Morning. It's good to see you here today. We're going to present our quarterly results. My name is Bunny Nooryani, and I'm the Chief Communications Officer. With me here today are Luis Araujo, Aker Solutions Chief Executive Officer, and Svein Stoknes, our CFO. They'll go through the main developments in the quarter. After that, we'll have time for a Q&A, and there will also be time for brief interviews with the media. Before we get started, though, I'd like to point out the nearest emergency exit, which is through the door on your right, go straight forward out through the glass doors until you get out of the building. I'd also like to point out that we have no fire drill scheduled today. Thank you. Luis, please take it.
Thank you, Bunny. Good morning, thank you for joining us here today. I'm pleased to be here today to present, to go through our Q1 results. Let's go to the main developments in the quarter. Top line growth was solid, rising 14% from a year earlier as we made good progress on key projects from Angola to Brazil and Norway. Our margins narrowed, partially because of a slowdown in the Norwegian maintenance modification operations market, which has led the overcapacity in our workforce. We announced the capacity adjustments in February that may affect about 300 MMO positions in Norway this year, and this follows adjustments made last year. I can assure you, we remain vigilant about capacity in all areas of the business to ensure the best fit for current market conditions.
We took one-off provision of 52 million NOK in the quarter to cover lease costs, due to office space that we have vacated after making workforce adjustments. Our earnings were also impacted by a slow start of the year for our subsea service units, particularly in the North Sea, and unfavorable outcomes of some late-stage commercial discussions on a few subsea projects. These developments were partially offset by operational improvements and a better capacity utilization in engineering business. Our major projects progressed as planned in the quarter, and our order intake rose 53% from a year earlier, helped by contract wins, including the NOK 4.5 billion engineering procurement management assistance contract for Statoil for Johan Sverdrup, and a very important strategic and significant order for concept studies of future phase of this important development.
Actually, the numbers, well, the quarter with a healthy backlog of NOK 48 billion. This puts us in a very good position as we face a challenging market, where many of our major clients continue to be vigilant on how they allocate capital. We are now set on delivering on the backlog and strengthening our competitiveness through a continuous focus on operational excellence and on bringing down costs and improving financial performance. To that end, we have made some changes in our executive management team. Tore Sjursen, who previously headed the MMO business, has now assumed the position as Head of Operational Improvement and Risk Management. Tore has been with Aker Solutions for 28 years, and his experience and drive will be invaluable in strengthening operations across the business.
Knut Sandvik has taken over from Tore as the Head of MMO. Knut, who's also an Aker Solutions veteran, has extensive experience in operations in both our engineering and subsea business, where he most recently led our major subsea project unit. I'm delighted to have both Knut and Tore in these critical roles, and I'm very positive the appointments will be a major benefit to the company, to our clients, and our shareholders. Now for the main numbers. Compared with a year earlier of, you know, our Q1 , revenue rose to NOK 8.5 billion. EBIT decreased to NOK 409 million. The EBIT margin narrowed to 4.8%. By excluding the one-off items, the margin was 5.8%.
Earnings per share were NOK 0.79. Our order backlog increased to NOK 9 billion and bringing the backlog to a robust NOK 48 billion. Since last quarter, we have passed some order and significant milestones, mentioned a few. Just 2 weeks ago, we, together with our industry partner, delivered the Edvard Grieg platform to Lundin exactly on time and on budget. Last week, we also delivered 3 subsea templates for Statoil Aasta Hansteen project, as you could see in the press. That's a good progression on key projects from teams dedicated to achieving high-quality results. Quality in all we do. That's a key driver at Aker Solutions, and we have intensified our improvement efforts, both internally in all parts of the business and externally with customers.
We made steady progress in the quarter in cost-saving programs across the company and continue our work with clients to achieve operational and cost savings improvements at projects. We intensified our push to improve quality and execution, including stepping up initiative based on lean principles to test work methods and process at key projects and develop new best practices. The program now includes 15 projects, up from four last year. We also continue efforts to deepen synergies throughout the company. In practice, this means sharing resources and expertise across the business to avoid duplication, strengthen processes, and develop the most valuable solutions for our customers. As an example, our business areas are focused on developing the future in advanced subsea production systems, from design to construction, maintenance and upgrades.
This type of collaboration is also key to our front-end work, which when we get involved early in a project, at the appraisal and feasibility stages, we use our technical expertise from the full spectrum of field development in our life field knowledge to assess total development, not just the parts of the project. That's how we maximize value and bring down the breakeven cost of projects. Under the current environment, we are seeing growing interest in front-end capabilities as customers increasingly seek more effective solutions for the total field development. Now to the outlook. No doubt these are challenging times for the industry, and many of our clients are reducing spending. We see tougher commercial discussions in this environment, and some projects are being postponed, though there is still steady tendering in our main markets.
