Earnings Transcript for AKCCF - Q3 Fiscal Year 2023

David Phillips: Good afternoon, and welcome to the presentation for Aker Carbon Capture's results for the third quarter of 2023. My name is David Phillips, Head of Capital Markets. I'm joined today by my colleague, Egil Fagerland, our CEO. Egil will start the main presentation. Then this will be followed by a Q&A with the audience. So firstly, Egil will take us through our main achievements and progress from the third quarter of this year, and will run through a number of topics that are important to our strategy. Then he will take us through our key Q3 financials, including some outlook commentary for the rest of the year. And finally, we will take your Q&A via the online system. Just as a reminder, you can post your questions into the system at any time. And at the end, we will try and work through as many of them as time allows. So Egil, over to you.

Egil Fagerland: Thank you, David. So this is the agenda for our presentation today. Following a highly active third quarter, we will address the highlights of this quarter, our operations and business development, our delivery models and the financial highlights. Finally, the way forward will be highlighted as well. Then we will move on to Q&A. But first, before we start the highlights from the Q3, we have a short introduction to the company. Aker Carbon Capture is a pure-play carbon capture company, offering modular and configurable plants with the strength of the Aker Group behind it. Today, we're already delivering 7 carbon capture plants. We are making carbon capture happen. Our proprietary patented technology has been developed over 20 years and is validated with more than 60,000 operating hours and verified across a range of industries. Aker Carbon Capture uses a biodegradable mixture of water and organic amine solvents to absorb the CO2. Our technology is modular, cost-efficient and energy efficient. And it has been a leading HSE profile in the market. Since mid-2020, Aker Carbon Capture has focused on the European and Scandinavian and Benelux markets together with U.K. With an increased policy support for CCUS in North America, we have started our market entry there as well. Also, we're exploring potential positions and markets in the rest of Europe and the Middle East. We continue to prioritize our 4 market segments with high market activity, cement, bio and waste-to-energy, gas-to-power and blue hydrogen. And we're also seeing good engagement with a number of additional segments where our technology is well-suited to capture CO2, such as the refining industry and process industries. Our technology has been tested and verified across all these segments. Now to the highlights of this quarter. We've seen a significant growth in pre-FEEDs and studies this quarter. With order intake year-to-date, 4 pre-FEEDs and studies, around 9 million tonnes of CO2 per year. In July, we signed a MoU with Aramco, one of the world's leading integrated energy and chemical companies. The MoU is to explore partnership opportunities to deploy CCUS and industrial modularization in Saudi Arabia, and we've strengthened our modular product portfolio with the launch of Just Catch 400. Through the third quarter, we've also seen good progress on our major projects. At Twence, the plant has started commissioning. At Brevik, the first heavy lift campaign has been successfully completed. And for Orsted Kalundborg, the container fabrication for the modular Just Catch units has started. In addition, 2 of our U.K. FEEDS and pre-FEED projects are in the final negotiations for government support. Our backlog remains strong at NOk3 billion on the backlog Orsted Kalundborg CCS award in the second quarter. I'm also happy to share that we've continued our revenue growth in Q3, more than doubling our top line compared to the same period last year. All this, while maintaining a cash position at NOk1.3 billion. This quarter, we've also appointed Julie Berg as CFO. Julie brings with her a vast experience in finance, risk assessment and compliance, and she will start on December 1 this year. Now let's take a closer look at the significant growth in our pre-FEED and studies work. In the quarter, we've continued to see a considerable development across regions and industries, further supporting the positive momentum we've been witnessing over time now for CCUS and the market. The EU, France, Germany and U.S. have all introduced supportive CCUS ambitions and favorable regulations the last couple of months. These are important steps for realizing and accelerating the broader industrial decarbonization across both sides of the Atlantic. And with this as a backdrop, I'm happy to share with you that Aker Carbon Capture has been awarded a number of strategic pre-FEEDs and studies across Europe and North America this quarter. In Europe, we strengthened our foothold with pre-FEEDs and studies in Sweden, Germany and France for the waste-to-energy and biomass and power plant sectors, all based on our standardized and modular Just Catch with a capacity ranging between 200,000 tonnes and 250,000 tonnes of CO2 per year per plant. A clear sign that there is a strong interest for the Just Catch product in the market. Then in the U.S., we were awarded a Big Catch study covering emissions from several mineral production facilities with a combined capture capacity of 1.5 million tonnes of CO2 per year. And recently, just before our presentation today, we signed a pre-FEED contract for a major European power company, covering a portfolio of power plants in Europe. The planned capture capacity could reach up to 14 million tonnes of CO2 per year for the sites combined. Some of these plants have the potential to become the largest capture plants in Europe. Finally, R&D is important to further develop our technology to maximize carbon reduction and removal, while minimizing climate and environmental impacts. In Q3, we've initiated 3 new projects

