Good morning. Welcome to Aker Solutions presentation of first quarter results for 2017. Thank you for joining us here today. My name is Bunny Nooryani , and I'm the Head of Investor Relations and Communications at the company. With me here today are Luis Araujo, our CEO, and Svein 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 interviews with the media. Before we get started, I'd just like to point to the nearest emergency exit, which is out through the glass doors on your left. Please do note that we don't have any fire drills planned today. Luis, will you take it from here?
Thank you, Bunny , good morning, and thank you for joining us here today. I'm pleased to be here with Svein to go through our results for the first quarter, which was another period of strong execution for Aker Solutions. As usual, let's start with the main developments in the quarter. We are now three years into the industry-wide slowdown. Conditions remain challenging amid an oil price that reached a six month low last week. Importantly, we also see some positive signs. Breakeven costs have come down, which increase the likelihood of more projects being sanctioned. Tendering activity is good. In this environment, we delivered yet another quarter of strong execution in our major projects progress as planned globally. To give you some examples, we completed the detailed design for phase I of the giant Johan Sverdrup development offshore Norway.
The Moho Nord subsea project in Congo- Brazzaville achieved first oil in the quarter. The first subsea manifold was installed at the Kaombo development offshore Angola. Aker Solutions is providing the subsea production system for both of these West African developments. We also made good progress, good headway in the quarter with our company-wide program to keep improving operations and bringing down costs. The program, called The Journey, is now more than 2/3 complete. We fully operationalize our new organizational structure of five delivery centers. This is streamlining and strengthening how we operate the company. Together, these improvements efforts helped to support our margins amid the market slowdown that caused a weakening of both our top and bottom lines. Now for the main numbers.
First quarter financial figures were revenue of NOK 5.2 billion, EBITDA of NOK 355 million, an EBITDA margin of 6.9%. Excluding special items, the margin was 7% and EPS was NOK 0.23. We had a solid financial position at the end of the quarter with a liquidity buffer of NOK 7 billion, this give us good flexibility going forward. Our order intake was NOK 4.6 billion in the quarter, bringing our backlog to NOK 3.7 billion. More than half of this are for projects outside Norway. New orders in the quarter included a front-end engineering and design contract from Statoil for the second phase of the landmark Johan Sverdrup development.
We also secured a NOK 900 million contract for the hookup of the riser platform at the Johan Sverdrup field. The value will be split about equally with our subcontractor, Kværner. The contract also contains hookup options for the field's processing and living quarter platforms. We won a NOK 1 billion order to provide engineering for the upgrading of the Njord A platform in Norway. We know this platform very well since we delivered originally about 25 years ago. We also secure a front-end engineering and design contract from VNG for the North Sea Pil and Bue development. I hope I got that right. We signed a framework agreement with Songa Offshore to provide asset integrity management services for the company's Cat D rigs. Importantly, our early phase capabilities continue to generate strong interest in the quarter.
We won 30 awards for projects in Norway, the U.K., the U.S., Australia, and Malaysia. That compares with a record of 80 studies from all 2016, making this a very good start of the year. About a third of these studies were won with our alliance partners and include work within subsea compression and field electrification, just to give you some examples. It's also worth noting that we are seeing an increasing tendency for our study and field work to be more closely tied to the potential next stages of a project. In other words, the engineering, procurement, and even construction installation phases of the project. That actually means that the front end study put us in a strong position to secure future work at these projects.
To say that we won some key contracts after the quarter end, This includes a framework agreement for as many as 10 years from Aker BP to provide engineering and procurement services for new offshore field installations. Now for another area that generating great interest, carbon capture. Last month, we secured two strategic important contracts for carbon capture concept studies here in Norway. One is a study for carbon capture at Yara's ammonia plant on Herøya. The other is a Norcem cement factory in Brevik. Yara and Norcem are two of the three companies in the running to receive funding from the Norwegian government to build and operate full-scale carbon capture plants by 2022. This study has put us in a very in a pole position to take part in any such future development.