Activity in North Sea, our largest regional market, is expected to be sluggish over the next 1-2 years, though key developments such as Johan Sverdrup that I mentioned will support the business. As I mentioned earlier, we are adjusting our MMO workforce capacity in Norway, and we will continue to be vigilant about capacity in our areas as we face an uncertain market in the short term. Our subsea service unit had a slow start of the year, particularly in North Sea, where difficult weather conditions hampered activity that was also constrained by oil company spending cuts. We expect more normal conditions moving forward, but we cannot rule out further headwinds in this area. Longer term, we remain optimistic.
Our leading technology, engineering and project management skills put us in a prime position to benefit from a shift towards a more focused complex offshore resources. We are well-placed in the global deepwater and subsea segments, where growth potential is good. According to standard analysis, spending on subsea equipment and services is expected to be 50%–60% higher in 2020 than in 2014. We face the current market environment from a position of strength with near record order backlog and a growing international presence. That's underpinned by our continuous effort to boost operational and financial performance. Well, thank you for listening, and Svein will take it from here, give you more details in our Q1 numbers. Svein?
Thank you, Luis. Good morning. I will now take you through the key financial highlights of the Q1 of 2015, our divisional performance, and run through our medium-term financial guidance before we move on to Q&A. I would like to point out that as usual, all numbers mentioned are in Norwegian kroner. Starting with the income statement. Overall operating revenue for the Q1 was up 14% year-over-year, driven by high activity levels and good progress on a number of key projects. Our reported Q1 EBITDA was NOK 591 million. As a result of capacity adjustments in MMO, we took a NOK 52 million provision for onerous leases in the quarter and also saw NOK 4 million of demerger costs.
Hence our EBITDA, excluding non-recurring items, was NOK 647 million, equivalent to a margin of 7.6%. On an equivalent basis in the same period last year, EBITDA was NOK 666 million with a margin of 8.9%. Depreciation was higher than last year, reflecting recent investments, in particular in subsea. We continue to expect depreciation to be in the range of NOK 700 million–NOK 750 million this year. Our Q1 EBIT was down year-over-year to NOK 409 million. This also included NOK 26 million of impairments related to subsea technology. Excluding all non-recurring items, EBIT was NOK 491 million, and the margin was 5.8% versus 7% last year.
As can be seen from the slide, fluctuations in the fair value of hedging instruments that do not qualify for hedge accounting led to a Q1 unrealized loss of NOK 7 million, consisting of, NOK 18 million loss included in EBITDA and, NOK 11 million gain in financial items. Net financial items were NOK 82 million, which included some one-off financial items linked to the demerger. Excluding these costs, the net financial cost was in line with our expectation for around NOK 60 million–NOK 70 million per quarter. Our tax charge this quarter was equivalent to an overall rate of 34.9%. Our tax guidance is unchanged. We still see average P&L tax rates in the low to mid-30% range going forward.
All in all, we ended the quarter with an unadjusted net profit of NOK 220 million, equivalent to an earnings per share of NOK 0.79. This brings us to our balance sheet position. As I mentioned, net interest-bearing debt increased to NOK 889 million at the end of the quarter. Our leverage and gearing levels reflect this strong financial position with leverage at 0.3x and gearing at 15%. These are well below our conservative balance sheet policy, which targets 1x net debt to EBITDA and less than 50% gearing. Our total liquidity buffer remains robust at NOK 6.8 billion. I'd also like to highlight our return on average capital employed performance, where as of the Q1 reached 17.3% versus 16.5% in the year earlier period.
This increase versus last year reflects both our operational performance over the last 12 months and also some effect from our low average working capital position. Let's turn to our cash flow performance for the quarter. Our cash flow from operations in the Q1 was negative NOK 414 million due to the expected working capital outflow on project work. Our reported NCOA in NOK remains low, but we continue to expect our working capital position to unwind as our major project projects progress through this year and next. We continue to see a more normal level of working capital to be in the range of NOK 1.5 billion–NOK 2 billion. Our investing cash flows totaled NOK 227 million in the Q1 , mainly related to fixed assets and technology development.
This is on track with our earlier comments for a CapEx spend of between NOK 1.5 billion–NOK 2 billion during 2015. Around 25% of our CapEx for the year is still uncommitted or not yet initiated and provides some level of flexibility. The net effect of these operating and investing cash flows brought our net interest-bearing debt to NOK 889 million at the end of the quarter. Let's move to our performance by business area. I will go through all three business areas here, rather than just our two primary reporting segments of subsea and field design, but I would remind you, that as of this quarter, we now include umbilicals into the subsea business area. We have just one subsea segment, including all of our subsea operations, and one field design segment, including engineering and MMO.
