Earnings Call: Q2 2021

Jul 28, 2021

Welcome, everyone. With me on the call today are John Evans, our CEO and Ricardo Rosa, our CFO. The results press release is available to download on our website along with the presentation slides that we'll be referring to during today's call. May I remind you that this call includes forward looking statements that reflect our current views and are subject to risks, uncertainties and assumptions. Similar wording is also included in our press release. I'll now turn the call over to John. Thank you, and good afternoon, everyone. I will start with highlights from the Q2 before passing over to Ricardo to cover the financial results. Turning to slide 3. Revenues improved 59% year on year to $1,200,000,000 driven by both Renewables and Subsea and Conventional, But our underlying adjusted EBITDA margin fell to 7.5%. Nevertheless, at the end of the quarter And after paying dividends of $72,000,000 our balance sheet remains strong with $390,000,000 of cash and equivalents And net debt of $39,000,000 Following the high level of vessel transits we reported in the Q1, Our key enabling vessels were working in the Q2 and utilization of our active fleet increased to 82%. Whilst we faced challenges in Taiwan, we made good operational progress on a number of projects including Seagreen. We had a strong quarter for order intake, resulting in a book to bill of 1.6. Finally, just after the quarter end, we announced the combination of our Renewables business unit with OHT. Turning to slide 4 and our operational highlights. Despite the challenges posed by China's strict COVID-nineteen restrictions, The Ling Shui project was successfully completed ahead of schedule by the 7 Borealis and 7 Eagle. In Norway, for the HOD project, we completed fabrication of the world's first mechanically lined pipeline based on Gluby technology. Meanwhile, Cern Arctic installed umbilicals on Erfugel Phase 2 And Seb Navica made progress installing gas pipelines on Johan Sverdrup Phase 2. Activity remained high in the Gulf of Mexico On the installation phases of Manuel, Kings Key and Mad Dog 2. SEM NAVICA was deployed to the U. S. To accommodate the rescheduling of some work from the San Vega, meaning we incurred some extra cost to keep project deliveries on track. In Australia, 7 Oceans spent the quarter installing pipelines for the Julimar II phase project whilst in Angola, The fabrication of topsite and jacket for the SLGC project is ahead of plan at the Sonomet yard. The PLSBs underpinned a solid performance and contribution from Brazil. Turning to the Renewables business unit. In Taiwan, progress of the Siwa Union was impacted by restrictions imposed by the government to control the spread of COVID-nineteen. In addition, conditions at the worksite and changes in scope of the project hampered progress. We are in negotiations to recover incremental costs from our clients in accordance with contractual terms. Elsewhere in Renewables, we continue to work on the Seagreen project, where the first five jackets began their transit from China to Europe. A further 10 jackets were loaded out from China and the UAE in July and fabrication of the remaining 99 jackets is running according to plan. Good progress was also made in the UK on the Hornsea 2 project on which Seaway Aimery, Seaway Moxie and the Seamard Esperanza were fully utilized during the quarter. Turning to Slide 5. We ended the Q2 with a backlog of $6,800,000,000 up 13% from the Q1 this year. During the quarter, we announced 2 large awards in Brazil, Bacalhau and Mero III. And including unannounced awards and escalations, We achieved a book to bill ratio of 1.6 times. We have good visibility on the revenue for the remainder of 2021 With $2,700,000,000 still to be executed. And now I'll pass over to Ricardo to run through the financial results in more detail. Thank you, John, and good afternoon, everyone. Slide 6 shows our income statement highlights. 2nd quarter revenue of $1,200,000,000 reflected higher levels of activity in both the Subsea and Conventional and Renewables business units. Adjusted EBITDA of $90,000,000 after incurring net costs associated with COVID-nineteen of approximately $4,000,000 was up from a loss of $9,000,000 in the prior year quarter. The adjusted EBITDA margin was 7.5%. This improvement largely reflects the absence of the restructuring charge of $104,000,000 that was recorded in Q2 2020. The underlying margin, excluding items relating to the restructuring provision, declined year on year as a consequence of continued delays and challenges Affecting renewables projects in Taiwan as well as reduced margins in Subsea and Conventional. The net loss for the quarter was $13,000,000 Turning to slide 7 for additional details of the income statement. Administrative expenses improved by $12,000,000 against the prior year period, reflecting the absence of restructuring costs with underlying expenses remaining in line. The depreciation and amortization charge was stable at $114,000,000 