Earnings Transcript for AKCCF - Q1 Fiscal Year 2023

David Phillips: Good afternoon and welcome to the presentation for Aker Carbon Capture results for the First Quarter of 2023. My name is David Phillips, Head of U.K. and Investor Relations, and I'm joined today by my colleague Egil Fagerland, our CFO. For information reflecting some feedback from the market we are now taking a more focused approach with Q1 and Q2 reporting. So we will have a shorter presentation with Egil alone, then we will have plenty of time for Q&A with the audience as usual. So firstly, Egil will take us through our main achievements and developments on the first quarter of this year and will also run through a number of topics that are important to our strategy. Then he will take us through our key Q1 financials, including some outlook commentary for the rest of the this year. And finally, we will take your Q&A via the online system. Just as a reminder, as in previous quarters, you can post your questions into the system anytime. And at the end, we'll try and work through as many of them as time allows. So Egil, over to you.

Egil Fagerland: Thank you, David. This is the agenda for our presentation today, following an active and interesting quarter. We will address the highlights of the quarter, our operations and business developments, our delivery models, the financial highlights, and finally our way forward. And then we will move on to Q&A. But before I start with the highlights from Q1, we have a short introduction to the company. Aker Carbon Capture is a pure play carbon capture company, with the strength of the Aker Group behind it. Our proprietary patented technology has been developed over 20 years and is validated through close to 60,000 operating hours and verified across several applications. Aker Carbon Capture's technology is cost and energy efficient, robust and flexible, meaning it can be applied to existing plants or new builds. The process uses a biodegradable mixture of water and organic amine solvents to absorb the CO2 and has a market-leading HSE profile. Since mid-2020, Aker Carbon Capture has focused on the European market with Scandinavia, Benelux and U.K. leading the way. We also note the increased policy support and early-stage corporate activity around CCUS market in North America, where we now have our first local employee. We continue to prioritize 4 market segments where our technology has been tested and verified

A - David Phillips: Okay. Thank you, everyone, and thank you, Egil, for your presentation as well. We now move into the Q&A section, as Egil just said. [Operator Instructions] So first up, a high-level question around project pipeline in terms of what is not considered as backlog for '23 and '24. On our progress in 10 and 25 slide, the one that we -- as you've seen for some quarters, is broken down into real contracts and FEEDs and tenders and studies and pre-FEEDs and so on. The only piece that we count as backlog from that is the very far left darkest color, which is the 0.5 million tonnes per year of CO2 capacity, which relates to the 2 projects we're building, Brevik and Twence. Everything else is in the yet-to-come group just to make that clarification. Moving now to the pipeline. Talking about -- looking at the pipeline, we've seen an increase in studies and tenders, but we have seen a decrease in terms of the secured FEEDs. Can we talk a little bit about this and what's behind this? Maybe if I take this first, Egil, and you jump in if you want to say something else. With this, the main -- the increase in studies in tenders is very much reflecting the ongoing momentum we've seen, seen good activity in a number of the sectors that we have on our targets, including waste-to-energy and so on. That is very much, I would say, business as usual, and it reflects the growing market we continue to see in this world. And it's very much a European comment at the moment as well. Our excitement over the pond will be -- is yet to come. The movements in terms of the FEEDs, when we reported this with our Q4 results, that reflected a peak level of tendering in the U.K., especially ahead of the government funding decisions that came through in late March. There was one of the projects in that list went with a different technology provider, although we would also point out that project itself did not receive funding. It wasn't on the list of 8 that were chosen to go ahead. So anything else apart from that, you'd have to go and look at that project yourself. But that's the reason that moved down from 8% to 7%.

Egil Fagerland : So maybe I can add David that we are also growing the rest of that pipeline, especially within pre-FEEDs studies and MTU campaigns. And that pipeline is important to continue to grow and build the feed and tenders overview. Over the next 12 to 18 months, we're hoping to see more of the tenders and FEEDs mature into real construction contracts. Some of them will come our way. Some of them will go to others or move out in time. When it comes to the pre-FEED studies and MTU campaigns, we expect more of those now over the next 12 months to move into the FEED and tenders bucket. So we're constantly filling in that pipeline, and we will see them convert now going forward.

