the supply chain. There's not a lot to take in terms of pricing because people think about supply chain in terms of pricing. What I see is that the clients understand now that they have to use standard components. They cannot have -- they cannot gold plate things, and they listen to our front-end people. So I think that's where we're going to capture the savings is working closer to clients. We have quite a lot of projects these days that are coming to us with performance milestones. And actually, that helps us achieving our margins. So yes, that's for us the goal. Anything else you want to...

[Svein Oskar Stoknes, Chief Financial Officer]

No, I think the obvious one is this continuous chase for costs driving through the efficiency, implementing digitalization, et cetera. But probably, the one you have to remember is this importance of front end that Luis talks about because it's a main contributor to us getting much more intimately familiar with the execution we are -- we have ahead of us. So whether to de-risk and deal with the entire sort of uncertainty related to a fixed price regime in a completely different way when we did in the past. So this is a key sort of contributor to maintain our margins even though they are awarded in a much more competitive landscape than the outgoing backlog.

[Tove Røskaft, Head of Umbilicals]

Yes. And another question from Amy. Can you talk about the ideal level of gearing medium term?

[Svein Oskar Stoknes, Chief Financial Officer]

We have indicated a level of 1x net debt to EBITDA as our sort of target, which is still sort of conservative. And we said we could fluctuate over and below that level. So we're now going to trend gradually towards this 1x level. So with the working capital normalizing up towards the 2% to 4% of revenue level, you will see that leverage or gearing level towards the 1x net debt-to-EBITDA level.

[Tove Røskaft, Head of Umbilicals]

Okay. Next question is from Mick Pickup at Barclays. On the subsea side, can you talk about the progress of standardization, lighter, smaller, integrated, et cetera, and how this will help offset continued margin pressure? Do we need to see more major awards to loosen off the market?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Good question. Thank you, Mick. I will just say is that I'll give you an example of the tree for the North Sea. That is 40%, it's light and so on. And that's being used by actually, at the moment, 3 clients in 5 different projects. So that did not happen in the past. So people understand that when it comes to scale and also the savings you achieved by repeating, and you see that learning curve improvement, for example, in the press out in Brazil, we're almost 0 lost hours, lost offshore which is, of course, more money for the clients because you're running that faster and improving and having efficiency gains. So we see that it's taking a lot of traction. And now we have engaged on several new developments for the future, which is for the simple all-electric. And that's probably what Mick has in mind because I know that some of our competitors are making a lot of noise. And our style is that rather making a noise and talk about things, we just develop them and deliver. So I think through the year, we announced that we have signed 5 majors into this all-electric tree that's going to really reduce the weight and the cost of the whole system, umbilicals, way to the manifolds, with some of the clients give names to it. We just say that this is all-electric and that's the future, not only for reducing cost and becoming more cheaper for our clients, but also improving the environment which is very important. So that's what we're driving towards together with our digitalization properties we are developing. So that's -- yes, I think I'm very excited about that subject. And I think you could do -- you could see standardization in several angles. You can see that making modules and building blocks, but also look into the overall system, that's the key, and also implementing new technologies without disrupting that standardization route.

[Tove Røskaft, Head of Umbilicals]

Next 2 questions are from Lillian Starke at Morgan Stanley. She has 2 questions related to Saipem, has been talking about having a more formal structure in the relationship with Aker Solutions. First question, could you give us an update on this? And the second question, coupled with that you are seeing an increase in the adoption of integrated contracts coming up, so update coupled to the integrated contract.

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Okay, I think that there are 2 questions there. So I'll start with Saipem. Saipem is our global partner for us for integrated SURF and subsea, and we have fairly several contracts together as we speak, projects that are being -- that are intended in this format. So I'm not sure about formal. It's formally our partner. We have also a partnership with Subsea 7 in the North Sea. That was actually established before we engaged with Saipem globally, and that's actually requested by the clients. So we are maintaining that partnership. So that's the first point. Second point, I think that especially in the downturns, people start to look into ways of reducing cost. And there's no -- and we talked about front end. The biggest advantage of linking SURF and subsea in the system base is to achieve their results right from front-end. So actually, we will talk about work with Saipem on projects. We're working on studies. We're working in front end with them. So that's for me the biggest savings. Is that all the quarters come in that way? No. There are still a lot of quarters being tended separate. There are some more quarters actually are bundled afterwards where the client can see the sales or interfaces. But one thing I keep repeating is that there is some difference between the SURF and subsea, and the main one for me is the amount of technology involved in subsea and the fact that the subsea provider will stay in the field for 25 years, while the SURF contractor is going to stay only 2.5, right on the CapEx. So I think we're being more backed into that. But that's the nature of the relationship. So I think this takes some traction. There are more projects there. And I think we are very well positioned, as I said, from -- as I said, Saipem have a very strong front-end engineering. That's where the savings are.

[Tove Røskaft, Head of Umbilicals]

Okay. Next 2 questions are from James Thompson at JPMorgan. Now that you have full control of C.S.E., what are your plans for that business? And do you plan to draw on the RCFs to repay the bond later this year?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Okay, I'll take the first one and then let Svein take the second one. The first one, C.S.E., I think that our plan has always been to take the whole company. What we did was just to, as we always do, test the waters. And I would say that it's being very well received. Brazil, Petrobras and all the clients there, there was a void for a strong and reputable contractor like Aker Solutions. We believe we can take our methods that we use on a global basis. We have proven that in several other locations like Brunei for Shell, Canada with Exxon, and now going to Angola with BP, that we can bring new methods and reduce cost of -- OpEx cost for our clients. So Brazil has a lot of facilities there, a lot of capable people and acquiring a company sets a good base for us to grow further. So we do believe that C.S.E. will be one of the growth engines in the future. And actually, in '19, there's quite a lot of growth on that particular division. So we're going to continue to focus on growth. And also, we hope to sell the IOCs on the other end in the future. Right now, the market is pretty much to Petrobras. It's a very large market, a lot of facilities and we have won a lot of work, which is very positive. And that's, I think, is a very good story. So on the second...

