Aker Solutions ASA (AKRTF) Q2 2023 Earnings Call Transcript

Aker Solutions ASA (OTC:AKRTF) Q2 2023 Earnings Conference Call July 13, 2023 3:00 AM ET

Company Participants

Preben Orbeck - Head, Investor Relations

Kjetel Digre - Chief Executive Officer

Idar Eikrem - Chief Financial Officer

Conference Call Participants

Victoria McCulloch - Royal Bank of Canada

Haakon Amundsen - ABG Sundal Collier

Martine Kverne - Nordea

Erik Aspen Fossa - Carnegie

Christopher Møllerløkken - SpareBank 1 Markets

Nikhil Gupta - Citigroup

Daniel Thomson - BNP Paribas Exane

Preben Orbeck

Good morning. And welcome to Aker Solutions Presentation of our Second Quarter and Half Year Results. My name is Preben Orbeck and I am 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. After the presentation, we have time for questions. Those of who are following the audio cast can submit your questions via the online platform.

And with that, I give the floor to Kjetel Digre.

Kjetel Digre

Thank you, Preben, and welcome, everyone. Let me take you through the highlights of the quarter. Firstly, the overall message is that we continue our positive development with increased top and bottomlines in the quarter compared to the same period last year. Our second quarter revenue was NOK14.2 billion, our EBITDA was NOK1.2 billion with a margin of 8.2% and we delivered NOK12.3 billion of order intake or 0.9 times book-to-bill and our backlog ended at close to NOK100 billion. Our financial position remains highly robust with a net cash position of NOK7.7 billion.

Secondly, we are progressing well with our transformation. During the quarter, we have successfully implemented our new organizational model reflecting a fine tuning of our strategy to better enable operational synergies. We will not make any fundamental changes to our financial reporting segments, but please note that the former EMM segment has been renamed Life Cycle.

Talking about the organization. I am very happy to see that our recruitment efforts are going well with about 1,250 new employees being welcomed into our global organization during the first half of 2023. This means that we are well on track towards our target of recruiting 2,000 new employees for the full year.

The process of establishing the new Subsea joint venture with SLB and Subsea 7 is progressing according to plan with expected closing during the second half of 2023 given regulatory approvals.

To ensure a flying start for the new entity, we are putting a lot of efforts also into joint integration planning, which is going very well with participation of key resources from each of the parties.

I also want to highlight our digital transformation. During the quarter, we launched the Aker Digital Alliance together with our partners Aker BP, Aize, Cognite and Accenture. By bringing together industry domain expertise with digital solutions and easy access to data, the ambition of the Digital Alliance is to radically transform how the industry executes capital projects and operations.

Thirdly, the outlook for Aker Solutions remains positive. The high order backlog mainly made up of projects to be executed in the well-proven alliance model with Aker BP with balanced risk/reward profile and upside potential through shared incentives, offers good visibility on activity levels going forward.

We see high demand for our services and we have a solid tender pipeline of opportunities across our market segments. This goes for both oil and gas and renewables markets and we continue to be very selective on which projects to take on.

Let us now move over to some operational highlights of the quarter. Overall, we are seeing high activity levels across our project portfolio. We are still in the early phase of our Aker BP portfolio of projects awarded in the fourth quarter last year and approved by the Norwegian Parliament in this quarter.

We are progressing well on the large platform projects with high activity in detailed engineering and procurement, as well as preparing the yards for the construction phases. Our Life Cycle business has also started the work for Topside Modifications on existing assets like the Skarv FPSO to ensure tie-in of new Subsea fields. Our Subsea deliveries for the Yggdrasil and Skarv Satellites projects are also progressing to plan with high activities specifically on procurement.

Within FPSOs, we are currently working on two major projects, namely, Johan Castberg and Rosebank developments for Equinor in Norway and the U.K. On Castberg, activities levels remained high with hookup work between hull and topside ongoing at our Stord yard.

For the Rosebank project, we are progressing well on engineering and procurement and the vessel is on its way to our joint venture partner, Drydocks World for fabrication and assembly.

Within Life Cycle, activity levels remained high, both within our more traditional maintenance and modification work, as well as our electrification projects on the Norwegian Continental Shelf.

