Subsea 7 S.A.

Welcome, everyone. With me on the call today are John Evans, our CEO, Mark Foley, our CFO, and Stuart Fitzgerald, CEO of Seaway7. The results press release is available to download on our website, along with the presentation slides that we'll be referring to during today's call. May I remind you that this call includes forward-looking statements that reflect our current views and are subject to risks, uncertainties, and assumptions. Similar wording is also included in our press release. Now I'll turn the call over to John.

Thank you, and good afternoon, everyone. I'm joined here today from Copenhagen, where Stuart and I are attending Wind Europe. I will start with a summary of the quarter before passing over to Mark to cover the financial results in more detail. Turning to slide three, the first quarter of 2023 was very much in line with our expectations, and we have reaffirmed our outlook for the full year. The quarter was, as usual, impacted by seasonality in the Northern Hemisphere, and this was compounded by an activity mix skewed to lower margin contracts, one in 2020. Our guidance for the full year is unchanged, with a weighting to the second half, as we have previously flagged. After a strong year for order intake in 2022, we've continued to grow the backlog in the first quarter, with a book to bill of 1.5 times. Bidding activity remains high, and pricing and contract terms continue to improve, supporting our view of a return to a through-cycle range of EBITDA margins between 15% and 20%. Turning to slide 4 for an update on the progress of our largest projects in the first quarter. In Turkey, the fast-tracked Sakarya project reached a 96% progress, up from 89% in Q4, and first gas was achieved last week. In Senegal, Sangamar reached 77% completion, as Semvega, Semseas, and Sem Sisters continued pipeline, whilst in Angola, Semborealis worked all quarter on SLGC before transiting to Saudi Arabia. In Brazil, Sempacific was active on the Bacalao project, and at Mero 3, we received the first line pipe shipment in Rio, and mobilized our new chartered heavy construction vessel, Boca Subsea. In renewables, cable activities were completed on the Hlandseekoe Zoet in the Netherlands. Foundation installation activity was reduced in the first quarter due to the winter conditions in the North Sea, but towards the end of the quarter, we restarted activity as planned on Sea Green and Dogger Bank A and B. In mid-April, we installed the final jacket at Seagreen and the cable A due for completion with Seaway Amory in Q2. Turning to slide 5, order intake in the first quarter was $1.9 billion, including new awards of $1.2 billion and escalation of $0.7 billion. Our book-to-bill was one and a half times resulting in a backlog of $9.7 billion. Revenue visibility continues to improve. Our backlog for the current year is 27% higher than the equivalent last year, whilst our firm workload for 2024 is up 16% since the last quarter. And now I'll pass you over to Mark to run through the financial results.

