Aker Solutions ASA

OSE:AKSO

Earnings Call Transcript 2022-Q4

[Preben Orbeck, executive]

Good morning, and welcome to Aker Solutions presentation of the fourth quarter and annual results for 2022. My name is Preben Orbeck, and I'm the Head of Investor Relations.

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 web page. After the presentation, we have time for 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 Kjetel Digre.

[Kjetel Digre, executive]

Thank you, Preben, and welcome to everyone.

Let me take you through the highlights of the quarter. Firstly, the overall message is that we have increased the top and bottom lines in the quarter from the same period last year and that we are delivering above our financial targets. Our fourth quarter revenue was NOK 12.5 billion, and EBITDA was NOK 999 million, excluding special items with a margin of 8.0%. We delivered NOK 59.3 billion of order intake or 4.8x book-to-bill. Our backlog ended at close to NOK 100 billion, providing a solid foundation for our growth targets moving forward.

Secondly, we continue to progress well with our transition journey. The process for establishing the new subsea joint venture with SLB is progressing according to plan with expected closing during the second half of 2023. As mentioned, we have experienced a record high order intake in the quarter, of which almost 80% is related to Aker Solutions segments, excluding subsea, meaning renewables and field development and EMM. In terms of our ongoing recruitment campaign, I'm happy to share that we have now welcomed around 3,000 skilled new colleagues during the year across our organization globally.

Thirdly, in terms of our outlook and recent developments, we believe that we are very well positioned for the future. We have spent the last 2 years preparing for the oncoming project portfolio and safeguarding the deliveries will be a key focus for the company in the years to come. Several of these projects will be executed through the alliance model, together with Aker BP and our delivery partners, a model that entails positive upside through incentive mechanisms. Lastly, we see strong momentum in project sanctioning internationally, both in oil and gas and in renewables markets.

Let's now have a look at our full year results. And as I said, I am pleased with our financial performance in 2022. Our key figures have improved significantly from the year before. We took several steps in 2022 to accelerate our strategy and position the company for the future. The year was successful on many fronts with solid operational performance and a strong order intake.

Our main numbers for 2022 were a revenue of NOK 41 billion, up from NOK 29 billion in 2021, representing year-on-year growth of more than 40%. EBITDA, excluding special items, of NOK 3 billion, or 7.3%, with earnings per share of NOK 2.53. We delivered a record high order intake of NOK 88 billion, equal to 2x book-to-bill -- 2.1x book-to-bill. This included several key wins across segments, both in our oil and gas business and within renewables and transitional solutions. Our order backlog was NOK 97 billion at year-end, which is an increase of 98% from the year before. About 60% of the NOK 100 billion backlog consists of projects under the NCS activity package with low risk and upside potential through incentives.

Let's now move over to some operational highlights of the year. Overall, I'm very happy to see that our main ongoing projects are progressing well. Within our oil and gas portfolio, we have seen high activity levels and strong performance on our North Sea projects. About 2,500 people are currently working on the Johan Castberg FPSO project. Several important milestones have been met during the year, preparing the FPSO for departure from the yard in the spring of 2024.

During the year, we have also had the successful delivery of the Njord platform upgrade, making it ready for another 20 years of operation. In subsea, we have celebrated the 5-year anniversary for the NCS frame agreement for subsea equipment with Equinor, and we have progressed well on projects such as the Tommeliten and Eldfisk for ConocoPhillips.

In addition, our EMM business has delivered solid performance with healthy returns. Projects within renewables and energy transition accounted for about 22% of our full year revenues in 2022. Jansz, the subsea gas compression project for Chevron in Australia, is progressing to plan, reaching key milestones on 20% progress in the third quarter. The Troll electrification project is also progressing well, with fabrication of modules currently taking place at Stord.

When delivered in 2025, it will result in CO2 emissions being reduced by almost 0.5 million tonnes per year, which represent about 10% of Norway's target for reducing its emission in 2030. We have also had high activity in our decommissioning and recycling operations. One example is the Valhall drilling platform, where we have achieved a 99% recycling rate for the complete platform.