In Brunei, we have recently celebrated the 10-year anniversary with Brunei Shell Petroleum. This is an example of the value of working in long-term relationships with key clients, decarbonization is high on the agenda in the industry and we are currently working on several large electrification projects with the ambition to significantly reduce carbon emissions.

For the Troll West Electrification project, we have recently started the fabrication of the last module at our yard in Egersund, while the Draugen and Njord projects are progressing well in the early stages of engineering and procurement.

Subsea has delivered another strong quarter operationally and financially with high activity across the project portfolio. We are progressing well on the Jansz, Subsea Gas Compression project for Chevron in Australia, as well as own Subsea production system and umbilicals deliveries in Norway, South America and West Africa.

Within renewables, we are executing several landmark projects within offshore wind and CCS. Some of these first Aker [ph] projects are challenging both from an operational and commercial perspective.

Within offshore wind, we have now delivered and installed all the 11 floating wind foundations on Hywind Tampen and are currently working on HVDC projects for the U.K. and U.S. markets.

Within carbon capture and storage, we continued to have high activity on the Brevik Carbon Capture and the Northern Lights Onshore Terminal. The Subsea trees for CO2 injection and storage on Northern Lights were successfully installed in early May, making this a milestone for the development of a complete CO2 value chain in Norway.

Lastly, I want to highlight our strategic focus to build the Engineering Consultancy business, where we are seeing strong demand for our services. So far this year we have delivered almost 80% year-on-year increase in the number of studies we are engaged in. The interest is coming both from existing and new clients in the energy market, as well as policymakers and governmental organizations.

Our engineering consultancy business is engaging in new markets with a broad set of scopes. For example, in areas such as electrification, hydrogen, carbon capture and storage, offshore wind, as well as in combinations of these in new integrated energy systems. Through early engagement in these emerging industries, we are already gaining new marketing sites, accessing new customers and growing our market position.

Let us now have a look at our main orders during the quarter. In the Renewables and Field Development segment, we booked an order intake of NOK6.7 billion in the second quarter. This is mainly related to growth in existing and newly awarded projects.

In the Life Cycle segment, we recorded about NOK900 million in order intake, also related to growth in existing projects and frame agreements.

Our Subsea segment reported an order intake of NOK4.3 billion. The main awards in the quarter were TotalEnergies’ Moho development in Congo and Exxon’s Uaru field in Guyana. In June, we also signed the LOA and later EPC contract for the Eirin development in Norway for Equinor.

Let’s now have a look at our tender pipeline. Aker Solutions offerings are in growing demand with a tender pipeline of about NOK100 billion. Within oil and gas, a substantial step up in capital spending is expected in the years to come. Oil demand continues to grow across the globe and increased investments are needed to ensure sufficient supply from reliable resources.

We are also seeing our customers focusing even more on decarbonization, both for greenfield developments during operations and for green recycling of existing assets at the end of the lifetime. These trends are positive for Aker Solutions, cementing our position as a key partner in creating a more sustainable oil and gas industry.

Within renewables, we remain highly selective on which projects to take on board with a continued focus on risk management and commercial terms. The global ambitions within renewables remain very high, creating major activity across the industry for decades to come to ensure climate goals and energy security.

We have commented previously about the Broken [ph] model within offshore wind where highly competitive auctions, coupled with high cost inflation from the Russian innovation of Ukraine have driven margins for developers and the supply chain down to unsustainable levels.

Over the past few months, we are seeing signs of change. New offshore wind auction prices are clearing at higher levels as seen recently in Ireland. Operators such as Equinor, Shell, Ocean Winds and Ørsted are asking local authorities and regulators to renegotiate terms and conditions to reflect cost inflation and the supply chain is requiring that cost inflation risk is properly reflected in contractual terms.

To develop a successful renewables industry, we need continued collaboration between authorities, developers, investors and the whole supplier industry. This requires changes to market design, auction parameters, permitting and a more collaborative way of working. We see an appetite for change already in the market towards more sustainable commercial models across the whole offshore wind sector, but it will take some time to turn around.

This takes me to the general outlook for Aker Solutions. I am pleased that we continued to deliver on our financial targets, while growing the business and developing our organization. Our financial position is solid and will be further strengthened with the closing of the Subsea joint venture expected in the second half of 2023.

