Aker Asa A Shs

Q2 2023 Earnings Conference Call

7/18/2023

spk00: 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, Eivind Eriksson, who will take you through the highlights of the quarter and recent developments in the portfolio. Our CFO, Svein Oskar Soknes, will then take you through the financials for the quarter in more detail. Following the presentation, we will host a 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 Eivind Eriksson.
spk02: Thank you, Fredrik, and good morning, everyone. Aker is today summing up a second quarter and the first half 2023. The bullet point version is... One of the strongest operating results on the record for some of our main industrial holdings, AKI BP and AKI Solutions in particular. Continued struggle in renewables with mainstream Chile as the biggest issue. Good progress in our software portfolio with the launch of KongNight AI as a possible game changer and valuations. adversely impacted by external factors such as declining energy prices, inflation concerns, war in Europe, regional bank failures, a debt ceiling debate, continued concerns about how climate change may impact markets, and deglobalization, changing supply chains and trade patterns. Aker's net asset value for the second quarter declined 2.3% down from the first quarter, or 2.5 billion Norwegian kroner, of which 1.1 billion was dividend paid. For the first half of the year, the decline was 9.7 billion kroner, or 12.8% adjusted for dividend. The decline was mainly driven by Aker Horizons and Aker BP. both impacted by the current market situation in their respective parts of the energy industry. The Aker share decreased 7.2% in the quarter, adjusted for dividend, to 608.5 kroner per share. This compares to a 5% decrease in the Brent oil price and a 1.7% increase in the Oslo Stock Exchange Benchmark Index. Arcus' value-adjusted equity ratio at the end of the period was 86%, and our liquidity reserve stood at 6.3 billion kroner, of which cash amounted to 900 million kroner. Aker's gross asset value decreased from 68.6 billion kroner to 66.3 billion in the second quarter. With approximately 75% in listed assets and cash, the Aker portfolio is still highly liquid. Our industrial holdings portfolio accounted for 82% of our gross asset values. RKBP remains the largest asset in our portfolio at 33.7 billion kroner. Despite a quarterly decline, it continues to be an important source of liquidity, recording record high production in the quarter and providing valuable upstream cash as we continue to invest in and develop our portfolio along macroeconomic trends. In total, renewables and green technology. software, seafood, and marine biotech made up around 26% of ARCA's gross asset value in the second quarter. Energy, decarbonization, digital, proteins, and nutrition are long-term market trajectories of global scale. Aker is positioned to take advantage of all of them, with strong portfolio companies, highly skilled workforces, great customers and world-class partners. Energy continues to be our largest industry segment, with portfolio companies positioned to provide energy security in the short and medium term with strong oil and gas production, while simultaneously playing a role in the longer-term energy transition. Energy companies are increasingly displaying capital discipline and revising strategies and timelines to grapple with current market uncertainties. ArcGIS is no exception. Oil and gas supply and demand forecasts would normally indicate an upside. However, other factors, including the continued fear of recession and energy transition mechanisms still weigh down prices. This is just one example of why our priority is to maintain a steady course and consider a multitude of factors and scenarios as we execute our active ownership. We recognize the uncertainty of the future of energy markets, our mindful wide-ranging oil demand predictions for the long term and the widening gap between policy regulations and commercial concerns, supply chain constraints, impacts of urbanization and growth of various technologies such as carbon capture and storage and artificial intelligence. Along the way, I'm encouraged to see such strong operational performance in the bread and butter of our portfolio. including ARKI BP, which reported record high production in the second quarter, and ARKI Solutions, with a robust order intake and strong revenue projections. ARKI strives to ensure that ARKI BP continues its strong focus on profitable growth and maintains an attractive and predictable dividend policy. A key focus in Aker's ownership agenda is to ensure solid and predictable project execution of Aker BP's new field developments on the Norwegian continental shelf. These projects will add significantly to growth and value creation. Through Akko Solutions, we are positioned as a supplier in both oil and gas and in renewable based on our engineering and project execution capabilities, thus capitalizing on both near-term market growth and for longer-term structural changes in energy markets. Our ownership agenda for Akkus Solutions is to continue to strengthen its competitiveness and drive further development and growth of the company as a digitally driven engineering business with a focus on its core oil and gas business while transitioning over time to new renewable and clean tech segments without compromising on earnings or risk-reward balances. A key priority for Aker is to ensure that Aker Solutions continues its strong cash generation and profitable growth, and that it maintains capital discipline, financial robustness, and an attractive and predictable dividend policy. Over to renewables and Aker Horizons. Not unlike our peers, We have hit snags in the build-up of our renewable business. Negative performance in the renewable sector does not change Aker's strategic direction. However, it impacts the ambition level, capital allocation and pace of development and deployment. The current market environment forces industry players across the globe to reckon with the fact that the energy transition is capital intensive, infrastructure reliant, and requires strong public-private collaboration. Aker's ownership agenda for Aker Horizons is to continue to develop the company that selectively pursues decarbonization opportunities through shareholdings