Welcome to Aker Solutions presentation of its Third Quarter Results for 2014. My name is Bunny Nooryani, I'm the Chief Communications Officer. 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 which we will have time for a Q&A and some one-on-one interviews with the media. Before we start, I'd like to point to the nearest emergency exit, which is through the door on your right. You keep going straight forward and out through the glass doors should there be an emergency. We have no fire drills planned today. Luis, please take over from here.
Thank you, Bunny. Good morning. So pleased to see you all here today. Thank you for joining us here today. As I am sure you all know, in September, Aker Solutions split into two companies. The Subsea umbilicals engineering and MMO business were spun off and listed in the Oslo Stock Exchange to become a new, leaner, and more focused Aker Solutions. The second company to emerge from the split is Akastor, an oil service investment company that presented its results yesterday. As the CEO of the new Aker Solutions, I'm here today with our CFO, Svein Oskar, present the company third quarter results. Let's start with the big picture. Top line growth in the quarter rising more than 20% a year and sales increase in all business areas.
Major engineering subsea projects progressed as planned, as we have a healthy order backlog that covers a large share of expected revenues over the next five years. At the same time, oil companies postponed some projects amid concerns over capital and the recent oil price drop. This was particularly evident in the offshore maintenance and modifications market in Norway, where we have since the summer adjusted our workforce capacity because of a drop in activity. This lower market affected our margins and order intake, which were somewhat lower than we would like them to be. But our near-record order backlog, almost NOK 50 billion, put us in a position of strength. Our main task now is to deliver on the backlog through a ceaseless focus operational excellence, and we will also continue to emphasize efficiency and financial performance as we seek to boost shareholder value.
Now for the main numbers. Yeah, sorry. Now for the main numbers. Pro forma figures for the new Aker Solutions show the following development in the third quarter of this year. Revenue rose to NOK 8.3 billion. Earnings before interest and taxes climbed to NOK 460 billion. The EBIT margin narrowed to 5.6%. Excluding one-off demerger costs of NOK 43 billion, the margin was 6.1%. We had an order intake of NOK 3.6 billion, bringing the backlog to NOK 49 billion. Well, today, Aker Solutions is a far more streamlined company with two reporting segments: subsea and field design. Subsea, which includes umbilicals units, accounted for about 60% of revenue in the third quarter, while field design stood for the rest.
Subsea sales were NOK 5 billion in the quarter, up 36% from previous year, driven by increased work volumes at large subsea projects in Norway and West Africa, as well as strong activity in U.S. umbilicals plant. The segment EBIT narrowed to 7.9% in the quarter as progress was made on a major project that had not yet reached the stage of recognizing profit. Subsea order intake fell to NOK 1.8 billion at the end of the quarter as oil companies delayed projects that were slated to be awarded this year. Nevertheless, subsea order backlog was NOK 35 billion at the end of this quarter, up 40% from a year earlier, boosted by a major award early this year for projects in Angola and Brazil.
We are of course pleased with the robust backlog, which is equivalent to twice the subsea revenues over the past 12 months. Our focus now is to deliver excellence on these projects. Now to field design reporting segment, which consists of modifications, maintenance, and operations, MMO, engineering units. It boosts revenues to NOK 3.2 billion in the quarter, helped by rising sales in engineering. The area's EBIT margin narrowed to 4.5%, driven by weaker performance for MMO, which had overcapacity caused by a steep drop in activity this year in the Norwegian sector. This was somewhat offset by a stronger develop in engineering business, which widened in margins to 10.6% as capacity utilization improved and good progress was made on key projects such as Johan Sverdrup.
Engineering also boosted its order intake by 20% in the quarter, helped by new awards that have not been disclosed and growth in existing contracts. This contributed to an overall order intake of NOK 1.9 billion for Field Design segment at this quarter and a backlog worth NOK 14 billion. As I have mentioned, a top focus of Aker Solutions is operational excellence and cost control. Areas that we have worked intensively throughout the third quarter, as we also push to take advantage of a more streamlined Aker Solutions. We step up work to reduce costs in all parts of the company, including rolling out new cost-saving programs in all business segments and corporate functions. We approach suppliers to renegotiate contract terms to better reflect changing market conditions and leverage our purchasing volumes.
We are also pursuing deeper synergies across the business to take advantage of our linear business model. As an example, functions such as supply chain technology and construction management were reorganized to better utilize the expertise throughout the business, avoid duplication, and at the same time, strengthen our processes. We also continue our major push to improve quality in execution. This included initiating pilot projects to test work methods and process in key projects so that we can develop excellent practices and significantly improve execution. I don't think I can stress that enough. Quality and Execution is key to improving our margins and delivering more value to our customers and shareholders. Since becoming CEO in July, I have traveled extensively and met with over 100 investors and clients, and they share our view. Aker Solutions must be predictable in delivering projects as bid or better.