David Phillips: Okay. Good. Next question, again, asking about the tenders and FEEDs, I think we've covered this one already. But also a little bit more about time line and converting feeds into backlog. Egil, as you mentioned already, we hope to see the ones that are, let's say, nearer on the radar screen in the next 12 to 18 months. I think if you look at the U.K., as you will have seen, a lot of news from the U.K., €20 billion of funding also the selection of 8 projects for Track-1 and then the expansion for Track-1 and also Track-2 more news on that over the coming year, year or 2. I think there's a bit of a known unknown around the financing timing for this and when these products will ultimately move forward. But certainly, the expectation is that later this year, early next year -- let's say, in the next 12 months, we would hope to see those in the U.K. to move forward. Okay. Next up, a question around Capture as a Service. Egil, maybe you want to discuss this one?

Egil Fagerland : Yes. So the question is what our traction is on that offering and how we foresee that business model compared to the other business models in the future. And at the moment, what we're seeing is a very strong interest in discussing the various offerings that we have in terms of Big Catch or Just Catch and especially our modularized Just Catch offering. And when talking about that modularized offering, we both talk about supply agreements, selling the facility to the client, them owning it and also Carbon Capture as a Service where we can provide and help them with the whole value chain, including the financing. So the main hurdle for implementing CCaaS right now is 2 things. It's the fact that we don't have storage capacity available as of yet in Europe. So that's a hurdle that needs to be in place or overcome before we can offer the full value chain. I think once that is solved, we're going to see projects come online in Norway, Denmark and the U.K. and then also Netherlands in terms of storage now over the coming 2 years. We also see that in the meantime, various governments are funding projects, and this funding often favors the CapEx model, basically where the client buys the whole facility and have an aftermarket and operations agreement.

David Phillips : And also in terms of the next follow-on question from this is, roughly can we give any indication as to the share of Capture as a Service versus licensing key equipment, EPC and so on in our pipeline.

Egil Fagerland : So over time, in the long term, we foresee that selling Just Catch units of various sizes and also in trains, meaning selling several units in parallel. That business line can be as large as the licensing with key equipment business line for larger-scale projects in terms of revenues. In terms of whether or not you sell the Just Catch as a service or for the client to own it and then we have an aftermarket agreement, that's a bit more up in the air in terms of discussions with the clients. With most of the clients, we explore both options as a part of our studies and also as a part of their approach to how they can implement CCS. And we are supportive of both models, and we do think that quite a fair share of the Just Catch sales in the future will be on the Carbon Capture as a Service business model.

David Phillips : Next question. Again, on the tenders and FEEDs question, Q1 versus Q4 last year, I think we've covered that already. The letters of intent that was signed in -- we talked about that signed in early Q1, and any comments we can say about timing of those converting into real awards?

Egil Fagerland : Yes. So we can't comment specifically on the data we expect them to be converted. But similar to the other pieces of the pipeline that we have shared with you within the 12 to 18 next month is very likely. And when you have an LOI in place within the next 12 months is likely.

David Phillips: Okay. Question around the membrane R&D project that we mentioned in the presentation today. What are the next steps and also a reminder of our annual R&D budget and just around the membrane itself. I mean we have -- although we may not have talked about too much of this openly, we have a fairly broad spectrum of experience that we gained over the last 10, 15, 20 years, not just around our favorite amines. And this particular project is one that's been going on for a while. It's actually -- it's an offshore use to separate high-pressure CO2 subsea. This is actually a rather specific niche opportunity. But what we learned from this from our perspective is very much more about membranes, making some good connections with others in the membrane, let's say, the membrane science world that we could develop further in the future to see how this technology could help us. But I guess the point of mentioning is really to say that we are very, very aware of this area of technology. This is a particular example of what we've been working on. R&D budgets, Egil?

Egil Fagerland: Yes. So what we're looking for going forward is on the CapEx side, we're spending quite a bit on product development, and we're building a new mobile test unit. So you can expect the spend to be around the similar levels that you've seen this quarter for this half year. For the second half of this year, you can expect them to slightly go down as the mobile test unit that we're building is finalized. On the R&D spend, we also have R&D spend in our P&L. Early phase R&D and technology exploring, where we are too immature to capitalize, but still developing new technologies. And that is represented in the cost base that you see for our EBITDA.

David Phillips: Okay. And the last question in this group. Looking at the prolonged -- thinking about the bigger picture, the prolonged periods for negotiating around the U.K. projects, no real acceleration with the speeds of awards and storage availability in the EU, how do we remain comfortable with our 10 in 25 target?