The Yara study will design a carbon capture plant for the ammonia facility reformer flue gas, and will also include liquefaction. The study for Norcem will design a capture plant that integrated with the cement factory. This includes a process to turn CO2 into liquids and storage facilities that can be used before shipping. Well, carbon capture is seen as crucial to curbing CO2 emissions and meeting global climate goals. At Aker Solutions, we have developed a cost-efficient and improved carbon capture technology that is commercially ready and can be applied to different types of industrial emissions. We have carried out extensive tests of our technology in the U.S., the U.K., Germany, and Norway. This includes testing with our mobile pilot capture plant at Norcem's cement factory in Brevik. The results were so promising that Norcem has chosen to use our technology for potential full-scale capture facility.
In fact, following the Paris Climate Agreement, we have seen a significant rise in interest in our carbon capture technology also outside Norway, in places such as U.S., Asia, Middle East, Croatia, U.K., and Germany, to name a few. We see promising opportunities for this important technology. In fact, in these challenging markets, it's more important than ever to look for and seize the opportunities. In Aker Solutions, we are very much focused on taking advantage of these opportunities, most recently in our services business. As you recall, we bought a majority stake in the Brazilian construction and assembly company, C.S.E. Mecânica e Instrumentação, in December last year. That's an easy one to pronounce for me, at least. Finally. This is a key step in growing our service business internationally, where we see major potential.
Here in the home market in Norway, we seized another opportunity last month. We acquired an origin oil and gas service business of Reinertsen, Norway third-largest offshore maintenance and modification supplier. We see many benefits of this acquisition. Combining Reinertsen and Aker Solutions' capabilities secures our position as leader in the Norwegian maintenance and modification market. It will enable us to generate synergies while helping to safeguard core competence at key locations and position us for a market recovery. It also provides another backlog containing key maintenance modification contracts with our key client, Statoil. This includes a framework agreement of as many as 10 years that was awarded in December 2015. This contract covers work at very important assets, Troll, Heidrun, Åsgard, Njord fields, offshore Norway. Both companies have a history of collaborating together in Norway, and we will build on this going forward.
While it's early days, I'm pleased to say that the process of integrating both Reinertsen and CSE with Aker Solutions is going very well. We share a similar culture and values, and we are working together to build a world-class service business that will be strongly placed for a market upturn. As mentioned at the start of this presentation, we are making good progress on our company-wide improvement, The Journey. The program targets an improvement in cost efficiency of at least 30% or NOK 9 billion in an annualized cost savings by the end of 2017. Important to remember that that compares with our 2015 cost and work volumes. We have now achieved more than two-thirds of this goal. We are making these improvements by simplifying our methods, our organization set up, and our geographic footprint. We are also standardizing our products and services.
Let me give you some examples. We have improved efficiency at some of our manufacturing facilities by as much as 50%. This can be seen in reduced man-hours and shorter lead times. A very important example to illustrate this, we produced our longest ever umbilical in less than a year at our plant in Moss. At the peak, we produced a record 83 km of the total 185 km long umbilical in 82 days. If you work the math, that's more than 1 km a day. We have also reduced assembly and test hours of subsea trees by 50% on some key locations. We have lowered the cost of newer projects by up to 40% compared with 2015 levels.
These are just some examples on how we are making progress and making our projects more cost efficient for our clients. Now to the outlook. Let's looking ahead. The outlook for our service remains challenging. Projects continue to be postponed, and there's pressure on pricing, and the oil price remains volatile. There are also signs of a recovery. Improvement measures across the industry are having an effect. Breakeven costs are coming down, and this increase the likelihood of more projects being sanctioned this year. This is particularly the case for brownfield projects as oil companies focus on optimizing output from existing fields. We continue to see healthy tendering in our main markets, and we are currently bidding for contracts totaling about NOK 50 billion. 90% of this is in subsea area, where we expect to see some key projects being sanctioned this year.
