Subsea 7 S.A. (SUBC) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Subsea 7 Second Quarter 2026 Results Conference Call. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Katherine Tonks, Investor Relations. Please go ahead.

Welcome, everyone, and thank you for joining us. With me on the call today are Stuart Fitzgerald, our CEO; and Mark Foley, our CFO. 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 the Subsea 7 annual report or in today's quarterly press release. I'll now turn the call over to Stuart.

Thank you, and good afternoon, everyone. First, I will talk to the highlights for the second quarter of 2026. This will be followed by a more detailed review of our financial performance by Mark. I will then return to talk about our operations in Norway and our tender pipeline before we open for Q&A. Turning to Slide 3. In the second quarter, the group delivered adjusted EBITDA of $471 million, representing over 30% growth year-on-year, and a margin of 24%. This was underpinned by strong project execution in both business units. We continue to see good order intake with a $2.1 billion backlog booked in the quarter, giving us a robust backlog of $13.6 billion and high visibility for the second half of 2026 and 2027. With 7 months of the year under our belt and a strong operational and financial performance to date, we have raised our guidance for full year EBITDA margin. Slide 4 shows details of our backlog, which continues to increase in quality in terms of both margins and terms and conditions. After strong order intake in the quarter, the backlog for Subsea and Conventional has reached a new all-time high of $11.8 billion, while the order book for Renewables was maintained just below $2 billion. We have a combined backlog for execution in the second half of 2026 of $3.9 billion, giving us excellent visibility over the remainder of the year. And our backlog of $5.9 billion for 2027 supports our positive view of the years ahead. As a reminder, the Middle East accounts for single-digit percentages of our backlog. We are currently commencing the offshore phase of CRPO-153 and this is progressing as planned with all the necessary resources to begin [indiscernible] operations in the Gulf. This contract represents 1% of our backlog with the vast majority of our Middle East exposure represented by CRPO-148, which is due to go offshore in 2027, with [indiscernible] of operations in 2028. And now, I'll hand over to Mark to run through details of our financial performance.

Thank you, Stuart, and good afternoon, everyone. I will start my review of our financial performance with a look at group and business unit results in the second quarter and then move on to our financial guidance of 2026. Slide 5 summarizes the group's revenue by quarter and by business unit. The group continues to deliver revenue growth, driven by good project execution across our high-quality portfolio. Second quarter revenue was $1.9 billion, up 10% compared to the same quarter last year, while first half revenue of $3.7 billion was up 13% year-on-year, placing us firmly on track to generate good revenue growth for the full year. Both business units contributed to the success, as I'll detail in later slides. Turning to Slide 6. Adjusted EBITDA of $471 million was up 31% compared to the prior year period, and our margin expanded by more than 3 percentage points to 24%. Other gains and losses were a positive $46 million, driven in part by the gain on foreign exchange on contracts and [indiscernible] to mitigate the currency exposure of the $414 million dividend, which was paid in May. Our effective tax rate was 29%, broadly in line with the 28% in the first quarter. Overall, we reported net income of $254 million, nearly double that of the prior year quarter. I will discuss the performance of each business unit in the next few slides. Slide 7 presents the key metrics for Subsea and Conventional. Revenue in the second quarter was $1.5 billion, up 9% year-on-year as progress continued across the [indiscernible], including notable projects such as Buzios 9 and 11 in Brazil, Yggdrasil in Norway, and Sakarya 2 and 3 in Turkey. Adjusted EBITDA was $410 million, equating to a margin of 26%. This represents an increase of 5 percentage points from the prior year period and reflects strong project execution and high vessel utilization as well as the favorable consequences of replenishing the backlog with high-grade order intake. Subsea and Conventional also benefited from a $9 million of net income contribution from OneSubsea in line with our expectations. Net operating income was $291 million, up 76% from the prior year period equating to a margin of [ 19%. ] Selected Renewables performance metrics are shown on Slide 8. Revenue in the second quarter was $350 million, up 14% year-on-year, mainly relating to continued activity in the North Sea at East Anglia THREE as well as the Inch Cape project. Adjusted EBITDA was $69 million, equating to a margin of 20%, up from 17% in Q2 2025 and the net operating income of $39 million. This represented a net operating income margin above 11% and reflects the outcome of selected bidding leading to improved risk reward allocation between us and [indiscernible]. Slide 9 shows a cash bridge between the first and second quarters. Net cash generated from operating activities was $570 million, which included a better-than-expected favorable movement in working capital of $149 million, more than offsetting the outflow of the first quarter. Overall, the first half saw a net inflow from working capital of $85 million, which, as I've noted on previous calls, is expected to reverse in the second half. Within investing activities, capital expenditure was $92 million. We also received a $7 million dividend from OneSubsea. Net cash used in financing activities was $528 million, including $414 million paid to shareholders and dividends in May. The net cash impact of the dividend to the group after including the gain on foreign exchange formal contracts was $403 million. After this significant cash dividend payment cash and cash equivalents was just over $1 billion, demonstrating the resilient cash generation profile of the group. Net cash was $190 million, including lease liabilities of $363 million, broadly unchanged from the end of the first quarter. Overall, we grew our liquidity of $1.6 billion at quarter end, which included $600 million of committed unutilized borrowing facility. To conclude the financials, we turn to Slide 10. Following another strong performance in the second quarter, particularly in terms of continued good project execution across the portfolio and increased clarity on the remainder of the year, we have revised upwards our guidance for the full year 2026. We now expect an adjusted EBITDA margin of approximately 24% from approximately 23% previously. Our guidance for net finance cost has also been favorably revised by $10 million to between $30 million and $40 million from between $40 million and $50 million, driven by higher and forecast cash balances. I will now pass you back to Stuart.