The steel from offshore platforms is of the highest quality and is therefore in high demand in the secondhand market, but also a key contributor to the circular economy with a significantly lower carbon footprint compared to production of new steel. Within offshore wind, electricity production has started from Hywind Tampen, the world's largest floating wind park where Aker Solutions is delivering 11 concrete floaters to Equinor. And progress is also good for Sunrise, the first HVDC converter station to be installed in U.S. Within CCUS, we are in the process of delivering the first phase of the Northern Lights carbon storage facility, as well as working together with Aker Carbon Capture for HeidelbergCement on their carbon capture facility at Brevik.

Lastly, we have experienced high demand for our early phase engineering consultancy services during the year with about 150 studies performed. Of these, more than 1/3 were related to renewables and energy transition, positioning Aker Solutions for future projects in these markets.

Let's now have a look at our main orders during the quarter. The renewables and field development segment is where we experienced the largest order intake this quarter, in total NOK 39 billion. This mainly relates to the Aker BP portfolio of projects on the Norwegian continental shelf that will be executed through the alliance model. Yggdrasil is the former NOAKA development, which consists of the Hugin A and Hugin B platforms. Hugin A will be the largest topside ever assembled inside the Aker Solutions' Stord yard area.

At Valhall, Aker Solutions has been awarded the Valhall production and wellhead platform, and the Fenris unmanned wellhead platform as well as their substructures. We have also recorded additional intake through growth in scope on existing projects, such as the Johan Castberg FPSO.

In the EMM segment, the majority of the order intake is related to modification work on the Aker BP portfolio, including modifications of the Valhall field center and Skarv FPSO to enable the planned tie-ins. This quarter, we also won the frame agreement for maintenance and modification from Equinor on the Johan Sverdrup.

Lastly, during the quarter, we announced a letter of intent for the electrification of the Draugen field for OKEA. The contract worth around NOK 2.5 billion was booked during the first quarter of 2023, and is expected to reduce the emissions by about 200,000 tonnes CO2 annually.

In the subsea segment, the order intake was dominated by the Aker BP portfolio with awards for the Yggdrasil and Skarv Satellites projects. The scope for both projects covers the subsea production systems, umbilicals and service work and will be executed in the well-proven alliance model with incentive upside potential.

Furthermore, we were also awarded the long-term frame agreement with Petrobras in Brazil, with a combined potential of more than 30 subsea trees to be delivered over a 5-year period. Only a conservative estimate has been included in order intake. As mentioned, several of the recent awards will be executed through the alliance model with Aker BP and strategic partners.

We see substantial benefits of executing projects in this manner. Our integrated model starts already in the concept and FEED stages, where Aker Solutions is deeply involved in designing the projects and solutions. This also enables planning for capacity to safeguard execution, already very early in the process. In these alliance projects, Aker Solutions takes no lump-sum exposure and the majority of the procurement scope is already secured back-to-back at time of signing the contract with the customer. Furthermore, the contracts include escalation mechanisms for cost inflation and wages. Lastly, but very importantly, we have shared upside incentives for delivery on time and quality.

So to summarize this, we believe that working in alliance models where we are aligning around common drivers, enhanced value creation for both our customers, for us as a contractor and for our shareholders. And we already have a proven track record in delivering in these alliances together.

Next, let's look at the tendering activity, but outlook remains positive. Even after the record high order intake, our tendering value is strong at almost NOK 80 billion with a good balance across segments. And moving forward, we expect international project sanctioning to increase. About half of the tender value relates to the Aker Solutions segments after the subsea JV transaction.

I would also like to reiterate that we remain highly selective in what projects we take on board, especially within renewables, where the industry is still in early development. We are focusing on projects with satisfactory terms and risk reward balance, where we can deliver value both for our customers and shareholders. And looking further ahead, we see robust multiyear 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 the agenda, particularly in Europe. And we believe that this will lead to high activity levels across our businesses in the years to come.

