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Edited Transcript of AKSO.OL earnings conference call or presentation 23-Oct-19 7:00am GMT

Q3 2019 Aker Solutions ASA Earnings Call

Fornebu Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Aker Solutions ASA earnings conference call or presentation Wednesday, October 23, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Luis Antonio Gomes Araujo

Aker Solutions ASA - CEO

* Ole Martin Grimsrud

Aker Solutions ASA - CFO

* Tove Røskaft

Aker Solutions ASA - Head of Communications & 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

* Glenn Lodden

Nordea Markets, Research Division - Analyst

* Haakon Amundsen

ABG Sundal Collier Holding ASA, Research Division - Lead Analyst

* Terje Fatnes

SEB, Research Division - Analyst

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Presentation

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Tove Røskaft, Aker Solutions ASA - Head of Communications & IR [1]

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Good morning. And welcome to Aker Solutions Presentation of Third Quarter Results of 2019. My name is Tove Røskaft, and I'm Head of Communications at Aker Solutions. With me here today, I have our Chief Executive Officer, Luis Araujo; and our new Chief Financial Officer, Ole Martin Grimsrud. They will go through the main developments of the quarter. We will also have some time for questions and one-on-one interviews with the press after their presentations.

Please note that we have no fire drills scheduled for today. So in case of an alarm, I would like to point out the nearest emergency exits, which is behind you and through the door to the left. Luis, I will now hand over to you.

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [2]

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Thank you, Tove. Good morning, and thank you for joining us here today. I'm happy to say that the third quarter of 2019 was another period of strong execution, very strong execution, strong financial performance and high tendering activity. Let me start with the main developments in the quarter. That's populated with a great number of achievements. So hold onto your seats. The biggest achievement in the third quarter was the opening of Johan Sverdrup field, which happened on the 5th of October, 2 months ahead of schedule and NOK 40 billion below the original budget. This is a major milestone for our key clients, Equinor and Aker BP as well as their partners, but also a major milestone for Aker Solutions. We were the main architect of Johan Sverdrup, involved from an early stage, develop and designing the field solution together with our clients. During the project execution, we took the role as EPMA contractor. We had 1,500 people working on this well Phase I. Following the project from concept development to FEED, fabrication, construction, engineering, installation, and finally, hookup.

You might know the facts, but I have to make here few important ones. Johan Sverdrup will, at peak, be responsible for 30% of the total oil production for Norwegian continental shelf. It has the lowest CO2 emission offshore to date at 0.67 kilos per -- of CO2 per barrel. This is less than 5% of the old average of 18 kilos per barrel. And importantly, a breakeven of less than $20 per barrel. So this is truly an offshore oil field of the future, in terms of cost, quality and CO2 emissions. On our linkage subject, some of you may have list -- heard about the list of Norwegian government about recent cost developments in the project on the NCS. We are proud to say that we are involved in all 8 projects that are currently under budget.

This shows that the operational efficiency improvements we have been talking about since 2015 are coming through to our clients. But Sverdrup was not the only big achievement in the third quarter. We also made good progress on key projects. We celebrated the first oil or Equinor Mariner field in the U.K. in early August. We also celebrated first oil on Utgard, also for Equinor in September. We completed the deliveries of Ærfugl and Skogul in Norway for Aker BP under the subsea alliance ahead of schedule. In China, we celebrated together with CNOOC, the start of the fabrication for Lingshui subsea project. The manifolds for Equinor Troll and Askeladd fields were successfully installed. Also the first subsea template for Equinor Northern Lights project was also installed. And to remind you, this is a groundbreaking project for subsea CO2 storage.