Thank you, Mark. During the quarter, we announced an award by Vår Energi for the Goliat Gas Export project in the Barents Sea. The project will connect the Goliat field to the existing Snøhvit pipeline system, which will take the gas to the onshore Hammerfest LNG plant. This is the first award under the new strategic partnership with Vår that was signed only a few months ago in March. By working closely together, we've been able to optimize the development solution to advance the installation schedule by a year and accelerate first gas. This demonstrable value creation has reinforced the confidence and collaboration between our 2 teams, and we look forward to working together to unlock opportunities across their entire Norwegian Continental Shelf portfolio. Now on the customary review of our Subsea prospects on Slide 12. Tendering activity remains high with a pipeline value of approximately $20 billion, a level we've experienced consistently for the past 2 years, independent of volatility in commodity prices. Clients continue to progress towards FID on multiyear projects supported by fundamental drivers, including a persistent growth in global energy demand, a drive for energy security reinforced by geopolitical supply disruptions and the natural depletion of baseline reserves. With favorable economics and given their strategic importance, the order developments ranked highly in the portfolios of our clients, adding to the resilience for our target markets. Overall, we are confident in both the near-term and longer-term outlook for Subsea 7, supported by favorable markets and our differentiated offering. To conclude our review of the results, we'll turn to Slide 13. Subsea 7 finished the second quarter of 2026 with a strong backlog, implying high visibility on revenue this year and next, while the robust tendering pipeline gives us confidence in the longer term. We continue to execute our proven strategy, focused on advantaged offshore energy markets underpinned by the highest safety standards and excellence in project execution. Regulatory processes relating to the proposed merger with Saipem are on track, and integration planning is well advanced. Overall, I'm pleased with the performance of Subsea 7 this quarter and excited by the outlook, both for Subsea 7 today and in the future as part of Saipem7. We'll now turn over to questions.

[Operator Instructions] Our first question comes from Guilherme Levy from Morgan Stanley.

I have two, please. First on execution in the Gulf. You mentioned, of course, that you are now starting the offshore phase of CRPO-153. Can you just remind us how many months that is expected to last? And I know small in the overall scheme of things, but can you share with us any color on the sort of inflation that you are seeing on cost there, if any, compared to the regional estimates before the conflict started? And then secondly, in terms of guidance, perhaps if you could share some color on what has surprised you in terms of execution in the second Q that allowed for the small increase in margin guidance for the year? Any particular projects or region where you had initially built some contingency that now has been released?