I want to emphasize that this is a task the management team and I are committed to every day. Now to the outlook. I'm sure that most of you will be interested in this subject. As a very quick summary, I would say we are short-term cautious, but long-term optimistic. The outlook is mixed across the areas where we operate. Tendering remains high across our main markets and a number of significant offshore projects in Africa, Brazil, and Asia are likely to be award in the coming quarters. Still, there is a risk of delays as oil companies scale back some investments and are selective about which projects to develop. We anticipate this focus on capital discipline to continue over the next one to two years.
The North Sea, our home market, will continue to play an important role, though we anticipate a challenging time in the MMO segment over the next 1-2 years. Just before activity picks up again. Our task now is to balance the need for short-term capacity adjustments. We position ourselves for the next upturn cycle. It's worth noting that our Norway business also supports projects in other parts of the world. Short-term, we see our growth being driven mostly by Africa and Brazil, where we are well-positioned in deep water and subsea segments through projects with major clients. To our focus on low content in our deep water technology.
In fact, Brazil is set to become the single largest offshore exploration and production market over the next 5 years. There are indications of strong demand for subsea equipment in Brazil that should be visible to us by the end of this year or early next year. Most of the expenditure will be on pre-salt developments. There will be a continued focus on maintaining production levels at maturing fields. In Sub-Saharan Africa, deep water markets continue to provide significant opportunities. Offshore spending will grow at one of the highest rates of any regions. We also see opportunities attractive to us in Atlantic Canada due to recent discoveries and in Mexico, triggered by regulators opening up for more private and foreign investments. The Asia Pacific, which focus on natural gas, also provides opportunities with several large projects slated over the next few years.
All in all, we see some short-term challenges in certain regions and market segments, mainly due to capital constraints, but we are long-term positive and the underlying strength of our main markets remain in place. With this as our backdrop, we will continue to focus on boosting value to improve execution, cost control and deeper synergies from being a leaner and more focused Aker Solutions. Well, thank you for your attention. I will let Svein take you over to the numbers and walk through the figures in more details. Svein?
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 medium-term financial guidance before we move on to Q&A. I would like to point out that all numbers in this presentation, of course, are presented in the Norwegian kroner. Starting with the income statement. Overall operating revenue for the third quarter was up quite significantly, almost 22% year-over-year, driven by good progress on a number of large projects. Year to date, we're up 10% compared to last year. Reported EBITDA was NOK 617 million. One-off items related to the demerger and listing process was NOK 43 million in Q3 and NOK 78 million year to date.
Adjusting for these non-recurring items, EBITDA was NOK 660 million in Q3, equivalent to an EBITDA margin of around 8% compared to, on an equivalent basis, just over 8% in the same period last year. Adjusting for the same items year-to-date, the margin was also around 8% compared to around 7% last year. Depreciation was higher than last year, reflecting our ongoing investments in Subsea in particular. Reported EBIT was up slightly year-on-year to NOK 460 million. Excluding non-recurring items, the margin was 6.1% versus 6.6% last year. Year-to-date, excluding one-offs, the EBIT margin is 6.2% versus 5.4% a year earlier.
As can be seen from the slide, fluctuations in the fair value of hedging instruments that did not qualify for hedge accounting led to a third quarter unrealized loss of NOK 30 million, consisting of a gain of NOK 2 million included in EBITDA and a loss of NOK 32 million included in financial items. These are temporary effects as we in fact have hedged all FX exposure. Our tax burden this quarter was equivalent to an overall rate of 36% in the quarter. This was due to two main issues. One-off effects linked to the demerger, which was worth about 3 percentage points on our tax rate and changing regional mix of our pre-tax profits. We expect this regional mix will remain a feature of our tax structure for the medium term, and we now see overall P&L tax rates in the low 30s.
Our cash tax continued to be lower than this level due to certain regional tax incentives and loss carryforwards. All in all, we ended the quarter with an unadjusted net profit of NOK 271 million, which is equivalent to an earnings per share of 0.97. Please note that all comparative numbers are carve-out financial information as in accordance with the listing prospectus. Let's turn to our cash flow performance for the quarter. Our cash flow from operations was negative, due mainly to the expected increase of working capital as our project progress starts to unwind the large prepayments we received earlier in the year. Our reported NCOA in NOK actually remains low as these balance sheet values also include our derivative hedging positions with no cash impact. Remember, we started out as a new company with a record low working capital.
