Good morning. Welcome to Aker Solutions Presentation of Third Quarter Results for 2017. My name is Bunny Nooryani. I head Communications and Investor Relations at the company, and with me here today are Luis Araujo, our CEO, and Svein Oskar Stoknes, our CFO. They will go through the developments in the quarter. After that, we'll have time for a Q&A and some short media interviews. Before we get started, I'd like to point to the nearest emergency exit, which is on your left side out through the glass doors. Luis?
Thanks, Bunny. Good morning. Thank you for joining us here today. I'm pleased to be here with Svein, to go through our results for the third quarter, which was yet another period of strong execution for Aker Solutions. As usual, let's start with the key developments. Market conditions remain challenging for the global oil and gas industry. There are also positive signs. Break-even costs are continuing to come down. We are seeing more projects being sanctioned. Overall, energy activity is good. There is strong demand for our front-end engineering. This is an early indication of a pickup in activity ahead. In this environment, we delivered another strong execution and on our major projects made good progress globally. To give you some flavor, we delivered the 28th and final subsea tree for the Moho Nord project in Congo- Brazzaville.
We have now also successfully installed 17 of the 65 subsea trees, as well as 19 manifolds at the giant Kaombo development offshore Angola. We completed the first of the 45 tie-in connections at the Zohr gas field offshore Egypt at water depths of more than 1,400 meters. This was done using our remote tie-in tool at a first for us at such water depths. We also made good steady progress with the field work for phase II of the major Johan Sverdrup development. We began manufacturing of our Vectus system for the Valhall project in Norway. Vectus is our newest generation subsea electronic module, represents a step change in predictability, data handling, and processing. We also made good headway in the quarter on our company-wide program to keep improving operations and reducing costs.
We took steps to strengthen our global manufacturing capabilities by optimizing our geographical setup in Norway, U.K., and U.S. Together, all of this improvement helped support our margin, even as the market slowed down, causing the weakening of our top line. Now for the main numbers. Our third quarter financial figures were: revenue of NOK 5.4 billion, EBITDA of NOK 401 million, an EBITDA margin of 7.4%. Excluding special items, the margin was 7.8%, and EPS was NOK 0.41. Our order intake in the quarter was NOK 2.6 billion, bringing the backlog to NOK 27.2 billion.
We also had a solid financial position at the end of the quarter with a liquidity buffer of NOK 4.5 billion , and this gives us a good flexibility going forward. Well, new orders in the quarter included a framework contract for Shell for brownfield modifications and services and monthly support at the Nyhamna and Draugen facilities in Norway. This order has a fixed period of four years and may extend, may be extended by the client up to seven years. We also won a contract for Statoil for front engineering and design of a module that will increase the gas output at the Troll field in Norway. This order also includes an option for EPCI option.
Also from Statoil, we secure a contract to deliver four subsea trees for the Visund and Fram Øst fields offshore Norway. We won an umbilical order for LLOG Exploration for the Buckskin development in the Gulf of Mexico. I'm also pleased to say that we secured a contract early this month to provide engineering, procurement, and fabrication services for upgrading for the subsea control system at the Njord Future project. This development is, of course, well known to us. We originally deliver the Njord A platform 25 years ago, and we are now working with Kvaerner on its upgrade. We have also previously installed a subsea production system with top sides controls at the same field.
This latest contract will be booked in the fourth quarter. Last but definitely not least, I am delighted to announce that we won an order this week to deliver the world largest ever umbilical system. The agreement is valued at more than NOK 1.6 billion and will be booked in the fourth quarter. It entails delivering 250 km of steel- tube umbilicals linking a subsea development to an existing platform. We have agreed not to disclose the name of the project or customer at this point in time, but obviously, we are very pleased to have secured this work, which is groundbreaking in terms of size, in technology of umbilical solutions. Well, importantly, we have seen a surge in demand for our early-phase capabilities, from feasibility and concept studies to front-end engineering design.