And together with Petrobras, we recently celebrated delivery of a subsea tree #100 to the Brazilian pre-salt fields, an important milestone for Aker Solutions in Brazil. And last but not least, we delivered the first Vectus subsea controls module to Wintershall Nova project. As a reminder, the Vectus Subsea Electronic Module technology provides reliability, field layout flexibility and better communication capacity. This is an enabler for our intelligent subsea offering, which we launched early this quarter, and which you will hear a lot about more in the future. We delivered another period of solid financial performance. This takes to our relentless focus on timely delivery and efficiency improvements despite the challenging pricing environment seen in recent years. These are the third quarter figures. Revenue of NOK 7.1 billion, EBITDA of NOK 553 million, an EBITDA margin of 7.8%, excluding special items, the margin was 8%, and EPS was NOK 0.33. We won NOK 4.7 billion in new orders, and the backlog ended at NOK 27.4 billion. Afterwards, Ole Martin will take you through the numbers in more details. On my previous slide, I mentioned that we won NOK 4.7 billion in new orders during the quarter.

We announced a contract for ADNOC to deliver more than 100 kilometers of subsea umbilicals for the Dalma Gas Development in the Middle East. This is our first subsea award in the region and a great opportunity to demonstrate our capabilities. In Norway, we booked a frame agreement for brownfield services for an undisclosed client. We also won an EPC contract for a new subsea compression module on the Åsgard field. The pressure in this field reservoir is on a natural decline. And it's now time to increase the capacity to enhance production. The module will be delivered in late 2021. The remaining order intake was primarily driven by small awards and growth on existing contracts. After the quarter was announced, a new consortium with EDP Renewables with the ambition to develop a 500 megawatt floating offshore wind farm of the course of South Korea was announced. This is in line with our updated strategy, which I will talk more about in the next slides.

Also after the end of the quarter, we announced that we are the lowest bidder for a large subsea project. The tender comprised delivery of a significant number of manifolds for a deepwater field. We are unable to name the client or project at this stage, but we hope to be able to confirm a significant award during the first half of next year. We continue to see a strong demand for an early-phase front-end work, not only here in Norway, but also globally. Out of the 37 new studies we won this quarter, 1/3 will be executed from our offices in London, Kuala Lumpur and Houston. So far this year, we have won 111 front-end orders, slightly higher than last year, which I would like to remind you, was a record year. This is a good indication that operators are willing to develop new projects. And we see this as a clear sign for potential increase in sanctioning activity. As you can see on this slide, 22 studies have turned into more detailed FEED projects compared with 16 for all of 2018. This put us in an excellent position to further work in the next phases of these developments. The world will continue to see rising energy demand, fueled by the energy -- emerging economies and growing middle class. The challenge for industry is the needs to deliver this with significant lower carbon footprint.

Recently, we also see a big shift in public sentiments. And the investors are reacting to climate risk, asking how companies like Aker Solutions are prepared for the energy transition. The same goes for recruitment. How attractive is the oil and gas business for both new and experienced engineers? The industry must change, and Aker Solutions needs to be at the forefront of innovation also in terms of carbon efficiency. We have addressed this in our updated enterprise strategy. And we have some clear long-term targets for our company. The new goal, we call 20/25/30. It means we will generate 20% of our revenue from renewables and 25% of our revenue from low-carbon solutions by the year 2030. Let me share few more details. Renewable energy will play a big part in our future.

We see great potential for growth in offshore floating wind, and we address this market in 2 ways: First, we are building on existing internal competency within floating structures, power umbilicals, subsea power stations and subsea infrastructure. Second, we are investing in proven technology through Principle Power. And third, we aim to develop floating wind parks together with established partners in the renewable energy market.

We have taken ownership stakes in big projects in California and South Korea, positioning Aker Solutions well in a fast-growing market. On the next 10 years, we invest and build this part of our business, and our ambition is for renewables to account for 20% of our revenue by 2030. In terms of low-carbon solutions, there's a lot we can do to help our customers decrease the carbon footprint through technology. Here are few examples from a long list of solutions we can offer to our clients, electrification on site. As an example, the supply of power from shore, the via Johan Sverdrup result in fuel gas savings and a reduction of CO2 emissions equivalent to 150,000 cars a year. Other solutions include, for example, use of unmanned production facilities and subsea gas compression, both enable low CO2 emissions than traditional solutions.