A - David Phillips: Okay. Thank you, and welcome back. I hope you enjoy the presentation. And we now move into the question-and-answer session for our presentation today. We will be taking questions on the system. This is a live system, as you know. So as usual, please do enter your questions during our discussion right now, and we'll get through as many as time allows. And thank you also for everyone who's already loaded the system up with some very, very good questions. We really appreciate the interest. So let's get things going. Firstly, from from Societe Generale in Paris. Two questions. Firstly, Egil, asking about the decline in backlog from Q2. What drove that?

Egil Fagerland: Yes. So in Q2, we had a big order intake of the Orsted Kalundborg CCS project with 5 Just Catch, more than €200 million. So the decline from the second quarter to the third quarter is the revenue recognition that we've done in that period due to the progress on Orsted and also the other existing projects that we have. So that's a natural effect of having a bulky order intake in one period that you will see that being consumed over time.

David Phillips: Absolutely. And also from Vincent asking about -- I think it's referring to the major pre-FEED we announced quite recently. How confident are we that this will convert into a real project?

Egil Fagerland: So for all the studies and pre-FEEDs and MTU campaigns, we do, we do quite a tight follow-up whether or not we believe these projects have the potential to become real projects with FID. So we look at whether or not they're in the right area, right clients, right type of emissions and close enough to permanent storage that the project can make sense overall. Whether or not this particular one will move into FID, it's difficult to say at this stage. It's still early. Once we've done the study and the pre-FEED, it's going to be easier for us to comment on whether or not we believe it will have the full potential to move forward. But it's an extremely interesting project and a huge potential. And if Europe and the various countries in Europe are going to meet their targets, this type of project is definitely required.

David Phillips: Okay. Moving on. Some questions from from Pareto now. A question on our pipeline, the tenders, FEEDs and PDPs and so on. This is now 7.9 million tonnes per year worth of projects. How much of this is PDPs? And how does the PDP differ from FEED?

Egil Fagerland: So let me start with what -- how our PDP differs from a FEED. So a FEED is typically the work we do before a project goes into FID and becomes a development contract. When we do a PDP, a process design package, that is typically -- instead of a full FEED, because we're going to deliver license and key equipment or it could be just after a FEED, because we're going to deliver the license and key equipment and not do the full EPC. So in that bucket, there's an element of the process design packages, but we can't be specific about the exact number of PDPs we're doing there.

David Phillips: Fair enough. I think it's still fair to say in that tenders and FEEDs bucket, it is still very much dominated by the large work in the U.K.

Egil Fagerland: Mainly dominated by FEEDs in the U.K. and also tenders for other projects.

David Phillips: Yes, absolutely. So the next question from Carrie Elizabeth is about Track-1. It sounds like then for me, actually.

Egil Fagerland: Yes, go ahead.

David Phillips: It's -- and so when can projects starting in the Track-1 tender hope to see construction commence? I guess, in the U.K., it's worth pointing out there are sort of 3 blocks, if you like, or 3 groups you should bear in mind. Number one, is the Track-1 list that is now in final negotiation stage. Number two, which includes -- by the way, even Net Zero Teesside and Viridor's Runcorn. Number two, is a Track-1 expansion phase, which most likely will include a number of projects that didn't get into that first 8 list. And this could include, theoretically, could include SSE Thermal's Keadby 3. And then you also have Track-2, which is the 2 projects or 2 clusters so far that we know that are Acorn in Scotland and also Viking on the East Coast. And in that list, there's not a lot of new news. The first new -- or I guess, if you look at what's happened in the last, let's say, few months, as Egil mentioned in his presentation, we know that there will be this Track-1 expansion process that will start later this year, November-December. And the ambition in that -- and this is not firm timing yet, but the ambition in that is to have those projects being selected and moving forward for fund negotiations by next autumn. So a little bit like this time, maybe slightly earlier next year. That's the expansion process. And that will also include quite a lot of other categories that weren't in Track-1. So for instance, by bioenergy, capture and storage or BECCS, that's also going to be in that phase if the projects are big enough as well. For Track-1 itself, those 8 projects, this is not a new news on this -- it's always been the case ever since we knew about those 8 projects at the end of -- I think, it was end of Q1 this year. Those 8 projects moving forward, we expect they'll be moving forward and to really taking some steps towards award middle of next year onwards, maybe a little bit in sort of Q3 next year, around that sort of time. That's the best indication. But this is still, as you know, in the U.K., this is not a finalized process. These are final negotiations. We still have to get those vital Ts and Cs sorted out with the government, with our customers before those really move forward. So moving on, Victoria from RBC, a number of questions from Victoria. First of all, net cash was stronger than expected going through Q3. Can we talk about the main moving parts in that free cash flow? What drove that to that point at Q3?