We continue to expect our working capital position to unwind further as we progress on these major projects through 2015. Our investing cash flows, mainly related to fixed assets and technology, are on track with our earlier comments for a CapEx spend of between NOK 0.5 billion and NOK 1 billion during the second half of 2014, totaling NOK 355 million in Q3 and is now at NOK 882 million year- to- date. We also saw the planned demerger consideration of NOK 3 billion in Q3, this, along with other restructuring effects, brought our net interest bearing items to NOK 2.45 billion at the end of the quarter. This brings us to our balance sheet position. Not a lot of new information to add here.
As I mentioned, net debt has moved up to where we expected it would be post demerger. Our leverage and gearing levels at the end of the quarter remain in line with our conservative balance sheet policy targeting 1 times net debt to EBITDA and less than 50% gearing. Our total liquidity buffer remains robust at just over NOK 5 billion. I would also like to highlight our return on average capital employed performance, where, as of the third quarter, our return on average capital employed reached 17.1% versus 20.1% over the full year 2013. This decrease versus last year reflects our investments and ongoing preparations for business growth.
That is to say, there is certain components of capital employed, which is worth about NOK 1.5 billion linked primarily to manufacturing facilities and technology development, that are yet to come online and contribute to earnings. Now let's move to our performance by business area. For continuity, I will go through all four business areas here, rather than just our two primary reporting segments of Subsea and Field Design. But I would like to remind you that as of next year, we will be rolling umbilicals into the Subsea business area, so we will just have 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.
As a reminder, these actual numbers, as in the listing prospectus, and hence in our historical pro forma carve-out financials, reflect the removal of our surface business, which is now part of Akastor, 100% of Subsea family JV projects, for example, like Oscar, and a revised corporate cost allocation. With that in mind, let me continue. Subsea saw a strong top-line performance with Q3 revenue of, up almost 40% year-on-year, driven by good progress on a number of major projects. Our Subsea margins did narrow versus last year, this was largely due to the higher level of revenue attached to work where we are yet to recognize full profit due to the early stages of project completion. We expect this revenue mix will normalize as we move through 2015 on these projects.
High activity levels also continued within lifecycle services in the quarter, but the strong progress on the project portfolio impacted the revenue mix and hence also the overall margin in the quarter. Our Subsea return on average capital employed reached 20% by the third quarter, similar to the level we saw last year. Our Q3 order intake in Subsea was lower than last year due to no major project awards in the quarter, but our backlog remains substantial at over NOK 33 billion. This is equivalent to over 2 times our last 12 months Subsea revenue and gives us very good visibility into 2015 and beyond, and tendering activity in Subsea remains high. Our Umbilicals business also showed strong revenue growth in the quarter with year-on-year top line growth of 20%. This growth was largely due to high activity levels at our plant in Mobile, Alabama.
Our EBIT margins in Umbilicals reflected both the utilization benefits of this activity growth and a better operational performance reaching 10% in the quarter. Reflecting this improved margin performance, our return on capital employed in Umbilicals improved to 32% in the third quarter, a significant improvement from the negative return it earned last year. This improved operational performance stands us in good stead for the future, but in the near term, we do see some possible risks from lower order intake that could offset some of these improvements. Still, tendering activity in Umbilical markets remains high for work in most offshore basins, but with no significant orders coming through in Q3, our backlog declined 16% year-on-year. Engineering showed a strong top-line performance with revenue up 24% in the quarter.
This was driven by good progress on major projects such as Johan Sverdrup and Gina Krog. Importantly, our work on Sverdrup is very much on track, and we continue to believe that we are well-positioned to secure future phases of work with this important project. Our margin performance reflected better utilization of our engineering capacity with EBIT margins reaching 11% versus around 7% last year. This improved utilization is likely to continue for most regions through 2015 and beyond. In the near term, in some other regions, we see risks that lower order intake could cause lower near-term utilization until our workload recovers. A good sign for the future was order intake for engineering in the quarter.
This was quite robust, up 20% year-on-year to around NOK 850 million, which kept book-to-bill around 1 and kept backlog flat versus the last quarter, although down versus last year. As a reminder, our backlog in engineering does not reflect the full potential of our work on the Johan Sverdrup project. Despite a tough environment in the Norwegian market, MMO increased revenue slightly year-on-year. This was helped by good growth on work in regions like the U.K., North Sea, and Asia. The slowdown in Norwegian MMO markets continued to be the dominant theme for the business, with margins significantly lower year-on-year. Although Q3 margins were slightly better than those in the second quarter of this year. The MMO market in Norway remains challenging, and we continue to expect no recovery until 2016.