in companies that develop and deliver industrial solutions. The ambition is still to build a platform for long-term value creation where Akka Horizons can benefit from technologies, industrial expertise, partnerships and industrial software solutions that enhance productivity and mitigate risks. An important priority for Akka Horizons in the near term is working closely with its portfolio company Mainstream related to current challenges being experienced in the Chilean market, where the increase in renewable production and the lack of flexibility of the power transmission system has caused significant headwinds. As the energy industry develops, It will also have to couple existing domain expertise with digital solutions and artificial intelligence, or AI, which in record time has propelled into powerful catalysts for growth, including across the Aker portfolio. I agree with the notion that generative AI is probably overhyped in the short term, but underhyped long term. We are still in the early stage of realizing AI's full potential. However, it's fast becoming an integral part of every aspect of our lives and our businesses. Forecasters at PwC. predict that AI could boost the global economy by over 15 trillion US dollars by 2030. However, industries have yet to fully exploit AI's transformative potential. The application of AI can harness data to become more efficient, lower costs, innovate and adapt to the ongoing transition to a lower carbon future. Cognite's recently released products, Cognite AI, couples generative AI with its core product, Cognite Data Fusion, and thus with accurate, timely, contextualized data. ArchiBP, ArchiSolutions, and ArchiBioMarine are already generating excellent use cases. As Girish Rishi, CEO of Cognite, puts it, this is the moment that Cognite was built for. I look forward to following the continued AI journey. The sustainable protein space, including offshore fish farming, is another growing segment in the Aker portfolio. Within 2030, the world needs to produce significantly more food with less resources and with a minimal environmental footprint. Oceans cover more than two-thirds of the world's surface. However, only 2% of the food energy for human consumption comes from the sea. Salmar Aker Ocean aims to sustainably produce 150,000 tons of salmon per year at fish farms far out to sea. Achievement of its production targets in 2030 will make it one of the world's largest producers of farmed salmon. The industry is currently evaluating the impact of changes after we launch Salmar Aker Ocean. like cost inflation and the regulatory framework, including the tax regime, which is expected to be put in place during the second half of this year. Lastly, managed assets, including industry capital partners or ICP. The company will make available clearly defined investment strategies across relevant asset classes that seek to contribute to the global transition to net-zero greenhouse gas emissions by 2050, from seed funding of clean technology to renewable energy infrastructure projects. The ICP structure consists of different funds under the umbrella investment company. each targeting different opportunity areas within the net zero challenge and is planned to consist of independent fund managers covering venture capital, listed equity and infrastructure. Our hope is that companies like ICP can contribute to more closely integrating the capital required to succeed in the green transition with industry players like Akersolutions, to manage risks and opportunities in a more value-creative way than what the situation is today. Over time, we also hope to see a more integrated public-private collaboration that will be required in different regions and industry segments to improve the risk and reward balance and attract private capital to green projects at scale. That concludes my portion of today's presentation. I now hand it over to Sven Oskar Stocknes, who will take you through the financials for the quarter in a greater level of detail.
spk01: Thank you, Eivind, and good morning. I will start off 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 Akers total assets or 12.2 billion kroner, down 419 million from the previous quarter. This is mainly due to a decrease in listed financial investments of 246 million and in our cash holdings of 286 million. As before, the main components on the financial investments are cash, listed financial investments, real estate, interest-bearing receivables, and non-interest-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 876 million kroner. This is down 286 million from the previous quarter. The cash inflows were primarily dividends received from Aker BP, Aker Solutions and AMSC of the equivalent to 1 billion kronor. The main cash outflows in the quarter were primarily dividend payment of 1.1 billion and payments for operating expenses and net interest of 174 million kronor. Listed investments included in our financial portfolio represented about 4% of Aker's total assets at the end of the quarter, or 2.4 billion kroner. The total value of this portfolio decreased by 246 million in the second quarter, explained by value decreases of our positions within listed investments. During the quarter, Acker posted a total dividend income from AMSC of $48 million. Next, real estate and other financial investments. Combined, the two represented 13% of Acker's gross asset value, or $8.9 billion in total. Acker's real estate holding, Acker Property Group, stood at a book value of $993 million at the end of the quarter. Interest bearing receivables totaled 4.3 billion, including a 2 billion kronor loan and a 1.2 billion kronor convertible loan to Aker Horizons. Other equity investments totaled 1.6 billion, down from 2.6 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 1 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 31 billion and in our accounts we used the lowest of historic costs and market values. This was down 1.9 billion kronor in the quarter, mainly explained by a negative value change in ArcaHorizons of 1.2 billion and ArcaBioMarine of 327 million. The book value of our equity was 21.9 billion. down 879 million, explained by loss before tax in the quarter. The fair value adjusted assets or gross asset value totaled 66.3 billion. This was down 2.4 billion in the