Furthermore, the new entity will be an important contributor to our business through the 20% ownership in a larger and stronger Subsea company. Aker Solutions is well positioned within the businesses we already serve and to seize opportunities in rapidly changing energy markets.

With our large order backlog, we have 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, in models with balanced risk/reward profiles that have upside potential through shared incentives.

We continue to see volatilities in the geopolitical landscape and in global financial markets and we actively manage our supply chain. Our tendering activity remains high across segments, which enables us to be highly selective in which opportunities we target.

And with that, I hand the word over to Idar who will take you through the numbers in more detail. Thank you.

Idar Eikrem

Thank you, Kjetel. I will now take you through the key financial highlights of the second quarter, the half year results, 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 second quarter revenue was NOK14.2 billion, up from NOK10.6 billion a year ago. This represents about 34% growth year-on-year. For the first half of the year, revenue reached almost NOK26 billion, which is 36% higher than the same period last year.

The underlying EBITDA in the quarter was NOK1.2 billion, up from NOK691 million a year ago with a margin of 8.2%. For the first half of 2023, EBITDA was NOK2.1 billion, up from NOK1.3 billion the same period last year. This was driven by continued good progress on our project portfolio, particularly within Subsea.

The underlying EBIT for the quarter was NOK867 million, up from NOK418 million a year ago. And the net income, excluding special items increased to NOK571 million from NOK231 million a year ago, representing a growth of almost 150%. Earnings per share was NOK1.14, up from NOK0.46 a year ago.

Let us now look at our financial position. We continued to have a solid net cash position, which increased to NOK7.7 billion in the quarter and our total liquidity buffer was NOK11 billion where almost NOK8 billion was cash.

For the second quarter, we delivered strong cash flow from operation of NOK1.8 billion. This was mainly driven by solid operating margins, as well as the favorable working capital development. Our working capital improved to minus NOK5.8 billion at the end of the quarter, driven by high activity levels and prepayments on ongoing projects. We expect working capital to remain lower for longer on the back of recent large order intake and this is expected to trend in the range of around negative NOK4 billion to negative NOK6 billion.

Now let’s look at our cash flow development in the quarter. As mentioned, our financial position is solid and has improved during the quarter. Operational cash flow in the period was NOK1.8 billion, of which NOK1.2 billion was EBITDA and improvements in working capital accounted for about NOK800 million.

During the quarter, CapEx was NOK434 million, which is in line with our previous guiding. Financing excluding dividends and bond repayments was NOK253 million and dividend was NOK489 million, in line with our ordinary dividend policy. Lastly, we also had exchange rate effect contributing about NOK250 million in the period.

Let us now look at our segment performance during the quarter. For Renewables and Field Development, the second quarter revenue increased to NOK5.4 billion, up from NOK4 billion same period last year.

The underlying EBITDA in the quarter was NOK208 million, up from NOK76 million a year ago with a margin of around 4%. The margin continued to be affected by project in early phases of execution without margin recognition, as well as negative impact related to legacy renewable projects in the portfolio. We expect margins to gradually pick up over the next quarters as recently awarded project will start reaching profit recognition phase in late 2023 and mainly into 2024.

The order intake in the quarter was NOK6.7 billion or 1.3 times book-to-bill. This was mainly driven by growth in existing and newly awarded projects. The secured backlog remains record high at more than NOK51 billion. Based on the secured revenues and backlog, we now expect the revenues in this segment to increase by about 45% in 2023 from 2022 levels.

For the Life Cycle segment, the second quarter revenue NOK3.3 billion. This was slightly up from the NOK3.2 billion a year ago, driven by continued good progress on ongoing work. The underlying EBITDA in the quarter was NOK164 million, down from NOK199 million last year and with a margin of 4.9%.

The order intake, which is generally quite lumpy was around NOK900 million or 0.3 times book-to-bill in the quarter. The backlog remains very solid around NOK21 billion, which is around 2 times the annual revenue in 2022 in this segment. We expect the life cycle segment to continue at close to 2022 levels in 2023.