Thank you, John, and good afternoon, everyone. I'll begin the financial performance review with some details of group and business unit performance in the quarter before returning to the group cash flow and financial guidance for 2023. Slide six summarizes the group's first quarter performance. As John has already discussed, we delivered solid order intake and backlog growth driven by new awards of $1.2 billion. and escalations of $700 million, which this quarter mainly comprised variation offers. Revenue increased modestly to $1.2 billion compared to the first quarter of 2022 as we continue to execute large projects in subsea and fixed offshore wind. Adjusted EBITDA of $107 million was up 24% compared with the prior year And the margin increased 140 basis points to 8.6% from 7.2%. As previously communicated, margin is expected to expand in the latter part of the year as the weighting of contracts in the portfolio, one at the cycle low, further diminishes. And backlog continues to be replenished with margin accretive order intake. Net finance costs were $8 million, primarily reflecting higher interest rates on borrowings. Despite a loss before taxes, there was a $3 million taxation charge due to the jurisdictional profitability mix and the impact of irrecoverable withholding taxes. This resulted in a net loss of $29 million in the quarter. I'll now discuss the drivers for the group performance in the next few slides. Slide seven presents the key metrics for subsea and conventional. Order intake was $1.3 billion, equating to a book-to-bill of 1.3 times, resulting in backlog growth of 4% to $8.4 billion. Key contract awards included Agogo in Angola, and Irtar and Vapanda in Norway. Revenue was $1.1 billion, up 18% year-on-year, reflecting good progress on Sakaria, Sangomar, and SLGC, as well as our other large EPCI projects. In the UK, against a backdrop of fiscal uncertainty, our fleet of diving support vessels had reduced utilization due to the postponement of activities by clients. Adjusted EBITDA was $97 million, with a margin of 9.1%, up 74 basis points from the prior year. This reflects a continued solid operational performance on projects one that reduced margins during the downturn. Selected renewables performance metrics are shown in slide eight. Order intake was around $540 million, equating to a book-to-bill of 3.3 times, resulting in backlog growth of 46%, to $1.2 billion. The notable new award in the period was the high long cable contract in Taiwan. Revenue was $160 million, down sharply year on year, reflecting the phasing of the Sea Green project. Adjusted EBITDA was $6 million, broadly flat year on year, resulting in an adjusted EBITDA margin of 3.8%. This performance was impacted by normal seasonality in the Northern Hemisphere with planned downtime on the foundation installation activities at Seagreen and Dogger Bank A&D. Projects outside of the North Sea, including New England and Taiwan, made a good contribution to adjusted EBITDA in the quarter. Slide 9 shows the cash flow waterfall for the first quarter. Net cash used in operating activities was $127 million, which included the expected and previously communicated build in working capital. This build is temporary in nature and is expected to unwind later this year and into 2024. Net cash used in investing activities was $86 million, mainly attributable to purchases of property, plant and equipment, including vessel dry docks and upgrades. Free cash flow in the period was a negative $219 million. Net cash generated from financing activities was $256 million. This included utilizing the remaining $300 million of the $500 million UK export finance facility entered into in 2021. The two-year availability period of this facility expired in February. There were also lease liability payments of $31 million, including principal and interest, mainly related to chartered vessels. At the end of the quarter, cash and cash equivalents was $686 million, and net debt was $419 million. This included lease liabilities of $456 million which increased $199 million from the year end position due to two new vessel charters, Boca Subsea and CEM Stingray, and the extension of three existing vessel charters, namely Grant Candies, Norman Subsea, and Seven Viking. These vessels have been chartered to meet the workload in Norway, Brazil, and the Gulf of Mexico. The group had a liquidity of $1.4 billion at the end of the quarter, which included $700 million of committed, unutilised borrowing facilities. To conclude, slide 10 shows our guidance for the full year. Guidance for all elements remains unchanged. We continue to expect revenue and adjusted EBITDA to be higher than 2022. while net operating income is still expected to be in line with last year. There is also no change to our expectation for capital expenditure for the year. As announced in March, we will pay approximately $110 million in dividends. That payment will be made tomorrow, the 28th of April, and the dividend represents four NOCs per share, including one NOC per share of regular dividend. I will now pass you back to John.

