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Edited Transcript of AKER.OL earnings conference call or presentation 14-Feb-20 8:00am GMT

Q4 2019 Aker ASA Earnings Call

Oslo Feb 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Aker ASA earnings conference call or presentation Friday, February 14, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Øyvind Eriksen

Aker ASA - President & CEO

* Svein Oskar Stoknes

Aker ASA - CFO

* Torbjørn Kjus

Aker ASA - Chief Economist & Head of IR

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Conference Call Participants

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* Chr. Frederik H. Lunde

Carnegie Investment Bank AB, Research Division - Head of Research of Norway, Head of Energy & Utility, and Financial Analyst

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Presentation

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Torbjørn Kjus, Aker ASA - Chief Economist & Head of IR [1]

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Hello, everyone. And good morning. Welcome to Aker's Fourth Quarter and Preliminary Annual Results for 2019. We will start today's presentation with Aker's President and CEO, Øyvind Eriksen. He will walk you through the highlights in the quarter and the development of our Industrial Holdings portfolio. Aker's CFO, Svein Oskar Stoknes, will then go through the financial investment portfolio and the fourth quarter and annual accounts in more detail. After the presentation, we will open up for Q&A.

And with that, I hand it over to Øyvind.

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Øyvind Eriksen, Aker ASA - President & CEO [2]

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Thank you, Torbjørn. And good morning, everyone, and welcome to this presentation of Aker's Fourth Quarter and Annual Results for 2019. Let me start with some brief comments on Aker's financial performance for the quarter and for the full year behind us. 2019 became a year of solid financial return for our shareholders. Aker's net asset value ended the year at NOK 50 billion compared with NOK 41.7 billion at the end of 2018, representing a return of 23.7% when including dividend paid.

Aker's share price adjusted for dividend increased 22.5%. This compares with a 16.5% increase in the Oslo Stock Exchange Benchmark Index. Aker's liquidity reserves stood at NOK 6.6 billion, including NOK 3.7 billion in cash. We received a record high NOK 3.5 billion in upstream cash, and we paid NOK 1.7 billion divided to our shareholders.

And finally, Aker's Board of Directors proposes a cash dividend of NOK 23.5 per share for the fiscal year 2019, equal to 3.5% of net asset value and a 4.3% direct yield as per closing values of 2019.

After a weak third quarter for Aker's portfolio, the fourth quarter came in a lot better. The net asset value increased NOK 6.9 billion or 16%, while the share price increased 12%.

Let's take a closer look at the key changes for Aker's net asset values for 2019 and for the past quarter on Slide 2. For 2019, the number that stands out is at NOK 12.7 billion return on our ownership in Aker BP, which equals about NOK 170 per Aker's share. Most of the positive return took place in the fourth quarter with a NOK 7.1 billion value increase on our shareholding in Aker BP. Our oil service companies lost value during 2019, mainly due to low order intake and an industry segment struggling with headwinds. Negative value changes in Ocean Yield, Akastor and Kvaerner totaled NOK 245 million for the quarter.

As outlined on Slide 3, the Aker share increased to NOK 81.5 per share in 2019 from NOK 462 per share to NOK 543.5 per share. The shareholders have, in addition, received NOK 22.5 per share in cash dividend. The annual shareholder return last year, hence, equaled 22.5%. Return for the fourth quarter alone became 12.3%. Aker's gross asset value as per 31st of December was NOK 61.9 billion, of which the Industrial Holdings portfolio represented 88%. When deducting liabilities of NOK 12 billion, the value adjusted equity ratio prior to allocation of dividend was 81%. This high equity ratio is a strategic choice by Aker that enables flexibility for new investments.

Slide 4 illustrates that in addition to a very high equity ratio, Aker maintains financial flexibility through a solid liquidity reserve, which stood at NOK 6.6 billion at the end of the year. Cash amounted to NOK 3.7 billion of the said liquidity reserve. The 2019 full year upstream dividend received from the portfolio was a record high NOK 3.5 billion. When including dividends received from financial investments, the upstream dividend receivables was, as I said, all-time high, NOK 3.5 billion. Aker BP stood for NOK 2.65 billion of the said dividend, while NOK 658 million was received from Ocean Yield.