Egil Fagerland: Yes. So the main driver of the cash increase this period was the project related milestone payments that we received from the clients when we achieve certain milestones. This typically comes ahead of cash outflows on the same projects as our vendors reach milestones as well. So we're expecting this cash to trend toward NOk1 billion at the end of the year. And then, of course, if you look at our working capital position, it's going to fluctuate through 2024 as well and maybe normalize a bit through that year.

David Phillips: And that's exactly the other question that Victoria had around cash was, how will this progress to the next year and so?

Egil Fagerland: Yes, as expected.

David Phillips: Good. Exactly. Good. So also moving on to the pre-FEED that we announced just recently, a very large one, the up to 14 million tonnes worth in Europe. Can we talk a little bit about what this involves, how long it might last, the pre-FEED phase that is? And what the timeline might be for that to progress to a real contract?

Egil Fagerland: Yes. It's a little bit early to say something about the time line. But you should note that the pre-FEED is more mature than a feasibility study. So typically, that's a client who is more specific on what they want and what they are looking for. We look at converting a pre-FEED into a FEED or a process design package probably within 6 to 12 months, that's the typical range. And then, of course, each client is special and this project, in particular, is extremely large, so timing could be different. But that's the time range we normally see on these pre-FEEDs.

David Phillips: And also from Victoria, last one, looking at O&M, so the operation and maintenance phase. As our first project moves towards delivery, how should we think about O&M? Is it just replacing and studying the amine and the solvent? But what can we say about how that might relate to the overall...

Egil Fagerland: So the aftermarket packages that we sell definitely includes an element of replacing solvent and maintaining the solvent and also optimizing both the consumption of the solvent and the capture rate and activities at the plant. If you look at the graph, we're showing for levelized cost of carbon capture as a service in the OpEx bucket, there's a range between €15 and up. And the numbers above €15 is typically related to power or energy consumption -- that number typically don't hit our books. It's typically the client who comes with the power source for the plant. So the remaining €15 per ton is typically the addressable revenue that we can have in the aftermarket for these type of plants.

David Phillips: There we go. Excellent. So moving on James Carmichael from Berenberg. A number of questions here. Again, looking at the phasing, when should we expect some of the studies, pre-FEEDs and so on to convert into firm contracts?

Egil Fagerland: Yes. So the first step is converting them into process design packages or FEEDs, especially if we're looking at licensing key equipment models for Big Catch. Like I said on the prior question, 6 to 12 months is probably the right range to assume. Then when you're in the FEED process design package and tender period, anywhere between 3 to 12 months again is typically the range that you should be looking at. So from a pre-FEED or study all the way until a final contract between 1 and 2 years. It really depends on the project itself. So the closer you get to the firm contract, the near where we are, and then we're typically looking at less than a year.

David Phillips: Okay. Next one from James. Any updates on the 2 LOIs that were announced in January, and when you talked about FID in Q2.

Egil Fagerland: Yes. So those 2 LOIs, I think you're referring to the 2 Just Catch that we announced and that announcement was actually related to the Orsted award that we signed in the second quarter, so that one has already been confirmed. And if I do remember correctly in the press release, we also referred back to that announcement of LOI.

David Phillips: Yes. So if you like a very first phase -- the early first half. Saudi Arabia, what's the position in this in terms of when we might expect firm announcement? And do we have any exclusivity?

Egil Fagerland: So first of all, it's MoU to explore this partnership. There's no exclusivity. However, we are in dialogues on various topics that are interesting and especially around the modular Just Catch 100 and Just Catch 400 solutions, it could be very interesting going forward. But it's too early to say firmly when there will be real activity in this MoU. And as you saw with the Orsted contract, we are quite persistent. When we sign an MoU, we really intend to move it forward. And with Orsted, we signed an MoU with them and Microsoft back in Q1 2021, and we realized this project in the second quarter of 2023. And if we draw that parallel to Saudi Aramco, it could take some time. It could also go faster.

David Phillips: Great. Well, moving on. [Operator Instructions]. Moving on, Vetle from SB1. Margins, one of our favorite areas. Should the overall gross profit margin be expected to stay around Q3 levels until recognition starts at minerals at .