Thank you, Mark. On slide 11, we take a brief look back at Sakaria project, which is now largely complete. With just 31 months from initial gas discovery by TPAO to First Gas, Sakaria has had an ambitious schedule which required us to build up a new presence in Turkey. It also saw us working in a new consortium that brought Schlumberger Midstream into a partnership with the Subsea Integration Alliance for a fully integrated onshore to offshore offering. Subsea CERN Scope with $1.2 billion has drawn on expertise of our project managers and engineers in Istanbul, Paris, London, Kuala Lumpur, and Perth. It created 1,000 days utilization of our largest global enabling assets and over 4,000 days of vessel utilization in total. The project's success is a testament to what can be achieved by our teams when we adopt an integrated approach and work in close collaboration with our clients. This project was the first phase of SACAREA and represents 10 out of what will ultimately be expected to be around 40 production wells. We are currently bidding for a role on the second phase. On slide 12, we have a summary of our position in floating wind. which has seen several recent advances. In the first quarter, our salamander development with Orsted and Simply Blue off the coast of Scotland was awarded an INTOG lease. The 100-BW project is designed to help develop Scotland's floating wind supply chain ahead of the large ScotWind development programme. During the quarter, we launched a second initiative with Simply Blue, this time in Australia. The new consortium includes local partners, Spark Renewables, and will pursue projects off the coast of New South Wales. The first step will be the identification of areas suitable for development and the launch of consultation with Avera stakeholder groups. Finally, earlier this year, we announced a new partnership with Siemens Energy to develop a high-voltage subsea power hub. that will enable valuable flexibility in the architecture, construction and operation of floating wind farms. The demand outlook for floating wind is positive, but the industry is not without its own challenges. Project economics are still to be proven and project execution and contracting models remain immature. From Subsea 7's perspective, we will be looking to establish a favourable balance of risk and reward in any contract that we will undertake. We will take a cautious approach and the initiatives I've described today are part of our process of building an understanding of this developing market. Turn into slide 14 and the new builds under construction for fixed offshore wind. Starting with the seaway alpha lift during the first quarter, we continued commissioning and testing of the crane and the vessel marine systems were nearly finished. The main crane load test was successfully completed last week, representing an important milestone. As we have noted before, the construction and delivery of the mission equipment by our subcontractor has been a challenge and remains on the critical path for vessel delivery. We continue to follow the revised plan for the mission equipment we outlined in Q3 last year. Alphalift is due to sail from China in July and arrive in Europe in late 2023. where it will be completed before beginning work on Dogger Bank in 2024. Turning to Seaway Ventus, the final legs have now been installed and the outfitting and commission activities are ongoing. The build is running to plan and we expect the vessel to be delivered third quarter 2023. As you know, in February, Subsea 7 made an offer to acquire the minority shareholding of Seaway 7. The voluntary offer period expired on the 14th of April, and as a result, we own 97.6% of Seaway 7. We have now moved into the compulsory acquisition phase. As part of the process, we propose to pay 1.615, sorry, 6.15 NOC cash per remaining outstanding share. Trading in Seaway 7 ceased on the 25th of April, and we expect it to delist from the Euronext growth on the 4th of May. The fixed offshore wind industry continues to evolve with challenges relating to contractor risk and reward, but we are confident that Seaway 7 is well placed to create value for Subsea 7 shareholders in the longer term. Moving on to our customary review of our tendering pipeline across the Subsea and wind industries. Tendering remains active and we're optimistic that 2023 will be another year of solid order intake. The most active markets are Brazil, where we're hoping to win one major project this year, as well as a new PLSV contract, the Gulf of Mexico, which remains an active Thai big market, and Turkey, where we are bidding second phase of SACAREA. In the first quarter, we submitted our bid for the Bay de Nord project in Canada. This is the largest bid we have ever submitted, and covers an integrated EPCI scope that would start in 2024 and involve vessel campaigns right up until 2032. We expect that this will be awarded in 2024. Overall, we're confident that we have a robust tendering pipeline that can support the continued momentum in subsea recovery. On the next slide, we have our wind projects. As you know, we have the preferred bidder status on East Anglia III project in the coming months. T-Green 1A, which we expect to convert in the longer term. As you can see, the number of tenders that should be awarded to the industry in 2023 in the US, UK, and Europe. Order flow in this industry remains lumpy, but we are confident that we can grow this business and generate the appropriate margins and returns. To wrap up, we'll turn to our final slide on page 17. Our first quarter has been about steady delivery in our two business units. Our major projects around after the winter as planned. Overall, the first quarter has reconfirmed our expectations for the year. and we are on track to meet our 2023 guidance. Commodity markets have experienced some volatility in recent months, but our clients make their investment decisions based on long-term supply-dependent forecasts that remain supportive. New order flow has continued, and bidding activity has been sustained at a high level. In both subsea and wind, we are seeing a continued tightening of the market, which is supporting margin outlook as we've noted before we expect an inflection in EBITDA margins in the second half of 2023 and this combined with a significant reduction in capex from 2024 underpins our confidence in the ability of subsea 7 to generate significant free cash as always and as per our strategy returning excess cash to our shareholders remains a priority and with that we'll be happy to take your questions

Thank you. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile a Q&A roster. Our first question comes from the line of James Winchester from Bank of America. James, your line is open.