In the Subsea segment, the second quarter revenue was NOK5.3 billion, up from NOK3.4 billion last year a growth of almost 60% year-on-year. The underlying EBITDA in the quarter was NOK883 million with a margin of 16.6%. This is yet another strong quarter with solid underlying performance in our Subsea business.

The order intake in the quarter was NOK4.3 billion or 0.8 times book-to-bill. The backlog in Subsea is around NOK25 billion. We now expect revenues in Subsea to increase about 45% in 2023 compared to 2022 levels.

Now over to order intake and backlog. In the second quarter, we booked an order intake of NOK12.3 billion. Our backlog is now -- is still at around NOK100 billion, which give us a very good visibility for activity levels for several years to come. This is a very good position to be in, and as Kjetel mentioned, our focus is to continue delivering predictable and solid execution to harvest upside potential and incentives.

Now to sum up. In the second quarter, we continued to deliver strong financial and operational performance and we have a solid financial position. This is mainly driven by strong performance within our oil and gas projects.

Based on our secured backlog and market activity, 2023 revenue is now expected to be up by around 30% from 2022. The underlying EBITDA margin continued to be seen up from 2022 levels with several large projects expected to reach profit recognition in late 2023 and mainly in 2024.

Working capital is expected to remain lower for longer in the range between negative NOK4 billion to negative NOK6 billion over time. The outlook for the company and for our industry is very positive and Aker Solution is in an excellent position to take advantage of the opportunities ahead.

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

Question-and-Answer Session

A - Preben Orbeck

Thank you. The first question comes from Victoria McCulloch. Could you give us some color on the remaining steps for completing the Subsea joint venture?

Kjetel Digre

Yeah. As we mentioned in the presentation, the process is running according to plan with expecting closing in the second half of this year, pending the regulatory approvals and regulatory approvals takes the normal time and there are no surprises or red flags at all so far.

And then also to the whole JV process, as I mentioned, the integration planning that we do together with the other parties is also running very well, proving that these are two organizations that will really fit well together and create an excellent company and also make sure that we get a flying start when the closing is happening later on this year.

Preben Orbeck

Then the next question comes from Haakon Amundsen. Two questions for him this morning. If we start with the first, Subsea is performing very well financially, can you give some color on how your JV partner has performed since the deal was agreed to understand what the EBITDA run rate in the JV is currently?

Idar Eikrem

Yeah. Thank you Haakon for the question. I think you need to address that question to SLB. But as you can read from their earnings releases as well, they are also doing well in Subsea and are delivering good margins on their portfolio also.

Preben Orbeck

Second question from Haakon. It appears that the margin improvement in Renewables And Field Development is slipping a bit into 2024. Is this driven by low profitability on renewable projects or by different progress on the recently awarded projects?

Idar Eikrem

Yeah. As you all know, we had the large order intake towards the end of last year and the portfolio will gradually develop and as we pointed to in the presentation, we expect some of those large projects to reach sort of profit recognition phase at -- in the later part of 2023 and into 2024. Renewables is a drag on the margin as we have communicated before.

Preben Orbeck

Moving on to a question from Victoria McCulloch. You mentioned remaining discipline -- remaining disciplined on tendering. Could you give us some color on this, is this simply price related or balancing the company’s availability and capabilities?

Kjetel Digre

Perhaps I can start on that Idar. The tendering discipline is about mainly dimensions in what we do and how we deliver, and it really starts with using the best version of ourselves securing maturity of the projects at the stage where we are committing to executing.

And we are known to do that in a very well way in oil and gas and we are working on that now as well to establish delivery models, which ensures that kind of maturity and also standardizing concept.

So that’s one dimension. The other is to, with the known clients from oil and gas but also new ones, be sure that we select the right kind of clients that are focused on common understanding of the risk picture and how we share that through terms and conditions, and then also we like to work with clients that have a longer horizon so that we can continuously work on improving both collaboration and deliveries together.

And then, obviously, the third dimension is to make sure that the terms and conditions are such that risks are shared -- understood and shared in a proper way so that we are taking care of the risk that we can actually, which we can actually influence and safeguard and then clients or also other partners are takes the remaining risk. Anything to add, Idar?

Idar Eikrem

No. I think that last one to manage the supply chain risk is very important and these days with the price increases that we have seen and also longer validity on the bids, it’s important that we do what we do today, that we push that risk over to the client or update this closer to execution than in a normal situation.