We will, however, continue to report separate financials for engineering and MMO. First up, subsea. Subsea saw a strong top-line performance with Q1 revenues up almost 24% year-on-year, driven by good progress on a number of major projects. Excluding the NOK 26 million of impairments I mentioned earlier, our subsea EBIT margin reached 7.5%, similar to both the year-on-year comparison and the Q4 . Although we started to see our revenue and profit mix normalize as we progressed our level of completion on major projects, we have seen some market headwinds in addition to the expected effect of higher depreciation. We saw a slower start to the year for our Subsea Lifecycle Services business, in particular in the North Sea, as well as some unfavorable outcomes of late-stage commercial discussions on a few projects.
In this current market environment, we're also taking a more conservative view on some of the other, late-stage commercial upsides in our current, project portfolio. We expect some of these issues will normalize as we move through 2015. With market headwinds unlikely to decrease, our outlook for subsea this year remains a flat progression in revenue and no expansion in margins when compared with 2014. Our subsea return on average capital employed reached 27.8% in the quarter, a strong increase versus the level we saw last year. This reflected a number of factors, including underlying performance on a rolling 12-month basis, but also the continued low level of working capital in the subsea business, which affects our calculation of capital employed.
We expect this will normalize further over 2015 as our working capital position sees an outflow on project progress. I would note our medium-term target for subsea remains for a return on average capital employed of between 20% and 25%. Our Q1 order intake in subsea was lower, down versus last year, our backlog remains substantial at over NOK 30 billion. This is equivalent to more than one and a half years of subsea revenue and gives us good visibility into 2015 and beyond. Due to a continued tough environment in the Norwegian market that was only partially offset by international growth, MMO slightly decreased its revenues year-on-year.
This slowdown in the region MMO markets continued to be the dominant theme for the business, and margins were lower both year-over-year and versus the Q4 of last year, impacted primarily by capacity costs. Despite this tough market, order intake was relatively solid at NOK 2.2 billion in the quarter, equivalent to book-to-bill of 0.9 times, and current tendering remains quite active. The MMO market in Norway remains challenging, and we continue to expect little, if any, near-term recovery. This year in particular is likely to see the full effect of lower modification activity. As we commented at our Investor Day in March, we continue to see overall revenues for 2015 around 20% lower than last year.
We see EBITDA margins remaining under pressure, but moving towards the mid-single digits margin levels towards the end of this year. In 2014, we undertook significant capacity adjustments to reflect lower business activity, reducing our MMO workforce by around 1,000 people. We are now in the process of further adjusting our Norwegian MMO workforce capacity by 300 people this year. MMO is positioned to recover when the market improves, but we continue to monitor the market closely and are prepared to make further adjustments if needed. Engineering showed a strong top line performance, with revenue up just over 20% from the same quarter in the previous year. This was driven by good progress on all major projects.
Importantly, our work on Johan Sverdrup is very much on track. We were awarded the EPMA phase of Sverdrup worth NOK 4.5 billion in January 2015. This will provide a solid work base for part of the engineering business for several years to come. Our margin performance reflected good project execution and improved utilization of our engineering capacity, with EBITDA margins reaching 12% versus 10.5% last year. Our outlook for engineering, as given at the Investor Day, is that we see moderate top-line growth this year and EBITDA margins on a similar level to 2014. Good utilization is likely to continue for some regions through 2015 and beyond. As we said last year, we do see risks in certain regions that lower order intake this year could cause lower near-term utilization until our workload recovers.
One good sign for the future was order intake. This was quite robust, up year-over-year to NOK 4.9 billion, equivalent to a book-to-bill of around 4.7 times. A few comments on our order intake and backlog performance. Our group backlog at the end of the Q1 was NOK 48.3 billion, equivalent to almost 1.5 times our last twelve-month revenues. Our backlog remains at almost record levels, helped by the award of the Johan Sverdrup EPMA contract. At NOK 9 billion, the overall order intake for Q1 was over 50% higher than this time last year, equivalent to 1.1 times book-to-bill. This backlog position continues to give us very good visibility into 2015 and also quite good visibility in the medium term. Finally, I would like to again summarize our medium-term financial guidance.
There have been no changes here since the comments we gave at our Investor Day in London in March. Our three key medium-term guidance themes are as follows. We aim to at least keep our market share in our core field design and Subsea markets. We aim to move towards peer group margin levels in our Subsea segment. We expect continued robust margins in engineering and expect a gradual recovery in MMO. We aim to improve our return on average capital employed in Subsea to the level of 20%–25%. As a reminder, we did exceed this level of return on average capital employed in Subsea in Q1, but this was influenced by our still low level of net current operating assets, and hence on our calculation of average capital employed, and this will normalize as major projects progress through this year.