This increase can be seen as an early indication of a pickup in activity ahead. Actually, on this quarter, we won 13 studies. That give us a record of 84 study awards for the first nine months of the year, compared with our previous all-time high of 81 for the whole 2016. About three-quarters of the studies are for projects in Norway, where we're seeing a pickup in activity. In fact, we expect several brownfield and greenfield projects to be awarded in the NCS over the next six months in both subsea and field design. We're well-positioned in all these areas, both as on a standalone basis as well as through our subsea alliances.
Indeed, about 1/3 of the study awards this year were won with alliance partners. They include work within subsea compression as well as field electrification. 26 of the awards so far this year are for FEED work. Notably, we are seeing an increase in the number of early-phase studies and FEEDs that are resulting in work in the next phase of a project. In the first nine months of this year, 20 of our concept studies led to FEEDs. Consequently, three of our FEEDs become fully fledged projects. This shows the value of entering a project at the early stage by putting us in a strong position to secure future work at the same project.
Of course, with the record demand we are seeing in the front end and increasing number of projects being sanctioned globally, this is a good place to be. As I said earlier, we are making good progress on our company-wide improvement journey. The program targets an improvement in cost efficiency of at least 30% or NOK 9 billion in annualized cost savings by the end of this year, 2017. That compares with our 2015 cost and work volumes. We have achieved 90% of this goal by the end of this quarter, and we are on track to reach our target by the end of this year. We're not stopping there.
As part of our drive to continuously improve, we will for next year target an additional cost efficiency improvement of at least 5% per year or 20% in total by the end of 2021. We are making all these improvements by simplifying our methods, our organization setup, and our geographical footprint. We are also standardizing our products and services and boosting efficiency through innovation and digital technologies. To stay the same theme, as part of our continuous improvement efforts, we are now also optimizing our global manufacturing setup. We are doing this by consolidating our capabilities at key locations to become even more efficient and better meet customer needs. Our sites in Reading and Tranby in Norway are now set up as centers for subsea product technology development and specialized manufacturing.
Our umbilicals plant in Mobile, Alabama, in U.S., is being further developed as our primary manufacturing center in North America. Part of this, we are closing our subsea manufacturing unit in Houston. We are also moving our service business in Houston to Mobile, where we already have our umbilicals plant. Together with our plant in Moss in Norway, Mobile will continue to deliver our global umbilicals project. Our plants in Brazil, in Curitiba, and Port Klang in Malaysia have world-leading capabilities for larger scale manufacturing of subsea equipment, that's what we will focus on. Finally, our site in Aberdeen will primarily serve the local market, manufacturing a selected range of products while also providing services to the North Sea and Africa markets.
We expect this consolidation and streamlining of operations to enable greater economies of scale and stronger processes that will benefit our customer and of course, boost our competitiveness. Going to the outlook, let's look ahead. The outlook for our services remains challenging, but there are also signs of a recovery. Improvement measures across the industry are having an effect, we are seeing more projects being sanctioned. This is particularly the case for brownfield projects, we are also seeing some greenfield developments moving forward. We continue to see steady tendering in our main markets, we are currently bidding contracts totaling about NOK 55 billion. The majority of this is in the subsea area, where we expect some key projects to be sanctioned over the next six months. Looking far ahead, we're positive.
We are upbeat that demand for energy in whatever form will increase globally. This is where our push for sustainable energy solutions will truly start to pay off. Our subsea technology is already playing an important part in this, but we are also broadening our focus to put our expertise harder to work on natural gas developments as demand for lower carbon fuels grows. We also see opportunities to apply our expertise in other areas, including offshore floating wind, and to continue building on our carbon capture technology, which is ready for commercial use and are essential to helping to meet global emissions goals. We see ourselves as key partner in helping provide the sustainable energy solutions the world needs, it's both the right thing to do and of course, good for business.
As I round off my part of today's presentation, let me quickly recap the main points. Aker Solutions continues to deliver consistently strong execution and major cost efficiency improvements that are supporting our margins and continue as we continue market challenges. We are also looking further ahead to new opportunities as we build on our capabilities in delivering sustainable energy solutions. I'll thank you for listening, and Svein will go through our numbers in more detail.