Compared to the prior year quarter, with declines in part driven by prior year impairments offsetting the impact of the newbuild 7 Vega and the converted 7 Phoenix. The quarter also benefited from the absence of impairment charges against property, plant and equipment And right of use assets totaling $229,000,000 and goodwill of $578,000,000 which impacted the prior year quarter. The net operating loss of $28,000,000 in the 2nd quarter included a credit of $11,000,000 relating to downward revisions to the cost of the group's resizing program. The latter follows a significant improvement in the outlook for the industry since we first introduced the cost reduction plan in the Q2 2020. To accommodate a higher level of tendering and engineering activity combined with improved vessel utilization throughout the year, Subsea 7's workforce is now expected on average to be approximately 2,000 more than forecast in the downsizing plan. However, given the phasing of our current projects and the timing of new orders, plans to reduce the size of the active fleet in 2022 remain in place. The net loss was $13,000,000 after a $15,000,000 tax credit. On slide 8, we summarize the performance of our operating business units. Subsea and Conventional business unit generated $863,000,000 of revenue in the Q2, 24% higher than the prior year period, mainly due to improved activity in Norway, Saudi Arabia and China. Renewables revenue was $315,000,000 a near fivefold increase compared to the prior year, mainly driven by the Sea Green and the Hornsea 2 projects. We recorded $20,000,000 in revenue in corporate, representing the contribution from Exodus and ForSubsea, our autonomous subsidiaries. Subsea and Conventional recorded a $10,000,000 net operating loss in the quarter compared to an underlying net operating income of $14,000,000 in the Q2 of 2020. This loss is due to a number of factors. It reflects the early stage of progress Of the 2021 offshore campaigns relating to WorkOne at low margin in the competitive environment of 2019 2020. And secondly, we incurred extra costs associated with the transfer of some work from 7 Vega to 7 Namica. The net operating loss of the Renewables business unit was $32,000,000 a deterioration of $6,000,000 from the Q1 Progress on Sea Green and Hornsea 2 continued as planned, but was offset by the issues that John has discussed Regarding the execution of work in Taiwan. As John has mentioned, we are in negotiations to recover these costs from our client. In the corporate business unit, net operating income of $14,000,000 included the $11,000,000 credit I have previously highlighted. Slide 9 shows our cash flow waterfall chart for the quarter. Net cash generated from operating activities It was $15,000,000 after incurring a $48,000,000 adverse movement in networking capital, driven largely by increased activity in the Middle East and the timing of milestone payments for various other projects. This increase was partly offset by client receipts on a newly awarded project. The net working capital position is expected to improve in the second half of twenty twenty one with milestone payments and final settlements expected on a number of projects. Capital expenditure was $34,000,000 including payments related to the conversion of Seaway Phoenix, A loan of $33,000,000 to one of our non consolidated joint ventures and the distribution of dividends amounting to $72,000,000 We had $390,000,000 in cash and cash equivalents, a reduction of $137,000,000 since the end of March. We moved into a modest net debt position of $39,000,000 including lease liabilities of $232,000,000 To conclude, slide 10 shows our guidance for the full year. Despite the low margins reported in the first half of the year, Our guidance for 2021 remains largely unchanged. We expect increased profitability in the second half to be driven by continued derisking of projects As execution progresses and commercial settlements with clients are achieved. Compared with 2020, Managing COVID-nineteen has become a more complex challenge as we navigate the differing requirements of various host countries. It remains difficult to forecast the magnitude of our direct costs net of client recoveries as well as the direct indirect impact on efficiency, Offshore Operations and the Supply Chain in General. However, absent COVID-nineteen, we continue to anticipate revenue and adjusted EBITDA be above 2020 levels with positive net operating income. I will now pass you back to John. Thank you, Ricardo. On slide 11, we have a summary of our strategy comprising the subsea field of the future and the proactive participation in the energy transition. Today, we'll take a closer look at the progress we've made in the Q2 in integrated SURF and SPS. I will briefly revisit our transaction with OHT. Turning to slide 12. The Subsea Integration Alliance is our venture with Schlumberger's 1 Subsea business that integrates SPS and SURF into one seamless offering. The aim is to optimize field developments by integrating