Since the start of the market slowdown in 2014, we have reduced our permanent workforce by about 30%. Going forward, we will continue to be vigilant about our workforce capacity to ensure it fits market conditions. Long term will remain positive. Global energy demand is seen increasing. This supports a positive long-term outlook for offshore and deepwater oil and gas, where we are well-placed. At the same time, field developments are becoming more complex. We have the technology and capabilities needed to manage these challenges. In sum, we are delivering consistently strong execution and significant cost efficiency improvements that are supporting our margins as we face continued market headwinds. We have a solid financial position. We are seizing opportunities to grow our business so that we stand even stronger when the market recovers.
Thank you for listening. Svein will now take you through the numbers in more details. Svein?
Thank you, Luis. Good morning. I will now take you through the key financial highlights of the first quarter, our divisional performance, and run through our financial guidance before we move on to Q&A. Our new organizational structure is now fully operational. We are today reporting according to our two new operating segments, projects and services. I would like to remind you that we, along with our fourth quarter presentation, released a definition of our new organizational structure, operating segments, and historical pro forma unaudited numbers for the new segments. This is also easily available on our investor relations webpage and in the financial appendix to this presentation. As always, all numbers mentioned are in Norwegian kroner. As usual, let's start with the income statement. Overall operating revenues for the first quarter were down 20% year-over-year.
The market slowdown continued to impact activity levels in both of our operating segments. This was partly offset by good progress on a number of key projects. Our reported first quarter EBITDA was NOK 355 million. This included a small number of special items, which were mainly related to our non-qualifying hedges and the recently announced acquisition of the Norwegian oil and gas assets and activities of Reinertsen. Excluding special items, the EBITDA was NOK 363 million, compared with NOK 521 million a year earlier. This was equal to a margin of 7% in the first quarter, which was down from 8% in the year earlier period. This we consider a modest drop in margins, considering we saw another 20% drop in revenues year-on-year, and a 16% decline versus last quarter.
Clear evidence of our ability to adjust our organization and our cost base to the continued subdued market conditions. Margin levels were also impacted by a changing revenue mix as we saw a more resilient activity level for our brownfield-related activities. Our first quarter depreciation was slightly up from last year at NOK 205 million. Going forward, we continue to expect our underlying depreciation to be in the range of NOK 800 million-NOK 900 million for 2017. Our reported first quarter EBIT or operating profit was down year-on-year to NOK 150 million. Excluding all special items, EBIT was NOK 157 million, and the margin was 3% versus 5% last year. This reflects also a somewhat higher depreciation burden year-on-year. Excluding an unrealized hedging gain of NOK 5 million, net financial items were NOK -63 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, excluding the effect of currency and non-qualifying hedges. Our tax charge was equivalent to a rate of 33% in the quarter. Our view remains for average P&L tax rates to be in the mid-30% range going forward. We ended the quarter with a net income of NOK 62 million, equivalent to earnings per share of NOK 0.23. Normalizing for all special items, our underlying EPS for the quarter was also NOK 0.23. Moving to our balance sheet and the cash flow performance. Our net current operating assets or working capital developed favorably to -NOK 974 million in the quarter, down from -NOK 904 million at year-end.
This was driven by several milestone achievements on key projects as well as disciplined cash flow management. We continue to expect our current favorable working capital position to unwind as our major projects progress and see this happening over the next 12- 18 months. Due to our improvement programs and ongoing initiatives to optimize cash flows, we remain comfortable that we see a more normal working capital level of around NOK 1 billion-NOK 1.5 billion through 2018. This is equal to about 5%-7% of revenue. We had net interest-bearing items or net debt of NOK 968 million at the end of the quarter, slightly down from NOK 1 billion at year-end, in large part due to the favorable effect of our working capital position.
Our net debt to EBITDA under the quarter at 0.8 times, we continue to expect to exceed this conservative target level of one time net debt to EBITDA during 2017. Our total liquidity buffer is robust at NOK 7 billion. This includes our undrawn NOK 5 billion revolving credit facility with leverage covenant at 3.5 times. This position continues to give us good financial headroom moving forward. As a reminder, the credit facility is secured at very favorable terms, with the margin starting below 1%. We now have NOK 1.5 billion of debt maturing in June. We will settle this bond from available liquidity reserves. NOK 0.5 billion related to local debt in Brazil was already settled at the start of the year.