Preben Orbeck

Thank you. Moving over to a question -- a few questions from Martine in Nordea. In terms of the order intake, we see the great order intake rise is partially due to more orders, but also partially due to increasing scope of current orders. Can I just check if for the increase in scope of current orders, would that mean that it comes with lower margins or more pass-through items, is it fair to assume no issues with regards to margins in the order book? And also -- just adding on also for the tender pipeline, can you give some more color on the split between the segments?

Idar Eikrem

Yeah. I can start with the order and the growth that you referred to. There is no reason to sort of assume that it’s passed through with a negative impact on our margin. It’s growth in scope and value of the contract, partly also driven by the cost inflation in the market.

Kjetel Digre

Yes. And to the tendering pipeline, I would say that, our outlook is that, all our segments will experience a growth also in the oil and gas setting where both Subsea, the EMM and also EPC projects is likely to grow, as we mentioned also in the presentation.

For instance, in Life Cycle, we feel that there’s a trend now to upgrade facilities, extend lifetime and also add Subsea tiebacks, which then trigger scope in addition to the electrification trend that is starting on the Norwegian Continental Shelf and might extend to other countries.

And then within renewables, as we say, we are very careful with whom we are tendering for and the job suite on board, but it’s going to grow exponentially in all the sectors that we are engaged in. So that’s really an area where we can control opportunities in a very favorable way in our mind.

Preben Orbeck

Thank you. I guess a follow-up question on the order intake from Erik Aspen Fossa. If you can give some more color on the strong order intake and growth guidance. Is the main -- what is the main driver, is it from increased scope on the projects that were awarded in the fourth quarter?

Idar Eikrem

It’s a combination, and as I mentioned in the sort of the supply chain issue and how to monitor that, we have in several of our contracts also a situation where we update, for instance, procurement and value of orders when we get closer and lock those in, that is part of this cost and value increase that you see in addition to the underlying scope increase in some of the projects.

Preben Orbeck

Thank you, Idar. Moving on to a question from Christopher. I know it’s early, but with the significant growth in 2023 revenue, do you expect this to be a new and higher level for Aker Solutions going forward or do you expect 2023 revenues to be a peak year?

Idar Eikrem

Yeah. We are not giving sort of at this point in time guidance for the next years to come. However, with an order backlog of close to NOK100 billion, you will understand that we are in a good position to deliver also a strong topline in 2024.

Preben Orbeck

Thank you, Idar. Moving on to Nikhil Gupta from Citigroup. Joined a bit late so we could be a bit of overlap on some of the questions. But update on medium-term guidance and where is the major change coming from, especially then on geographical point of view, I guess, is we can focus on. So mainly where is the growth coming from, mostly in Norway or is the growth coming mostly from inter -- other international markets?

Idar Eikrem

Yeah. The strongest sort of is, of course, our home market and the large portfolio that we have in our home market, but we also see growth in our international portfolio.

Preben Orbeck

Moving on to a question from Daniel Thomson. Presumably, given the strengthening offshore outlook, the value of the Subsea business could exceed the implied cash value. This would place a low multiple on the remaining Aker So [ph] business, are there any actions being considered to address the apparent valuation gap?

Idar Eikrem

Yeah. I think it’s -- this is a topic that we will also be happy to come back to at the time when we are closer to the close -- successful closing of the JV transaction and give you a full update on both the potential on the future joint venture in Subsea, as well as remaining part of Aker Solutions.

Kjetel Digre

Yeah. Perhaps I -- also in my presentation we talk about how we are working on transforming and improving the company, which is really on track in all dimensions and the Subsea JV and also the solid financial position we have creates a lot of opportunity to further develop the future Aker Solutions.

Idar Eikrem

And just to remind everybody, approximately 75% of our total order backlog of NOK100 billion is actually within the segments that will continue in Aker Solution and as presented we are working actively to improve and increase margin over times and cash generation over time.

Preben Orbeck

Thank you, Idar and Kjetel. That was the end of our presentation. Thank you all for listening in. We wish you a good summer. Thank you.

Kjetel Digre

Thank you.

Idar Eikrem

Thank you.