Finally, carbon capture. Both oil and gas installations as well as industrial facilities has a lot of potential to reduce with carbon capture. I will come back to this in the next slide. Our goal is to generate 25% of revenue from these low carbon offerings by 2030. We believe oil and gas will continue to be our largest revenue contributor, also in 10 years' time. This is why we will continue to work with our clients to reduce costs and carbon footprint for all developments around the world. By combining our competence in oil and gas, CCUS, and offshore floating wind, we can really make a difference in leading a sustainable energy future. Aker Solutions has been a front-runner within carbon capture utilization and storage since 1996. You may even say that we started too early for this market.

In 2012, we delivered a large test plant for the CO2 Technology Centre at Mongstad. Currently, we are delivering a modularized Just Catch plant, capturing CO2 from waste-to-energy plant in the Netherlands. This is a growing market. In Europe and across the world, and we are in dialogue with 50 potential customers about new opportunities. As you can see on the slide, Aker Solutions can offer services, products and technical solutions throughout the whole CCUS value chain. Capturing CO2 is essential, but we also need somewhere to store CO2. We use our subsea expertise to enable the groundbreaking Northern Lights project. Succeeding in these projects, we will open new opportunities for Aker Solutions in the future.

We are well positioned to realize the first carbon capture facility at a cement plant with Heidelberg in Norway. We have completed the FEED and are ready for the next step. This will be a significant contract for us. And as you know, the cement industry accounts for more than 5% of man-made CO2 emissions, and there are more than 1,000 cement plants in the planet. We are working hard to make carbon capture plants cost-efficient by using industry standards and modular solutions. At the same time, the price of carbon emissions quotas is rising. As the price of CCUS solution move towards the cost of emitting CO2, we will see the commercialization of CCUS market take off. Now back to the third quarter presentation and to the outlook. Despite the competitive and volatile markets, the outlook for offshore markets looks promising.

We continue to deliver strong execution and enjoy repeat orders from key clients. Tendering and front-end activity remains high in our target markets, with current bid activity totaling about NOK 55 billion. However, contracts are taking longer to be awarded than we expected early this year. With a good balance between regions and segments, we anticipate some key projects to be awarded in the next 6 months. We have a strengthened focus on low carbon activities and a firm commitment to grow our business in that area. All in all, I believe that Aker Solutions is well positioned to capture opportunities in both new and existing markets. So in summary, we closed the third quarter with continued revenue growth, strong execution on projects and services and high tender activity. These elements are supporting stable and health financial performance of our company. Thank you for listening. And Ole Martin will go through the numbers in more detail.

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Ole Martin Grimsrud, Aker Solutions ASA - CFO [3]

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Thank you, Luis. And good morning. I'll now take you through the key financial highlights of the third quarter, our segment performance and run through our financial guidance before moving to Q&A. And so all these -- all numbers are in Norwegian kroner. So let's start with the income statement. Overall operating revenues for the third quarter was NOK 7.1 billion, up 9% year-on-year, reflecting a higher activity level within field design and increased activity within subsea on the back of work won over the last 18 months. As a result, our projects reporting segment was up 8% year-on-year. The Services segment also delivered solid growth, and was up 21% year-on-year, primarily driven by the production asset services subsegment.

Our reported third quarter EBITDA was NOK 553 million. This included net NOK 16 million of special items, while the IRFS 16 leasing standard increased our reported EBITDA by NOK 141 million. Excluding special items, EBITDA was NOK 570 million, an increase from NOK 492 million a year earlier. This was equal to an underlying margin of 8% compared to 7.5% in the same quarter last year. Excluding the other effects of IFRS 16, our underlying margins were slightly down compared to same period last year. However, this should be viewed as a solid achievement as we are currently progressing on our new backlog won in a very competitive market. This is an evidence of continued strong execution and good momentum on our cost improvement programs. Compared to the same period last year, we also see the effects of a different revenue mix on our margin with a higher share of lower-margin production asset services and field design activity.