Thank you, Luis. Good morning. I will now take you through the key financial highlights of the third quarter, our divisional performance, and run through our financial guidance before we move on to Q&A. And as always, all numbers mentioned are in the Norwegian kroner. As usual, let's start with the income statement. Overall operating revenue for the third quarter was NOK 5.4 billion, down 9% year-on-year. Increased activity in our Services segment helped to partly offset weaker activity in Projects, which continue to be impacted by low order intake. Our reported third quarter EBITDA was NOK 401 million. This included some special items, including restructuring costs of NOK 8 million and a loss of NOK 10 million related to non-qualifying hedges.
Excluding special items, EBITDA was NOK 421 million compared with NOK 471 million a year earlier. This was equal to an underlying margin of 7.8% in the third quarter, mostly unchanged from 7.9% in the same period last year. We maintain these stable underlying margins despite the year-on-year drop in revenue as a result of strong execution and our continued ability to keep adjusting our organization and our cost base. Third quarter depreciation was down slightly from last year at NOK 184 million. Looking ahead, we expect our underlying depreciation to be around NOK 750 million-NOK 800 million per year. Our reported third quarter EBIT or operating profit was down year-on-year to NOK 217 million.
Excluding special items, EBIT was NOK 243 million, the margin was 4.5% versus 4.7% last year. This is in line with our underlying EBITDA development, with a slightly higher relative depreciation burden compared with the same period last year. Excluding an unrealized hedging gain of NOK 20 million, net financial items were NOK -55 million in the quarter. We continue to see net financial items on an annual basis in the range of NOK 60 million-NOK 70 million per quarter. This excludes the effect of currency and non-qualifying hedges. Our tax charge was equivalent to a rate of 32% in the quarter. Looking ahead, our view is for the average P&L tax rates to be in the low to mid 30% range going forward.
We ended the quarter with a net income of NOK 124 million, or EPS of NOK 0.40. Excluding special items, our underlying EPS for the quarter was NOK 0.41. Moving to our balance sheet and cash flow performance. Our net current operating assets or working capital was NOK 15 million in the quarter. This was up from NOK -454 million at the end of Q2, as we trend towards our more normalized level of working capital over the next 12-15 months, as previously communicated. Due to our improvement programs and ongoing initiatives to optimize cash flows, we remain comfortable that we will see a more normal working capital level of around NOK 1 billion-NOK 1.5 billion through 2018.
This equals about 5%-7% of revenue. We had net interest bearing items or net debt of NOK 2 billion at the end of the quarter, up from NOK 1.7 billion at Q2, primarily reflecting this outflow of our working capital. Our net debt to EBITDA ended the quarter at 1.4x , in line with our previous guidance. We expect to continue to exceed our conservative target level of 1x net debt to EBITDA through 2018. Our total liquidity buffer remains healthy at NOK 4.5 billion. This includes our revolving credit facility with leverage covenant at 3.5x net debt to EBITDA. This position continues to give us good financial headroom going forward. As a reminder, the credit facility is secured at very favorable terms.
At the end of the third quarter, our underlying return on average capital employed was 7.6%. This is down from 11.2% a year earlier and is due to a year-on-year decrease in our nominal rolling 12-month EBITDA. At the end of the third quarter, our group capital employed was NOK 8.9 billion. This includes around NOK 800 million linked to facilities and technologies that are not yet contributing to earnings. Our cash flow from operations in the third quarter was NOK -214 million, primarily reflecting our outflow of working capital. Our investing cash flows totaled a NOK -26 million in the third quarter. We still expect 2017 CapEx levels significantly lower versus 2016 and see overall CapEx and R&D at roughly 2% of revenues going forward with flexibility.
Cash flow from financing was NOK +591 million in the quarter, mainly related to utilization of our revolving credit facility. On to projects, where third quarter revenue was down 16% year-on-year as the activity level remained challenging in subsea, partly offset by increasing activity in field design. We continued to realize significant benefits from our improvement programs in our project portfolio. Coupled with our solid operational performance, this helped offset some of the market headwinds. This results in an underlying project EBITDA margin of 7.7% in the quarter versus 7.9% last year, despite the significant drop in volume. The EBIT margin, excluding special items, was 4.9%, which is unchanged from a year earlier.
