Subsea 7 S.A.

Welcome everyone and thank you for joining us. 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 slides that we'll be using during today's call. Please note that some of the information discussed on the call today will include forward-looking statements that reflect our current views. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in our annual report or in today's quarterly press release. I'll now turn the call over to John.

Thank you, Catherine, and good afternoon, everyone. 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. Subsea 7 reported satisfactory results for the second quarter, including a good operational performance from subsea and conventional, and strong results in renewables. Momentum in order intake continued with $2.2 billion of workbook this quarter, increasing our backlog to $10.4 billion. Tendering activities remain high, and we're seeing a continued improvement in pricing. Overall, we're on track to meet adjusted EBITDA consensus for 2023, and remain confident in our longer-term expectation to return to a margin range of 15% to 20%. For an update on key projects in the quarter, in Senegal, Sangamar reached 84% completion, as SemSys and SemSisters continue to install umbilicals and other subsea hardware. In Brazil, SemVega and SemPacific were active on Bacalao projects, Procurement continued at Mero 3, and engineering is underway on Bougios 8. In Saudi Arabia, SEM Borealis completed two jacket installations for the Marjan 2 project, which reached 43% completion. And in Norway, we were very active, with five vessels working on eight fields for five different clients, including the Northern Lights CCUS project. In renewables, cable activities were completed for the Seagreen project in July, and this $1.4 billion project has now been successfully concluded. We made good progress on the Dogger Bank A and our other offshore wind scopes. Turning to slide five, order intake in the second quarter was $2.2 billion, including new awards of $1.5 billion and escalations of $0.7 billion. Our book to bill was 1.4 times. Overall, our group backlog increased to $10.4 billion, giving us a high degree of visibility on both the remainder of this year and next year. Both business units delivered strong backlog growth. Our subsea order book increased 25% year-on-year to $8.7 billion, including $3.6 billion to be executed in 2024. up 29% from the equivalent position in June 2022. Our renewables order book has doubled year-on-year to $1.7 billion, of which $650 million is due to be executed in 2024. And now I'll pass over to Mark to run through the financial results.

Thank you, John, and good afternoon, everyone. I will 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 seven summarizes the group's second quarter and first half performance in the context of the prior three years. Revenue in the second quarter increased 22% to $1.5 billion compared to the second quarter of 2022 as we continue to execute large projects and sub-sea and fixed offshore wind. Adjusted EBITDA of $162 million was up 21% compared with the prior year, and the margin remained broadly flat at 10.7%. As previously communicated, the margin is expected to expand in the latter part of the year as the proportion of contracts in the portfolio, one at the cycle low, further diminishes and backlog continues to be replenished with margin accretive order intake. Net income was $14 million after net finance costs of $8 million and net foreign exchange gain of $59 million driven by movements in non-cash embedded derivatives and an effective tax rate of 73%, which was elevated by 22 percentage points due to the non-tax deductibility of non-core vessel impairments. I will now discuss the drivers for the group's performance in the next few slides. Slide eight presents the key metrics for subsea and convention. Revenue in the second quarter was $1.2 billion, up 23% year-on-year, reflecting good progress on Sangomar, Bacalao, and Marjan II, as well as our other EPCI projects. Adjusted EBITDA was $121 million, with a margin of 10.3%, up 120 basis points sequentially, but down on last year due to a mixed shift towards contracts won in the challenging environment of 2020 and 2021. A net operating loss of $10 million for subsea and conventional includes a $23 million impairment of non-core shallow water assets in Nigeria, a market we have now exited. The performance of the renewables business unit is summarized on slide nine. Revenue in the second quarter was $309 million, up 19% year-on-year, reflecting high activity on Seagreen, Holland's Equus South, and projects in Taiwan. Adjusted EBITDA was $34 million, resulting in an adjusted EBITDA margin of 11.1%, driven by strong operational performance across our portfolio projects. This marks a return to double-digit margins in the new renewables business, year. Slide 10 shows the cash flow waterfall for the second quarter. Net cash used in operating activities was $31 million which included an expected building working capital of $176 million. This build is temporary in nature and is expected to begin unwinding later this year. Net cash used in investing activities was $201 million mainly attributable to milestone payments for the new-build wind vessel, Seaway Alphalift. As a result of this investment in the business, free cash flow in the period was negative $228 million. Net cash used in financing activities was $60 million. This included our $112 million dividend payment, which equated to $4 per share, which is notably higher than the $1 per share regular dividend. lease liability payments of $48 million, including principal and interest, mainly related to chartered vessels. These financing cash outflows were offset by $111 million of net proceeds from borrowings, which included a modest drawdown on our revolving credit facility. At the end of the quarter, cash and cash equivalents was $398 million, and net debt was $805 million. This included lease liabilities of $442 million. The group had liquidity of approximately $1 billion at 30th June and is at an advanced stage of negotiation to secure additional core debt funding of $450 million. This funding will be a Seaway 7 facility for use in the renewable sector and will primarily finance Seaway Alpha Lift and Seaway Ventus vessel buildings. To conclude, slide 11 shows our guidance for the full year. 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. Guidance for taxation has increased to between $70 and $80 million, resulting from a shift in forecast profitability towards higher tax jurisdictions, the impact of recoverable withholding taxes, and tax non-deductible impairment charges. There is no change to our expectation for capital expenditure for the year. I will now pass you back to John.