Third quarter depreciation was up year-on-year at NOK 308 million. Excluding effects of IFRS 16, the depreciation was NOK 193 million in line with our previous guidance. We continue to expect underlying depreciation, including the effects of IFRS 16, to be around NOK 1.2 billion per year. Our reported third quarter EBIT or operating profit decreased year-on-year to NOK 245 million from NOK 282 million. Excluding special items, EBIT was NOK 262 million, and the margin was 3.7% versus 4.8% in the previous year. Net financial items were minus NOK 111 million in the quarter, excluding a minor unrealized hedging gain of NOK 6 million. We continue to see our net financial items around this level per quarter going forward, excluding the effects of currency and non-qualifying hedges. Our tax charge was equal to rate of 34% in the third quarter. And going forward, we continue to expect average P&L tax rates to be in the low to mid-30% range.

We ended the quarter with a net income of NOK 93 million or earnings per share at NOK 0.30. Excluding special items, earnings per share were NOK 0.33, down from NOK 0.60 last year. Now moving to our balance sheet and cash flow performance. Our working capital or a net current operating assets continued to normalize and ended the third quarter at NOK 1.3 billion in line with our previous guidance. Excluding the effects of IFRS 16, it ended at NOK 828 million. Going forward, working capital is expected to trend around 4% of group revenue. Our cash flow from operations in the third quarter was minus NOK 173 million as the working capital continued to normalize. Our investing cash flow totaled a net negative NOK 248 million in the quarter, mainly driven by investments in offshore floating wind, rental tools, R&D and digitalization.

We continue to expect overall CapEx and R&D at around 3% of annual revenue with flexibility. Excluding IFRS 16, we had net interest-bearing debt of NOK 1.9 billion at end of third quarter, up from NOK 1.4 billion at Q2, reflecting the working capital outflow. Our net debt-to-EBITDA ended at a solid 1x. At the end of Q3, we have continued to have a strong a financial position with total liquidity buffer at a healthy NOK 6.8 billion. This includes our revolving credit facility with leverage covenant of 3.5x net debt-to-EBITDA. And as a reminder, our RCF and latest bond covenants are both based on pre-IFRS 16 GAAP. Our solid financial position continues to give us flexibility and good financial headroom going forward.

Now on to projects, where the third quarter revenue was up 8% year-on-year, mainly driven by high activity level in field design subsegment compared to the same period last year. This resulted in an underlying Project EBITDA of NOK 455 million with a margin of 8.1% for the quarter, up from 7.2% last year. EBIT, excluding special items, was EUR 250 million, with a margin of 4.4%, down from 4.9% last year. We had yet another quarter of solid operational performance in the Project portfolio as we still are in early stages of execution of the new backlog won in a very competitive market, it's important that we continue to realize significant benefits from improvement programs in order to maintain underlying margins in this segment.

Now some further details for subsea and field design within the Projects reporting segment. Revenue from field design projects increased 9% year-on-year, driven by strong activity on several modifications and hook-up jobs versus same period last year. In the third quarter, field design accounted for 61% of projects revenue. Revenue from subsea project was up 4% from the same period last year, driven by increased activity level globally. Third quarter order intake in projects was overall NOK 3.3 billion, with NOK 1.4 billion in subsea and NOK 1.9 billion in field design. The backlog in projects ended the quarter at NOK 17.3 billion. Despite the competitive market, tendering activity remains very healthy, and we are still tendering for about NOK 45 billion of work overall in projects with substantial part within subsea. We have experienced some delays in project sanctioning. However, there is a high probability of several of these ongoing tenders to be concluded over the next 6 months. Our services revenue increased 21% year-on-year, mainly driven by international growth in our production asset services subsegment, which accounted for 59% of services revenue.

Underlying EBITDA was NOK 174 million with a margin of 11.2%, a decrease from 14.9% in the same quarter last year, driven primarily by the effect of a different revenue mix on our margin. EBIT was NOK 112 million, with a margin of 7.2% versus 11.6% a year ago. Third quarter order intake in services was NOK 1.4 billion, mainly related to awards within production asset services. The backlog in services ended the quarter at NOK 10.3 billion. Despite a competitive market, tendering activity within services is healthy, and we're currently tendering for around NOK 10 billion of service work globally. And as a reminder, in addition, a part of services order intake is short-cycled or book and turn in nature. Now over to the order intake and backlog performance for the Group overall. The third quarter order intake was, in total, NOK 4.7 billion with a healthy level of unannounced awards in several key regions globally.