In terms of order intake for projects overall, our third quarter book-to-bill was at 0.4 x versus 0.5 x last year. Our backlog remains healthy at NOK 20.7 billion. This is equal to about 15 months of projects revenue. Let's take a look at the key figures for our Subsea and Field Design segments within this reporting segment. Subsea projects revenue was down 37% year-on-year due to softer demand in some markets and as some projects neared completion. Field Design projects revenue was up 12% year-on-year, driven mainly by North Sea modification work awarded over the last 12 months. In terms of order intake, Subsea projects delivered at 0.3x book-to-bill and Field Design at 0.6x book-to-bill.
Despite the tough market, tendering activity is still healthy, and we are currently tendering for around NOK 45 billion of work overall in projects, with the majority in Subsea. For projects overall, we still see 2017 volumes down by around 15% from last year, mainly driven by Subsea, but mitigated by an improving activity level in Field Design, especially in brownfield. We continue to expect softer underlying margins year on year, driven by a changing revenue mix and the challenging market conditions. Our Services revenue increased 14% year- on- year. This was supported by growth from the acquisition of CSE in Brazil in December last year, as well as good activity levels in some regions of Subsea Lifecycle Services. As of the third quarter, Subsea Lifecycle Services accounted for about 60% of services revenues, in line with the same period last year.
Underlying EBITDA was NOK 157 million, with a margin of 13.5%, up from 11.4% a year earlier. EBIT was NOK 119 million, with a margin of 10.2%, up from 8% a year ago. The stronger margins reflect high installation and commissioning activity, solid operational performance, as well as good resource utilization in some of our geographies. Third quarter order intake was down year-on-year, but up from previous quarters this year, and totaled NOK 0.7 billion for Services overall, resulting in a third quarter book-to-bill of 0.6 x. Please note that a significant part of our Services order intake is short cycle or book-and-turn in nature. Despite the tough market, tendering activity is good, and we are currently tendering for around NOK 10 billion of work globally.
In terms of our outlook for Services this year, we now see revenues down around 5%-10% from 2016 levels. Versus 5% previously. Despite the somewhat lower revenue and changing activity mix, we now see underlying EBITDA margins for 2017 slightly above 2016 levels. This compares with our previous guidance for margins to remain similar to 2016 levels. Over to the order intake and backlog performance for the group as a whole. Overall third quarter order intake was NOK 2.6 billion. This is equivalent to book-to-bill of 0.5 x, down slightly from the third quarter last year. Our backlog was NOK 27.2 billion at the end of the quarter. This is equivalent to around 1.2 x our revenues over the last 12 months.
As mentioned earlier, tendering activity is good, and several key projects are likely to be sanctioned over the next six months. We are currently engaged in tenders with an estimated face value of around NOK 55 billion. As a reminder, our backlog does not include a significant part of our services business or potential growth or options on existing contracts. Finally, this slide sums up our financial guidance and some of the comments I made on our near-term outlook. Our outlook for 2017 remains largely unchanged for the group overall. We still expect overall revenue down by about 10%-15% this year versus last year, with improved activity levels in the field design components of both projects and services. We now see underlying EBITDA margins for 2017 to be somewhat improved compared with our previous guidance, and see full year underlying margins close to Q3 year-to-date levels.
As already addressed by Luis, as part of our continuous improvement efforts, we are now also optimizing our global product delivery and manufacturing setup across the world. As part of this program, we expect there will be a need for further restructuring and related one-offs in the fourth quarter. At this stage, we estimate fourth quarter charges around NOK 150 million, of which about 2/3 with no cash impact. As Luis mentioned, there are some early signs of a pickup in activity levels ahead. At this stage, our outlook for 2018 indicates overall revenues somewhat up from this year, pending the successful outcome of several ongoing key tenders across all segments and regions. At this point, we see our underlying margins remaining around 2017 levels, supported by solid execution and our continuous improvement efforts, as well as increased volume and scale effects.