Our other policies around topics like leverage, gearing, working capital, and dividends remain unchanged. As previously mentioned, although the near-term picture is uncertain, our overall long-term view on the future remains for the future of deepwater remains positive, and we continue to see Aker Solutions as well-positioned to grow from the opportunities these markets will present in due course. That was the end of our presentation, and we'll now open up for Q&A.
Thank you, Stein. As Stein said, we have time for some Q&A now. We plan to end the session by 10 our time. I would ask that you please limit your questions to 1 and 1 follow-up. We will start in this room, and we also have a webcast audience, so we'll use a microphone. I would ask you to please introduce yourself before you ask any questions. Kristoffer Lilleeide at the back.
regarding MMO. First of all, order intake in Q1 was surprisingly high given the soft market. Can you give any more comments regarding what you saw there on the MMO order intake? Secondly, the cost-cutting efforts you have made in MMO, will that be assumed to have an effect in like 3 months? So we will see more effects on your margins in second half once the layoffs have been officially completed. Thank you
Okay. The backlog in MMO primarily comprised of growth in existing backlog. There were some smaller new awards, primarily related to growth and primarily related to international markets. Related to the cost side of it, we announced adjusting our capacity by another 300 people in Q1. That process has been initiated. We don't foresee any significant cost impact as a result of that adjustment. As you can see from the margins in the Q1, it was impacted by capacity cost. What we are doing, we are adjusting the capacity, and hence we foresee that we will start trending towards the mid-single digit margin levels towards the end of this year. That's what we're targeting.
I think it's good to emphasize that though this discussions with employees are progressing as we speak. Not something that we like to do as a company, but necessary. We're very mindful of the impact of the workforce that we've been training for so long. Important to maintain this execution muscle going forward.
Next question. Turner Holm.
Hi there, Turner Holm from Clarksons Platou. We've seen crude prices come up in the last couple of months. I'm just curious if you can kind of give us a macro view. I mean, what level of crude price do you need to see for a lot of the major projects that you're bidding on to go through?
Okay. I think it's very early days. One important point that we have not seen any change in sentiment with the oil price. Let's put that point first. I think the whole industry realized that even if the oil price goes back to a hundred, we cannot relax the efforts being made now. I think that's a key difference that I see this downturn comparing to all the downturns we had before. I think people realize that even before the oil price coming down, the price was too high. Not the price, but the cost of few developments more than the price of equipment. is actually a combination of how the industry evolved.
What we see now is a lot of discussions on how to develop the cost of these fields. Of course, the I think most oil companies have established a threshold around $50 per barrel, if you have to pick up a number. They are trying to make those projects strong and robust, you know, at this kind of level. $50-$60, they have not affected the sentiment yet. Very good work being done by whole industry as a whole. Very important discussions at the moment.
Okay. Just a second one on Subsea. You mentioned some unfavorable outcomes on late-stage commercial discussions, and you expect that to normalize through the year. I just hope that you could give us a little bit more insight in what you meant by that?
Okay. I can start and then Svein can give more details. The market is tough. Environment is not easy for our clients. I think everyone, the whole industry is under stress, under pressure. Under this environment, you can expect that a lot of the discussions that end at, or happens at the end of the projects, such as bonus in some ways for delivery and also growth, they are taking at the end. We have seen some change in attitude for some clients coming to those close discussions. We actually took a more prudent approach at the end of the going forward. Svein, you wanna?
Yeah, no, just to add to that, we have done a thorough review and of course, assessed the opportunities, so it is the upsides in our existing portfolio. Given the recent market developments, taking a somewhat more conservative view on the upsides existing in the existing project portfolio. Nothing with the project performance per se, it is just a view on the balance in the project related to the opportunities and the risks and continuous available in the project.
Thank you.
At the back there's another one.
Hi, Sondre Stormyr, Pareto. I was just wondering if you could comment a bit on engineering, 'cause you guide margins the same as 2014, at 12% approximately. You're talking about some potential utilization costs the next quarters. Could you perhaps just tell us a bit on how we can accept or expect the development to be there in margins throughout the year?
Well, I can start and then, as usual Svein complements with more color. Our backlog is strong, and that's very good. What we're doing, working close to Statoil and Shell in all the projects is really a good place to be. Of course, we have a global organization, so markets are different in locations. I mentioned in my presentation that we see a lot of interest from clients for us to get involved early in the projects. Best way, clients are looking for opportunities, not only for our front-end studies, but also from our Subsea Production Alliance with Baker. That's some good traction about studies and making sure that we lower the cost of those fields. That's quite good activity.
There are locations we are finishing large projects, for example, in KL. There will be capacity coming free. We need to continue tendering in some particular places. We need more work, probably in London. Even though we are doing some of the work for this group in London, we need to replenish and get more work in some locations. Overall, utilizations for is foreseen to be good. Svein, anything I missed?
