Subsea 7 SA

OSE:SUBC

Earnings Call Analysis

Subsea 7 Achieves Record Q2 Performance and Raises Guidance

Subsea 7 reported a strong Q2 with an 80% increase in adjusted EBITDA to $292 million, achieving a margin of 17%. The company witnessed a 15% revenue growth to $1.7 billion. A record order intake of $4 billion boosted the backlog to $12.5 billion. Guidance for 2024 has been revised upwards, with revenue expected between $6.5 billion and $6.8 billion and adjusted EBITDA between $1 billion and $1.05 billion. The company aims for margins of 18-20% in 2025 and over 20% in 2026. Selective tendering in renewables and a robust subsea market outlook underpin these expectations.

Strong Financial Performance in Q2 2024

Subsea 7 achieved remarkable financial results in the second quarter of 2024. Adjusted EBITDA reached $292 million, marking an 80% increase compared to the same quarter of the previous year and reflecting a 17% margin. This strong performance was a record for the company in terms of both order intake and backlog. The company’s financial guidance has been revised upwards, with expectations of achieving an adjusted EBITDA range of $1 billion to $1.05 billion for the full year 2024, based on a revenue range between $6.5 billion and $6.8 billion.

Record-Breaking Order Intake and Robust Backlog

The order intake for Q2 2024 was $4 billion, driven by new awards in key regions such as Brazil, Turkey, the U.K., and the Gulf of Mexico. The company’s book-to-bill ratio stood impressively at 2.3x for the quarter, leading to a backlog of $12.5 billion of firm work, the highest in the company’s history. This substantial backlog provides strong visibility into future revenues, with $4 billion of work already secured for 2026 and beyond.

Diverse Performance Across Business Units

Subsea 7’s Subsea and Conventional segment posted a revenue of $1.4 billion, up 21% year-over-year. This segment’s adjusted EBITDA was $247 million, with a margin of 17.2%. Meanwhile, the Renewables segment’s revenue was $281 million, relatively flat year-over-year, but it maintained a healthy adjusted EBITDA margin of 13.6%. The Renewables business is expected to continue generating double-digit margins for the full year.

Significant Investments and Cash Flow Management

The company managed operating cash flow exceptionally well, generating $187 million. Although investing activities used $202 million, including significant expenditure on acquiring the African Inspiration vessel (to be renamed Seven Merlin), Subsea 7 ended the quarter with a solid liquidity position of $1.1 billion, including $290 million in cash and cash equivalents and $860 million in committed unutilized borrowing facilities.

Outlook and Strategic Focus

Looking forward, Subsea 7 aims to achieve an adjusted EBITDA margin of 18% to 20% by 2025 and over 20% by 2026. The company remains confident about the positive long-term outlook for both its Subsea and Wind businesses. Management highlighted the strategic importance of early engagement and alliancing in optimizing field development designs, which strengthens their competitive edge in the market.

Key Projects and Technological Capabilities

Subsea 7’s recent projects underscore its capabilities. Notably, the Gas to Energy project in Guyana was completed ahead of schedule, and the company’s high-performance pipeline technologies continue to set industry standards. The Seaway Ventus vessel also successfully completed turbine installations at Gode Wind 3 in Germany.

Strategic Acquisitions and Fleet Enhancements

Subsea 7 strategically acquired the African Inspiration vessel, now Seven Merlin, to support its extensive project pipeline. This acquisition was a financially prudent move, aligning with the company’s approach to balancing asset charter and acquisition costs efficiently. This addition enhances the company's operational flexibility and project delivery capabilities.

Commitment to Shareholder Returns

Subsea 7 reaffirms its commitment to delivering strong shareholder returns, aiming to return at least $1 billion from 2024 to 2027. This commitment is underpinned by the company’s robust project delivery, effective risk management, and sound financial health.