Egil Fagerland: So when you look at our pipeline, and you see that we have more than 7 million tonnes of CO2 in tender and FEED space that is likely to convert into real projects within the next 12 to 18 months. We believe that we are well positioned for a large portion of that bucket in addition to even larger bucket in the pre-FEED studies and mobile test unit campaigns, we see that it is still likely that the 10 in 25 is very possible, especially when you take into consideration that many of the major projects that will move forward will move forward in the second half of 2024 and even more in 2025.

David Phillips: Absolutely. Thank you. Okay. Moving on, looking at the U.K. again and thinking around how long would the FEED process at Runcorn take? And will it FID on the same time frame as those others already moving through the FEED? If we look at these projects like many in the same country, you normally have to start at where the storage project will be kicking off. So you work back from that. So given all that, we would assume that all these in the first wave will be moving roughly the same at the time. And as we said, that is -- it depends, it's the known unknown in terms of when this finally happens in the U.K. And when it's -- when the negotiations are finalized, how long does it take for the company to then do their own FID finally before they move ahead. But that feels like later this year and into early 2024. So as we said, very roughly the next 12 months should be around them. A follow-up question here. Again, LOIs, I think we've already covered this one in terms of the timing for the LOIs awards. Moving on, the next question is looking at the North America markets. Can you talk a little bit more about the potential of their delivery models and partnerships? Very interesting area for us as you spotted in the comments that Egil made earlier. And as you remember, we talked about at our Q4 results, we have our key first employee in Houston, who is extremely busy chasing opportunities and discussions left, right and center. It is taking a step back. It is a very exciting market, particularly looking at the U.S., but it is 48 separate areas to look at. It's not just one country. Plus, it's a little bit earlier in terms of developing how the whole value chain and business models will work than we've seen in Europe. The opportunity though is that arguably some aspects of policy could be easier to work through, particularly from the financing angle, given you have a floor in terms of the famous $85 for 45Q. Plus also, it is as always, very large. So even if you look at all of the North America -- all of the U.S. footprint for CO2, which is roughly 5 billion tonnes of CO2 a year. If you then go down to the industries that are of relevance, things like energy, point and source industrial emissions, that's about half, so let's say, 2.5 million tonnes a year. Then you think, well, a big chunk of that is going to be in the wrong place. It's going to be too far from storage. We'll need too much at this point of an expensive pipeline solution to move the CO2 around. So even then, you're still left with a market opportunity that is sizable even when you work out all those sort of areas that may not come through in the first few waves. And also from our perspective, there are a number of industries that could be potentially exciting in the U.S. where we have a lot of experience, a lot of technology validation and actual experience of building the plants right now. So from that point of view, we see a great opportunity there. I think for us, the key is going to be really working out what models we use to work over there, how we work with partners because we've always said this is an area that's going to be key in terms of being driven by partnerships. We're not just looking for the first contract. We're looking for a base from which we can really scale the business over the next 5, 10 years and more. Egil, anything to add on that space at all?

Egil Fagerland: I think it's well covered David.

David Phillips: Thank you. Next one, are we able to provide any guidance on CapEx for 2023?

Egil Fagerland: We briefly touched it in another question, but we're probably going to stay around a similar run rate as you see today. But you can expect the fixed asset portion of the CapEx to reduce towards the second half of this year as the second -- or the new mobile test unit is finalized. On the intangible asset side, I think you can expect to see a similar level going forward.

David Phillips: Okay. All right. Moving on. We've already talked a little bit about the U.S. market. So we mentioned that one. I think -- maybe I'll just have one additional comment around this. I think bearing in mind at the stage that the market is out over there, whether it ultimately accelerates past Europe in the next 5 years or whatever the time frame is it's one question. Right now, as I mentioned, it is early. So right now, a lot of it is about positioning and working out how best this value chain works. But we certainly find an extremely rewarding experience to work over there. It's an enormous opportunity and a great lot of very productive and positive discussions going on. So we will -- of course, when we have some real news to update you with, we will update you with some real news. Also, you talked about another question about membranes. So just this membranes, the reason -- again, the reason we mentioned this is to really show that we do have quite a broad technology base, even though we may not have rolled all of it out commercially. But we understand this technology very well. This specific one we talked about is a niche opportunity looking at subsea separation from high-pressure well streams. So this is, I would say, more looking at the physical durability and chemical durability of the actual membrane itself. And as we've always said, remember the slide we had at Q4 breaking down the market across everything in carbon capture into fermentation to precombustion, post combustion and so on. This is important thing to note, whenever you think about something like membranes, it's a different technology. And often, certainly historically, has had a different target. Its separating high-pressure CO2, where the ambition perhaps is not to capture 90% or 95%. It's to reduce it by maybe 70%. It's a different style of target. But it's a very interesting area overall, and we are certainly keeping ourselves very aware of how this market might develop. So next question. Thinking about our growth and everything else, how do we plan to maintain our financial robustness, while investing in product innovation and technology and so on. How do we balance our financial resources while staying competitive in a growing market?