Yeah. No, not as I repeat what you just said, but, you know, the execution performance is very good. Utilization is currently good. What we are saying is that, a couple of, areas within the engineering business area need some order intake to refill during the year. There are a lot of prospects out there. Tendering activity is high. Of course we do intend to replace. I'm just saying that we are addressing some potential soft spots in that portfolio. Overall, for engineering, of course, utilization and backlog is extremely healthy. We have to address some individual soft spots regionally.
Okay. Thank you. Just a quick follow-up. In general, do you see competition being more aggressive on pricing?
What I would like to say that this quarter, actually the Q4 has been actually marked by clients looking to projects. There's a lot of, as I mentioned, it's a lot of attending activity. with our teams are working very, very hard on proposals. We're doing proposals, we're analyzing costs. I think that we'll be price pressure. There's no question, I think. Since our clients are under pressure for price, we'll be under pressure for price. There's no question about that. the very few data points so far, and I'm looking back for the awards, the project list is very expensive, with the same project list from last year. Things are moving.
We believe that all the efforts that are happening now, and I have to say that, uh, the dialogue is a bit different than it's been in the past, 'cause we're talking about how long have we been talking about standardization, uh, about, you know, uh, operation efficiency and so on. I think now, uh, the clients are really looking to that with, uh, with, uh, I guess, open eyes that this is one way. We need to bring some disruptive new technologies, for example. We have to standardize. A-and some people that have done that before are actually collecting some of the, some of the savings now. I would like to mention, for example, that, uh, standardization as, as an example, we just delivered the first tree for Petrobras in Brazil for the new frame agreement that, uh, and it was delivered twenty days ahead of schedule.
Not many projects deliver trees and first, the first offs ahead of schedule. It's only possible because of what we did in Sapinhoá, the previous project and the repeat of technology. Of course, brings the components faster to the manufacturing, also improve our quality, get quicker to the first oil. Clients are working out how to speed up first oil. It's all about improving the MVP of the project overall.
Okay, thank you.
In your slide where you show the backlog execution dates, we have seen that you have a significant increase in 2016, and a decrease in 2018 and beyond. Can you go into details on which project or what you have seen which have moved from in time?
It's related to the order intake you saw in Q1, and it's also related to our view of the pacing of existing backlog. This, what is causing the shift if you try to do the math from the previous quarters pacing of backlog.
What will be engineering mainly? Right? It's quite backlog is quite steady in execution.
Any further questions in here? No. I think we'll go to the webcast audience.
Thank you. We will take our first question from James Evans, Exane BNP Paribas. Please go ahead.
Hi, thanks for taking my questions. A couple, if I may. Firstly, what visibility do you have on your subsea services into the rest of the year after a slow start in one Q? Are you confident in a pickup, particularly in the North Sea? Secondly, more of an industry question. One of your competitors obviously formed a JV fairly recently with a subsea installer claiming potential cost savings of up to 30% through partly through eliminating interfaces. I just wondered if you had any view on those potential savings and whether you're looking at possibly forming a partnership or even investigating such a thing yourself in the near future.
Okay. Let's start with the first one on the service side. We do expect things to normalize going forward. We see actually steady activity in other locations outside the North Sea. The service business can have some seasonality. Usually the Q1 is slow because of the weather in the North Sea, and that was no exception, actually, even worse this year in some areas. We expect to normalize on services, and we expect it to be steady. Since we're delivering components, we have to install it, help our clients to deliver and to install this equipment going forward. We expect that to continue steady. On the Subsea Production Alliance that you're referring to, I'm glad to see that our competitors are starting to get where we are.
As a company, we've been talking since we've emerged the company last year, that one of our strengths is that we get very early on. We have our own capability to get early on, and some of our competitors realize that how important this is, and they're trying to countermeasure that. I do agree that you can cut costs strongly in the beginning of the project. That's one of our firm beliefs in terms of strategy. That we also prove that, or try to prove that, or proving that through the SP alliance with Baker Hughes. A lot of interest how we can reduce costs by linking what's under the well, what you call the vertical alliance, with our equipment, and that can reduce costs and improve recovery of fields.
Same with new technology developed by those alliances. We do have a front-end spectrum. We do get involved very, very early on. We have done so in most of the projects in the North Sea. I mentioned several during the Capital Markets Day, and we're still involved in those projects. When it comes to the SURF, we do work with some of the SURF partners. We don't have a selected one, but there are some that work closer to us, which brings us also some flexibility. I think they're working, the industry is looking for ways of reducing costs. I think we are well positioned to the front end, both when it come into the well, to trees and to the SURF environment.
Thanks very much.
Okay.
Thank you. We'll take our next question from Nick Green with Bernstein. Please go ahead.