the engineering, combining procurement efforts And streamlining the installation of the entire Subsea solution. It also reduces the number of contractor interfaces for the clients And increases delivery and deployment assurance. This is a highly differentiated offering. And in the last couple of years, The SIA has become one of the 2 main players with an SPS served solution. Since its inception, the SIA has a very strong track record of winning greenfield contracts. And since January 2020, We have won 68% of the market by revenue. In the Q2, we added to our success with the award of Bacalhau and Hasselmus That together proved the relevance of the alliance to both large greenfields and smaller marginal fields. The pipeline of opportunities for integrated work remains strong. The SIA is the preferred supplier For Scarborough and Ormen Lange 3 and it's currently bidding Lappa Southwest, BMC 33 and Bay du Nord. Moving to slide 13 and a quick recap on the combination we announced earlier this month of our Renewables business unit with OHT. The aim of this transaction was twofold: to reinforce a position as market leader in the offshore fixed wind industry And to unlock value associated with the renewables for shareholders of Subsea 7. One of the main drivers for the deal Was the sharp ramp up in activity forecast from 2025 and it's shown in the chart on the right. This has become more tangible With higher levels of tendering than we expected and an acceleration of projects, especially in the U. S. The combination creates a company with an enhanced fleet of vessels, including capabilities for turbines, foundations, Cable installation as well as heavy transportation. This expanded toolkit will enable us to win a greater number of integrated And EPC contracts and take a larger share of the offshore fixed wind market. Although a deal in renewables may have come sooner than we may have predicted a year ago, it's indicative of the strengthening offshore wind market And our nimbleness to seize the opportunities when they arise. It reinforces Subsea STEM's long held strategy To make selective investments that enhance our growth opportunities and accelerate value creation for Subsea 7 shareholders. On slide 14, we have a view of the outlook for the coming 12 months for Subsea. And on the following slide, we'll address the opportunities in offshore wind. Although several contracts We've been awarded to the industry in Brazil already this year. Our tendering team remains very active and we continue to work on a large number of prospects For both Petrobras and the IOCs. In Norway, engineering activity is high as operators work on Sanctioning field developments in time to benefit from the country's tax incentive. This quarter, We announced contracts for Aker BP's Cobra East Gecko and Okea's Hasimos project, but there are multiple projects still on the radar. Elsewhere, we see a cluster of new opportunities in West Africa with Clove 3 and Begonia in Angola, Pican in Ghana and even Bonga Southwest, which marks a potentially important inflection point for activity in Nigeria. In Australia, we continue to work for opportunities for Scarborough and Jansai O. In the U. K, we have started the tendering process for the projects on the Northern Endurance Partnerships, the NEP. This is a partnership of BP, ENI, Equinor, Shell, Total Energies and National Grid to develop offshore CO2 transport and storage infrastructure in the UK, serving 2 hubs on Teesside and Humberside. Overall, we are seeing strong demand for certain vessels in the Subsea and Conventional from late 2023 onwards, And we're becoming increasingly optimistic about the pricing environments for new orders in that window. Turning to the next slide. In offshore wind, we continue to see good long term opportunities in Europe and Asia. There is a long list of projects awaiting the next CFD round in the UK, which is currently scheduled for early 2022. We have introduced new prospects in Germany as well as Poland where our Renewables business unit opened an office earlier this month. Finally tendering for projects in the U. S. Has accelerated with a glowing list of opportunities that should be awarded from late 2021 or early 2022 onwards. To wrap up, we'll turn to slide 16. Although we had a cash outflow in the Q2 after paying our latest dividend, our balance sheet remains strong with net debt including lease liabilities Just $39,000,000 and liquidity of over $1,000,000,000 We have a growing backlog And very active tendering pipeline in the Subsea and Conventional with early signs of an improved pricing environment for new awards. In Renewables, we believe we are creating a business with OHT that will enhance and accelerate value creation in offshore fixed wind for our shareholders. While at Subsea 7, we continue to push ahead with a nascent floating wind business. Overall, our confidence in the long term outlook has increased For both our business units, we're optimistic about the range of opportunities for the group. And