Earnings Transcript for AKER.OL - Q2 Fiscal Year 2023

Fredrik Berge: Hi, everyone, and welcome to the presentation of Aker's Second Quarter Results 2023. My name is Fredrik Berge, and I'm Head of Investor Relations. We will start today's presentation with Aker's President and CEO, Oyvind Eriksen, who will take you through the highlights of the quarter and recent developments in the portfolio. Our CFO, Svein Oskar Stoknes, will then take you through the financials for the quarter in more detail. Following the presentation, we will host our prepared Q&A session. And in case you have further questions or feedback, please do not hesitate to contact me after the presentation. And with that, I hand it over to Oyvind Eriksen.

Oyvind Eriksen: Thank you, Fredrik, and good morning, everyone. Aker is today summing up second quarter and the first half 2023. The bullet point version is

Svein Oskar Stoknes: Thank you, Oyvind, and good morning. I will start out spending a few minutes on Aker's financial investments before I go through the second quarter results in some more detail. The financial investments portfolio accounted for 18% of Aker's total assets or NOK12.2 billion, down NOK419 million from the previous quarter. This is mainly due to a decrease in listed financial investments of NOK246 million and in our cash holdings of NOK286 million. As before, the main components on the financial investments are cash, listed financial investments, real estate, interest bearing receivables and noninterest bearing assets, all of which I will now go through in some more detail. Then as usual, starting with cash. Our cash holdings represented 1% of Aker's gross asset value or NOK876 million. This is down NOK286 million from the previous quarter. The cash inflows were primarily dividends received from Aker BP, Aker Solutions and AMSC of the equivalent to NOK1 billion. The main cash outflows in the quarter were primarily dividend payment of NOK1.1 billion and payments for operating expenses and net interest of NOK174 million. Listed investments included in our financial portfolio represented about 4% of Aker's total assets at the end of the quarter or NOK2.4 billion. The total value of this portfolio decreased by NOK246 million in the second quarter, explained by value decreases of our positions within listed investments. During the quarter, Aker posted a total dividend income from AMSC of NOK48 million. Next, real estate and other financial investments. Combined, the two represented 13% of Aker's gross asset value or NOK8.9 billion in total. Aker's real estate holding, Aker Property Group, stood at a book value of NOK993 million at the end of the quarter. Interest bearing receivables totaled NOK4.3 billion, including a NOK2 billion loan and a NOK1.2 billion convertible loan to Aker Horizons. Other equity investments totaled NOK1.6 billion, down from NOK2.6 billion last quarter. The decrease is mainly explained by the sale in April of the shares in Aker Energy to AFC Equity Investment. The consideration for the share purchase by AFC is an earn out model based on potential sales and/or production proceeds from the Pecan project. As of Q2, this earn out is presented as part of fixed and other interest-free assets at the value of NOK1 billion. Then let's move to the second quarter financial highlights for Aker ASA and holding companies, and let me start with the balance sheet. The book value of our assets totaled NOK31 billion. And in our accounts, we use the lowest of historic costs and market values. This was down NOK1.9 billion in the quarter, mainly explained by a negative value change in Aker Horizons of NOK1.2 billion and Aker BioMarine of NOK327 million. The book value of our equity was NOK21.9 billion, down NOK879 million, explained by loss before tax in the quarter. The fair value adjusted assets or gross asset value totaled NOK66.3 billion. This was down NOK2.4 billion in the quarter, mainly explained by the negative value development in Aker BP of NOK602 million, excluding the dividends received and in Aker Horizons and Aker BioMarine as already mentioned. Subtracting for debt, the net asset value was NOK57.2 billion at the end of the quarter. This equaled NOK770 per share and the value adjusted equity ratio was 86%. Aker had total liabilities of NOK9.1 billion at the end of the quarter that mainly consisted of bond debt and bank loans totaling NOK8.7 billion. Noninterest-bearing debt is down NOK1.1 billion in the quarter due to dividends paid. Aker's financial position remains robust with a total liquidity buffer of NOK6.3 billion, including undrawn credit facilities. Our net interest bearing debt was NOK3.3 billion at the end of the quarter, up from NOK2.9 billion in the previous quarter due to a slightly reduced cash position. Our loan to value was 12% and 75% of our gross asset value is in listed assets and cash. In terms of our debt maturity profile, the average debt maturity at the end of the quarter was 3.1 years. We currently have NOK5 billion of bonds outstanding and our bank loans of NOK3.8 billion consists of a US dollar denominated loan of NOK1.6 billion and Norwegian kroner denominated loan of NOK1 billion and NOK1.2 billion euro denominated Schuldschein loan. Taking into account available credit lines and extension options on the bank loans, the implicit maturity of the total loan portfolio is 4.4 years. Then to the income statement. The operating expenses for the first quarter were NOK96 million. The net value change in the quarter was negative NOK1.7 billion, mainly explained by value reductions in Aker Horizons of NOK1.2 billion and Aker BioMarine of NOK327 million. During the quarter, Aker booked a total dividend income from Aker BP, Aker Solutions and AMSC of NOK1 billion. Our net other financial items were negative NOK154 million, mainly explained by the net interest expenses of NOK48 million and loss on the AMSC total return swap of NOK46 million. And the loss before tax was then NOK883 million in the quarter. Thank you. That was the end of today's presentation, and we can then move on to Q&A.

A - Fredrik Berge: So your first question is about Aker delivering a strong operational quarter this quarter. And if we start with the oil and gas part, Aker BP delivered yet another quarter with record high production levels with the Johan Svedrup as one of the main drivers. Aker BP owns more than 30% of this field. Can you tell us a bit more about how attractive and important Johan Svedrup is for Aker BP and Aker?