Thank you, Mark. On slide 12, we have an update on the Dogger Bank A project, which has made good progress in Q2. To date, 71 of 95 monopiles have been installed by the Seaway Strational, with steady and predictable cycle times for each monopile. We're on track to complete the monopile scope in the third quarter and the transition pieces in the fourth quarter of this year. A strong performance on Dogger Bank A will allow a commencement on Dogger Bank B, and we expect to start installing monopiles in the third quarter of this year. The remainder will be installed in 2024 as planned. Good predictable operations from Seaway Strashnoff have formed the basis of a revised execution plan for Dogger Bank A, Dogger Bank B, and Dogger Bank C projects using the Seaway Straschnoff as the monopile installation vessel throughout. This revised execution plan has been agreed with the client. On slide 13, we'll review the plans for our new build foundation installation vessel, Seaway Alphalift. The vessel has now left the yard in China and is sailing to Europe, where it should arrive towards the end of the summer. The crane and marine systems have been successfully commissioned and it will be deployed in heavy lift mode, installing transition pieces on Dogger Bank A, B and C from late 2023 to 2025. This revised plan has been developed with the clients and although subject to final approvals, provides confidence in our financial estimates for the project. The mission equipment for Seaway AlphaLift remains under construction but is now removed from the critical path, allowing us to de-risk our renewables backlog. Turning to slide 14 and our other new build vessel, Seaway Ventus. This is a multi-purpose jacket capable of both turbine and monopilot installation. Construction remains on track with the jacket legs now fully tested and the crane and the marine systems commissioning underway. The vessel is due for delivery at the end of 2023 and is scheduled to start work on turbine installation activities on Borkham, Rifgun 3, and Goldwyn 3 in 2024. It will then be deployed for monopile installation at East Anglia 3 in 2025. Switching to our sub-scene conventional business, on slide 15, we have a brief overview of our work for BP in the Caspian. Since 2018, we've built up our presence in Baku, servicing this landlocked region, and from here, we provide inspection, repair, and maintenance to BP under a long-term framework agreement. In 2019, after early engagement with BP on its development plans, we were awarded contracts for the engineering and fabrication of subsea structures for the Azeri Central East Project, along with transportation of a jacket and topside unit. BCE made good operational progress in the second quarter with the launch of the 16,000 tonne jacket in April and the installation of the 20,000 tonne topside unit is planned for Q3.

Our final spotlight today is on our role in the Northern Lakes project as part of the Longship development.