The order intake was equal to a book-to-bill of 0.7x in the quarter. Our backlog totaled NOK 27.4 billion at end of third quarter, which is equal to around 1.1x 2018 revenue. The backlog for 2020 execution is about NOK 12 billion versus NOK 17 billion at the same time last year and NOK 12 billion at the same time in 2017. The high tendering activity and several ongoing significant FEEDs gives us reasonable visibility going forward. The order intake continues to be somewhat and even caused by large contracts and timing of project sanctioning. But as mentioned earlier, tendering FDA activity remains high with some key projects likely to be sanctioned over the next 6 months. We are still engaged in tenders with an estimated sales value of, in total, NOK 55 billion. Finally, over to our guidance. We delivered a solid top line growth of 12% last year, and we still see our overall 2019 revenue up around the same rate this year, in particular, driven by the high activity levels in field assign and production asset services. With Q4 margins slightly below Q3 level. The phasing of our secured backlog, combined with a healthy field and tendering activity, at this stage, indicate that top line for 2020, slightly down versus this year. For 2020 overall, we currently expect a slightly lower EBITDA margin as we are facing in the new backlog won in a very competitive market.

And as a consequence of the late sanctioning of some major projects. This industry challenge applies the continued focus on quality execution and the cost to discipline as we move into 2020. In this market, our capital allocation priorities remain firm. We continue to drive a strong balance sheet with good liquidity. We also continue to invest in the business to further position Aker Solutions for the future. Overall, CapEx and R&D are expected at around 3% of annual revenue with flexibility. And our dividend policy remains 30% to 50% of net profit should over time be returned to our shareholders. So to sum up, we ended the third quarter by continuing to deliver strong project execution with good underlying financial performance. And we see good opportunities for increased order intake over the next 6 months. We have a solid financial position, which continues to give us the flexibility and financial headroom to position Aker Solutions for the future, both within our traditional markets and within renewables and low-carbon solutions. Thank you for listening. That was the end of our presentation here today, and we will now open for Q&A.

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Questions and Answers

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Tove Røskaft, Aker Solutions ASA - Head of Communications & IR [1]

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Thank you. I think, as always, we have an online audience as well as the people in the room, but we can start with the people in the room. And it would be good if you could state your name and who you represent. If you, online, could do the same, that will make it a little bit easier for us to share the questions.

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Terje Fatnes, SEB, Research Division - Analyst [2]

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Terje Fatnes from SEB. A question on the announcement on Friday on the wind farm project in Korea.

Can you talk a little bit about the timing of the different milestones you have on that project? At what time will you have to allocate capital for the project?

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [3]

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Sorry, I think the Norwegian autumns get to this old Brazilian. Yes, yes, it was an important milestone for us, just to start. We have -- that's the second project we work close with EDPR. So this is an important partnership as EDPR now is together with Engie.

So early stages now, we have, right now, for example, we're installing the buoys locally to measure wind, and that's going to be the first phase. And then we're going to go into engineering phase. So I think we are probably going to start to ramp up the project in around 2021, 2022. So in terms of capital allocation, the -- any further

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Ole Martin Grimsrud, Aker Solutions ASA - CFO [4]

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I am just going to say it's limited, and we will see, in later pieces, how much we need to allocate to that project.

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [5]

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Yes. As I said, interesting place to be. Good incentives for new energy, the corporate of South Korea has ambitious plans to move into renewables. It's 13 gigawatts they want by the end of decade. So it's a good place to be, and we have more opportunities there. So that's -- very pleased with the new opportunity.

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Terje Fatnes, SEB, Research Division - Analyst [6]

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And just a follow-up on that. So you will be then the operator on that project. And at what time do you see it most likely that you will farm down? Because you will not be a utility company.

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [7]

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Yes. I can say we are the operator. We are part of the developer. We are actually -- we are sanctioned to do this, a new industry. And we believe that we can position our company quite well to produce systems and get some direct awards and provide, as long as we have the right cost and the right technology that we think we do, we can help to develop the industry.