Next year, in particular, is likely to see the full effect of lower modification activity, and we continue to see overall revenues for 2015 around 15%-20% lower than this year. We have undertaken significant capacity adjustments this year to reflect this revised business activity and have transferred around 500 employees to Frontica Advantage and are in the process of moving a further 100 to the Subsea business area. Given these moves, we expect MMO margins to be able to regain some ground and remain close to the mid-single digit EBIT margin level through next year, then recover. In our outlook for this business, we see a recovery in the Norwegian market starting in 2016, and we also see an increasing number of brownfield opportunities for MMO in international markets.
Now I want to spend a few minutes on our order intake and backlog performance. Our group backlog at the end of Q3 was NOK 49 billion, equivalent to 1.6 times our last 12-month revenues. Although our backlog is slightly down versus the NOK 54 billion we reported at the end of Q2, it still remains at almost record levels, and it continues to give us very good visibility into 2015 and also quite good visibility in the medium term. I would also repeat my comment about our work on Johan Sverdrup, where our backlog currently captures relatively small amounts of the longer-term potential we see for Aker Solutions from that contract. Our backlog by region continues to show the future direction of the group's growth quite clearly, with a similar share of backlog from Africa and the Middle East as from Norway.
Our order intake was lower this quarter, due largely to no major awards in subsea or umbilicals. The overall intake number was 30% lower than this time last year. On a year-to-date basis, our group order intake was NOK 31 billion, not too far below the NOK 35 billion we won in the first 3 quarters of last year. As Luis mentioned earlier, although we have seen some awards slide to the right, we do still see a number of significant projects on the horizon, particularly in Brazil, in West Africa, and also in Asia. Finally, and again, I would like to run through our medium-term financial guidance. There have been no changes here since the communications around the demerger and listing process. Our three key medium-term guidance themes are as follows. We aim to at least keep our market share in our core engineering and subsea markets.
We aim to move step by step towards peer group margin levels in our subsea segment. We expect an improvement in engineering margins 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%. Our other policies around topics like leverage, gearing, working capital, and dividends remain unchanged. As Luis mentioned earlier, although the near-term picture is uncertain, our overall long-term view on the future of deepwater remains positive, and we continue to see Aker Solutions as extremely well-positioned to grow from the opportunities these markets will present in due course. Thank you. That was the end of my section and the end of our formal presentation. With that, we'll open up for Q&A.
Thank you. As Svein said. Sorry, is this working?
Hello? I think it's working.
Okay.
It is.
As Svein said, we have time for some questions now. We plan to end the session at 10:00 A.M. our time. If we have very many questions, I would ask that you limit it to two each. We have a webcast audience for their sakes, please use the microphones that we have in this room. Also please introduce yourselves. You can take the first question.
Hi, good morning. Turner Holm from RS Platou. Yeah, I was just wondering if you guys could maybe provide a bit more insight on some of the major projects that that you alluded to in your presentation. I think, Luis, you talked about Brazil being a particularly important market. And also one of your large competitors said they expect 2015 order intake in subsea to be as good as 2014. I mean, I appreciate that you may not have another Kaombo in 15, but if you could just give us some guidance there. Thanks.
Okay. I think you have a few questions in one.
Yeah.
Let's start with Brazil. We are in deepwater, we are in subsea in Brazil mainly. That's our business down there. That we have actually grew 3 times the last 2 years. I'd like to remind people that, because it's been, it's never easy to do that. We are forecasting to grow going forward. The subsea demand in that country is quite large. We know the developments are there. We know also Petrobras cash concerns, the curtailing has been more in downstream, so we are in a good position when it comes to Brazil. When it comes to the overall, of course, we've seen a slowdown in MMO in Norway, and that affected a bit, also affects our confidence in a way.
In subsea, we see a large pipeline of projects, and we believe we're gonna take our share of those projects. It's true they're being scrutinized further with the clients. I also believe, I strongly believe that we are there to help those clients by sit down with them and reviewing the projects. We've been doing that a lot with clients these days. Look into the concept, push standardization, taking out from the project the costs that don't belong to the project. We are very confident in the pipeline of projects, especially as I mentioned, in West Africa and Brazil. I think going forward, we don't guide in volumes of orders. We're not traditional doing that. We are confident we're gonna get our share of the contracts.
We are, as I said, we are optimistic, long term.
Okay, very good.
Even though we, like yourselves, we follow the oil price daily as well. It's important for the business.
Absolutely. Svein Oskar, I guess you mentioned that you probably hadn't recognized profit on the Kaombo project. Can you just kind of remind us how the accounting works on that project and when you might be recognizing profit on that particular project?
We have an internal guidance indicating when the project should start recognizing profit. The guidance says, 20% complete, but it's not the 20% complete per se, which is the important thing when we start recognizing profit on a project.