Longship is a carbon capture, transport and storage This encompasses the shipping of CO2 to an onshore terminal through its taken by pipeline to a storage field in the North Sea. Subsea Sound Scope is the engineering, fabrication, and installation of a 180-kilometer pipeline taking CO2 from shore to the North Sea field. In the second quarter, Seven Oceans installed the first 55 kilometers of pipeline with the remaining 53 kilometers scheduled to be installed in spring of 2024. Now on to review of our tendering pipeline on slide 17 and 18. Tendering remains very active and 2023 is shaping up to a year of strong ordering tape. The most active markets remain Brazil, where there's a long list of major projects of which we will win our fair share. and the Gulf of Mexico, which remains a very active tieback market. In addition, there's a good array of prospect in Africa, including Egypt, Libya, Morocco, and Angola, most of which have been tendered as integrated surf and SPS projects. We're also working on integrated surf and SPS tenders for Browse in Australia, Aphrodite in Cyprus, Block 58 in Suriname, and the Northern Endurance Partnerships CCS development in the UK. Overall, we are confident that we have a robust tendering pipeline that can support continued momentum in the subsea market. On the next slide, we have our wind prospects. There are a number of tenders that should be awarded to the industry in 2023 and 2024 in the US, UK, and Europe. as well as some longer-term prospects with installation windows as far out as 2029. We're also starting to see interest from our wind clients in locking up long-term capacity under multi-year rewards. We are seeing some project delays due to project economics impacting our clients, and 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 19. Our second quarter delivered a good operational performance in sub-C and a return to double-digit margins in renewables, which is now back on track. We anticipate renewables margins remaining in double digits for the remainder of this year, and we have de-risked the backlog for 24 and 25, which should underpin and improve financial performance over the longer term. Overall, the second quarter has reconfirmed our view of the full year of 2023. Our on track to meet consensus expectations for adjusted EBITDA. We continue to experience high level of tendering activity with a pipeline of over $20 billion in subsea and $5 billion in wind, which is supporting a positive pricing dynamic. As we've noted before, We expect margins to return to a range of between 15% and 20% in the coming four years. And this, combined with a significant reduction in capex from 2024, should enable the group to generate significant free cash. And with that, we'll be happy to take your questions.

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 11 on your telephone keypad. To withdraw your question, please press star 11 again. Please stand by while we'll compile the Q&A roster. This will take a few moments.

Now we're going to take our first question.

And the question comes from the line of Kevin Roger from . Your line is open. Please ask your question.

Yes, good afternoon. Thanks for taking the time. The first one is to come back on the EBDA margin forecast by division, because when I'm trying to make some calculation based on your guidance and your backlog for execution in 2023, I'm arriving basically to a sub-CH2 EBDA margin of at least 15% that is embarked in your guidance. So the first element is, am I missing something when I arrive to this conclusion? And the second, if it's relatively true, is there any reason why the 2024 EBDM margin in the subsea segment should be below the H2 2023? So that would be the first question, please. And the second one, I think if there is one element that surprised us quite a lot over the past two quarters is the level of escalation orders still at 0.7 billion this quarter. Is it fair to assume that until the subsea tundra pipeline is at a record level, the level of escalation order should remain also relatively high? Thanks a lot.

Okay. I'll take the EBITDA 23 question, and then Mark can give a bit more detail on the escalations. We're pretty comfortable with the consensus for this year, and we're pretty comfortable that the Seaway 7 business will be in double-digit margins. So as you said, the maths work their way through from there. I'd just like to remind you and everybody in the call, we've been quite clear here that we expect an inflection point at the middle of this year. We had taken on some large complex projects during 2020 and 21, where the market was very tight. And we're now liquidating those projects. And as you see in this quarter, we've liquidated chunks of Marjan, chunks of Bacalao, chunks of Sangamart. So we have spent a lot of time this quarter liquidating lower margin work. We do expect the second half of a better margin in terms of where we're at. And the general trend on margins, I won't go into the specifics of 24 at this stage in the year. But as we said, we do expect the trend to improve and we do expect to see a good cycle coming from here. So that's where we are on 23 margins. And maybe, Mark, you can just give a bit more detail on the escalation.