As of the first quarter, our unadjusted return on average capital employed for the group overall reached 4% versus 7.1% in the year-earlier period. Excluding special items, our return on average capital employed was 9% versus 14% last year as our nominal rolling 12 month EBITDA decreased year-on-year. On return on average capital employed, there is also the effect of recent investments that are yet to contribute to earnings. Our group capital employed was NOK 8.3 billion at the end of Q1. Of this, around NOK 800 million was linked to facilities and technologies that did not yet contribute to earnings. Our cash flow from operations in the first quarter was NOK 98 million, reflecting favorable working capital. Our investing cash flows totaled NOK 76 million in Q1.
We still expect 2017 CapEx levels down from 2016 and now see overall CapEx and R&D at roughly 2% of revenues going forward with flexibility. On to Projects, one of our two new reporting segments comprised of, as previously reported, our subsea engineering and MMO projects. First quarter revenues were down 20% year-over-year. This was driven by lower activity levels that were somewhat mitigated by continued good progress on key projects. We also continue to realize significant benefits from our improvement programs in our projects portfolio. This helped offset some of the market headwinds. A result, our underlying projects EBITDA margin was only slightly lower year-over-year at 6.6%, despite the significant drop in volume.
Our projects EBITDA margin was 3.2% excluding special items, down from 4.8% a year ago, driven by a higher depreciation burden. In terms of order intake for projects overall, our first quarter book-to-bill was up versus last year at one times. Our backlog remains healthy at NOK 22.6 billion. This is equivalent to more than 13 months of projects revenue. Now let's take a look at the key figures for subsea and field design within this reporting segment. Subsea projects revenue were down 27% year-on-year, due in particular to lower volumes on the NCS and in Africa, and as some projects neared completion. Field design projects revenue were down 10% year-on-year, with new projects not yet sufficiently progressed to offset the effects of well-advanced or completed contracts.
In terms of order intake, subsea projects delivered a 0.3 times book-to-bill, and field design, a solid 1.8 times book-to-bill. As Luis mentioned, despite the tough market, tendering activity is still good, and we are currently tendering for around NOK 45 billion of work overall in projects, with the majority being subsea-related. We continue to see a challenging market for projects this year. We still expect subsea projects revenue down around 25% year-on-year, but have a more optimistic view on field design projects, where we anticipate a modest pickup in activity levels, especially within brownfield. For projects overall, we see 2017 volumes down around 15%-20% from last year. We expect softer underlying margins year-on-year, driven by the change in revenue mix and continued challenging market conditions. Our services segment includes subsea lifecycle services and production asset services.
The latter consists of MMO-related service work and also includes our recently acquired Brazilian maintenance and modification company, CSE. Services revenue were down 28% year-on-year. This reflects a subdued activity level in subsea lifecycle services and a maturing project portfolio for production asset services. As of the first quarter, subsea lifecycle services accounted for roughly 60% of services revenues in line with the first quarter last year. The underlying EBITDA was NOK 152 million, with a margin of 14.2% versus 10.7% a year earlier. EBIT was NOK 113 million, with a margin of 10.6% versus 7.8% a year ago. Margins were driven by high installation and commissioning activity in the subsea space, a healthy resource utilization in some geographies, and strong operational performance.
The first quarter order intake was down year-on-year and totaled NOK 0.5 billion for services overall. The Q1 book-to-bill was 0.5 times and reflects seasonal effects in the North Sea and continued lower activity levels across regions. Please note that a significant part of services order intake is short cycled or book-and-turn in nature. Despite the tough market, tendering activity is good, and we are currently tendering for around NOK 5 billion of work globally. In terms of our outlook for services this year, we see revenues remaining around 2016 levels. We expect a slight decline year-on-year for subsea services, mitigated by revenue from production asset services and the CSE acquisition in particular. Despite this slight change in revenue mix, we see underlying EBITDA margins remaining similar to 2016 levels. To the order intake and backlog performance for the group as a whole.