It is when the baseline is set, the baseline is agreed with the client and the project estimate to complete is stable, and we're well underway. That's management sort of decision to take to make when we start taking profit. The guidance is typically at 20%.
Okay. Question from DNB.
Yes. I want to ask from DNB. I have two questions about MMO margin. First question is, have you booked any one-off costs in Q3 related to?
No, we have not booked any one-offs or non-recurring items in our MMO business in Q3. We restructured or moved people to what is now called Frontica Advantage during Q3. That was taken was completed during the third quarter and prior to the demerger of the companies. Of course, we do have idle time. We see, you know, the impact of idle time and impact of facility costs, et cetera, in our numbers, but I would not call those sort of non-recurring or items to be normalized for. Hence, you can see the impact on the margin in the quarter.
Just because a customer said yesterday in their Q3 presentation that they would receive a compensation of around NOK 140 million in cash in Q4 related to the transfer of personnel to the Frontica business.
Yeah.
Would that be-
This is all part of the demerger process. You know, if you see, we had a demerger consideration of NOK 3 billion established upon the completion of the demerger. You saw the net effect of that was slightly below. There are items in between the two companies, for example, related to the individuals that have been moved to Frontica Advantage, which is probably what they're referring to.
My second question on MMO profitability in 2015. The guidance you said that you should return to EBIT margin of 5% for this year.
Do you assume further, extra costs related to capacity adjustment in that figure? How is the 5% figure excluding potential costs related to capacity adjustments?
The capacity adjustments we have done so far is to reflect the volume that we see in front of us. We have no further, you know, capacity adjustments planned for. Given the adjustments, you know, the effects of it flowing through our P&L is a little bit sort of delayed. My expectation is that we would see a trend back to the mid-single-digit margins as I guided on relatively soon as we move into 2015.
Question here.
In your guidance, you have a margin guidance on the engineering and the MMO business. Whereas the return on average capital employed guidance on Subsea and Umbilicals. Why don't you have return on capital employed for both?
Our Field Design businesses are extremely capital light businesses. In terms of financial KPIs, yes, it's a very impressive return on capital employed in MMO and engineering, but it's not really a relevant financial KPI for us to have for those businesses due to the capital light nature of the businesses. It's more the Subsea side of it, including Umbilicals, which ties off capital in the business, and hence we want to drive that return on capital employed up to the range of 20%-25% as we've guided on.
Yes. I see. Don't you consider the peer group margin for the engineering and the MMO business right now?
I can take that one. I think we are in line or better than peers when it comes to MMO and engineering. Just to complement the point, Svein Oskar made about return on capital employed, in fact, we have, when you compare to our Subsea peers, we have better return on capital employed than them historically because of the low capital employed in MMO engineering, very cash generating businesses. Yeah, we are in line. Where we have to work hard is in Subsea, and that's been the guidance. When it comes to Subsea, we are below peers in terms of margins, and we're gonna be working hard to incrementally move that, those margins up. That's, I guess, was the main part of my presentation anyway.
What I'm asking about is what is your analysis of the margin among your peers when it comes to engineering and MMO, because that's your target. What are their margins now?
I wouldn't, you know, to be too concerned about the margin level also. What we've guided on, you know, the margins on engineering have recovered pretty significantly, driven by improved capacity utilization of our engineering capacity over the last few quarters. There's still potential to drive that margin up by continuing to improve on that utilization moving forward. So what I'm saying is that we expect engineering margins to continue to improve. I also said that we had, you know, certain
Regions within the engineering organization that needs order intake moving into 2015. On the MMO side that we, you know, from the margins that we are operating at today, we expect a gradual recovery into 2015.
You said initially that margins will approach a margin level fine among your peers. What I'm asking.
I see.
What is that margin level you see among the peers right now? That's my only question. All the others is okay.
Yeah, that comment is specifically related to subsea.
Okay.
Where we continue to close the gap, towards our peers. I'm not gonna comment on, you know, what our peers are operating at, but I'm pretty, you know, you've probably seen that there is a gap from what we are operating at and the peers, and we, definitely want to drive that gap down, gradually.
Question-
Well, not subsea. There it goes. I think.
I think that's where we stand that one today.
We'll take the next question now.
We can take that offline, I guess, if there's more questions for me to be clear, but.
Are there any further questions?
My name is Thor Eika. I'm re-representing a company called Amender Advisors. Mr. Araujo was alluding to improvements in execution quality, obviously, or the inference is that that could eventually improve margins as well. I wonder if you could elaborate a little bit on what the expectations are from that program and what it sort of vaguely consists of, in a sense.