Brilliant, thank you. I have two on the renewables and then just a quick one on the capital allocation. Firstly, can you talk a bit more about your expectations for order intake? There's been quite a lot of news flow regarding certain projects and the CFD terms. So what's your kind of best guess for timing on, I guess, East Anglia III and Sea Green FID? Secondly, could you talk a bit about the renewable margin outlook for the remainder of the year? And also, if you can now provide any colour on what is embedded into your medium-term guidance for renewables. And then finally, if you kind of include that payment for the JV this year, where do you think you'll land in terms of net debt at the end of the year? And I guess for 2024, how are you going to think about capital allocation?

Thank you. Thanks, James. There are many questions in that one question you gave us. So what I suggest we do is... We get Mark to answer the net debt question, then Stuart will give you some guidance on the renewables business.

So two projects that you referred to, East Anglia 3 and Sea Green 1A, where we have our preferred position. On East Anglia 3, I would say that a number of commitments on that project have been made to the industry. We are one of the last... last contracts to be signed there and we're in an active discussion with the client and as John said in his prepared remarks would expect that to close within the coming months. a little bit less certain, I would say. Less commitments have been made to the market, and we are supporting the client there to try and get a project that has sensible project economics from the developer's perspective. So we see higher uncertainty, and it would be for the client there to really make the definitive comments on their timing, but higher uncertainty in relation to Seagreen 1A compared to East Anglia 3. In terms of margin outlook, I think I'm not going to be too specific there obviously, but we're in an environment where risk and reward profiles and pricing is improving. I think there is a collective realization both amongst the contractor group and also from the clients that there's a need for our segment to move to a more sustainable financial return. And that process is ongoing and has been ongoing for some time. So we see the margin in the new backlog that we're taking in, progressively becoming stronger. In terms of the renewables guidance, which I think was the third point that you had, no change from what's been communicated previously.

Mark, if you could take the next step, please.

sure um thank you james as we've communicated previously this year is a year of investment in the business so uh we've expected on it materialized in q1 the start of the working capital build in addition we have capital expenditure required for both the seaway alpha lift and the seaway ventus and as you commented in your question We do expect the first tranche of our investment in the new 1C joint venture with Acker Solutions. So as a calibration point, we exited Q1 with net debt, including lease liabilities of $490 million. I would expect that year-end that we would be higher than that. So hopefully that provides colour or an answer to your question.

That's brilliant. Thank you very much for that.

Thank you. We will now take our next question. Please stand by. And our next question comes from the line of Guillaume Delby from Societe Generale. Guillaume, your line is open.

Yes. Good afternoon. Two questions. First, if I may, just on your net debt answer, did I understand correctly you expect a net debt at the end of 2023? to be higher than at the end of Q1?

Am I... Yes, Guillaume, you are correct.

Okay. Okay, second question, and you are not going to like it. It's rather project-specific. To be honest, I would have expected a stronger contribution from the subsea business in Q1 because we are ending to the near completion of the Sakaria project. and the Zakaria project is an iconic project for you, it is an iconic project for SLB. And should we understand that the margin embedded in this project is lower than what you could have expected, or does it mean that most of the margin might be recognized next quarter?