Egil Fagerland: So what we've done on the liquidity side is that we made sure that all of our projects are cash positive throughout the execution. We aim at cash neutral, but that means in reality that we get cash in before we pay our vendors. So in that sense, our projects are very robust in terms of being able to cover their liabilities at any time. Then when it comes to being able to grow at the right speed and do the right technology development, we did raise capital some time back. And part of the purpose for that capital raise was to ensure that the business we have is well equipped to deliver on our 10 in 25 strategy. And as you can see from our figures, we are also investing quite a lot in product development and technology and innovation on a quarterly basis.

David Phillips: Moving on. Also on the financial side. And this is a question we often get asked all the time, and our answer is nearly always the same. The question is when do we expect to reach breakeven? We have never given any guidance on this. But I think you have to bear in mind that, firstly, as Egil said, we have a very good financial support, both from a high level as being part of a larger organization and also immediately with us in terms of our balance sheet and everything else. And I think -- and given that, our priorities really are to secure growth in the industry and make sure we can really scale and make the most of the opportunity that's in front of us. Given that we have not given any exact comments around breaking even.

Egil Fagerland: I think to follow on that, David. We don't want to do that because there are so many growth opportunities in this market, but you have to decompose it almost by the country or the opportunity to see whether or not it makes sense. And taking advantage of opportunities in North America, for example, also costs additional funds to grow. So becoming profitable, we should look at a market-by-market and project by project. And we can say that all our projects are profitable, and that's our starting point when we do business. So the costs that we have are mainly related to sales, tendering and technology development. And of course, some staff functions like myself and David Phillips there. But that's the smaller part of that cost that we are incurring on a running basis.

David Phillips: Absolutely. And given the good support we have, effectively, you can say you may even get a false positive or negative if we were to say we're breaking even earlier or later because really, we want to be positioning ourselves for growth in future years, not just aiming for a very short-term financial target. Moving on. Back to the U.S. again. A very good question around what's the best way to crack this U.S. market, particularly as a smaller Norwegian player and how do we participate? Shall I take this first? Yes, I think we talked a little bit broadly about the U.S. and our approach and talking to various partners and so on. I think key to this is, firstly, making sure that we have a very good understanding of the local value chain of partners, also of understanding how the actual business model works over there because there's no question it will be different from what it is in Europe. There'll be certain aspects that maybe are -- have a different emphasis on certain aspects of technology. There may be a different emphasis in terms of certain industries. I think that the key way for us -- I think I must have met we spent quite a lot of time in the U.S. already. as we've been talking about for the last year, having many good discussions with potential partners across the value chain and also investors and are very privileged to have a very good following in the U.S. as well. Even given, as you said, we're a small-cap Norwegian player. But in this, I think the awareness in the industry of our technology is quite strong. I think the challenge is making sure we link up with the right piece of the value chain to really deliver the projects in a sustainable, on budget, credible way. And the pieces of the value chain, as I mentioned, will likely be different in the U.S. versus Europe and probably even different in different parts of the U.S., whether you're looking at working with a developer around one industry, whether you're working with a natural customer and emitter in other states, I think there will be some quite some differences there. But we have to keep it very open mind, keep ourselves to be very flexible and also have to be prepared to take some views as and when the time comes.

Egil Fagerland: To add some more flavor to it as well, we will try to replicate some of the success we've seen by having a focused and targeted strategy in Northern Europe. We've been quite good at prioritizing where do we start to grow, where are the best conditions for us to enter. And when you look at the North American market, it's vast. It's larger in totality than the European market. So the way we focused around Scandinavia, Benelux and the U.K. and Europe has been a success for us to be able to grow, and we will have to do a similar approach in North America. And picking out those spots that are going to come first with the best support and the best conditions for growing is what we're working on right now. Then in addition, we will have to leverage our partnership approach, which we've been successful with in Europe so far. And we also have some global partners that we will continue to work with also in the North American context, including Microsoft and Siemens Energy.