quarter, mainly explained by the negative value development in ARCA BP of 602 million, excluding the dividends received, and in ARCA Horizons and ARCA Biomarine, as already mentioned. Subtracting for debt, the net asset value was 57.2 billion at the end of the quarter. This equaled 770 kroner per share and the value-adjusted equity ratio was 86%. Aker had total liabilities of 9.1 billion kroner at the end of the quarter that mainly consisted of bond debt and bank loans totaling 8.7 billion. Non-interest-bearing debt is down 1.1 billion in the quarter due to dividends paid. Aker's financial position remains robust with a total liquidity buffer of 6.3 billion kroner, including undrawn credit facilities. Our net interest-bearing debt was 3.3 billion at the end of the quarter, up from 2.9 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 5 billion of bonds outstanding and our bank loans of 3.8 billion kroner consist of a US dollar denominated loan of 1.6 billion kroner, a Norwegian kroner denominated loan of 1 billion and a 1.2 billion kroner euro denominated Solskjaer 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 96 million kroner. The net value change in the quarter was negative 1.7 billion, mainly explained by value reductions in occurrences of 1.2 billion and Aker Biomarine of 327 million. During the quarter, Aker booked a total dividend income from Aker BP, Aker Solutions, and AMSC of 1 billion. Our net other financial items were negative 154 million, mainly explained by the net interest expenses of 48 million and loss on the AMSC total return swap of 46 million. And the loss before tax was then 883 million in the quarter. Thank you. That was the end of today's presentation, and we can then move on to Q&A.
spk00: So your first question is about Acre delivering a strong operational quarter this quarter. And if we start with the oil and gas part, Acre BP delivered yet another quarter with record high production levels. with the giant Johan Seidrup field 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 Seidrup is for Aker BP and Aker?
spk02: Well, we are really grateful about the fact that Aker BP owns 31.6% of Johan Seidrup. 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 perspectives, the production from Johan Svedrup 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 record low, around 4 US dollars per barrel, and the CO2 emissions is record low, 0.67 kilograms of CO2 emissions per kilogram. So, not only measured by size, but also by efficiency. Johan Svedrup is a jewel in both the Aker crowd but also in the Norwegian oil and gas history.
spk00: 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?
spk02: Well, Fredrik, I can hardly think about ARCA solutions without reflecting on the importance of the temperature changes in the Norwegian 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, ARCA Solutions is almost fully booked. And ARCA DP is a very important customer in its capacity as operator of a large number of greenfield developments. So it goes without saying that flawless execution of the SEDS Greenfield portfolio, both by costs and by time, is of vital importance both to AKI BP and AKI 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 Arca Group, both in Oxolutions and in ArcaBP, 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 Arca Group. And so far, they have really delivered. Excellent.
spk00: Now switching gears to renewables. AquaHorizons 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?
spk02: Well, it's truly a dilemma in the bigger picture. Our oil and gas activities 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 and 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 the mainstream is the process of renegotiating with third parties, including lenders. And we are also engaging in dialogue 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.
spk00: Next question is about artificial intelligence. So in your presentation and your letter to shareholders, you discuss the significant potential of AI. How is Acre positioned to take advantage of AI?
spk02: Well, we are positioning in the AI space basically from two different angles. One is deployment of AI to further improve the productability in our industrial holdings portfolio. Acquire Solutions, Acquire Biomarine and Acquire BP as examples. And partly as a new opportunity for our software businesses standalone, Cognite in particular. Since we reported the first quarter results, I think one of the really exciting news from the Acquire 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 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 if you're running this risk of a hallucination. The cognate 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 harmonious ways. which will enable the user to deploy AI and other applications 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 a cognitive 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 in going forward than what we had already identified before the AI hype happened a couple of months ago. we should all realize that it's still early days. And 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 aqua industry companies about how to maneuver in this new, but also games changing landscape.
spk00: Thank you. So your final question is regarding ICP. So what is the latest status with establishing the funds?
spk02: Well, overall, we're progressing according to plan. We have decided to launch... a few clearly defined investment platforms, a venture capital firm in industrial technology, an investment vehicle for listed equity and infrastructure investment vehicles. And the first funds will start raising capital during the second half of this year. 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... 6 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 ARCA group. But that's That's not particular for a relatively immature industry. It has happened over and over again. And in periods like now, the winners and the losers are defined. And my hope and belief is that ICP can leverage access to the industrial domain expertise in the ARC group in a way which differentiates ICP from their peers and increases the chances of success.
spk00: Very exciting. 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.
Disclaimer

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