This takes me to the general outlook for Aker Solutions. I'm pleased that we are delivering above our financial targets, while at the same time, growing our business and developing our organization. Looking ahead, we see very positive projections for our industry. We also see volatilities in the geopolitical landscape, which we follow closely. Aker Solutions is well positioned within the businesses we serve, with our all-time high order intake and backlog, of which the majority relates to Aker Solutions segments, excluding subsea.

We have secured record high visibility for our activity levels in the years to come. We have a strong focus on continuously delivering predictable project execution together with our partners, with low risk models that have upside potential through incentives. Our tendering activity remains high across segments, which enables us to be highly selective on which opportunities to target, and we expect international project sanctioning to increase moving forward.

Our financial position is solid, and the announced subsea joint venture will unlock significant shareholder value, as well as be an important contributor to our business through the 20% ownership in a larger and stronger subsea company. Overall, Aker Solutions will play an important part, both in the current upcycle and for the longer-term structural changes in the energy markets.

The energy transition is a large undertaking that will require new ways of working across industries and in partnerships and with authorities in order to succeed. And in this, we will play an important role by continuing to develop Aker Solutions into a digitally-driven engineering and project execution company. However, within renewables, it is our experience that the current frameworks in the industry is operating under are not sustainable and change is needed.

On the positive side, we see that governments set high ambitions for the generation of renewable energy. In Northwest Europe alone, the ambitions for new offshore wind power could imply a demand for more than 1,000 new turbines and substructures each year in addition to other infrastructure and services. However, this demand depends on the industry's ability to significantly expand current capacities, capabilities and develop more effective technical solutions.

As of now, the profitability in the value chain is insufficient to ensure that the industry can make the investments needed to deliver on government targets. The renewables industry is dependent on authorities and policymakers, taking an active role in developing frameworks that increases predictability and improves commercial models to ensure industrialization and improving cost of clean energy. Together with our customers, we will continue the dialogue with authorities for necessary steps to be taken to meet the needs of the industry in driving the energy transition.

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 fourth 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 fourth quarter revenue was NOK 12.5 billion, up from NOK 8.7 billion a year ago. This was driven by continued good progress on our project portfolio across segments. The underlying EBITDA was close to NOK 1 billion, up from NOK 593 million a year ago, and the margin increased to 8%. The underlying EBIT was NOK 712 million, up from NOK 303 million a year ago. And the net income, excluding special items, increased to NOK 529 million from NOK 112 million a year ago. Earnings per share increased to NOK 1.1.

For the year overall, we delivered revenue of NOK 41.4 billion, a solid increase from last year. EBITDA for 2022 was NOK 3 billion, and underlying EBITDA margin increased to 7.3%. Earnings per share increased to NOK 2.53. And as Kjetel mentioned, the Board has proposed to increase the dividend per share to NOK 1 for 2022, equaling 40% of net income.

Now moving to our balance sheet and cash flow. We continue to have a solid net cash position, which increased to NOK 5.1 billion at the end of the quarter with a leverage ratio of minus 2.2x. Our liquidity buffer was NOK 11.2 billion, where NOK 6.2 billion was cash. For 2022, we delivered strong cash flow from operation of NOK 4.5 billion. This was mainly driven by solid operating margins as well as the favorable working capital development.

Our working capital improved to minus NOK 4 billion at the end of the quarter, driven by high activity levels, year-end effects and prepayments on ongoing projects. We expect working capital to remain lower for longer and at the back of the recent large order intake and is expected to trend in the range of around negative NOK 2.5 billion to negative NOK 4 billion.

Capital expenditure for the full year was NOK 714 million, or 1.7% of revenues. We have implemented measures to safeguard the delivery of the record-high NCS activity for the years moving forward, which will temporarily increase our CapEx to about 4% of revenues in 2023. The majority of these investments will be fully covered by the cost base of the projects and will, therefore, not have a negative impact on our cash generation. This is a one-off effect related to the all-time high activity level. And for the -- for next year's onwards, we expect CapEx to be more in the range of 1.5% to 2% of revenue. And after the quarter, we have successfully refinanced our revolving credit facility at attractive terms. It has been reduced from NOK 5 billion to NOK 3 billion and with maturity in 2028.