I'll answer that one, Ghiloumi. Zacharia, we achieved first gas, which is good, but we also have another number of wells to bring on. So we will be continuing to work there for a number of months with smaller, lighter construction vessels. The project has delivered exactly what we had in plan when we bid it. So we're very happy with the project. It's gone well for us. It's gone well for our clients. And again, we are working with our client to tidy up our account here in quarter two and into quarter three. So again, project's gone very well, no major concern. The main challenge for us in quarter one has been, as we've discussed in the prepared remarks, is the seasonality. A number of our diving ships were not working in quarter one. We had a number of vessels under maintenance. We had a number of vessels moving in transit. So it's the vessel account that causes a challenge in quarter one, which is not unexpected and not uncommon for contractors like ourselves, and certainly has not been uncommon for us over the last decade to have that. So, Zachary is going fine for us, thank you.

And second question, and sorry once again on a major project which is Bacalo. There has been some press article regarding Bacalo. Is everything well on track as well?

For us, it's on track. We do need an FPSO to be there for us to allow it to hook up the rises at the end of the project. But at the moment, we're on track, as the prepared remarks said. We have the Pacific starting the pre-construction work. And last week, the Vega was in Ubu picking its first load of production lines to be installed. So we are on track there. We have no major concerns. But again, the final timing at which the FBSO arrives will work its way out in the next year or so.

Okay. I turn it over. Thank you, John.

Thank you.

Thank you. We will now take our next question. Please stand by. And our next question comes from the line of Kevin Roger from Kepler Chauvereau. Kevin, your line is open.

Yes, good afternoon. I would have mostly one question and it's related to the fact that if you have shown a bit more optimistic on your top line expectations for 2023 mostly because Explaining myself, when I look at the level of variation order that you had in Q1, it seems that a lot entered for execution in 2023, and you still have something like $4 billion of revenue to be executed for this year. So I was wondering if it was expected on your side, or if it comes as a positive surprise, and so it leads you to be a bit more optimistic on your short-term forecast for 2023? and if it impacts also a bit the guidance for the EBITDA, please.

So, Kevin, as we've said in our prepared remarks, we reconfirm that we are comfortable with where we see this year and where the market sees this year for EBITDA. Yeah, we have some lumpiness in our variation orders. We need to remember that a lot of our Brazilian contracts have annual escalation mechanism protections that kick in. which is how we protect ourselves from the higher inflation that our market exposes us to. So we get some lumpiness in terms of, and these get distributed back to us through a variation order, it's a contractual mechanism that allows us to do that. So again, I would not read across the higher level of escalations as yet to be anything to say that there's going to be a fundamental change in how we see this year. So at the moment, to recap, We see our EBITDA in line with how the market views it. And the escalations aren't a surprise to us. They're mechanical protection mechanisms that are put into contracts to give us that coverage. Okay, understood. Very clear.

And maybe the second one, if I may, related to the... in a way, merger of Accur solution with SLB and the fact that you will take 10% of that entity that will be part of the subsea integrity alliance. Any update on the timing on that side and also maybe some feedback that you can share with us in terms of potential commercial opportunity that have emerged with that, not only getting access to a number of clients, maybe from...

Kevin, as you correctly pointed out, the process is underway now with antitrust in many jurisdictions. That's going as per the plan that the three parties have put together when we put the craft of the deal together. We still expect in the second half of this year to get the final approvals. And until we get the final approvals, the two companies are running independently. And so we haven't had any discussions as yet. And we can only have those discussions when closure takes place. So I think that's more of a 24 opportunity set for us. We know what the overall logic of the transaction is, as we shared with the market when we announced it. But at the moment, we're in that closed period, whilst the antitrust bodies of different regions do what they need to do to assure themselves of the security of the deal.

Okay. Thanks a lot for that.

Thank you. We will now take our next question. Please stand by. The next question comes from the line of Mark Wilson from Jefferies. Mark, your line is open.