At NOK 4.6 billion, overall first quarter order intake was equivalent to a book-to-bill of 0.9 times. This was similar to the first quarter last year and was helped in particular by field design projects, which had a strong book-to-bill of 1.8 times. Our backlog was NOK 30.7 billion at the end of the quarter. This is equivalent to around 1.3 times our revenues over the last 12 months. As mentioned, overall tendering activity is good, though delays in project awards remain common. We are engaged in tenders with an estimated sales value of around NOK 50 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've made on our near-term outlook. Our outlook for 2017 still indicates overall revenues down by about 10%-15% this year versus last year, with activity growth in the field design components of both projects and services. We see the underlying EBITDA margin for the group overall for 2017 slightly down from current levels. To sum up, we started 2017 by continuing to deliver strong project execution and a good underlying financial performance as we faced persistent market headwinds. We're driving through our efficiency improvement program and are continuing to adjust our cost base to offset the impact from falling volumes. Improvement efforts, solid finances, and order backlog will stand us well going forward. Thank you. That was the presentation for today. We will now move on to Q&A.
Thank you, Svein. As Svein said, we do have time now for some questions. We will start with this with the people in this room, and people are also able to send in questions via email for those who are following our webcast. We do aim to be finished at 10:00 A.M. today, so I would ask that you please do limit your questions to one and one follow-up. After, when we're finished here, we do have time for some one-on-ones with the media as well. Let's start with this room. Any questions?
Thank you. Tom Erik Kristiansen on the Pareto Securities. You're now guiding margins slightly down from current levels. Is it fair to assume that those current levels are around 7% as you delivered in Q1? What does that reflect in terms of what you previously guided when it was slightly down from 2016, which was 7.5%?
I think it's specific enough. Correct as you stated, underlying EBITDA margins for the group overall was 7.0% in Q1. I'm indicating we're gonna be slightly down from that level, 2017 overall.
Thank you. Just on the key Subsea projects you're mentioning, in your outlook statements that are gonna drive activity in 2018, could you elaborate a bit on the regions that those projects are in?
In terms of the Subsea projects that will drive activity moving forward, of course, we have our backlog in West Africa. We have significant tendering activity ongoing at the moment. As we indicated, NOK 45 billion worth within projects alone, of which about 90% is Subsea related. In terms of regions of those ongoing tenders.
Yes, in many regions. I would say it's many regions. We have quite good drive on gas projects today. We see projects in India. We see West Africa, as you know, some LNG. Very good for us because we have a lot of technology for long step out and compression and large bore trees and so forth. We also see some projects in Asia as well, start to move, and lots of tiebacks. As we know, what we used to call the ones and twos. There's a lot of tiebacks to existing fields that we actually developed them now.
Okay, thank you.
Thank you. Are there any further questions in the room? If not, We will go to our webcast audience. We have a question from Christopher Møllerløkken, SpareBank 1 Markets. Did your Q1 order intake include anything from the acquisition of Reinertsen, or will that be included in 2 Q?
There was nothing. Order intake was included in order intake from Reinertsen acquisition, Q1, no.
We have one more question from Philip Lindsay at Credit Suisse. On Kaombo, the FPSO is behind schedule. Has your schedule been impacted by the progress of others?
No, we are pro... I cannot report on any scope of other suppliers and so forth. I think, for us, the project going according to plan. We progressed, including very well the local content in Angola. Give you an idea, we have 17 manifolds ready in Angola right now. One is Subsea, 16 ready to go by the dock, and several trees ready to go as well. It's, and of course, the drilling program is progressing according to Total's expectations. Very good project for us. Solid performance by the team, both in Norway and Angola, so making us proud actually. We're progressing, and this, the relationship with Total is outstanding. Start from the Moho field, we achieve first oil now and moving now to Kaombo.