Now over to the segments. For renewables and field development, the fourth quarter revenues increased to NOK 4.6 billion, up from NOK 2.7 billion last year. For the full year, the revenue were almost NOK 15 billion, up more than 40% since 2021. The underlying EBITDA in the quarter was NOK 185 million, up from NOK 108 million a year ago and with a margin of 4.1%.

We expect margins in this segment to remain around current levels during the first half of the year and gradually to start kick up in the second half of 2023 and into 2024, as recently awarded project will start reaching profit recognition. The order intake in the quarter was record high at NOK 38.9 billion, or 8.6x book-to-bill. This was mainly driven by the Aker BP contracts on the Norwegian continental shelf, and provide a very solid visibility for activity level over the next several years. And we expect revenue in this segment to increase by more than 30% in 2023.

For the EMM segment, the fourth quarter revenue was NOK 3.6 billion. This was up from NOK 2.6 billion a year ago, driven by continued good progress on ongoing work. Full year revenue was NOK 12.2 billion, an increase of 32% from 2021. The underlying EBITDA in the quarter was NOK 188 million, up from NOK 92 million last year and with a margin of 5.3%. Full year EBITDA was NOK 663 million with a margin of 5.5%. The order intake was strong at NOK 6.1 billion, or 1.7x book-to-bill in the quarter. The backlog is strong at NOK 21.6 billion, which is around 2x the annual revenue in 2022 for this segment. EMM delivered 32% increased revenue in 2022, and we expect the revenue to continue at close to the 2022 levels also in 2023.

In the subsea segment, the fourth quarter revenue was NOK 4.2 billion. Full year revenues was NOK 14.1 billion, representing 45% growth from 2021. The underlying EBITDA in the quarter was strong at NOK 750 million with a margin of 17.7%. The margin was extra strong in the quarter, driven by solid operational performance and some contingency releases. The full year EBITDA was NOK 2.3 billion with a margin of 16.4%. The order intake in the quarter was strong at NOK 14.2 billion, or 3.4x book-to-bill and the backlog in subsea is close to NOK 25 billion. And we expect revenue in subsea to increase by more than 25% in 2023.

Now over to order intake and backlog. In the fourth quarter, we delivered all-time high order intake of close to NOK 60 billion, or 4.8x book-to-bill. Our backlog is now at NOK 97 billion, which gives a very good visibility for activity levels in the next several years to come. About 60% of our current backlog refers to project under the NCS temporary tax regime or activity package. This is an extremely good situation to be in. And as Kjetel mentioned, our focus will be to continue delivering predictable and solid execution of this backlog to harvest upside potential and incentives.

I would like to conclude by sharing some of our exciting ambitions for Aker Solutions moving forward, also after the close of the subsea JV transaction. Aker Solutions is in a very good position for growth and value creation. Firstly, we will deliver on our growth ambition through our record-high order backlog and strong position in future growth markets.

Secondly, through solid execution of our projects, we aim to gradually increase margins and this result in a target to generate about NOK 1 billion of free cash flow on average annually, excluding proceeds and dividends from the subsea joint venture. The earnings and dividends from our share of the subsea joint venture will, therefore, come in addition to this amount.

Our ordinary dividend policy will remain firm at 30% to 50% of annual net profit. The subsea joint venture transaction is expected to unlock significant shareholder value, and I would also like to emphasize that the subsea JV will be an important contributor to Aker Solutions' profit moving forward through our 20% ownership in a longer -- in a larger and stronger subsea company.

In sum, I'm confident that Aker Solutions is in a excellent position to accelerate its growth and transition and to deliver solid, long-term shareholder value. Now to sum up. In the fourth quarter, we continued to deliver strong financial and operational performance, and we have a solid financial position. And for the full year, we delivered above our targets for revenue growth, order intake and cash generation.