Okay. Take step by step. I think I stressed quite a lot that we need to focus on avoiding quality problems, make sure we are focused on the projects, and deliver to client expectations. That's key to any business of course, and it's even stronger for us since we just mentioned that our margins are below peers in a way. We are more streamlined company now. You know, when I joined this company, 3 years ago, we had the 9 business areas, very diversified. Difficult to see it in the operating as independent units. There was very difficult to take synergy from those business. We were very diverse. The client base was it ranged from shipyards to EPC contractors to oil companies. We are focused now.
Our clients now are the oil companies. Call, I call it first tier, 'cause we're closer to the, where the money is, I guess. Those business, they have a lot of interconnections. I mean, we have a lot of. Take for example, supply chain. The volumes we have in supply chain now with large projects like Kaombo, like Johan Sverdrup, next phases, it's just pretty large. We have a pretty buying power. If you get all this business together, you can leverage on that. We also, by being fragmented, we have a lot of duplications. It's natural, 'cause you're controlling like independent companies. By functionalize all these functions, HR, sharing resource, we need to share more.
We can see quite a lot of costs being taken out of the business. When it comes to best practices, if you have all those companies fragmented, you don't take the best practices in engineering. Take project management, for example. We're probably one of the best project management company I've ever seen. Very proud to have those guys running the most complex projects. That's another important point, because our backlog now is less risky than before. I think I stressed a bit the concerns and actually the drive towards standardization, which is something our clients are doing, wants to do as well now. That's in those times we can improve and start to do more of the same, or design one, build several.
We, that, those are the areas we are focused, you know, supply chain, execution, trying to avoid, and be more transparent, looking more to the business and, you know, spending more time monitoring that, monitoring our suppliers, making sure we monitor lower content. Those are some of the points. I think it's very diverse operations. Improvement is a very broad. It comes from also managing your portfolio, but also manage your supply chain, manage your engineering, start engineering ahead of projects, so on time, and making the project in, into a nice flow.
Thank you very much. Maybe it's difficult to answer, but what would be the expectations, let's say margin improvement-wise from these efforts? In what timeframe?
Well, what we see is an incremental improvement. That's how it is. I like to comment that usually operation improves like, going to the gym, lifting weights. You have to go slowly, lifting more and more weights. You just don't go there and lift all the weights at the same time. Of course you can, you know, as I call it, take some vitamins to become stronger. Eat well. Exactly. That's, it will be gradual, so it's not guiding towards firm numbers yet. Maybe we'll do in the future.
Thanks.
We have time for one more question in this room, or perhaps two more questions then. Yeah, we have two, so. Yeah. Haakon Amundsen.
Yes. Thank you. Haakon Amundsen in ABG. A question also subsea order intake. It looks like there, I mean we're seeing in the MMO a slowdown in Norway. If you look on the sanctioning from Statoil, it looks like generally that's on the new development projects going down except Johan Sverdrup. Wanting to, can you see how do you see subsea order intake in 2015 on the kind of smaller tieback projects? How will subsea order intake in 2015 be for you relative to your history? I guess you have had a lot of subsea order intake in Norway specifically.
Yeah. It's true that the Norwegian market is low than it used to be. There's no question. It's also important to point out that our Norwegian organization for subsea, specifically the support projects in West Africa, South Sub-Saharan Africa now, it's more than West Africa now we're looking. There are opportunities in Mozambique, Tanzania, and it's broader than just West Africa. We're not guiding how... We don't do that usually, we don't guide on projects. That's what we do. We see quite a lot of activity tendering, and that's one of the messages we see because we of course, we read the papers like all of you do. We talk to clients.
When it comes to deepwater projects, some of the clients, especially the NOCs and so on, they're moving on. Though projects have good returns, and they want to continue. They're long-term projects, and some of them actually are moving. If you think about Petrobras's portfolio, it's like a big ship. These's over 20 FPSOs being built, and they're gonna need subsea equipment. We have to produce, regardless of the current situation. We, as I said, we are cautious because, you know, we, as I mentioned, we hear the drums. The drums are there, we see a lot of clients continue working the projects. I like to compare also with their drives in other parts of the business who affect us. For example, think about drilling costs.
You know, it's pretty obvious the drilling rates are coming down. There are cheaper rigs out there, and they should help developing fields that reducing costs and projects become more attractive. You're right about step outs as well. Infrastructure in place that people can tie in, you know, with a low cost of capital, tie in more resources. We are I would say that the pipeline of projects in subsea is very extensive in clients that we deal with. We are constantly gonna take our market share.
Carnegie.
Just looking out for the announcement this morning that there will be layoffs at Egersund. Quite massive ones. Can you elaborate on that?
We saw press this morning as well. I can tell you that's not true. That's not coming. We have not announced any cuts. What we have sometimes in projects, that's if you look back in history, when projects end, some of the contractors who come in just for a particular project, of course, they are released. We're not laying off any our employees at this present time.