It's, as I said, I'm very proud and happy to what we're doing for Total. That was actually testified by Total during the OTC last week during the presentation of Moho. Aker Solutions being the only supplier mentioned during the presentation of the EVP, I was extremely proud to see that.
Another question from Philip Lindsay. How is your strategy developing in terms of the Integrated Subsea offering? Do you think the alliance with Saipem is sufficient to be a relevant player in this market?
Okay. That's a good question. I know there's a lot of moving parts today and, actually, the jury's out there, as you say it. Not many projects have come to the market combined SURF Subsea, but there are some start to show up. There's one for ONGC just coming out now, and I think we have both Saipem and ourselves are very strong in India. To be more concrete, more direct to your question, I think, as I said all along, there are no installer or no Subsea supplier who is good everywhere. I guess you might be stronger. We are extremely strong in Norway and in other locations, and so is Saipem in some clients.
Actually combined towards Total and some other clients, we're both very strong. I think it is sufficient, and the choices for everybody are quite limited. I think our relationship with Saipem is good, and we are, as agreed in the beginning, pursuing projects as they come along, and it's a project-by-project, project case. If you look, for example, towards Aker BP in Norway, we are working with Subsea 7. When it comes to the NGPL, we're also working together with Subsea 7. It's case by case. Of course Saipem is our main choice for larger projects in the international market.
Philip Lindsay has a final question: In terms of the progress that you and the broader industry have made on cost initiatives and bringing down project breakevens, in your view, do you think enough has been done to reverse the declines in Subsea in the coming years?
Yeah, I actually think so. Of course, this... What we see now is volatility, and that's demonstrated now for the last few weeks with the oil prices moving up and down. People are actually making sure they develop the projects that bring returns quickly. That's why I said that brownfield, especially in Subsea, are coming faster. People are trying to produce those assets with, you know, that they have, so I think we did. Subsea will be competitive, especially in large producing fields. For example, I can mention the Pre-Salt, what we're also producing 25,000 barrels a day in average. That has to be competitive. Of course, we are competing with other resources.
Some areas are very fast to produce oil, as you know, the so-called shale or unconventions in U.S. That's a balance, but I think in the long term, for certain assets, I think Subsea will be competitive. The cost reductions are significant, and I think they're here to stay. One of our key clients last week said that they believe about 75%-80% of the savings are to be maintained going forward. They're not supply chain driven or demand driven.
A question from Haakon Amundsen at ABG Sundal Collier. Can you explain how you may be able to improve the profitability on the MMO contracts taken over through the Reinertsen acquisition?
Okay. I cannot be, I don't wanna be too specific. This is a very recent acquisition. We are working integration plan and so forth. We believe that we need more volume. Volume is key to MMO business, not only Reinertsen, but any MMO business. That's has been a struggle for the whole industry. We have worked very hard on our operation improvements. We actually gonna apply that to Reinertsen. That's the first part. We don't know exactly how much they have done. We know how much we have done. We have reduced the cost of modification contracts by about 40% overall. We believe we can apply some of those methods in Reinertsen.
As I said, integrating the two companies, we have a lot of synergies that we can take, where, for example, we are moving all the personnel from our Trondheim and Bergen office, getting everybody together, so there's rationalization to be done. Also, as I said, volume. We see that Statoil has very important assets under Reinertsen, as I mentioned, key assets that we have developed a lot of those fields before as well. I think we can take some of the advantage there.
A question here on restructuring from Michael Pickup. Are there any further restructuring plans on the horizon?
Well, as we've been saying since the beginning, we be very vigilant about capacity and then we look and see if any pockets of low utilization appear, then we have to take the measures. I think we have proven that we have done quite well as a company. Nothing is something we like to do. We are protecting our capacity, and we have maintained the integrity of our capabilities. We have no plans at the moment. We have demand, we know what we have in them.
Thank you. That was the final question from the webcast audience. If there are no further questions in the room today, then I'd like to thank you for joining us here.