To sum up, as we face continued market challenges, we ended the third quarter of 2017 by continuing to deliver strong project execution and a good underlying financial performance. Thank you. That was the end of our presentation here today. We will now open up for questions.
Thank you, Svein. As Svein said, we have time for some questions now. We have two audiences, the people in this room and of course our webcast audience. For the sake of the webcast audience, I would ask that you please do use the microphones in this room. There are some women on the side here who can provide that, and also introduce yourselves before you ask a question. We have time for one question and one follow-on question. We can start in this room. Haakon Amundsen.
Good morning. Just a question on the margins for 2018. Did you say that in 2018 that you see the full impact of the price pressure that we're seeing in industry? Should we think about this as the low point in terms of your profitability?
Pricing competition is fierce. I think you have seen our ability to adjust to this new pricing environment over the last three years. You know, we've seen our top line coming down by more than 30% over the last three years, and we have been able to sustain stable underlying margins. Of course, you know, we have to continue adjusting, and we believe that we will even be able to maintain current margin levels in 2018, pending that our revenue remains at current levels, or we see it somewhat up. As we say, it's pending successful outcome of a pretty healthy ongoing tender portfolio.
I can just complement what Svein said. There's no question there's fierce competition always. As we just proved today with a nice award, you know, we can compete, and we know that since the beginning. Those are the new times, there's the new price, and we have to make those products viable by, you know, reducing the cost of the whole industry through ourselves. We're gonna be fighting hard as we've been fighting hard for the last two years.
All right. Thanks.
Any further questions? Gentleman here in the middle left.
Hi, Magnus Olsvik, Kepler Cheuvreux. Just uh, first of all, a follow-up on the last question. The project you won today, the political award, can you say which region are we located in? Will it be accretive or dilutive to your margins for next year?
Okay, I can start with the first part of the question, which is I would love to be able to tell which was the project, but unfortunately, we have agreed with the client at this point not to release the name of the field or location. I'm sure very soon we're gonna be able to do it. We just take getting clear from the other partners to allow us to announce. Again, I think it will be, it will not be dilutive. We are still very disciplined about tendering. I think especially when it comes to verticals that are very differentiated technology, and there is not a need to completely, you know, destroy the business, so it's not dilutive.
Yeah. The second one, for your capital structure, and, so you have drawn some on the RCF, this quarter. What are your priorities going forward with regards to that RCF and also the bond maturity in 2019?
Yeah. As you probably remember, we settled the NOK 1.5 billion bond in June by drawing on the revolver. As you've seen, we have continued drawing somewhat on that revolver, and at the end of Q3 have drawn about NOK 1.9 billion of the NOK 5 billion frame. In terms of our balance sheet structure, it's something we're gonna look at related to processes of potential rolling the revolver, term loan, bonds, et cetera. Right now we have plenty of flexibility as relates to our liquidity and moving forward also for 28 PM needs. As you've seen, we've also been able to facilitate some inorganic activity with the existing liquidity reserves we have.
Thank you.
I believe there is a question from Terje Fatnes .
Yeah, Terje Fatnes from SEB. Some of the projects now coming up for award in Q4 in the North Sea, there is both a subsea and an engineering component. Is it likely that you can get both on some of these projects? Will you have to compete for either the engineering or subsea on these projects?
Okay. Yeah, well, no, absolutely we are I think we are well positioned in all areas, I would say the greenfield, some engineering also, the SPS, as we call it, Subsea Production Systems as well, in some of the brownfields and also some of the hookups for the new future platforms. No, we are competing for the whole scope. I think we can, we are competitive and good enough to win on the IRS. That's what we believe.
Okay, thank you.
Any further questions in this room?
There's one more question then.
Just on M&A, you made two very small, how should I say, but very sensible acquisitions last year. Do you see further opportunities now in the, as the industry is, actually in the downturn?