Good morning. Thank you for taking my question. Nick Green here from Bernstein. You mentioned in your prepared comments, unfavorable outcomes from late-stage commercial discussions on a few projects. I know you probably can't go into, you know, massive detail on that, but it would be good to. Could you explore a little bit more with us, if possible, the nature of what those unfavorable outcomes were and the causes of those, but then also give it a bit more color on the nature of the pressure that you're feeling from customers. Is it that they won't pay for overruns? Is it that, there's been some execution issues? Just maybe talk through that a moment, please. Thank you.
Okay. I think I answered some of the questions a bit earlier, but I'll repeat. You know, at this kind of environment, we also have procurement people in our company. I'm hoping my procurement people is doing the same with my suppliers. Discussions become more difficult because we are trying to save, protect our companies, protect our results. The discussions might become easier when the oil price is when the money is flowing, become harder when the oil price is low and the money is not flowing the same way because management is putting pressure on those guys to behave in a different manner. It's more a procurement approach. Again, that's not across the board. There are some clients. Clients are different.
Client, clients react in different ways. They're structured differently. As I mentioned, most of the discussions are actually very positive considering the pressure and the stress in the industry. There are some cases, maybe you wanna add.
Yeah. I mean, without being too specific, a typical example could be, you know, a variation order that, you know, could be at various degrees of advancement related to formalization, you know, in these market circumstances. They are dragging out in time in terms of being formalized. As mentioned in a couple of cases this quarter, it was communicated they would not be sanctioned. You are in a situation where, you know, you always in a project have a balance between your upsides and downsides, and that's why, you know, we maintain a certain level of contingency in a project.
You know, by taking a more conservative view on the opportunities remaining in project execution, you need to make sure that you remain that balance. Nothing related to project execution, quality issues or whatever. It's related to a more prudent view given this current market circumstances on the opportunities in our backlog or specific projects in this case.
Okay. That's very helpful. Thank you. Understood. My second question was really your talk about the threat of renegotiation in your Subsea Tree order book. You got a large Subsea order book, 30 billion NOK. Generally, we can, we can feel that construction contracts in order books seem not a great risk of renegotiation. When it comes to equipment supply, that there is probably a larger risk of renegotiation. I just wondered on your thoughts whether your existing backlog is, if you have any concerns that some of your more cash-strapped customers may try and come back and, you know, change the price that's been agreed for the remainder of the orders not yet completed. Thank you.
Okay. I can answer that. We have not seen that at all. Just make sure that we didn't see that that people trying to cancel, all the clients are honoring the contracts. Might be some discussions on how they can move around deliveries. We are dealing here with very large contracts that, you know, those are large ships. They are moving. They have to be produced. And they've been sanctioned. Some of them have been sanctioned actually under pretty good commercial conditions. Those clients want to deliver to get this equipment delivered. We've not seen that kind of discussions, to be honest. The respective contracts has been normal.
I think our backlog is quite secure from my point of view.
Okay. Just to confirm, you are seeing changes to the scheduling, perhaps maybe some deferrals, but you're not seeing pricing renegotiation on those contracts?
Sure. If the client can, if there is space, if there is actually, I would say float on the schedule, they might want to do that to improve the cash flow, but no renegotiations.
Okay. Thank you. I'll turn it over.
Thank you. Our next question comes from Frederik Lunde in Carnegie. Please go ahead.
Thank you. Just 2 quick questions. First, on CapEx, it sounds like you're alluding to potentially reducing your CapEx, compared to the budgets or guidance given previously. Could you indicate a little bit about the flexibility you have there and what you could realistically end up at this for this year?
Sure, Frederik. As we have guided, we have plans equivalent to about NOK 1.52 billion of CapEx. I mentioned that about 25% of that CapEx is still not initiated or committed. We do have the large programs ongoing this year related to building the new manufacturing and technology center in Brazil. We do have commitments related to some of the investments we offered to undertake here, for example, in Angola, and we do intend to proceed and bring them to conclusion. The reason I'm mentioning that we do have some flexibility and still have 25% of that CapEx uncommitted is to underline that, of course, in these circumstances, we are scrutinizing heavily initiation of any new CapEx programs at the moment.
Definitely there is still flexibility, but we do intend to complete the ongoing programs this year.
You have to.
Thanks. Just one question. I mean, you mentioned several times being involved early in projects, and I would argue very few companies have the same overview as you have on in terms of a full field development. My question is really if you were to make a wild guess or a qualified guess of the cost of a field development today, deepwater field versus a year ago, how much do you think the costs have come down given prices and across the value chain?
Okay. That's a very difficult question. And,
That's why I asked you.