Yeah, indeed. As we're all familiar, escalations are a normal part of the contracting business and escalations for Subsea 7 have been elevated now for several quarters. They break into two primary components. One, where we have contractual indexation in certain countries with certain customers, Brazil being a good example, as well as the customary variation order requests that we receive from our clients as well, regarding a change in scope and a change in timing. So moving the window as a result of developments on drilling or indeed FPSOs. So it's difficult for us to predict what those levels are likely to be, Kevin.

But yeah, it does underpin the new order intake that we've had in recent quarters.

And the other item I'd just like to add to Mark's point is some of our contracts today have an initial kickoff that we do feed on early engineering. And later on then, we have an option to procure. So one of the contracts we have in Q2 is where we've gone ahead and procured the umbilical and the line pipe. So Mark's point is right, but it's not just variation orders because of change. There are some mechanisms these days that our clients want to have the ability to go in stages on some of these contracts.

Thanks a lot.

Thank you, Kevin.

Thank you. Now we're going to take our next question.

Just give us a moment. And the next question comes to the line of Martin Hughes Bikalsen from D&B Markets. Your line is open. Please ask a question.

Thank you. Quick question on the CapEx side from me. Based on your guidance, you have around 350 million left to spend in 2023. I guess you have fully paid the shipyard for the Alphalift by now, but could you provide us with a split of the remaining CapEx between the Ventus mission equipment on the Alphalift and other key categories?

Yeah, in terms of the two new build vessels that we have in renewables, we probably have something in the region of $300 million, Martin, to go on the build. So that covers the Alphalift, which is a small remaining part, the Ventus, where there's a significant upcoming milestone payment, as well as other elements of mission equipment.

Thank you. A quick follow-up on the Alphalift, if I may. It seems like the vessel will do transition pieces through 2025, which seems like quite low-end work for a quite high-capacity vessel. Does this imply that mission equipment won't be completed and installed until late 2025 or even into 2026? And if that is the case, could you help us

understand facing of the mission equipment capex beyond 2023 i can take that one martin um so we've taken the decision as we've stated in the release here to de-risk dogger bank um to not have a dependency on mission equipment delivery the build of that mission equipment is ongoing but we would not intend to install that mission equipment ahead of, for example, the 2024 campaign. We focus the vessel on transition pieces and we see acceptable returns on the vessel investment in that mode, given these transition pieces are large and it is relatively high-stake work. Second part of the question, I think, in terms of when the mission equipment will go on board, key point for us is to not create dependency in our forecast program here on the readiness of that mission equipment for installation. So we would expect that that pushes out beyond the dollar bank project.

Just to clarify on this, should we think that the 2023 CAPEX guidance fully capture your spending on the mission equipment, or will there be additional spending in 2024 and 2025 as well?

Well, the 300 million provided covers the remaining expectations that we have for the two vessels as well as the ancillary equipment.

Okay, thank you. I'll turn it back.

Thank you. Now we're going to take our next question. Please stand by. And the next question comes from the line of Christopher Muller-Löcken from Spare Bank One Markets. Your line is open. Please ask your question.

Good afternoon, gentlemen. The news of the quarter was clearly the bid you put in for DOF earlier, which was rejected. Could you please update us on the situation regarding potential consolidation in the subsea industry going forward? Thank you.

Thank you, Christopher. I think the interest in DOF was clear to us as part of that IPO process that they had. As we mentioned to our investors when we announced it, at the particular price point that that was put onto the market, we were interested in the business. And we continue to be interested. We will continue to have to charter more tonnage to be able to liquidate the work that we have. And we will push ahead in the second half this year with further chartered tonnage to make sure we have the capacity to deliver what we believe is going to be a very long upmarket here in subsea. And also we have a good market in renewables. So for us, we see the need for chartered tonnage in our fleet. And DOF fitted the bill at the price point that was originally identified. As you know, the history of that bid was that the Board of DOF did not want to pursue that with us and therefore it lapsed. So we continue to run our business the way we've always run it, which is that we own our key enablers and that we bring additional tonnage in as we need to.

Thank you.

Thank you.

Now we're going to take our next question. And the next question comes from the line of Guillaume Delaby from Societe Generale. Your line is open. Please ask a question.