Confident in Capitalizing on Energy Transition

Acknowledging the ongoing energy transition, Subsea 7 is deeply involved in the renewables sector, particularly offshore wind. The company maintains a selective bidding approach to ensure profitable growth in this market, supported by strong political and market signals, especially in regions like Europe and the U.S.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Subsea 7 Q2 2024 Results Conference Call. [Operator Instructions] Please be advised today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, Katherine Tonks. Please go ahead.

[Katherine Tonks, executive]

Welcome, everyone, and thank you for joining us. With me on the call today are John Evans, our CEO; Mark Foley, our CEO; and Stuart Fitzgerald, CEO of Seaway 7. The results press release is available to download on our website along with the slides we will be using during today's call.

Please note that some of the information discussed on the call today will include forward-looking statements that reflect our current views. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Subsea 7's 2023 Annual Report or today's quarterly press release.

I'll now turn the call over to John.

[John Evans, executive]

Thank you, Katherine, and good afternoon, everyone. I will start with a summary of the second quarter before passing over to Mark for more details on the financial results.

Turning to Slide 3. Subsea 7 delivered a strong second quarter adjusted EBITDA of $292 million, up 80% year-on-year and with a margin of 17%. We're on track to meet EBITDA guidance, which has been revised upwards by 5%. The second quarter was a record for Subsea 7, both in terms of order intake and backlog. The addition of more high-quality projects support our expectations of strong margins in the remainder of 2024 as well as our goal to achieve a margin of 18% to 20% in 2025 and over 20% in 2026. Our tendering pipeline in both subsea and wind remains robust, and we're confident in a positive outlook for both businesses.

Turning to Slide 4. Order intake in the second quarter was $4 billion, reflecting new awards in Brazil, Turkey, U.K. and the Gulf of Mexico. Our book-to-bill for the quarter was 2.3x and 1.7x for the first half. With a high book-to-bill, we continue to drive strong growth in our backlog. And at the end of the first half, we had $12.5 billion of firm work, a record high.

Slide 6 shows the backlog by business units. After recent awards in Subsea and Conventional including Buzios 9 and 4 new PLSV contracts, we have good visibility of the years ahead, including $4 billion already secured for 2026 and beyond. In renewables, the backlog is roughly flat, as we remain selective in our tendering approach to support future margins and returns.

And now I'll pass over to Mark to run through the financial results.

[Mark Foley, executive]

Thank you, John, and good afternoon, everyone. I will begin the financial performance review with some details of group and business unit performance in the quarter before returning to the group cash flow and financial guidance for 2024.

Slide 7 summarizes the group's second quarter results. Revenue increased to $1.7 billion, up 15% compared to the second quarter of 2023, largely driven by Subsea and Conventional. Adjusted EBITDA of $292 million was up 80% compared with the prior year, and our margin increased by over 600 basis points to 17%. Net finance costs of $24 million, a net foreign exchange loss of $8 million and taxation of $41 million resulted in net income of $63 million compared with $14 million in the prior year period.

I'll now discuss the drivers of the group's performance in the next few slides. Slide 8 presents the key metrics of Subsea and Conventional. Revenue was $1.4 billion, up 21% year-on-year, reflecting good progress on fabrication of Vigra, Wick, [indiscernible] and Bintan spoolbases as well as the execution of offshore swaps in Guyana, Brazil, Australia and Norway.

Adjusted EBITDA was $247 million, equating to a margin of 17.2%, an increase of approximately 700 basis points from the prior year. This result was underpinned by the continued mix shift to higher-margin projects, high utilization of the global enabler vessels as well as a $9 million of net income contribution from OneSubsea. Net operating income was $126 million compared to a loss of $10 million in the same quarter last year.

Selected renewables performance metrics are shown on Slide 9. Revenue was $281 million, broadly flat year-on-year, reflecting ongoing activity installing foundations on transition pieces on Dogger Bank as well as cable lay projects in the U.K. and Taiwan and our first turbine installation project in Germany. Adjusted EBITDA was $38 million, resulting in a margin of 13.6%. We continue to expect the Renewables business unit to generate a double-digit adjusted EBITDA margin in the full year.