David Phillips: Okay. Moving on. This is a question around revenue timing. And thinking more from a Big Catch project, what is the lead time from firming up a contract in terms of announcing it to actually recognizing meaningful revenues?

Egil Fagerland: So when we work on a Big Catch project and typically, for us, that would be a license with key equipment contract, we would start typically all the way back in the study phase. After study, they could consider a mobile test unit or not. That depends a little bit on the case. So that typically takes half year to year. And then once you've done that, they can move into a FEED phase. A FEED can take anything from 6 months to a year. Some prefer to have a pre-FEED and a bit shorter FEED and some do a larger FEED, and that takes a bit longer. Once you've done a FEED, that typically also entails the combined tender or ends with a tender price. And then you can win the EPC contract or the license and key equipment contract. And for Aker Carbon Capture, we will typically then deliver the technology and the key equipment associated with that. And the building of a plant can typically be around 3 years. So then you have the lead time up to the contract and through the building of this facility, we, Aker Carbon Capture, will incur license fees and key equipment revenues. And we typically recognize revenues from the start and profit once the project is mature enough to credibly foresee its end state or its financial outcome. And as a rule of thumb in EPC industries, that's been around 20%. This is a newer, less mature industry. So maybe at a slightly higher percentage of completion before we start recognizing profits.

David Phillips: Okay. Just with a similar theme, but looking more into 2024. The question is the market seems to be a little bit nervous about revenue development in 2024, when most contracts be in place to avoid our revenues dropping year-on-year.

Egil Fagerland: Yes. So with the secured backlog in 2023 of NOK 800 million and NOK 200 million in 2024, it's very clear that in 2024, we need to have some new contracts to continue to keep the revenue level we're at now. So that would be in the first half of 2024.

David Phillips: Yes. So a pretty quick reaction to any contract awards, absolutely. So first half 2024. We covered the next one already. So question, looking at the quarterly result itself. Why is the EBITDA down despite revenue increases given what's been happening in the background? Does it imply that R&D spending and tendering are increasing much more and if so, how comfortable are we to cover our spending from our current funding without needing to raise any capital?

Egil Fagerland: So what we're showing in this quarter is according to our plans and the revenue is increasing -- that is also the project is progressing well. At the same time, we do see increased market activity. You see that both from our tendering pipeline. It has been growing over the last period. And typically, these tenders can last all from a couple of months to half a year. So some of this cost definitely links to sales and tendering. Also on the R&D side and early innovation, we're spending capital. But that's according to the plan that we've had to deliver on our 10 in 25 ambition.

David Phillips: Next one is a more detailed one around costs. It's around looking at the LNG cost for our SSE work Keadby 3. We're not going to be commenting on a particular plant. What I would say though, and maybe if you've seen this already, we had this Technology Day earlier in this year in January. And the full recording is on YouTube. So if you look for Aker Carbon Capture Technology Day 2023, something like that, you will find it and go through that, and there'll be some nice slides in some parts of that. But talk particularly around how we see opportunities to reduce the energy consumption to really bring that net energy cost down, both from internal and external heat recovery. I mean I think we'll leave it at that because we're not going to be talking about any project in any detail. Anything to add Egil?

Egil Fagerland: I think that's fine. You can also find this information on the recording that we have also on the web page, not only YouTube. So you can find in our homepage.

David Phillips: And the very last one, we sort of covered already, I think, how soon do we need to get one of the large contracts to generate revenues in 2024. And as you said, first half 2024. There's a lot of homework done before these contracts typically move to the actual final award.

Egil Fagerland: Yes. So I would say within the next 12 to 18 months, certainly, a new award is needed to have the same -- to continue to recognize revenues in 2024 on new contracts.

David Phillips: All right. Those are all the questions that are coming so far. So I think we will draw a line there. I think what remains is for us to thank you for your interest and good questions, as always. Those who don't have time, I know it's a busy time of the year with Q1 reporting, but please if you run out of time and haven't got time to follow-up, then please do drop us a line and get in contact, and we can always run through more topics then. But thanks for your time again, and we will speak to you in the next few months.