now we are happy to take your questions. Ladies and gentlemen, we'll now begin the question and answer We have the first question from the line of Michael Hesburgh. Please go ahead. Yes, thanks. Good afternoon. I've got just a question first on the renewables business. I was wondering With the Q2 result, it was particularly weak. I just wonder whether you could maybe try to pull apart the moving parts. How much is relating to The losses relating to Taiwan that you booked in 2Q, I mean, can you talk a little bit about the underlying performance? Are we seeing better margin Capture on the broader portfolio of projects that you're executing on? That would be my first question, please. Thanks. Yes, Michael, thank you. Yes. The performance of the underlying projects excluding Taiwan are satisfactory for us. We made good projects on Hornsea 2, Good project performance on that one. Similarly, good performance continues on Seagreen. We talked on my Prepared remarks about the preparation for the offshore campaign this year. So underneath it, we have a good business there. Taiwan is the main cause of the challenge. And as I discussed in the prepared remarks, it's a combination of The COVID restrictions that have been imposed by the Taiwanese government, which from the middle of May effectively locked down the entire country. And that has meant that changing crews and restocking our assets has become harder and harder as time moves on. We have effectively ceased to work on that project since the middle of July because we cannot change the crews out. And we would expect to restart work in August subject to the Taiwanese authorities providing visas for our crews. So it's pretty much all around Taiwan and allowing that country to unlock. To add a bit of complexity, we also Have some different conditions out there and some changes to our scopes, which also need to be managed with our client. But that into the nutshell It's the situation with our renewables business at the moment. Thanks. And then just a follow-up on the Subsea business. You mentioned about The high market share of awards from the integrated alliance. But I'm just wondering, should that maybe Worry, you have to translate into therefore a lower margin on those projects. Have you been bidding more aggressively to win that kind of work? Because Clearly, the Subsea margin is also weak in the quarter. Thanks. Yes. The margin in the quarter reflects The work that we're liquidating at the moment, the work that we have announced will be liquidated later in the timescale. So for us, it's about the balance of the work that we've got. The other thing I think to remember in this quarter is We've just started the offshore activity on a number of projects. Once we liquidate those projects, which we should do through quarter 3 and quarter 4, We'll have an opportunity to look at our contingencies and allowances in those projects. And also we'll have an opportunity to have a discussion with our clients As we settle our final accounts on each of those projects. So again, I think it's more about the timing. And as we said, we're not a very good quarter company And we're comfortable with where we think the year is heading. Okay. Thanks, John. I'll hand it back. Thank you for your question. The next question is from the line of Camille Roger from Kepler Cheuvreux. Please go ahead. Your line is open. Yes. Good afternoon. Thanks for taking the question. Sorry for that, but I was wondering if you can, let's Saif, the magnitude of the loss that you booked in Taiwan, maybe if you can give us kind of guidance as a follow-up on the question that Just ask it. And the second one is related to the commercial dynamic. So two questions in one if I can. The level of variation orders remains quite important. So should we expect, like I said, the same kind of activity for the upcoming quarters? And based on that I'm just talking about variation orders. And based on that, would you say that it's likely that you will, let's say, outpace The order intake of 2020 2021 regarding your current pipeline, please. Thank you, Kevin. A number of questions in one there for me. Let me take them 1 by 1. We don't give specific numbers on individual projects as we're in a number of Discussions with our clients on that. But I think it's fair to say that what we have done is to forecast the loss to completion on that project, Considering the circumstances that we have in front of us today, we have allowed for what we believe We can recover from our clients and we've also allowed for some of the areas that we may not be so sure we can recover from our clients on that work considering The complexity of the changes in law and such like that's happening in Taiwan at the moment. So that's the way we've looked at it in terms of where we're at as a company at the moment. In terms of the commercial dynamic for the second half of the year, You're correct that our business involves escalations to our current contracts. And that can be through the form of