Just going back to Kaombo, when do you expect to book profit on that? You're a bit evasive.
Yeah, we want to be profitable in Kaombo, the whole project, but, I think it's a matter of just recognizing revenue as well, right?
It's when we are ready for it, that will be 2015.
I think everyone here is ready today.
When am I due?
To be more specific.
Thanks.
We need to be moving on to the webcast audience as well. We have 10 minutes left.
He had a question, and he's raised his arm. If you have a chance to go. He's been there with. I can see you with your hand, so.
Thank you very much. It's Eivind Tønnesen from DNB. On your engineering segment, obviously you posted quite strong margins this quarter, and that is despite a drop in revenues, at least sequentially, and flatters from Q1. Should we read that, you understand that the work is carrying a higher embedded margin than the remainder of the engineering portfolio?
No, I wouldn't say the margins is improvement is driven by improved capacity utilization. You can see the effect in a people-intensive business like engineering. Holding utilization up is very important.
Of course. Johan Sverdrup is a fantastic project, we're very proud to be involved, we're looking forward to next phases. You know, we're doing the FEED now, it's almost over, we're looking forward to next phase for sure. It helps utilization is my estimation.
Are there any further questions? I didn't hear anything from the webcast audience.
We have questions through telephone.
Yes, that would be good.
We'll now take our first question from Mukhtar Garadaghi of Citi. Please go ahead.
Hi, it's Mukhtar from Citi. Just a couple of questions. One, to follow on your comment about around intake expectations and just the growth in the subsea. I remember you were talking about a 14% expectation of growth in that market in the medium term. I kind of no longer see that on your slide. Have your expectations changed around that? My second question is around the Norway activity and as you say, expected recovery in 2016. What are you basing that expectation on, just out of curiosity, in terms of, you know, do you see many more projects being sanctioned in 2016 than we are expecting in 2015, which is a very low number? Thanks so much.
I think that sounds quite.
We're having some problems with the sound here, so it's a bit difficult to hear.
Sorry, should I repeat my question?
Yeah.
Yes, please. Yes, please.
If you might, because, yeah, unfortunately, we have some sound issues here. If you can repeat, that'll be good.
Yes. Yeah, my first question is around the growth expectations for the subsea segment, which you previously placed at 14%, you know, in your presentation relating to the demerger. That number has disappeared from your slide. I'm just wondering, have your expectations changed in the recent, you know, month? My second question is around your expectations for recovery in Norway activity from 2016. I am just wondering what project and what engineer are you're basing this on just out of curiosity, given we see so little, that will be done in 2015, and we see Statoil really pulling back on activity. Is self-help that you're expecting to kick in or is it genuine increase in activity that you, that you're looking at?
Okay. Now, now you came clear. Thank you.
Okay. We have guided that we see the underlying fundamentals for a growth within the subsea markets over the next 5 years to be between 10%-14%, and that has not changed. 2015 will probably be more moderate, but still on an average basis over the next 5-year period, you should, we do still see expected growth between 10% and 14%. As I think we have mentioned several times now, tendering activity in subsea is very strong. We have some significant tenders that are currently in process. We're actually hopeful that some of these might materialize already, you know, towards the end of this year or the next year.
On the back of that, very healthy backlog we have within subsea, it looks good for 15, 16 as well but 15 probably more on low side of the 14% guidance over the average of the period.
Okay. Let me take the MMO one, because important to mention that I've been looking through statistics this week, and we actually have a tender 36% more this year than last year. Tender activity is high. MMO has a very long and very large project pipeline. I like to remind people that the platforms are not getting any younger. As we speak now, they're getting older. There's a limit you can do until you have to go and work on those assets to maintain production because they decline and things get like ourselves, they get older, have to be maintained. We see these projects are there, and they've been delayed. They won't disappear. They've just been delayed. They've been prioritized over all the projects, and people are actually prioritizing capital.
We see that, when that phase is over, people have to produce those assets because they are important, and there's a lot of value, trapped. We know that Norway's benchmark, at least where I come from, Petrobras always look towards North Sea as a way of recovery. That's something we do very well here. We see that it's gonna go back, and we believe that there's no guarantees, of course, but we believe that 2016 is a good time for this to come back. That's what I mentioned about our efforts to keep our workforce, to maintain as strong as possible workforce. We're very fortunate to have a lot of work in subsea.
This company has spent a lot of money training its employees to use them in subsea in all the areas. You know, you just don't switch from day to night. If you invest on people and the quality of people we have in this country, you can basically utilize them in where we have work. We've been very successful on that one, I think, comparing to the expectation, to the competition.