Egil Fagerland: Yes. I think the simple answer is yes, of course, it depends. But if you take the Q3 numbers and normalize the way the Orsted project, our underlying margins or gross margins are in line with what we've had before. So given that we are not increasing the margins on other projects or some of these pre-FEEDs or FEEDS that we're signing starts up during that period. You should expect the same margin level until we start profit recognition of Orsted, then you should expect a decent increase for sure. So, of course, there could be more work coming in over the next quarter in terms of FEEDS and pre-FEEDs in addition to what you've seen so far that could also impact positively here.

David Phillips: Absolutely. Okay. Good stuff. So Daniel from Clarksons is asking also around timelines for conversions or pre-FEEDS and FEEDS. We've done a little bit of that already, I think. But maybe just linking this up. In other words, when can we expect the recent wave of news that we've had in the last few weeks to become firm orders. I mean, I know it's quite a mixture in that, there's something Just Catch, some Big Catch and so on.

Egil Fagerland: Yes, so if we take the Just Catch first. Just Catch study or feasibility study or pre-FEED can actually convert into a firm contract within 6 to 12 months. Some of them, depending on the site and the Big Catch project will typically use 6 to 12 months to convert from pre-FEED or study or a Mobile Test Unit campaign into a FEED or process design package. And then when you're in the FEED or process design package or tender period, it's 6 to 12 more months before typically, you see a firm award.

David Phillips: Absolutely. And moving to Elliott Jones from Nordea. Orsted profit taking -- or profit recognition rather, should, we assume this will start in Q4 or next year?

Egil Fagerland: Yes. I think it's a bit difficult to guide specifically on exactly when it will start because here, we are talking about 5 Just Catch units across 2 sites. So normally, when you have a construction contract, you will start it all in one go when you have enough certainty in the contract. I think the timing that you're mentioning is roughly right, but we have to see the triggers come through before we can make that accounting assessment. Also given the fact that we have several sites here, might be slightly different assessments than what we saw for the Twence project, which we've already done profit recognition on earlier.

David Phillips: And it's very much next year, not this year. Yes, absolutely. And on to the topic again about pre-FEEDs and studies, but thinking more about conversion rates. We talked about timing, but what sort of conversion rate might we assume in terms of seeing those pre-FEEDs and studies move to orders?

Egil Fagerland: I think so far, we've seen a very high level of conversion rate. It's just that it's been a bit slower than everyone has expected, especially related to the U.K. But the projects that we have secured, we have -- and worked on, we have converted. Some of the ones that we have worked on have not converted yet and we're still in competition for those. Over time, I would target to be able to convert, let's say, 1/3 of this into projects as long as the underlying project moves forward. And that is just the reason being that there will be competition on some. And it might be that the client decides not to move forward with some of them in the time period that we are looking at here now. It could be that they come later, like some of the projects in the U.K. where they might move into a later track in the funding process. But we have so far had a high conversion rate on the stuff that has moved forward. So we expect to stay on that for a while longer.

David Phillips: Absolutely. Question from Sasi at Morgan Stanley. We sort of mentioned this a little bit, but he is asking again about recording profits on Orsted and I know we've discussed this. I know maybe -- I know in your prepared remarks earlier, you mentioned about some of the issues that you would look at to decide to recognize profit.

Egil Fagerland: So typically, we look at have we placed all the major purchase orders that can really impact the cost of the project. And on this project we have. Do those profit purchase orders have the right level of maturity so that we can be certain about that cost? Well, I think we're very close to that. Then secondly, how we place the orders for the installation work, which will happen on site. That's typically a major defining factor for these projects. Once that is done, typically, you're at the right time to start profit recognition. We expect that to be around early next year.

David Phillips: Very clear. One question left now. So again, a quick reminder, once we finish this -- answering this last question, we will be heading off. So if you want to get the question in, please do so in the next few minutes. Question from Kate O'Sullivan at Citigroup. Again, it's about the U.K. Track-1. And we mentioned this a little bit, but maybe just go a little bit more detail. You asked about when we expect the final decision on the Track-1 expansion in the U.K. and if Keadby 3 is not in that group, what does it mean and so on? I think the latter point, we would have to refer you to our customer. I mean, it's their decision in terms of how they would position that project in these various phases. But just purely as a what-if, as I mentioned before, a project that's going to be joining the Track-1 expansion process, we'll likely be able to do so from November-December this year. That will probably run until Easter, then there'll be decision processes, selection and so on, a shortlist and then with the ambition and as a famous phrase goes, there are lot of known unknowns in this, but the ambition is then to see those final negotiations stage start in the autumn next year. And then probably, if you look at the final negotiation stage from this year, which was announced in, I think it was end of Q1, then it runs for at least a year before you get down to the FID. So you have to think, well, presuming that timeline is correct, and anything the expansion -- in the Track-1 expansion group if they do move into final negotiation stage next autumn, you're looking at autumn in 2025 for the actual award. Something like that is that how we think of those stages. It's also worth bearing in mind that the Track-1 expansion process is now also aligned time-wise roughly with Track-2. And this appears to be -- again, it falls into known unknown camp. It appears to be a chosen routes by the U.K. is to have these 2 running sort of in parallel to really maximize the chance of hitting that 20 million to 30 million tonnes target by 2030 for the whole country. Any to underline at all?