variation orders or amendments to our contracts. As we said, I think in Ricardo's prepared remarks, we expect to see The benefit of some of those coming through in the Q2 and we remain comfortable with what the year end looks like for us. In terms of order intake, we see a good pace for order intake in the market at the moment. And I think on a previous call, I was asked whether or not we would feel comfortable that we can meet our Book to bill for the year of over 1 and I think we can say that we're comfortable that we should be able to achieve that this year. Just as usual subject to our clients' timing of awards, but in the discussions we're having at the moment with the projects that I see fitting into place there, I think that is a reasonably clear intent on our part. Okay, perfect. Thanks a lot. Have a good day. Thank you. Thank you for your question. The next question came from the line of Vlad Serwisky from Bank of America. Please go ahead. Your line is open. Yes. Good afternoon and thanks for taking my three questions. The first one is on the backlog. Based on the phasing you guys provided to us, revenues this year could approach $5,000,000,000 But at the same time, backlog execution next year currently stands about $1,000,000,000 less than it was 12 months ago for execution in 2021. So in that sense, Is there a scenario which could help you to avoid a significant revenue contraction next year compared to obviously very strong this one? The second one is probably an accounting question to Ricardo on contract assets. So we obviously have seen a pretty big build in contract assets this quarter, And this is normally not what we would like to see. Could you shed some light on what drove this increase and how do you expect it to develop from here? And very lastly on COVID costs. Obviously, net COVID costs pretty low $4,000,000 this quarter. Is this primarily driven by the fact that operations are getting more predictable and paid homes? Or you are just basically able to recover more from your customers to offset that. Thanks very much. Thank you, Vlad. If I take COVID and the backlog and I'll ask Ricardo to talk about our contract assets. If we look at COVID costs, we provide a net figure. And net includes recoveries that we may have received from previous quarters' worth of activities where we incurred costs and recoveries that we have received this quarter from that. Ricardo said it in his prepared remarks. We're actually seeing quite a bit of complexity in each different region that we're working in at the moment On our COVID costs. And here we're putting our direct costs in. So things like Taiwan where your efficiency goes down and down Down is not directly put into these accounts, whereas our quarantine costs and such like and people standing And the testing costs are in the direct costs here. So COVID is we all have to be careful with COVID. It's complex And we're working our way through and Taiwan is a great example. 1st phase, no issue. 2nd wave of COVID, no issue. 3rd wave, flawed the country completely. So We keep a very careful eye on that. In terms of our backlog, if we join the dots together in terms of backlog, what we see here is A pickup for work going offshore in late 2023 2024. And as Ricardo mentioned, we are sizing our fleet next year For the work that we will have, which means that we will reduce the size of our fleet to get it to be the right size. Conversely, we are hiring a significant number of engineers and Supply chain experts to come in to go through the lower margin procurement and supply chain phase of those projects that will happen in 2022. So an interesting sort of dynamic of change that's happening there in 2022. Maybe Ricardo, you can talk about the contract assets question that Vlad raised. Good afternoon, Vlad. I think your question on contract assets Ties back to my prepared comments regarding our working capital movements. Yes, our contract asset balance has increased And this is linked, as I previously explained, to factors such as the timing of milestone payments, Progress on projects, the fact that we have increased activity in the Middle East where one major client in particular is relatively Slow in making payments. However, as I indicated, I'm optimistic that the Working capital position, which is strongly affected by our contract asset balances will improve in the course of the second half as Projects progress and settlements take place with clients particularly with respect to those that will be closing out In the course of the second half of this year. Beyond Ricardo, thanks very much. Thank you for your question. Next question came from the line of Mark Wilson from Jefferies. Please go ahead. I'd like to ask about the current Margin and pricing dynamic you feel you're getting into the awards that you're winning. Very good book to bill. But if we look back, the other comments for 2019 2020, speaking to competitively priced contracts, Is there a step change in the pricing dynamic that you're putting into