But we don't -- we're not a utility company, we have no intention to be a utility company. So just -- we're going to make that project happen. And then we see how it takes forward, still long way to go.

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Haakon Amundsen, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [8]

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Haakon Amundsen from ABG. Just a follow-up on that. Can we -- should we expect that the -- within your long-term renewable targets or low-carbon targets and also this project that you will remain within the kind of 3% of revenues with respect to your long-term CapEx outlook?

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Ole Martin Grimsrud, Aker Solutions ASA - CFO [9]

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We think we have already invested into low-carbon solutions, as example could be carbon capture and subsea, I guess, the compression, renewable all from this is likely to require somewhat more investments, however, we expect to be within the long-term guidance of 2% to 3% of revenue.

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [10]

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Yes, I think we have to be very clear that, of course, those are large projects, and depending of the percentage, we're going to remain during the ramp-up. We know the beginning is not capital-intensive. But then when you start to ramp up, those projects can take anywhere between $1.5 billion and $2 billion. So of course, you would have to find ways of raising that capital. But that's a long way and until we get there, we can do that within our financial means.

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Haakon Amundsen, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [11]

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Yes. But your own CapEx versus revenues will be below the 3%. That's conventionally right. Okay. And then just on your guidance for 2020. You're, obviously, dependent on some success on some near-term tendering. Given your backlog order, do you feel this is sensitive in the fourth quarter that you need to book some of these large awards already in the fourth quarter? Or I'm just trying to see how sensitive the, kind of, 2020 guidance is versus short-term contracting?

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [12]

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Okay. No, I still feel that we have to win more work. And, I think, by thus. But -- and we announced a few after the quarter ended that will be part of our plans next year. And I think as we mentioned, there are several projects who are quite lumpy, as we know, that's a nature of the subsea industry. So of course, we need those projects to be sanctioned. Not specifically in Q4, but in the next 2 quarters, for sure, to be able to have an effect next year.

And also -- there's also -- we also always have growth on projects. We have services that the nature book-to-bill. So yes, we need to win work, but we're confident we can achieve that. If you look back to the position we are now, and we are a bit lower than last year. That's easy to see it. You guys run the spreadsheets as well as we do, so you know that. But we'll be like that in 2017. If you look back, that was pretty much the situation. So we've been there before. So -- and we have work in those studies and so on. So yes, we're closer to the action.

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Glenn Lodden, Nordea Markets, Research Division - Analyst [13]

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Glenn Lodden with Nordea. You mentioned production asset services seeing increased activity. Could you shed some light as to what's driving that?

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [14]

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Yes, absolutely. This is going to be a record year for us in brownfield and in terms of revenues and activity. I think in activities, it isn't higher because can you imagine the price out, say, 30% lower? The cost overall develops comparing to 2014 went at peak. So the main activity driving this is actually the fact that clients are trying to get oil faster.

So we're trying to produce more from existing facilities and trying to cope with this shorter cycle that they have to compete in other place like, for example, the shale. So I think that's been the norm to the downturn. People trying to produce more for existing facilities and reduce the CapEx that is required for long-cycle greenfields. So that's the main driver. At least we'll continue, actually, which is good for us since we'd been involved in the facilities for so long, and we have designed most of the -- of them in the North Sea and coastal of this. And so we are well positioned to take more work.

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Ole Martin Grimsrud, Aker Solutions ASA - CFO [15]

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And in production asset services we see a particularly strong growth, international, also on the back of the acquisition of C.S.E. in Brazil, where we completed execution of the remaining 30% now earlier in the year.

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [16]

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Excellent. Good point, you've added. That's true. Part of the growth is coming from Brazil. We have a strong position in Brunei, strong positon in Canada. So that's the global trend. So as we become more international, there'll be more opportunities.

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Glenn Lodden, Nordea Markets, Research Division - Analyst [17]

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And also just a follow-up on in terms of increased work. The amount of FEEDs that became contracts was 5 during the quarter and for the first half of '19, it was 2. Should we read into that as something is inflicting or changing? Or is that normal variation?