Oyvind Eriksen: We are really grateful about the fact that Aker BP owns 31.6% Johan Svedrup. It's probably one of the most attractive offshore oil and gas fields in the world, touching 755,000 barrels a day in production. And just to put it into perspective, the production from Johan Sverdrup only accounts for 30% of Norway's daily oil and gas production and it represents equivalent of between 6% and 7% of Europe's daily demand for oil. And even more importantly, the production cost is a record low around $4 per barrel and the CO2 emissions is record low, 0.67 kilograms of CO2 emission per kilogram. So not only measured by size but also by efficiency. Johan Svedrup is a jewel in both the Aker crown but also in the Norwegian oil and gas history.

Fredrik Berge: Very impressive. And Aker Solutions also delivered a strong set of results in the first half of the year and activity is high and increasing in its main markets. How is the project execution progressing with the company's record high backlog, including the large new field developments for Aker BP, and what is the latest status on the subsea JV transaction?

Oyvind Eriksen: Well, Fredrik can hardly think about Aker Solutions without reflecting on the importance of the temporary changes in the Norwegian and petroleum tax system, which was introduced during COVID. That tax incentive has initiated a large number of projects on the Norwegian continental shelf. As a consequence, Aker Solutions is almost fully booked. And Aker BP is a very important customer as it is capacity as operator of a large number of greenfield developments. So it goes without saying that flawless execution of the said greenfield portfolio, both by costs and by time, is of vital importance both to Aker BP and Aker Solutions and other operators and license holders on the Norwegian continental shelf. And so far so good. We have a world class team in the Aker Group both in Aker Solutions and in Aker BP, collaborating to execute the said project in a rather challenging market environment due to supply chain bottlenecks. But if anyone should be able to execute flawlessly it's the great people of the Aker Group. And so far, they have really delivered.

Fredrik Berge: Excellent. Now switching gears to renewables. Aker Horizons owns 58% of Mainstream renewable power, which has experienced some significant issues in Chile. Could you tell us a bit more about what these issues are and how the company is working on solving this?

Oyvind Eriksen: Well, it's truly a dilemma in the bigger picture. Our oil and gas activities are progressing very well with record operating results. And in the bigger picture, our renewable portfolio, not only in our horizons but also in other parts of the group is struggling. But Mainstream Chile is a particular situation, mainly due to external and more structural issues, partly about oversupply of renewable energy, partly about bottlenecks in the grid and other infrastructure, partly due to inflation and partly due to other factors. So the short version is that Mainstream is in process of renegotiating with third parties, including lenders. And we also engage -- we are also engaging in dialog with the regulators in Chile to find a holistic solution in order to get the renewable business in Chile, including mainstream Chile back on track and in order to pull off the enormous potential of renewable energy production, both wind and solar in that part of the world.

Fredrik Berge: Next question is about artificial intelligence. So in your presentation and your letter to shareholders, you discussed the significant potential of AI. How is Aker positioned to take advantage of AI?

Oyvind Eriksen: Well, we are positioning in the AI space basically from two different angles. One is deployment of AI to further improve the product ability in our Industrial Holdings portfolio, Aker Solutions, Aker BioMarine and Aker BP as examples and partly as a new opportunity for our software businesses, stand-alone, Cognite in particular. And since we reported the first quarter results, I think one of the really exciting news from the Aker Group is the announcement of a new Cognite product, Cognite AI, which has attracted a lot of interest from existing and new customers and partners. So what's the magic about? Well, we have all read a lot about hallucination and as a limiting factor or a bottleneck for deployment of artificial intelligence because it's just a simple fact that no algorithm will ever be more intelligent than the data you are putting into the system. And I think it's also a fact that most business leaders will be reluctant to deploy artificial intelligence or other software tools to an industrial process [and] if you're running this risk of hallucination. The Cognite Data Fusion technology is unique when it comes to how data are liberated from, in principle, all relevant industrial sources and put together, contextualized in safeguarded and harmless way, which will enable the user to deploy AI and other replications on top of a clearly defined and very safeguarded data set. Hence, the risk of hallucination will be significantly reduced by deployment of AI on top of Cognite Data Fusion technology. And what I just briefly explained is probably the main reason why some of the driving forces in the AI development for the time being, like Microsoft, like Accenture and other partners, see an even bigger potential in collaborating with Cognite going forward than what we had already identified before the AI hype happened a couple of months ago because we should all realize that it's still early days. One of the key innovator in this space said the other day that AI is probably overhyped short term but underhyped long term. And I'm keeping that in my mind when I advise the different Aker industry companies about how to maneuver in this new but also game changing landscape.

Fredrik Berge: Thank you. So your final question is regarding ICP. So what is the latest status with establishing the funds?

Oyvind Eriksen: Well, overall, we're progressing according to plan. We have decided to launch a few clearly defined investment platforms and venture capital firm in industrial technology, an investment vehicle for listed equity and infrastructure an investment vehicle. And the first funds will start raising capital during the second half of this year. And all the said platforms have now hired key members of their respective teams and all the said platforms are already in the process of identifying and analyzing investment opportunities. So the next six to 18 months will be very important and decisive for ICP. ICP is, to a certain extent, exposed to the same headwinds in the green industry segments as we are in other parts of the Aker Group, but that's not particular for a relatively immature industry. It has happened over and over again and it's in periods like now, the winners and the losers are defined. And my hope and belief is that ICP can leverage the access to the industrial domain expertise in the Aker Group in a way which differentiates ICP from the peers and increases the chances of success.

Fredrik Berge: Thank you very much. So that was the end of our presentation today, and I wish everyone a nice rest of the Tuesday and the rest of the week. Thank you.