bids through this year? Thank you. Yes. Thank you, Mark. As I've said many times before, our pricing is taken on a project by project basis. We look at the circumstance of each bid that we put in, the more work that's awarded into the market for late 2023, 2024 and into 2025 absorbs capacity either ours or our competitors. And that will change the dynamic of each bid that we put in step by step as the year progresses. So we tend to look at each one on a case by case basis, how well we're positioned in that particular country, that particular client, that particular project. So that's the dynamic of really what's going on. And we can see that as you can see from our outlook, We remain positive that there is quite a good outlook of prospects that are coming there. Near term work in 2022 is competitive, but further It's improving. And that's what we're seeing in the market. And hence our comments that we are feeling more optimistic About the pricing that we'll see later on in the windows. Okay. Thank you. If I go back to full year 2019, you spoke to vessel availability tightening for certain SURF Projects in 2022 and 2023. Today, we speak about certain pipe lay from late 2023. Would that suggest that projects have moved out in time or there is additional capacity that has come into the industry to satisfy By 2022 offshore environment, or do you think that is that's now been bid and that Can be a timing of project that would see some of these improved margins come through. Well, I think when we were talking in 2019, we haven't seen the oil price shock and the delay in the projects that we've seen. So this is basically a shift as a result of What's happened there, I think, is the main thing. The projects that we were preferred bidder on Pachelaou in late 2019, we had expected that to be awarded a year earlier than it eventually came to us. So there's a whole timing shift I think in the market That we're seeing there, Mark. And that's been there, I think, since the oil price crash in Q1 of 2020. Okay. Thank you. Thank you for the question. We have another question from the line of Iskante Chilukuru from Morgan Stanley. Please go ahead. Your line is open. Hi. Thanks for taking my question. I just I had a question on your adjusted EBITDA guidance for 2021, which is higher than 2020, which is at $423,000,000 I look at the consensus numbers prior to the release, and it was around €550,000,000 for EBITDA. I was just wondering if you could give some context on where you think your expectations are related to this consensus And how this has changed with the 2Q results? Thanks. So I'll take good afternoon and thanks for your question. I think the main takeaway here is that we have provided in our written and Vovable comments here that we remain comfortable with this year. We know that if we were significantly out From consensus, we would need to declare that to the market. We've also said in our prepared remarks that we expect to see a stronger second half In terms of profitability on both sides of our business and that's where we stand here at the moment. So I think these are the building blocks that will provide the market From where we're at. Thank you. Thank you for your question. We take the next question from the line of Nick Costantinogis from Exane. Please go ahead. Hi, guys. Thanks for taking the question. Apologies if this has been asked a little late. I want to ask two things. Just touching on the 2021 answer you just gave, I want to ask whether that includes any assumption of recovery of some of The costs that you've incurred in Taiwan. And then secondly, when I'm thinking into next year, obviously, less offshore work. How does otherwise the mix change? I'm just trying to understand what are the big moving parts when we're thinking about your margin into 2022? Again, apologies if this have been already asked. Well, Nick, as you know, we don't generally give guidance for the year ahead, and We'll do that a bit later. So and we provide enough information in the pack here on the backlog and how it's broken down and The different years and such like. In terms of recovery for 2021, as we've Stated earlier, we have put in what we believe our full life position on the Taiwanese project is, Including some recovery from our client is in that number. And so we will now go through a process of having a discussion with our client and having those Discussions over the next few months. So at the moment, we're obliged under the accounting rules to put in what we believe is the position on that. So for this year, we look at the whole portfolio of projects. We see which projects are finishing. We see where we're at in terms of the phasing. And we remain comfortable with where we stand for the year. Thank you. Thank you for your question. There are no further questions at the moment. Well, thank you very much everybody. We appreciate your calls. I know it's a busy time of year. And thank you very much for everybody for joining today. We look forward to talking to you on our