After a strong revenue growth of 41% in 2022, we expect to continue to grow our top line in 2023. We expect to see a full year revenue up by around 15% in 2023. And at the same time, we expect our EBITDA margin to continue to increase in 2023 from last year. The outlook for the company and for our industry is very positive and Aker Solutions is in a excellent position to take advantage of opportunities ahead.

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

[Preben Orbeck, executive]

Our first question comes from Erik Aspen Fossa in Carnegie.

With strong growth in 2022 and '23, your [ 2020 to '25 ] 10% annual growth rate indicates that growth will plateau from 2024 onwards. Could you elaborate?

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

Yes. When we set our targets back in 2020, when we announced the merger between Kvaerner and Aker Solutions, we said and we communicated clearly that in average, we will grow the top line by 10% up to 2025. And based on a flat development in the first 2 years and a growth of 40% plus now and with another 50% growth, in average, we will deliver on the 10% growth, but it's flattening out due to the high activity level that we see over the next year to come, but we still see significant growth from 2022 into 2023.

[Preben Orbeck, executive]

We will continue with questions from Erik Fossa. On EBITDA margins, they are expected to improve from '22 to '23 with many projects likely moving into margin recognition in 2024. Should margins continue to improve in '24, and what type of margins should we expect?

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

Yes. Again, we have also said that we will gradually continue to sort of improve our margin over time, and that is the journey that we have -- we delivered on. And we have, in this presentation, also said that we expect that the margin will gradually improve going forward and from the 2022 levels that we saw of around 7.6%.

[Preben Orbeck, executive]

Continuing on the question on the cash position on the NOK 5.1 billion. Are you considering share backs or cash dividends?

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

Yes. Cash dividends is, of course, some that the Board have proposed to pay out a dividend for 2022 in 2023 and is NOK 1 per share.

[Preben Orbeck, executive]

Moving on to Lukas. A question from Lukas Daul in Arctic. If you can provide some more highlights and milestones on the closing for the subsea JV transaction?

[Kjetel Digre, executive]

Currently, the filing has been performed in the relevant countries and those processes around antitrust procedures are different from country to country, but they are currently ongoing. Some of them will be handled fairly quickly, but others have a more a longer process. And it will, as we have stated and guided upon, be looking at the closing of the whole deal in the second half of 2023. In parallel with that, we are then working with the integration planning, looking at the organizational structure and also the way to actually physically integrate from day 1 later on in 2023.

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

Yes. And just to add to that, it's all in line with what we plan for, and there is no sort of hiccup that we have seen so far. So all going according to plan.

[Preben Orbeck, executive]

Thank you. Moving on to a question coming in from Nikhil Gupta in Citi. Subsea margins were strong in second half. Can we expect current run rate as a normalized level going forward?

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

Yes. As in subsea, we have communicated that some of the uptick in the margins you have seen in the last 2 quarters is also related to a project that have reached 20% completion, and therefore, we have started recognizing margins and some contingency releases also in the fourth quarter. We communicated earlier on that the underlying margins is more in the range of 15%.

[Preben Orbeck, executive]

An additional question here from Nikhil Gupta is on the CapEx side. When you say it will be absorbed by project, does it mean that you will be compensated for the CapEx? And can you provide some examples of CapEx items that can help safeguard project delivery?

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

Yes. Short answer is yes. And to provide some more color on that one, the activity level that we are embarking on now is quite high, and we have identified several good business cases whereby we invest in equipment like cranes, multi-wheelers, camps and facilities instead of renting those. And then that is a win-win solution for us and the customer. And we are saving costs for the customer, and we have a benefit of -- in the business case by investing in those instead of renting it. And the cost of that is fully charged to the project, and therefore, will not have a negative impact on our cash generation.

[Kjetel Digre, executive]

And we are getting modernization also because part of safeguarding and making execution more robust is also to introduce new methods around digital solutions, robotized fabrication, et cetera, which makes the execution for the next 2 years, 3 years, 4 years, more robust, but also is a building block for our yards to enter into the renewables area, which follows.

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

Yes. And these cases are definitely cases that then will improve our productivity during the execution of this project and again, a win-win situation for us and our clients.