I made a joke the other day with our strategic market that if everybody's cutting the percentage that they're declaring to the market, the fields are going to be developed for free. That's not the case. I think we have seen quite a lot of new ideas and some, but it's case by case. Depends how much the field can take in terms of flexibility of installation. One thing that we see that's very important for clients to realize, and that's, as we've been discussing, I think I can say that probably half of my time and management team now time is being spent with clients, actually, and that's good. Discussing new ideas, discussing what we can do.
What this industry has done in the past, for example, we tell we are totally different than other industries. When you, a consumer, go and buy something, you have a price in mind, how much you prepare to pay, how much you can afford. That's not how industry has worked before. People get engineers to do a specification, then the specification come with a price, and then they find out what the price is. We have to change the mindset. How much can that field afford to be developed? That's what's happening now. Discuss, look to the fields, what is the cost? Then you can guide your engineers to design or to specify what you can afford and not the opposite way.
Most of the times I can guarantee you that, when you give the price of a specification, the client gets surprised because that's not what they expect to pay in the past. Why don't you start the dialogue earlier? For example, if you're going to develop a field, why do you have to commit the whole CapEx from day one? Why need the whole CapEx? Sometimes you just build this flexibility that you're gonna need that CapEx for five years ahead, six years ahead, 10 years ahead. Why don't you wait. There are some solutions that you can apply, lower CapEx now and then, develop the CapEx when you need it going forward. You can protect your cash. That kind of discussions.
You start to ask yourself, what you need some of the requirements for paperwork that the clients ask for. You know, those reports, and who reads them and why do you need them, why they cannot be simplified. We see clients actually who are benefiting from doing things different than others. We had a client, for example, who told us, "You don't even need to change the heading of the drawing," because some clients want their logo on the drawing. One client said, "I don't care. Give the logo to the other guy. I don't mind. I just want equipment that works well and fast to improve my delivery." That kind of discussion, discussions on standardization, operational efficiency, they're very strong in the industry now, and they're necessary to make offshore fields viable.
Long answer to a difficult question. I'm sure I didn't answer your question, but, I don't know why I can.
I did get the number I wanted.
Thank you. Our next question comes from Amy Wong in UBS. Please go ahead.
Good morning. My question relates to the MMO division, which actually, you know, even though the revenues are down 5% year-on-year, is actually still trending a bit better than what you're guiding to for the full year in terms of revenues being down 20%. Could I get a bit of idea from you what the splits of Norway and international is currently at the moment, how you see that developing through the year? Also kind of the trajectory. I mean, do we expect, you know, things to continue to worsen through to, you know, the end of the year and then worsening into 2016 as well? Is that how you see your order book, you know, activity developing? Thank you.
I can start and then Jose can complement as we've been doing. I could establish that I know MMO business is still a very Norwegian business. That's where most of the workforce is. MMO as a business is very much localized. We need people on the ground, so we just cannot move these people very quickly to other locations and so on. You can move some experts, but you're going to have to develop the workforce where the work is. There's no secret that has been dramatic, the cuts in Norwegian North Sea, I mean, on the MMO side. To give you a percentage of international and local, that will be probably wrong because they change every day. The less you do here, the more international business becomes relevant.
We see because of the hard stop, there was like the brakes that we saw here in this market that's been. You can look back and count in your fingers how many projects have been awarded the last 12 months in MMO in one hand, probably. We see a lot of activity outside because people start to realize that there are technologies and ways of improving field recoveries that apply in the North Sea, and they look back North Sea and then see how much recovery we have in these fields, which is actually, you know, state-of-the-art. We see some clients trying to bring that kind of practices to other places to take more oil from existing fields rather than invest in more CapEx. I think that eventually this market has to come back.
The pressure to continue producing those fields is there. I guess, as I usually talk in our company, Sophie's Choice, you have to choose where you're going to put your CapEx. Some of the clients are very committed to existing new Greenfield CapEx, and they have to have a choice.
As you can see from the numbers, Amy, the international activity for MMO has increased significantly during 2014 and so far this year. Of course, converting to NOK, so reporting currency, also somewhat of a favorable impact from the weakening of the NOK against sterling. The underlying fundamentals are such that international activity for MMO has been ramping up and to a large degree offset the slowdown on the Norwegian side. We are still seeing a 2015, maybe close to 20% down from 2014 levels, or we haven't seen a full impact yet.
I think one important point to realize that, as any other projects, you have the front end, which is engineering and project management, then you have the second part of the project. You start to suffer first when there's no projects, then you start to have spare capacity on engineering project management. I mean, that's what you call probably white collars that we have seen the most significant impact.
Mm-hmm.
We have also taken some of the flexibility we had in terms of contractors and so on, to protect our workforce.
All right, that's helpful. Just a follow-up question in the subsea division on the late-stage negotiations, are you able to quantify the amount that was hit in the quarter? Secondly, are there any other significant projects that, you know, are currently under negotiation with clients that we need to be aware of going forward? Thanks.