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [18]

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We like to believe that this is bad times, and people are up -- those projects are maturing and people will start to produce oil. But we see more greenfields start to move. But yes, I hope it's a trend, but you just want more data for you to analyze. But -- and we keep looking and hoping that we are into a different nature. But as you know, oil price continue to be cycle and people still taking time to decide.

There's a lot of activity, but the sanction is taking low. And there are all of implications in some of the markets, we have political changes. You have some place in Africa, West Africa start to move, but they are all the things to count in that so...

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Glenn Lodden, Nordea Markets, Research Division - Analyst [19]

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So we'll keep looking at the details.

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [20]

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Yes, absolutely. Detail is everything.

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Tove Røskaft, Aker Solutions ASA - Head of Communications & IR [21]

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Jennifer, there is a gentleman in the back.

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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 [22]

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Frederik Lunde from Carnegie. Just a question on CapEx. You're investing 2% of sales and -- for the second year in a row now. And your return on equity has been single digit. So when do you expect to reap the benefits of these investments and reach circles of capital, which I guess will be around 10% likely or so?

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [23]

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I can start, everything that we announced here for the future is being -- it takes capital. We invested on Principle Power, took ownership, we increased our ownership.

We are developing new technology, investing a lot on the digitalization that we believe that's going to help us in the future. And it's happening now, with these costs, it will help our clients with this cost. So I'm very -- actually, it was nice to see all this data about all the project going down within our citable cost. That's coming from us. And that takes investment. But I think in the long run, and we also -- an important point for you, Frederik, and that's a good question, if by speaking about that. Some of the projects that we are winning, we are playing to win. It will require new tooling.

There's a few changes that happen in the market as of some clients, for example, instead of buying the tooling, they are -- they actually intend to lease. That's a big change, for example, in Brazil for Petrobras. And that's -- this takes CapEx. But of course, you're going to capture better margins going forward, and you can prepare for more work in the pre-salt in Brazil. So we have to take that in consideration going forward.

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Ole Martin Grimsrud, Aker Solutions ASA - CFO [24]

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And we are, you know, we are a technology company, and we need to invest in R&D and facilities and digitalization to remain competitive. I would say, going forward, to shed some more light on our CapEx, I would say, as 2% of annual run rate is needed as a minimum, however, let's say, the remaining 1% is needed could be project-specific investments, like Luis mentioned, rental tools, or to facilitate growth within specific areas, such as the, for instance, renewables.

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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 [25]

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Okay, great. And on carbon capture, you have a quite unique position in the market. And it's been very quiet for, give or take, 10 years now, but now we're seeing a lot of movement. But do you expect to be in the first contract, say, next year? Or is that too early? Is it dependent on subsidies? Or can you talk a bit about the markets?

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [26]

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Yes, I think I mentioned that the whole -- we're in the whole chain, and you're right, not 10 years, actually more than 2 decades. And actually, just recently wrote a blog to my employees talking about the value of persevering, which, too, and company persevere now. We think we need that. There are some challenges in the CCUS, for example, the storage.

And Norway has an important project that's going to be unique in the world, so hopefully, we will have more projects like that in the future. So as I said, in terms of, for example, the North Sea, we finished the FEED. They're ready to start execution. So of course, you need some subsidies to begin with. And as I keep saying to everybody, nothing's cheaper than just putting CO2 in the atmosphere, right? But we cannot do that forever. And I think that the Norway is setting a great example. And I participated in European High-Level Conference last month here in Oslo. And you can see the pressure's on.

And I think there's a lot of intention, especially in Europe, to set an example. And we need, of course, the CO2 tax and so forth to match. That's what I said during the presentation, but we hope we have some projects now, as said, there's some revenues coming out of, for example, the Northern Lights. So we started the templates, and we expect to start in the new subsea equipment in the future that really are in phase now. But -- and I think that, hopefully, those -- the North's efforts then will move. So yes, I think we're going to have reviews next year. I think -- we're hoping.

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Tove Røskaft, Aker Solutions ASA - Head of Communications & IR [27]

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Maybe we should take a couple of questions from the online audience. I'll start with 2 questions from Michael Alsford at Citi. The first question is regarding the tendering activity, what are the key reasons for the delays on the new awards?