Slide 10 shows a cash waterfall for the second quarter. Net cash generated by operating activities was $187 million, which included a modest $12 million adverse movement in working capital. Net cash used in investing activities was $202 million, including capital expenditure of $55 million, and the second of 2 payments for our investment in OneSubsea amounted to $153 million. Net cash used in financing activities was $213 million, which included dividend payments of $82 million, share repurchases of $19 million and lease payments of $55 million. Restricted cash increased by $83 million related to the purchase of African Inspiration, a 250-tonne crane class construction vessel. The purchase was completed on the 18th of July, and the vessel will be renamed Seven Merlin.

At the end of the quarter, cash and cash equivalents was $290 million and net debt was $1 billion, which included lease liabilities of $533 million. The group had liquidity of $1.1 billion at quarter end, which included $860 million of committed unutilized borrowing facilities. At the 24th of July, the company had utilized $52 million or 65% of the $80 million allocated to share repurchases as part of our $250 million shareholder returns in 2024.

To conclude, Slide 11 shows our guidance for the full year. We have raised our expectation for revenue and adjusted EBITDA slightly as well as reflecting the purchase of Seven Merlin and capital expenditure. In 2024, we now expect revenue to be in a range between $6.5 billion and $6.8 billion, with adjusted EBITDA being between $1 billion and $1.05 billion. This reflects the good progress on our existing portfolio of projects. Our capital expenditure guidance now includes the purchase of Seven Merlin for $83 million. The underlying capital expenditure guidance has not changed.

I will now pass you back to John.

[John Evans, executive]

Thank you, Mark. On the next 3 slides, we have a few highlights from the last quarter, starting on Slide 12 with our Gas to Energy project in Guyana. This was our first project in Guyana and involved the fabrication and S-Lay of 119 kilometers of rigid pipeline using Seven Borealis. The pipelay scope was successfully completed 10 days ahead of schedule, and the Seven Borealis is now mobilizing to Saudi Arabia for work on Aramco's Zuluf field.

Slide 13 continues a theme from our recent Investor Day of enabling products, including our range of roll-on solutions. As we discussed in June, the Alliance framework and early engagement with Aker BP allows a very open dialogue about the solutions that could be used to optimize their field developments. At Vigra, we saw the fabrication of high-performance, corrosion-resistant rigid pipelines, Yggdrasil. While across the water at Wick in Scotland, our spoolbase is also working on Yggdrasil, fabricating pipeline bundles. As you can see in the image, these bundles combine several pipes and control lines in a single structure. This highly efficient solution saves vessel days and simplifying the field infrastructure and is proprietary to Subsea 7.

As we explained in June, these solutions are part of the suite of enabling products and capabilities that keep us at the forefront of the Subsea industry. When Combined with the benefits of early engagement, they have been key to unlocking reserves and optimizing value, both to clients and Subsea 7.

Turning to Slide 14. In March, we took delivery of the Seaway Ventus, our new-built turbine installation jacket. And on the 2nd of July, we completed our inaugural contract at Gode Wind 3 in Germany. After installing the turbines on that project, the Seaway Ventus moved to Borkum Riffgrund 3, where we continued to install project installation turbines on that project. This winter, during the off-season, the vessel will be equipped with a gripper to enable monopile installation before it commences foundation installation on East Anglia 3.

Now on to review of our tendering pipeline on Slides 15 and 16. Bidding for subsea work remains very active, and our tendering has exceeded $21 billion. The outlook for incremental work in Brazil remains very good with several projects on the bidding horizon valued at multiple billions. Elsewhere, there's a wide range of small and medium-sized projects in deepwater markets in the U.S., Gulf of Mexico, West Africa, Turkey and beyond. Overall, we are confident that we have a strong tendering pipeline that can support continued momentum in our subsea order intake.