Slide 5. The Industrial Holdings portfolio currently consists of 8 assets, 5 listed and 3 nonlisted companies. Aker's gross asset stood at NOK 61.9 billion as per year-end, which means that our listed industrial assets stood at 82.1% of that value. The nonlisted companies, Aker BioMarine, Aker Energy and Cognite are reflected at book value in Aker's net asset value reporting. Despite this fact, and even though 90% of the net asset value is represented by listed assets and cash, the Aker share trades with a discount to the net asset value. We believe the true value of the nonlisted portfolio is significantly larger than the current book value, hence, representing an additional upside for the Aker share. As per year-end, exploration and production accounted for 68% of our gross values compared to 66% in the third quarter. Oil services decreased to 7%, maritime assets decreased to 9% and marine biotech decreased to 5%.

Let us then dig somewhat deeper into the listed Industrial Holding portfolio. You see the companies here on Slide 6. Since the merger with BP Norway, almost 4 years ago, Aker BP has been the main engine in our development, both financially and industrially. The favorable impact on our net asset value and upstream cash flow has already been highlighted. This year, Aker BP is expected to pay USD 850 million in total dividend, of which Aker will receive 40%. The upstream cash flow from Aker BP is based on a predictable plan for returning value to shareholders through increasing dividend payments. This plan reflects the underlying value creation that is taking place as Aker BP matures its significant resource base into profitable projects. Remember, the company is looking to almost triple its production from 2019 to 2026. We believe it's in all shareholders' best interest to see a predictable, steadily increasing dividend distributions through the investment cycle, not a policy optimized for the cash flow in any given year.

In addition to attractive and increasing dividend payments, the main value drivers in Aker BP going forward are continued growth in production, both organically and inorganically, combined with enhanced operational excellence with a commitment to reduce costs and emissions per barrel further down from current levels that are already highly competitive. The combination of high growth, increasing dividends, low costs and low emissions sum up in an attractive value proposition to us and other investors. This has made Aker BP investment-grade and enabled the company recently to issue USD 1.5 billion in U.S. bond loans at attractive terms.

Aker Solutions, Akastor and Kvaerner is the opposite story. All affected our financial performance negatively last year. Aker Solutions and Kvaerner were hit particularly hard after they presented their respective fourth quarter results. Both companies are operating in industry segments, which are expecting to be muted for a long period of time. And hence, investors have lost confidence in the sector. We are challenging our oil service companies, both on what actions they should take to adjust their businesses to the said market realities and about what new transactions or business opportunities they can pursue in order to be less exposed to oil and gas uncertainties going forward.

Ocean Yield is our second-largest source of upstream cash flow, and the company continues to produce a positive cash flow. The employment of the FPSO, thereby one, is a main value trigger, and hence, a top priority. Alternatives are being explored, including discussions with third parties who have already expressed interest in the FPSO.

Let me then continue to Slide 7 and our nonlisted industrial portfolio, which operates in 3 segments: E&P, industrial software and marine biotech. The dialogue and collaboration between Aker Energy and the authorities in Ghana has been very constructive in recent months. In December, the Ghanian Parliament amended the regulatory framework to increase oil and gas activity in the country, and an amendment to the Aker Energy's petroleum agreement was approved by the same parliament. The amendment clarified existing rights in the original petroleum agreement, and Aker Energy will be allowed to keep the contract area as one development and production area. Another important amendment was a license extension from 2036 to 2040, with an option for Aker Energy to extend further. These amendments enables Aker Energy to take a holistic and long-term approach to the development and production of the resources. This will maximize value creation both for the people of Ghana and the Aker Energy shareholders. The initial priority is to make the Pecan development more economically robust on a stand-alone basis. The Pecan reservoir consists of 450 million to 550 million barrels of contingent resources already discovered. The progress achieved in the fourth quarter bodes well for the next milestone for the company, which is to mature the PDO to approval and make a final investment decision in the partnership without a necessary delay. For our industrial software company, Cognite, customer deployments are progressing well. The company is in an advanced commercial discussions with several of the world's largest oil and gas companies. One IOC has already signed the contract and negotiations continue with other companies in the same category. Cognite also pursue a solid pipeline of potential new customers in power and utilities, manufacturing and shipping. The company recently opened an office in Tokyo, following the opening of offices in Texas last summer. Cognite, hence, continues to scale into new geographies and to establish itself as the fast-growing software provider for digitalization of asset-intensive industries.