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [28]

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Okay. I don't think that's one reason. There are several, I think, it's the fact that people are taking longer to mature. Some of those projects, they are going to produce oil in even now that we're doing faster. They have produced oil in 2, 3 years' time. So people are a bit more cautious about the CapEx. But having said that, the oil core has never had so much cash, as you probably know. So they do have the means to invest. Some of them invest in also renewables, which is good for us. Because we're going to be suppliers to them, in some cases, partners. But I think there's several reasons, and I think it's more about -- volatility is one of them, of the oil prices, concerns about, of course, future demand.

And some of the oil companies, I guess, replenishing the balance sheets, and some of them returning capital to the shareholders after some time. So that's -- it's a mix of reasons. But no technical reasons. I think looking into, at least before we look for the portfolio, the large majority of the projects are economical at current oil prices and profitable. So there are no technical reasons not to do them. People just, in some cases, we're finally in the concept, in some other cases, just waiting for the moment. Some of them just taking a bit longer.

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Tove Røskaft, Aker Solutions ASA - Head of Communications & IR [29]

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And the second question from Michael is related to recent press reports talk about workforce reductions in the U.K.? Is this a new cost savings, restructuring plan or part of the ongoing plan?

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [30]

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I think it's more part of day-to-day business, we -- there's no question you have to -- we have too much capacity. We used to produce controls. It was the case there in several locations. We have a different mix these days. We're looking for low-cost productions.

We have quite a lot of capacity in low-cost manufacturing centers like Malaysia and Brazil. So there was a normal reduction capacity to cope with less demand, especially for the old legacy control systems. As we bring the new Vectus control to the market quite successful, actually.

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Tove Røskaft, Aker Solutions ASA - Head of Communications & IR [31]

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Okay. And then there's a question from David Farrell at Crédit Suisse. What percentage of concept studies being won are related to renewable and low-carbon solutions?

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [32]

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I would need to have -- actually I would have to tell later about the right numbers, because I don't think I have this data. I know that some of them actually are mixed because you have some studies that are looking, for example, for wind for oil, or trying to power existing brownfield facilities with wind, which will be a great way to reduce CO2. It's a better diversification from shore. So I don't have this number actually, unfortunately, but it's not a large proportion, but it's some of them.

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Tove Røskaft, Aker Solutions ASA - Head of Communications & IR [33]

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Okay. Then we have James Evans from Exane BNP Paribas. He also have 2 questions. On your new targets set out today, roughly how much of your revenue in 2019 is from renewables and low-carbon solutions?

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [34]

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Yes, again, we are not reporting the way we presented this strategy. We still have profitive projects, service and so on. So in terms of renewables, it's very early days. So not a large amount of revenues from there. There are some tailors out there for cables and so on. So quite small now.

And in terms of low-carbon solutions, we're doing several studies. We are deep into the -- for example, the FEED for Jansz-lo in Australia subsea compression project. So we're not, as I said, I don't give you a percentage now because that's now how we organize or how we are reporting.

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Tove Røskaft, Aker Solutions ASA - Head of Communications & IR [35]

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So his second question is in the same sort of level. On the R&D, how much of the R&D spend today is on renewable or low-carbon solutions?

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Ole Martin Grimsrud, Aker Solutions ASA - CFO [36]

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Yes, we do not decompose that and guide on that level. However, as we said, we are looking into our capital expenses now for Q3. We invested in offshore floating wind and R&D. Of course, it's a significant part also within those growth areas for us.

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [37]

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Yes, it's been clear that we are a company full of ideas. So actually, we have ideas for at least 4x more than we are spending now, but that's what Michael's talking about, we don't want to talk or mention how much we invest in either so.

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Tove Røskaft, Aker Solutions ASA - Head of Communications & IR [38]

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Okay. Any more questions in the audience? All is crystal clear? Okay, then I think we can say thank you for all of us listening in today, and we'll have some time with the press after.

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Luis Antonio Gomes Araujo, Aker Solutions ASA - CEO [39]

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Thank you.

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Tove Røskaft, Aker Solutions ASA - Head of Communications & IR [40]

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Thank you.