Yes. Good afternoon. Maybe a question regarding the durability of the cycle. So you are providing a new data point, which is, I think, the subsea tender pipeline of 20 billion. So this is data point number one. And I understand that pricing continues to improve as we speak today. Just would like to be sure, and this would be my first half question. And my second half question, which is, of course, related with the first half, is SLB mentioned on Friday evening that basically they now expect... 500 billion of offshore SID for the period 2022 to 2025. So am I missing something if I'm saying, hey, look, the market continues to tighten, pricing continues to tighten, and pricing is likely to continue to tighten in 2021. H2 2023-2024, which might be the peak of pricing and bargaining power with Q. And if my thought process is correct, should it mean peak margin, not at the end of the next four years, but maybe in 2028 and 2029. I'm sure you are not going to commit yourself for 2028 or 2029, but just would like to be sure that my thought process is not too, I would say, candid. Thank you.

Gloomy, great question. And the good news is I certainly won't commit to 24 at this point, let alone 28, 29. Your logic is absolutely right. As we mentioned in the DOC transaction, nobody is building tonnage in this sector at the industry at the moment. There is tonnage being built in renewables, but very specifically the jack-up side of that business, which we don't have much of an exposure to. So if we come back to the basics here at the moment, we believe that there is a good long cycle in oil and gas coming. We believe we're very well positioned to do that. We've been open with the market that we will need additional tonnage to do that, but we don't intend to build it. We will charter it. We will find a way of getting access to that tonnage. So we do believe there are a number of good years ahead of us. I think it's very hard to project ahead as to where the peak point in the cycle is. As I said in my final paragraph from my prepared remarks, you know, we continue to experience high level of tendering, pipeline of 20 billion in subsea, 5 billion in wind, which is supporting a positive pricing dynamic. That's where we're at today, and we keep working the market as we see it. I think the other point to remember here as well is in this cycle, It is still the two main competitors that we've always had, Cypem and Technip FMC. So there are three large players here in this market, and there aren't many regional players that we've seen in previous cycles that tend to disrupt the market. So directionally, your thought process is right. I think it's very hard to judge where that peak point is. We're just working our way through it and trying to optimize our position on each tender that we put in and each piece of

Thank you very much, John.

Thank you.

Now we're going to take our next question. Please stand by.

And we have the next question comes from Lan of Victoria McCulloch from RBC. Your line is open. Please ask your question.

Hi, afternoon. Thanks all. Maybe following on from that, could you give us a little bit of colour into how discussions are going in terms of margin and tendering in a backdrop of commentary that seems to be focused on the wider market and inflation, and certainly seeing some projects delayed, you noted Badanor. These are being delayed due to economics, so maybe how those conversations are happening with yourself. And then a second question, if I could. Looking at the prospects for subsea, a growing number of these seem to be integrated awards, including CCS work. Do you see this being a greater demand and anticipate this growing as that agreement is formalized in the second half of this year? Thanks very much.

Yeah, I think your question is a good one about the pressures in the market. We are seeing that input costs from our suppliers are stabilizing now. They have gone up with the disruption that we saw in the market last year. But I think it's fair to say that Petrobras in Brazil goes at full tilt with its plans. Saudi Aramco goes full tilt with its plans. Qatar goes full tilt with its plans. Norway goes full tilt with its plans. So, yeah, there are certain areas where clients make their choices and that's absolutely their prerogative to make sure that they are using their shareholder cash well for future capex. But at the moment, we're seeing the general trend pointing the right way. We always see that certain projects in certain jurisdictions can be challenged. So again, I think we're not sitting here today concerned about the general direction. But we know our clients, especially on very complex field developments, may have two or three shots at how they configure it, how they develop it, the speed at which they develop, the speed at which they bring cash on, how many wells they bring on. that has always been part of our industry which then brings us to the SIA and the integrated projects and that's where we do see our relationship with Schlumberger and in due course with the ACCA group coming into the actual entities coming into that alliance as well we see that there's real value in some of those discussions you asked as well about carbon capture the SIA does have a carbon capture offering in the market and which again is a tailored piece of subsea hardware along with our surf capability. I mentioned in my prepared remarks we will be bidding the Northern Endurance Partnership this year in the UK. I think as a market it is gaining traction and we've seen most countries in Europe will have one CCUS type project in their portfolio. Norway has led the way with Northern Lights and we're very pleased to be physically building one of the first carbon capture projects in the world. uh in the offshore arena um so for us at the moment we don't see that as being a huge volume of work for us but one that the sia is very interested in and one that we will pursue with with energy thanks very much for coming to really helpful thank you and now we'll proceed to the next question