The company's organization now stands at about 280 employees compared with about 120 employees a year ago. Commercial discussions with Saudi Aramco continue to progress following the October 2019 announcement to establish both a bilateral collaboration with the world's largest producer of energy and a joint venture with Aramco for other business opportunities in the Kingdom of Saudi Arabia.

Aker BioMarine has, during 2019, seen growing revenues and EBITDA. The company has now undertaken necessary investments of the past few years to utilize their operational leverage. Aker BioMarine owns and controls the entire value chain from real harvesting, fleets operating in the antarctic, logistic operations in Montevideo and krill oil factory in Houston. Revenues are expected to grow going forward by the development of existing segments, but also new verticals like the human protein consumer market. We're thrilled the right protein has significant benefits of a current protein sources. Hence, Aker maintains a positive outlook for Aker BioMarine's core products and markets.

This ends my part of the presentation this morning. And I now pass on the word to our CFO, Svein Oskar Stoknes, who will take you through Aker's financial investments and our financial statements.

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Svein Oskar Stoknes, Aker ASA - CFO [3]

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Thank you, Øyvind, and good morning. I will start out spending a few minutes on Aker's financial investments before I go through the fourth quarter results in more detail. The financial portfolio accounted for 12% of Aker's total assets or NOK 7.7 billion, which is up NOK 1.3 billion from the previous quarter. This was mainly due to the increase in cash holdings in the quarter. As before, the main components on the financial investments are cash, listed financial investments, real estate investments and interest-bearing receivables, all of which I will now go through in some more detail.

Starting with cash. Our cash holdings represented 6% of Aker's gross asset value or NOK 3.7 billion. This is up NOK 1.1 billion from the previous quarter. The main cash inflows were dividends from primarily Aker BP and Ocean Yield of the equivalent to total NOK 873 million. In addition, our cash holdings increased by a net amount of NOK 1.1 billion, following the issuance of the new Aker 15 bond at very attractive terms and the partial repurchases of the Aker 10 and Aker 13 bonds.

The main cash outflows in the quarter were NOK 442 million participation in the Ocean Yield equity issue, and the investments in Abelee and REC Silicon with a total of NOK 180 million. Payments in the quarter for operating expenses and net interest were NOK 166 million. Our liquidity reserve at the end of the fourth quarter was NOK 6.6 billion, including undrawn credit facilities of NOK 2.8 billion.

Listed investments included in our financial portfolio represented about 2% of Aker's total assets at the end of the quarter or NOK 917 million. The main event in the quarter was the acquisition of the 23% ownership interest in REC Silicon for NOK 85 million. There was an opportunity to take a position in the company that Aker recorded as an interesting option. At this time, we do not have more information about the company and what is known in the market. At the end of the quarter, the value of the investment had increased to NOK 172 million. Aker has not yet decided on the next steps and will revert with more information when the time is right. The remaining value change in our listed investments is mainly explained by a value increase of Philly Shipyard of NOK 29 million. Aker also posted a dividend income of NOK 22 million from American shipping company and received NOK 20 million in proceeds from the divestment of Cxense.

Next, real estate and other financial investments. Combined, the 2 represented 5% of Aker's gross asset value or NOK 3.1 billion in total. In the quarter, a NOK 35 million loan was issued to FP Eiendom, and the book value of the real estate investment increased to NOK 603 million. Other financial investments is mainly comprised of receivables against Aker BioMarine and Estremar Invest, airplanes and unlisted equity investments. The NOK 61 million increase in book value in the quarter is mainly explained by a NOK 95 million investment in Abelee, partly offset by a NOK 59 million partial write-down of the investment in Align.