Of course, we are looking to the market. There's a lot of consolidations and there are opportunities, so we continue looking at the course of business. There's nothing can talk about right now. We keep looking especially where we complement our offer or we spearhead developing a new market like we did for the subsea acquisition Brazil, and also for the lines consolidation here. We're looking into opportunistic acquisitions for sure.
We will definitely take the advantage of the price variations and, look for, similar, you know, bolts-on when the opportunity, arise.
Take some of the questions from the webcast audience then. There is a question from Amy Wong at UBS. In your projects division, I appreciate that you are guiding to a 15% year-on-year decline in revenue. Can you give us some color on the split and the change in volume and change in price?
Within projects, as I said, Subsea is significantly more down than the field design components, 2017 or 2016, and the percentages are there in the presentation. In terms of margin performance, as we said, we see very strong performance and improvements within our existing backlog. As Amy is very aware of, we have some significant ongoing projects on the Subsea side, where we have seen great momentum related to driving the margin level up in that part of our backlog.
Okay. We have a further question from Amy. Your 2018 revenue guidance has a health warning on successful outcome of several key tenders. When do you need to win those awards to make a contribution to 2018 results?
Okay. Well, I think, we, during the presentation mentioned that we expect awards to accelerate the next six months. That's I think an indication where we believe that we need to win this work. And I'm glad to say that one of those awards has been announced today. We expect to win our share, and that's how it's based on.
Yeah. Some of these, tenders and prospects are of course, very matured. We have very good visibility related to the timing of, sanctioning and, conclusion on award. There will be, a pretty healthy sanctioning FID and award volume over the next, six months. That is, needed in order to, deliver on the indication we set for, hopefully for 2018.
There's a question from Eirik Tørstad at DNB. Can you please name the projects you expect to be awarded over the next six months?
Yeah. We cannot, we never comment specific projects, even we don't want the competitors to know which ones are our targets just to start with. I would not answer that question in detail. I can only say that is that in several regions and we're well positioned in several regions. Just keeping aside all the rumors that usually comes out this time of the year that we want qualified names.
Another question, this time from Maria Laura Adornato at Goldman Sachs. From the current cost-saving program, how much of the cost reduction is cyclical and due to the drop in volume versus structural changes to the organization?
Okay. Yeah, it is always a question comes and, well, when we qualify our operational improvement efforts, we are talking about, you know, a specific improvement in actually in the process, in the efficiencies I mentioned, footprint announced today that we are organizing our operations. That of course will be lowest cost and improve efficiencies. We talk about reducing costs of the products. We have really focused on sustainable savings. Obviously, we cannot control the price of our suppliers. We're working very close to them to make sure that they have a long horizon, and they actually work with us through all the efforts, including, you know, simplifications, standardization, digitalization. We're working very close with key suppliers to also bring their costs down. We are refocused.
I think like the whole industry, to try to have sustainable cost reductions. That's where our heart is right now.
I think this ties in well with the next question from Gregory Brown at Credit Suisse. The industry has done an admirable job in tackling the structural cost issue for offshore developments, and many of the changes look structural. However, it hasn't been enough to make all projects viable at current oil prices. What, to your mind, needs to be done to ensure that these undeveloped prospects do not fall by the wayside? How does Aker fit into this next wave of cost cutting?
Yeah, that's a extremely good question. We know that oil companies are being extremely cautious about the capital expenditure, as this place to be. We also believe that we know that the cheapest barrels will be produced. That's something to have in mind. I think for lots of the savings we've seen in the central projects, the reductions have occurred in the early phase of the projects, what we call front end. That's where we sit down with clients. We have several examples, Sverdrup, Castberg, and several other international projects that we sit down with the clients and they look into the design, they look for all the savings, simplifications that we can do to reduce the costs.
In our opinion, and that go to second part of the question, where we're positioned on, I think we are positioned to bring this front end knowledge. As I said, our front end business is extremely busy now. That's what we're doing there. It's looking into the field layouts, looking at technology they need, and then working towards having reducing the break even cost of the project. That's in our view, where we are placed. Of course, with the external components being a very important part of that.
That was the final question. Unless there are more questions in this room. Thank you for coming. We will wrap it up now.
Thank you.