We can take-
Okay. Just very briefly for Svein. Svein, can you just confirm your midterm tax guidance has, is it now lower thirties, you said?
Is that CapEx?
Tax.
What's tax?
The tax rate.
Yes. As you saw, this quarter's tax rate at 36%, I mentioned there was a one-off effect related to the demerger of about 3%. Normalize that out, you're at 33%, and I'm guiding that you should probably see tax rates moving forward or effective tax rates in the low 30s moving forward. Part of that is driven by the changing regional mix of our pre-tax profits. So it is slightly higher than what we guided on during the road show of the demerger. Of course, cash tax-wise, it's significantly lower than that, driven by both regional tax incentives as well as tax loss carry forwards. Cash tax-wise, you're probably in the, you're in the low to mid-20s percent-wise.
Thank you very much.
Our next telephone question comes from Philip Lindsay from HSBC. Please go ahead.
Yeah, good morning. Two main questions from me, please. Firstly, can I confirm that the subsea margins in Q3 merely reflect the strong top-line progress on projects like Kaombo and do not in any way reflect a change to your expected margin outcome on, say, a large job in West Africa like Moho? That's the first question. Second question. Obviously, we've seen oil companies' behavior change as we've gone through this year. On the competition side, are you starting to see any change in behavior there? Are there any business lines where competitive pressures have seen a noticeable change in recent times? What would you expect to see moving forward? Thank you.
Okay. On your first question, as I said, it's predominantly driven by volumes going through the P&L at 0 gross margin on a big project and then I also said, the revenue mix had somewhat of an impact on the margin level in the quarter. Of course, I'm not saying that the margin level in a specific quarter is not impacted by Project estimate to complete adjustments on our project portfolio, but it's nothing of materiality related to explaining the margin in the quarter. If that answers your question.
Okay. I guess the second one was about customer behavior. Well, I like to say that clients that work with Aker Solutions, those are sometimes more than clients. They're partners. I actually keep mentioning that there are two different things. One is cost avoidance, one is cost reduction. Cost avoidance, if when you decide not to buy a new car, you avoid the cost. In cost reduction, when you look for a cheaper car to take you from A to B. I think you'll see clients doing a lot of the second point. Work with us to reduce costs, look into the solutions, as I mentioned, look into standardization. Of course, the relationships can get strained. I just mentioned that we are negotiating in terms with our suppliers.
I think the whole industry is working to take costs out of the projects. I'm optimistic to see how much is happening. You know, we talk about standardization alone. It doesn't come in easy times, 'cause people just tend to re-engineer. We want to do better. We have a lot of good engineers and good minds in this industry. We just keep sometimes over-engineering. I think in moments like that, standardization will play a big part. For us, you just mentioned Moho and Kaombo. There's a lot of designs. Actually, quite a lot of engineering in Moho will be applied in Kaombo. That's very positive for us. There was not a place that this company used to design all our new products, I think a lot.
I used to say that we like the complex projects, but now we're taking a lot of those repeat business. It is the same in Brazil. In Brazil, we were the first company to qualify for the pre-salt. We don't take a lot of credit for that. We should take more, but almost all the pre-salt in Brazil, it's a record production for any region in history of the oil business in terms of speed to produce those fields. We are the first company to qualify, and almost all trees are made by our Curitiba plant. Of course, it took all the pain back in 2011 by being the first companies to develop. Since then, we've been delivering on time, so there's more repetition.
The plant's producing more and more with better quality and better results. That's one of the keys that we see that we can discuss with clients how to improve their projects. We do have the technology for that and the knowledge.
We can take one final question.
Okay. Sorry.
Hello, am I still on the line?
You're still on.
Sorry, yeah. The second question was actually more about the competition, as opposed to the customer behavior. Are there any business lines where the competitive pressures that change materially? Thank you.
Okay. Okay. There was a second part of your second question. Okay. Well, we have not seen, at least in Subsea, we have not seen people misbehaving, as I call it, yet. We're certainly not prompt to go for volume rather than for margins. I think I mentioned a lot in this presentation that we are focused on improving margins. Again, we all have, I think ourselves in competition. Subsea, we do have health backlogs now, so that helps the behavior. This is a competitive business. We always compete. We compete for almost everything we win. Competition is there, so we're used to that. But we have not seen more aggressive than usual so far.
Perhaps, in Moho, we'll see that, I would say. Right now, we haven't seen it yet.
Okay. Very helpful. Thank you.
Thank you. That was our final question today. We'd like to thank you for joining us here. For the media, if you have questions for Svein, please contact Ana Cecilia here at the front. For those who wish to speak with Luis, you can come to me. Thank you.