[Svein Oskar Stoknes, Chief Financial Officer]

Yes, on the RCF. So as you saw back in 2017, of course, an available revolving credit facility gives us the flexibility to time going to market on a new bond in a perfect way. And back in 2017, we did draw on the revolver to settle the bond, and then we found the perfect window to go to market with the bond. We might use that same approach, but we're currently assessing how to address the maturity of the bond, which matures in October. It's a NOK 1 billion facility. So we're looking for the perfect window to do that.

[Luis Antonio Gomes Araujo, Chief Executive Officer]

It's very important to highlight the fact that the bond was very well received by the market and highly oversubscribed. So office is now open.

[Tove Røskaft, Head of Umbilicals]

Next question, from Michael Alsford. You have seen an improvement in your geographical balance in 2018. However, Norway still represents 61% of backlog. Where do you expect the geographical balance to be at the end of 2019 based on the tendering outlook?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Okay, yes. Well, there's nothing wrong if we're being strong in Norway, and that's our key market, and we are going to continue to be stronger here. In fact, during the downturn, we actually increased our market share in Norway, which is a huge achievement. So I think we're going to continue to focus here. There's a lot of opportunities here. We have top-class capabilities here, best people in the industry working for us. So we are very close to the local clients, and that's going to be the focus. But of course, it's clear that Norway picked up faster than the rest of the world, and the world is a big place. So we're going to -- we'll continue growing. We expect to be 50-50 by 2019. That's probably a good place to be, considering what you see in the tenders. And we see, as we said, same class of opportunities in South -- in Asia Pacific, opportunities in Africa. And we expect not in '19, but more for 2020, opportunities also in Brazil. So yes, I think it's across the globe. Obviously, a lot of opportunities then. How is going to be the future is very hard to predict. But I said the world is a big place. And with our capabilities, we know we can see an improvement this quarter and this year. Last year that we can see the global market, which I know was a question from a lot of people, but we are very strong.

[Tove Røskaft, Head of Umbilicals]

So the last question, from [ Toby Harvard Snape ] at Bernstein. It's linked to the same you just answered about having a competitive advantage in winning work in Norway. Can the same be said for your operations in international markets? Please, can you help us understand how Aker Solutions differentiates itself versus competitors in international markets like Brazil and Asia?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Okay. I guess, again, several questions one. But I would say that I repeat what I just said. We have proven to see that we can win, and the amount of studies being awarded internationally shows that the clients start to get -- some of the clients who didn't know us before is getting to know us now. So I'm convinced. I think our differentiation starts always in front end. We understand and we are hearing clients saying to us that they don't know any other company that knows greenfield, equipment and brownfield. So go across the whole chain, when you look into a client's project now, we discuss to them from 0 the front end, the greenfield. We also discuss how they're going to ramp up, how they're going to phase their CapEx in the future, for the next 20, 25 years. And now more than ever, we also discuss with them how they're going to reduce their CO2 exposure. And something -- I spoke a little bit about carbon capture, but that's one thing, which is important because capture the CO2. But we -- actually, today, half of our studies include a CO2 section, showing our clients how they're going to reduce their footprint -- CO2 footprint going forward because we have to do that. That's what the world expect from us. So you're looking to subsea compression. We are looking into technology that reduces or eliminates completely very -- how to capture the -- how to produce brownfield platforms for winds, how to power those platforms with different new energy. So there's a lot we can do to add to our clients. So that's for me the biggest differentiator. And of course, we have global clients. And most of all, we work very close to our clients. We like to collaborate as our culture, and that's what clients are looking for because I think, as I said before, we add to the supply chain squeeze in my view. And now we have to go to -- continue to go to the efficiency hunting. And that's the clients are interested to do. And that's for me, I think, is where the large range of competencies to succeed internationally.

[Tove Røskaft, Head of Umbilicals]

And we just received 2 more questions from Mick Pickup. On the digitalization side, can you talk to data ownership? Do you see a business where you own the data and can use it to develop, improve, make returns or if the data owned by the client and you provide recording equipment?

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Okay. I think as a mix, it's not to the 2 streams. I think that there's no question that data is one of the most underutilized assets in the industry. We have data for years. It's internal data and not used in the next projects. We've been doing that a lot now. I think I spoke about the software house that we created earlier this year, [ IS3 ] is the name. We also have this push project with -- sponsored by several clients. This is taking traction now, where we actually getting all the -- gathering all the engineering, all the knowledge in the past. I think through the year, I also spoke about the so-called engineering assistant or I nicknamed Google for engineers where you can search in minutes what used to take engineers to take days to gather the information. So there's a lot of positive effects on digitalization. But data sometimes is owned by clients. But we see now that some clients are not -- are starting to understand that by sharing data is important. So I would know that one of our key clients, Aker BP, is very forced about that, talking about liberating data. So the more data we share, I guess not only data, but experiences, the better will be for the industry. But I think we still have progress to make. And we are, at the moment, of course, working with the data we have and the ones we can share with the clients and work with particular clients, making sure, because the clients want to protect data, so making sure that the data is not shared to others.

[Tove Røskaft, Head of Umbilicals]

Okay. That was the last question. So thank you all for listening, and we can open up for some one-on-one with the press.

[Luis Antonio Gomes Araujo, Chief Executive Officer]

Thank you.

[Svein Oskar Stoknes, Chief Financial Officer]

Thank you.