[Preben Orbeck, executive]

Thank you. Then we move on to a question from Haakon Amundsen in ABG. If you can indicate what EBITDA margins you imply in the NOK 800 million future cash or free cash flow guidance on future [ Aker Solutions ].

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

Yes. I don't think we should sort of go deeply into detailed guidance on margins other than what we have said. We will gradually increase the margin over time, and we expect to generate the NOK 1 billion in free cash flow over time, all included in that one, including the lease payment from our leasing obligation as well. And then just to highlight that on the slide, you will see NOK 0.8 billion and I'm talking about the NOK 1 billion. It's -- underlying, it's the same. It's just the time period we referred to, and we expect us to generate NOK 1 billion in average for Aker Solutions going forward. And in addition to the NOK 1 billion that we are talking about, we will, of course, have the, gradually, the earnings coming in from the joint venture after the closing that will also result in future dividends payout from the joint venture to the shareholders. And that will come on top of the NOK 1 billion in free cash flow generation.

[Preben Orbeck, executive]

Thank you. Moving on to a question from Christopher Mollerlokken in SpareBank. I assume a key risk for Aker Solutions going forward is delivering on the record-high backlog. Could you please elaborate on who you are working on -- how you're working to secure that you are able to deliver on time and on budget?

[Kjetel Digre, executive]

I think if you look at our portfolio of projects in the different segments, we have many customers and more and more. These are the key ones that we know. And we know how to collaborate all our clients and particularly the key ones and those we have large portfolios with engage us very early. And just to run the example of Aker BP, where we have the largest portfolio of projects, when we're entering into this activity level, we are working in the alliance setup. We are engaged very early. We are part of not only designing the facilities, which then suits both us and the market around us, but we're also planning and preparing and safeguarding through actions that we take on frame agreements on standardizing on equipment by also locking up agreements with the sub-suppliers and also introducing the right kind of escalation.

So, we have control of the project in a completely different way when we are actually pushing the button and entering into the execution phase. What we are focusing together again in the alliances around now is to actually keep the momentum to make sure that we are acting on a mature engineering basis, but then also executing all the different milestones, placing orders, getting over to the next phases, et cetera. And we've been there before, so we know exactly what we need to do.

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

Just would like to add that high-activity level that we now see is what we expected, and we have had actually 2 years to prepare for this since the activity package was announced in 2020. And all the safeguarding initiatives that I talked about is also part of this by recruiting people and the safeguarding measures that we have put into our CapEx budget going forward, and that will be covered by the project. So all in all, we are well prepared for the activity ahead of us.

[Preben Orbeck, executive]

One question from Martin Karlsen from DNB back to the CapEx side. Can you provide clarification on 2023 CapEx compensation, if it's received from -- if the compensation is reflected in the 2023 revenue and margin guidance.

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

Yes. CapEx that we will execute in 2023 related to projects that will be in our early phase will have an impact on the working capital and will only have future impact in earnings and margins when we start profit recognition of those projects. So in 2023, most of this will have its impact on the net working capital developments.

[Preben Orbeck, executive]

A final question here from Russell Searancke from Upstream is the mentioning of new 3,000 new skilled employees to prepare. And what do you think on the need for recruiting more skilled employees?

[Kjetel Digre, executive]

Yes. As Idar said on an earlier question here, we have had 2 years to prepare. And after the merger between Kvaerner and Aker Solutions in the summer of 2020, we saw this uptick coming and that's part of our strategy. Then we also knew that we had both to grow the competence and the capacity of the organization all over our global setup. And that's what we have been acting upon. We also have a turnover which is normal. So the net number is not 3,000. It's lower than that. We also want to sort of look at that number and see that we are attractive in the market, which then resonates with our strategy. So, that is really -- I'm really pleased to see that. In 2022-2023, we will continue some recruitment in the different areas to follow the activity level that we have in front of us.

[Preben Orbeck, executive]

Excellent. That was the final question for today. Thank you all for listening in to this audiocast, and goodbye from us.