On the next slide, we have our wind prospects. The recent licensing round in the Netherlands was a success with 2 2-gigawatt developments being awarded to consortiums, including SSE and Vattenfall. For both these clients, we have delivered substantial and similar project scopes recently and have good track record and relationships. Likewise, in Germany, there were 2 lease awards in June for EnBW and TotalEnergies. So Continental Europe, the market is functioning well with regular bidding and prospects for Seaway 7. In the U.K., we're optimistic that the change in government will provide continued support to offshore wind with potentially increased volumes. This is expected to support strong activity in current and future CFD rents, and we expect Seaway 7 to remain one of the leaders in this market.

Although there is political uncertainty in the U.S., both Atlantic Shores 1 and 2 and New England 1 and 2, together representing 5.4 gigawatts, have received final governmental approval, and bidding activities for future prospects continue. Overall, we remain confident that the long-term outlook for offshore wind is strong and that through selective bidding, we can continue to deliver good financial performance in our renewables business.

To conclude, we turn to our final slide on Page 17. As discussed during our Investor Day last month, we have a strong suite of solutions, vessels and technologies that unlock opportunities for Subsea 7 and create high barriers of entry. You heard from Aker BP last month about the benefits of early engagement and alliancing in optimizing field development design. This goes hand in hand with the ability of our experienced project teams and crews to deliver complex offshore scopes on time and on schedule. We're very clear that there is an energy transition happening, and we're very much involved in it. Our offshore wind business is profitable and growing, and we have a well-developed strategy to address CCS.

Financial strength starts with good project delivery and good risk management. These are fundamentals to delivering profitability and maintain the balance sheet strength that enables us to win super major projects. Finally, we intend to be a Tier 1 player in subsea and offshore wind in 2030, 2040 and 2050 and beyond. And as part of that goal, we will be considering the long-term reinvestment needs of our fleet, but we're very clear that shareholder returns are a priority and are underpinned by the commitment to return at least $1 billion in 2024 to 2027 as a minimum.

And with that, we'll be happy to take your questions.

[Operator]

[Operator Instructions] First question today is from the line of Guilherme Levy from Morgan Stanley.

[Guilherme Levy, analyst]

The first one on offshore wind. I was wondering if you could say a few words on the competitive environment for the different activities that the company does in this business. If you could say a few words on what you're seeing on cables, foundations and wind turbines. And also, into the long term, what type of margin profile should we see in these different segments of the market? That would be great.

[John Evans, executive]

I'll ask Stuart to pick up the wind questions.

[Stuart Fitzgerald, executive]

Yes. So as you know, our -- the segments that we participate in are cables, foundations and turbines. I would say in the cables, in the foundations segments, we see high barriers to entry, and we see high demand for our services. So active bidding and a relatively tight market, particularly as we head towards '27, '28 and beyond.

Turbines, lower barriers of entry, I would say, more speculative capacity coming into the market, and I would say less tight market there. As you know, with the Ventus, we've equipped that ship or that vessel to be able to do either foundations or turbines, so we will allocate the ship into the segment where we see the best returns in 2025, that will be foundations. And beyond that, we'll basically go after the segment that provides us the best opportunity.

Yes. And then I think on the second point in relation to margin evolution, we're basically seeing margins improving as the quality of the jobs that we take in improves. We're selective in the bidding, making sure we have the right risk profile and the right pricing. So we see an upward trend in the margin delivery out of offshore wind.

[Guilherme Levy, analyst]

And a second one, if I may. The company acquired a new vessel for the conventional business recently. I was just wondering if you could also comment on other opportunities that you see, too, to expand the fleet from here.

[John Evans, executive]

Well, thank you. We always look at what is out there in the market. We are regular charters of challenger of this class, 250-ton construction assets are needed to support our big pipe layers. And as we've discussed many times, we are aware of every vessel in the world that can meet our needs. This happened to be a vessel that was owned by a company that got into financial distress. And the investment for us is not too dissimilar to the 3- to 4-year charter, and we ended up buying the asset for the same amount of money that we have spent on the charter. So for us, that was quite a speculative opportunity that came our way.