Then let's move to the fourth quarter financial highlights for Aker ASA and holding companies. Let me then start with the balance sheet. Please note that the figures on this slide are after a dividend allocation of NOK 23.5 per share. The book value of our investments was up NOK 415 million in the quarter, mainly explained by the participation in the Ocean Yield equity issue. Total book value of our assets was NOK 26.7 billion. And in our accounts, we use the lowest of historic costs and market values.

Share prices of our investments continue to be volatile. And this quarter, we faced a positive fair value adjustment of NOK 6.2 billion, bringing it up to NOK 35.3 billion. This is NOK 7.7 billion higher than at year-end 2018. The gross asset value stood at NOK 61.9 billion at the end of the quarter. Our total interest-bearing debt was NOK 11.6 billion, which is up NOK 1 billion from the previous quarter due to the Aker 15 bond issue, partially offset by Aker 10 and Aker 13 bond repurchases of in total NOK 350 million and by foreign exchange adjustments. The remaining Aker 10 and Aker 13 bonds of in total NOK 1.35 billion will be settled in the second quarter this year. As before, we have significant headroom with regards to our debt covenants, and we had a net interest-bearing debt of NOK 6.7 billion at the end of the fourth quarter, down from NOK 6.8 billion in the previous quarter.

Then to the income statement. The operating expenses for the fourth quarter were NOK 64 million. The net value change in the quarter was negative NOK 63 million, mainly explained by a partial write-down of the investment in Align and negative value adjustment of our direct investment in Akastor. Net other financial items were positive NOK 847 million in the quarter, mainly explained by dividend income of NOK 880 million. The profit before tax was NOK 711 million in the quarter.

Thank you. That was the end of today's presentation, and we will now open up for questions.

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Torbjørn Kjus, Aker ASA - Chief Economist & Head of IR [4]

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So operator, if you can then open up?

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Questions and Answers

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Operator [1]

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(Operator Instructions) From Frederik Lunde from Carnegie.

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Chr. Frederik H. Lunde, Carnegie Investment Bank AB, Research Division - Head of Research of Norway, Head of Energy & Utility, and Financial Analyst [2]

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I was wondering if you could give a bit more flavor on the progress in Ghana. I realize you'd probably don't want to commit a time frame. But is this a potential for FID this year? Or is that completely out of the question?

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Øyvind Eriksen, Aker ASA - President & CEO [3]

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We're making a good progress with the authorities in Ghana, and we're now sitting around the same table, discussing and resolving the various issues in order to progress and have the PDO approved without unnecessary delay. And I have indicated time lines before and missed the targets. So I should be cautious. But the joint ambition is definitely to have the -- both the PDO and the investment decision during the course of this year.

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Chr. Frederik H. Lunde, Carnegie Investment Bank AB, Research Division - Head of Research of Norway, Head of Energy & Utility, and Financial Analyst [4]

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Great. Could you also give some thoughts on the oil service portfolio? What are the big changes, streamlining back a few years? And now the market is quite different. Are you sort of rethinking or evaluating the structure of our role with regards to Aker Solutions currently and potentially also our customer?

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Øyvind Eriksen, Aker ASA - President & CEO [5]

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Our oil service and portfolio, Aker Solutions in particular, have still great capabilities, but the market caps are frustrating low. And that's partly due to external factors, partly due to timing issues impacting order intake, but it's also partly due to operational excellence and performance. So Aker is now challenging the management teams in all the 3 companies, Aker Solutions, in particular, on what actions to take. And we will explore any opportunity available to shift the current trends and get also value creation back on track.

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Operator [6]

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(Operator Instructions) No further questions at this time. I would now like to turn the call back to the host for any additional or closing remarks.

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Torbjørn Kjus, Aker ASA - Chief Economist & Head of IR [7]

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Okay. If there are no further questions, I think we will conclude the presentation for today. And we take the opportunity to thank you all for attending this morning. Thank you.