Okay, thank you. I'd like to ask regarding most of my questions have been answered, by the way, so I'd like to ask on the fleet size, the 38 vessels in the active fleet and given what we've spoken about in terms of the tightness in the market and the outlook, just if you could comment on the right sizing of that fleet for the outlook you see.

incredible vessel activity you may potentially have at Bader Nord you spoke to there John so that would be interesting to hear how you think that fleet sets up for the outlook thank you yeah thank you Mark we as you know we have a philosophy of owning the key enabling assets and then chartering other tonnage in as we need it this is the way we cycle through the good times and bad times of a cyclical industry and that strategy is being played out at the moment. As you heard from Mark, we renewed three existing charters this quarter and we bought two new vessels into the fleet. One heavy construction vessel that's working for us on, will go to work for us on Bacalao and then our remaining Brazilian work, which is the Boca Subsea and then a light construction vessel from the CM fleet that came in that will do our construction work in Europe for us. So again, for us, we are making sure that we have sufficient support assets to make sure our key enabling assets can work. And as we've discussed a number of times on these calls, for us, the real inflection point in our EBITDA is when our enablers are working all year on only enabling work. So they're not trading down or doing slightly suboptimal work. So we bring other tonnage in to do that. So our logic is always to make sure we protect that in our outlook. And so we may continue to bring one or two other vessels that we need in to make sure that we are covered. Some of it is done on a project by project basis. Some of these other vessels, as we've named them in this prepared remarks, are on multi-year charters to us to provide the coverage that we need. So it's something that we do. It's a part of our business. It's something that we are very tight to the market to understand the tightness in that market and how well it works. So for us, we're in the right place, and the message we need to give back is that we always make sure that we have sufficient support assets to make sure our enabling assets can support our outlook.

Okay, very good. Thank you. I'll hand it over.

Thank you. We will now take our next question. Please stand by. And our next question comes from the line of Christopher Mollerlachen from Spare Bank One Markets. Christopher, your line is open.

Thank you. Good afternoon. I just have two questions. Regarding the $700 million in escalations booked in Q1, how do the margins work on such work? They're similar to the contracts that were originally entered into, or do escalation work have better margins than the historic work? The second question is related to the charter agreements. So you entered into two new charter agreements during first quarter and also extended three charters during the quarter. How did pricing for the chartered vessels change versus prior agreements? whether it's unchanged or up or down. Thank you.

Let's take the escalation question first then, Christopher. As I said earlier, there are a mix of different things driving the 700 million in terms of what it made up of. There are some contractual protection mechanisms that exist to protect us from escalation in raw materials and supply of costs. And they're very much there to protect our cost base, not to either enhance or detract our profit base on the contracts that we have. So we will be in a place where some of that passes straight back through to our supply chain. Then there is extra work and additional work. And generally, that's a better margin than the underlying contract. So you get a mix in there. And that was the message I gave out earlier. that you shouldn't read across increase in revenue will automatically change our view of the year because of that mix. In terms of the charter agreements, I think it's fair to say that we're seeing the cost of chartering moving incrementally year on year. The market was very low two or three years ago, but equally so was the workload two or three years ago. So the market goes up in debt and then we make sure that we have in our estimating models the correct pricing for what we see. A number of our bids have third market vessel prices at cost to our clients, plus a fee for managing those elements. So for us at the moment, we are seeing the pricing increase, and that then is passed on to our clients. Thank you.

Thank you. There are no further questions, so I will now hand the call back to John Evans for closing remarks.

Well, thank you very much for joining us for Q1. As I said, it was exactly what we expected the quarter to be, quite straightforward, but we restarted our operations in the Northern Hemisphere as planned. We've started our operations in Bacalao. We've just concluded Sakaria. A lot of things have happened in the last two to three weeks which are instrumental to how we see the year playing out. I'm pleased with the quarter's book to bill and we remain quite optimistic that we can continue that this year. Not necessarily every single quarter, but we expect to see a good year in terms of order intake for us. Stuart here is seeing a good year with the work ahead of him and a clear plan of how we're going to do that. We have a plan on how we support our new assets and bringing them into the fleet over the next year. So we look forward to talking to you again in Q2. And thanks for joining us today. Good afternoon.