But equally, we were in the market for a 3-year charter of an asset class of a similar capability as the African Inspiration, which will in the future be called Seven Merlin. So for ourselves, it's about keeping a very close eye on what's out there. And when the right opportunity comes, the strength of our balance sheet and our understanding of the market allows us to move relatively quickly to pick up on where we're at, at the moment. So that's the way to think about it is the cost of charter versus acquisition in an asset plan that we use quite regularly in the fleet.

[Operator]

We'll now take our next question. This is from Christopher Mollerlokken from Sparebank 1 Markets.

[Christopher Møllerløkken, analyst]

Yes. With the acquisition of Seven Merlin, will this result in a release of a chartered vessel? Or do you plan to add 1 additional vessel to your fleet?

[John Evans, executive]

At the moment, we have work allocated for the vessel that we just acquired, probably drags 2.5, 3 years. So at the moment, we would not be releasing anything that we have on the contract at the moment. Again, the flexibility of having quite a bit of charter tonnage in as we can flex up and down as we see. And we also have options on a number of those charters. So we will take it as we see in market, but the acquisition was backed by the work that we had for the asset.

[Operator]

We'll now take our next question. This is from Kate O'Sullivan from Citi.

[Kate O'Sullivan, analyst]

The first one is on the subsea prospects slide. It indicates you've many more significant project opportunities in Brazil. So just wondering at what point could you see your exposure to Brazil being relatively full, that geographical exposure? And in terms of capacity to win new awards in subsea and conventional at the scale of the recent Brazil awards, could you help me understand how much capacity you have to do this? So do they get added at the back of the queue for 2027 as such? And related to that, if you could just give an update on outlook for opportunities over the rest of the year for awards?

[John Evans, executive]

Okay. Yes. The prospect page that we show in the quarterly earnings release is looking very positive and looking very full. As you quite rightly point out that Petrobras have the large group of projects in the hopper at the moment, and they're in in-house for tender, a number of those as we speak. Again, some of these work sequentially. So as we finish something like Bacalhau, we would be looking to start the new award that we have, Buzios 9. So we need to remember that these projects cover multiple years. So for us, at the moment, we are working our way through how they fit together in our capability and how does it fit in terms of asset allocation inside the group.

So for ourselves, we are in a good dialogue with Petrobras about the timing, which we're doing it. And also, we have a supply chain that needs to work behind us or our competitors also need the same supply chain. So the timing of how the Buzios 10, 11; Atapu 2; Sépia 2 putting together is probably work in progress for the industry. But again, we are certainly putting our front foot forward there on those opportunities.

I think in terms of between now and the year-end, one comment I'd make, which is quite clear to everybody is that each quarter goes up and down in terms of volume of work that's coming in. But we, again, see opportunities for Stuart to win business to bring some good quality backlog in before the year-end as well as some further subsea opportunities coming into the market and will be awarded to the market by the end of the year. So for ourselves, we're reasonably comfortable that we will replenish work that we burn off this year very clearly and that we will take work in that suits our profiles in the out-years in '26, '27, and some of this will go into '28 in the due course.

[Operator]

We will now take our next question. This is from Victoria McCulloch from RBC.

[Victoria McCulloch, analyst]

First one on the subsea and conventional business. How much of -- you talked about this being a mix shift in getting a higher margin sequentially, how much do you consider to still be lower margin work within the portfolio of backlog that the subsea business is working on?

And the second one, maybe a certainly bigger picture for John. What was the biggest challenge in managing this record backlog? And how do you plan to mitigate that for the business on a medium-term basis?

[John Evans, executive]

Victoria, I think your second question was one that was asked at the Vigra Investor Day that we did last month. As I mentioned then, I think supply chain, managing a supply chain is very important. And as we answered the question a month ago, we have decades long relationship with our supply chain. We have long-term relationships with each of these vendors that are important to us. And we also very much bring them involved during the tender and in the run-up to these tenders to make sure we understand their capability, their capacity, their ability to meet the specifications. So again, working our supply chain closely with us, having a clear understanding of what drives them and what drives us.