Egil Fagerland: I think that's a good summary.

David Phillips: Okay. Just checking. And we have a couple of more coming in. One more from Vincent in Paris. Capture as a service, will capture as a service cover the fixed cost of the Just Catch? How does the CapEx part of that fit into the capture as a service model?

Egil Fagerland: So the carbon capture as a service model is typically an offering where we would go and work with the client and transportation storage partners to have an offering to the end customer on a pay per tonne model that covers the full value chain range. So whatever that full value chain costs, we would charge that fee. So it will definitely cover the fixed piece, but it will also cover the operations and the transportation and storage. The nice thing about this for Aker Carbon Capture is that the better we operate these plants, the more plants we have in operation, the more of the potential improvements we're able to do on those plants in terms of capture rate and efficiency will fall to us in terms of margins on these. We're quite flexible when we work with transportation and storage partners, whether or not we offer capture as a service only for the facility itself, and they have the same type of model on the transportation and storage or whether we consolidate and do it all.

David Phillips: Obviously, my bluff has been called in terms of putting questions in, because we're having some more coming in which is excellent.

Egil Fagerland: It's good. Very good.

David Phillips: So Anders from SEB. The catching up -- we have this extra slide, you've probably seen, it's Slide 31, I think, where we talk about very theoretically how the profit recognition would work of timing and catch-up and so on. Is the catching up of margin recognition the same methodology as we've used in Twence and Brevik?

Egil Fagerland: Yes, it is the same methodology. I think there is a difference in this project, and it's that we're doing 5 of the same unit. So in this project, there is a possibility, of course, to take all the learnings that we've done from Twence and implemented in the project here. So the potential is larger, of course. And also as we deliver 5 units, there is the purchase power that we get from buying 5 off from all our vendors and also the efficiency gain by doing 5 units at the time. So those elements are new, but the profit recognition principles are the same.

David Phillips: And the follow-on for Anders, are we able to say which quarters will you started recognizing margins on the other 2 projects?

Egil Fagerland: On the other projects, if I don't recall incorrectly, we started in the fourth quarter with Twence of 2022. And we started gradually on Brevik in a different way in the second quarter of 2022, if I'm incorrect. I'll have David summarize to the others if we did incorrectly. So -- but we did also -- and please note that we did have other activities in the P&L at that time. So it's not necessarily very obvious when those came in.

David Phillips: Okay. And at the moment, the last question, but, let's see what happens when we finished answering. At the moment, the last question, again from Victoria, RBC. You talked about the U.K. quite a bit. What about the U.S.? How has this market been in the U.S. in Q3 in terms of looking at the market and progress with potential opportunities?

Egil Fagerland: Yes, we've got feet on the ground in the U.S. now, and we see a tremendous level of activity over there. Especially in the states that we've been focusing on mostly now during the startup, which is Texas and Louisiana. We have a huge amount of incoming inquiries. Our brand name seems to be fairly well known. We were a bit worried being European and Norwegian company will people recognize is over there, but in the carbon capture world, our name is fairly well-recognized. So we get a lot of inflow. And now we're selecting the clients that we believe will have the best chance of moving forward into developing carbon capture projects and doing studies and pre-FEEDs with them.

David Phillips: Yes, absolutely. I think as you said, one of the key words is selectivity. I mean, something that we've learned a lot even in the last couple of years from Europe. I mean we think we turned away last year something like 7 out of 10 inquiries, politely, of course. But this selectivity -- given how much bigger the U.S. market could be -- this selectivity is so important. Otherwise, we will just spend all our time chasing loose ends.

Egil Fagerland: Yes.

David Phillips: Okay. That is the last question.

Egil Fagerland: Thank you.

David Phillips: So thank you very much for your time. You know where we are, so please do get in contact if you want to follow up. And we look forward to engaging with you in the next few weeks and months and at the very least, speaking to you again, I think, in February with our fourth quarter results. Well, of course, we'll have Julie, our new CFO, with us as well.

Egil Fagerland: Yes. Very good.

David Phillips: Okay.

Egil Fagerland: Thank you all.

David Phillips: Thank you.