And the question comes from the line of Richard Dawson from Berenberg. Your line is open. Please ask a question.

Hello. Thanks for taking my questions. Just a couple from me. Firstly, on net debt, they currently sat just over 800 million. Where do you see that moving to by year end? I appreciate there's a fair chunk of capex still to come on those new build vessels. And also that first payment on the FAA. But just sort of on the working cattle, how much of that unwind can be achieved by year end? And then just secondly, on EBITDA margins, just a quick follow-up. Just given the performance in the renewables segment this quarter and the double-digit margins expected in H2, could we see renewables contributing to that 15% to 20% target earlier than you'd expected? That's it for me. Thank you.

Mark will take the net debt and working capital questions.

Thank you, Richard. As John and I have communicated over several quarters now, 2023 represents a year of significant investment in the business. So one, in terms of working capital. Two, as you alluded to, the investments we're making on new build vessels, the Seaway Alpha, the Seaway Ventus, for the renewables opportunities that we see in fixed longshore wind not least the expected first-franch payment of $153 million for our 10% share in the new one-sub-C joint venture. So net debt at just over $800 million at Q2 probably signifies the peak. I would expect that to kind of come down in the region of $100 to $200 million by year-end. The caveat here, of course, is working capital. Working capital is fiendishly difficult to estimate with a high degree of accuracy. So that can be the swing factor. And that can move expectations a quarter or two. But I do expect to see the net debt come down based on our assumptions, particularly underscored by working capital by the end of the year.

And to answer your question on 2023 EBITDA margins,

I'd say again the same answer as I gave previously. We're comfortable with where consensus is at the year end. We're comfortable that renewables will be a solid deliverer for us there. As we discussed, this was a year where we liquidated and put behind us some of the lower margin work and the better quality work in subsea cuts in the second half of the year.

renewables would turn this year and the work the steward and the team have done in seaway is now proving that we're on that path that's great thank you thank you dear participants as a reminder if you wish to ask a question please press star 1 1 on your telephone keypad Now we're going to take our next question, and the question comes from the line of Daniel Thompson from BNP Paribas Exxon. Your line is open. Please ask your question.

Hi, good afternoon. Just one quick one from me. I noticed on the subsea bidding pipeline regarding Nigeria, there were no sort of opportunities listed there despite sort of in the industry news media some opportunities recently resurfacing. Always a bit of a difficult market. I mean, are you just being a bit cautious on the outlook for near-term opportunities actually moving forward there, or are you not intending to bid on existing opportunities for strategic reasons, perhaps? Thanks.

Daniel, that's a good question. As we mentioned, we did a write-off on certain shallow-water Nigerian assets. which we have decided is not a market for us in the future. We continue to remain interested in the deepwater projects in Nigeria. We're just trying to understand, will the stars align for the timing of those to succeed? History will show that we've spent many years bidding some of these larger projects, and whether or not they actually come to FID is one of the key challenges for us at the moment.

So for us, we continue to be interested in deepwater Nigeria, absolutely. Okay, thank you.

Thank you. Dear speakers, there are no further questions at this time. I would now like to hand the conference over to our speaker, John Evans, for any closing remarks.

Well, thank you very much, everybody, for joining us on our Q2. We're on the path that we've declared that we're on. We can see both our markets picking up. We're very pleased with the order intake. and we expect the second half to play out as we've guided the market here. So thank you very much for joining us. Thank you very much for your questions. And as ever, we're available offline if we need to give any further information to you. So thanks a lot, and we will see you soon with our Q3 results. Thank you. Goodbye.