In terms of assets, we own the last bulk of our assets. So, therefore, that asset allocation of our own fleet is within our gift to do that. So a very strong relationship with a good supply chain is the key. And we continue to find that, that long-term investment in relationships and alignment of objectives is what's good for us and good for our clients and good for our suppliers. So for us at the moment, that's how we view the supply chain and the biggest challenge there for us.

Could you just repeat your first question again for me, just to make sure I answer it correctly?

[Victoria McCulloch, analyst]

Sure. Just on the subsea and conventional business, you talked about the mix shift and on moving margins higher, how much of the remaining work in that portfolio do you see as lower margin? Or is it simply an evolution of incrementally moving higher?

[John Evans, executive]

Well, just to give you a sort of rough indication out of our $12.5 billion of backlog, only $0.5 billion was awarded to us before 2021 and before that. So again, we're starting now. The vast bulk of our backlog is '22, '23, '24 vintage. And as we've discussed quarter-on-quarter, the quality gets better as each new slice of work comes in.

[Operator]

[Operator Instructions] We will now take our next question. This is from Richard Dawson from Berenberg.

[Richard Dawson, analyst]

And just following up on that margin comment, when you look at the new projects that are coming into your backlog now and then also on the bidding prospects, are you still seeing those margins increasing? And just trying to get a sense of sort of how high margins can go as given, obviously, guidance of margins above 20% in 2026. Is there still sort of further we can go on these new projects?

And then maybe just a question on the order intake, obviously, very strong for the quarter. Escalations maybe took a bit of a dip lower. I appreciate this has been discussed in prior calls, but if you could maybe give us some sort of color on what was driving those margin -- that escalation is a bit lower for this quarter. And is that sort of a more normal level going forward?

[John Evans, executive]

Every bid that we submit is effectively an opportunity for us to understand the pricing in the market, and that's what we do. Every project is looked at individually. We put our margin expectations into every discussion we have with the client. And it allows us to understand the way we go.

At the moment, we still are in a place where the 3 very large players in this sector, and each of us are taking on substantial volumes of work. So the pricing is strong and good in the market as we see, and we will continue to explore that. We've seen a couple of projects recycled, but equally, as you've seen in the first part of this year, some of the projects that were put to recycle are now back with such integration alliance such as this and then Bay du Nord to, again, see if we can get those to sanction now with a very firm supplier involvement through Subsea integration alliance. So I think the answer is every opportunity that we have to understand what our pricing abilities are. It is what we will do, and we will continue to do so.

In terms of escalations, in our escalations, it is as of timing on different projects, different mechanisms we have in contacts to get inflation indices to kick in and such like, and they generally land on the anniversary or different contracts and such like. So I'm not unduly concerned about they will always be a bit lumpy as to how those come through, and they're generally contractual mechanisms or changes that we agree with clients as we go through. So for ourselves, we don't look at that too tightly each quarter because it's just the facts and circumstances of the particular quarter that we're in allows us then to either conclude those escalations or not.

[Operator]

[Operator Instructions] There are no further questions at this time. So I will hand back to the speakers. Thank you.

[John Evans, executive]

Well, thank you very much. I know today is a very, very busy day with all 3 of us announcing our figures today, and I'm sure there's a lot of activity from the analysts and our shareholders today. But thank you very much for joining Subsea 7 for our Q2. Most of you also joined us at our Investor Day last month. So thank you again for making the time to join us. That was an exciting and interesting day for all of us to share our plans and what we can deliver for this market.

We will again talk to you in Q3, and we'll give you an update of how we're seeing both our markets, which we see as being very strong, continue to develop. So hopefully, you have some time off this summer, and we'll talk again in our Q3 figures. Thank you very much.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.