Okay. Now, Amy, I, you know, given you see where we are, margin voice, the projects are proceeding as according to plan, or balance between, you know, revenue and profits on our larger projects, is normalizing. Of course, SLS, we're down or softer than what we had anticipated in the quarter. We are continuing on our journey of operational improvements in the business. As we have indicated previously, we expect it to yield about half to one percentage point a year in terms of effects from our operational improvement program. You have the offsetting factor, which is now the partial commercial environment.
All in all, we are indicating that, you shouldn't expect any expansion in margins from what you saw in 2014.
Execution is quite strong and probably stronger than ever. I'm very confident about our execution. I mentioned a few examples here today of projects being delivered even ahead of schedule. From that point of view, that we're very confident on that.
All right. That's very clear. Thank you very much.
Thank you. Our next question comes from Mukhtar Gadzhimagomedov from Citi. Please go ahead.
Good morning, gentlemen. Just 2 quick questions from me. First of all, in Brazil, could you just update us where you are in terms of replacing the current backlog and whether you think you will be affected by potential deliveries on the next wave of FSOs? Just the second question, really quickly, as a result of this standardization and everything that's going on in the industry, do you think the subsea equipment can retain the current margin levels, not just for yourself, but amongst your competition as well? Or do you see ultimately margins trading lower over the next, let's say, 3-5 years? Thank you.
Okay. Let me take the Brazil question first. I'll just remind you that our backlog in Brazil is 63% of our existing backlog, and it's all related to the pre-salt. But actually, as I mentioned, every three has a name and a location in our portfolio. It's progressing well. Of course, there are risks of projects getting delayed, projects get delayed, and we all know what's really happening with Petrobras, but there has been some good positive moves. In terms of actually deliveries, I'm very bullish about our Brazilian operations. I'm very proud of what the guys are achieving in Brazil. We as I mentioned, last year, we delivered 32 systems, which is basically twice more than two years before. Huge improvements.
We have seen that there'll be a steady delivery at the same level this year. It is likely higher. We have, as I declared in Capital Markets Day, move some equipment to next year because there is some float there. I'm very confident about the Brazilian backlog and the relationship with Petrobras and what we have achieved with them for the last years. I always like to remind that over 90% of the pre-salt production is flowing to all three. I'm looking forward to go to Houston next week to see Petrobras receiving the OTC technology award on the back of the pre-salt 'cause we are a major player and a major contributor to that client.
The second question was about, remind me again, it was about, negotiations in the market.
No. Just in terms of, you know.
Oh, okay.
the margins are going on a sort of three, five-year view.
Okay. I guess that whoever's in this industry now and doesn't realize the pressure that the clients and ourselves are under now has some mental disturbance, you know, that is not here. I would expect there'll be a lot of price pressure, and that might affect and likely to affect margins in new contracts. That's why it's so important for us to concentrate what we're doing now in executing the backlog and improving operational efficiency because we have also to improve our efficiency internally and with all the discussions we have with the clients. It's likely that there to be some margin pressure going forward.
I think, it's sad to say, but, I guess the companies who are better executing the projects, who have better relationship with clients, have more innovative technology, they will come up better than others. That's where we are trying to place, position our company.
Okay, thank you.
Thank you. We have reached 10:00 and we have time for perhaps one final question if there's someone there. Otherwise, we have to stop.
Thank you. We'll take our last question from Haakon Amundsen in ABG. Please go ahead.
Yes, hello. Thanks. Just a follow-up on the order backlog scheduling. I wondered if you could provide the backlog number in Q1 2014, which was for execution in 2015. Also based on the NOK 7.8 billion you then have for backlog in 2016, if you could give some early thoughts about how we should think about activity in 2016. Thanks.
Haakon, I don't have that at the top of my head. I would propose that you contact investor relations with us, and we can for sure help provide you those numbers, or at least some more details.
Yeah. We can give you the view that the execution in 2015 should be maintained, especially in subsea because we have the projects to deliver. As I mentioned, the solid backlog, so we're progressing to that. Specific numbers, you can have to come back to us, and we have them, but not top of our minds.
Okay. Is it possible to give some color on where you see activity in 2016 going?
We are trying to take quarter by quarter. I'm very pleased to see that our backlog is remaining strong and we're gonna be fighting for all the projects that make sense to us. I think it's too early to talk about 16, but we need to see what's going to happen through this year. As I mentioned, there's several projects there, you know, tendering activity is extremely high. You have to interpret that trend, if that's clients trying to make the fields work or if it's real projects gonna be awarded this year. We see some projects that will be award, we expect to be award this year. We need to wait until that to give a good view for 16.
Okay. Thank you. That's it for me.
Okay, thank you very much. We will end our session here.
Thank you.
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.