Thanks, Guilherme. I'll take the first one, and then Mark can comment on the guidance question. So as said, CRPO-153 commencing in the Gulf with pipeline operations in the very near term with the required assets and equipment within the Gulf. We have additional campaigns coming up over the next 3 to 4 months and would expect to be complete with our operations by the end of the year. So that's the kind of time frame that you're looking at. Within the scale of that project, I would say, not significant inflationary effects. So we are not seeing any notable impact on our expected performance of that project given its size and the scope that we have. The other project that we have that you're aware of, CRPO-148, which will go offshore middle of next year and into 2028, there, we're in the early phases of that project with placing orders for different equipment components and with our engineering. And again, there, I would say we're not seeing any material inflation for the activities that are currently ongoing.

Sure. Thank you, Guilherme. You're right. We increased guidance as communicated from approximately 23% adjusted EBITDA margin to approximately 24%. And as a reminder, that was in the back of the uplift that we announced to the market with the Q1 results moving from 22% to 23%. More specific project or indeed region-wise contributing towards this. We're very satisfied and encouraged with the performance across the portfolio and that together with the results that we've delivered in the first half of the year, together with the clarity that we have for the remainder of the year has given us the confidence to share this view with the market as we've done today. So again, no specific project, no specific region. But we are encouraged by the high level of the execution that we observed across the portfolio.

We are now taking our next question, and this question comes from Victoria McCulloch from RBC.

Can we talk about Renewables and the tender outlook there? I noticed you've taken sort of the [indiscernible] opportunities off. But maybe you could give us some color on what we should be thinking about in the second half of the year and the opportunities and what that tells us about the market. And then secondly, maybe a bit on numbers of Mark, what should we expect working capitalized in the second half of the year? And the OneSubsea dividend, what's your expectation on that for the remainder of the year?

Okay. I'll talk to the tender outlook on Renewables. So we've been communicating for some time now that the renewables market is going or is in a lull in terms of project sanctioning associated order intake and that, that will [ bleed ] through into a weaker market in '28, '29 is our market perspective there. We are actively working, I would say, on tenders in relation to AR7, sort of awarded projects in AR7 as you know. And then there is a -- the various developers are shaping their bids for AR8. So significant client engagement in preparation for AR8. In terms of actual awards to market, we think, very limited in the second half of the year. Those prospects, if you like, both for AR7, AR8 will be 2027 awards and project FIDs. Outside of the U.K., as you know, markets in Poland and Germany, [ storms ] to some degree, some ambitions and objectives stated, but still to see the project flow, restart in those 2 key countries. Poland, a better market, some projects under bid now. But really the key as has been for the last period, and we expect to be for the coming year or so, it's going to be the U.K. market where not much second half of the year, but probably a strong flow next year. Over to Mark.

Victoria, as previously trailed, I expect working capital to unwind in the second half of the year, something in the quantum of around $200 million, Victoria. As you know, we have had a good run in terms of working capital management over recent years so that $200 million should [indiscernible] the context of where we are today and what we've achieved in 2025 in 2024. As you know, forecasting working capital can be quite pretty bad, but expect something about $200 million. Of course, we begin to mitigate that endpoint. In terms of OneSubsea dividend, just as a reminder, we have a 10% shareholder in OneSubsea. That will be a decision for the Board of OneSubsea, but I would be expecting something in the region of $20-or-so million for the remainder of this year.

We are now going to take our next question, and this question comes from Mick Pickup from Barclays.

Quick one for you, Stuart. Just on the bigger picture. I think in your introduction, you talked about terms and conditions improving and quality of projects improving. And obviously, over the last few months, some of your clients have gone to great lengths to try and document how tight this market is. So is the behavior changing?

What I would say, Mick, is -- so I've spent the last 3 to 4 months, obviously, as part of the handover process with John, traveling to every region and meeting every client and all of our key suppliers, some of the regulators, et cetera. Consistent messages in those visits and in those interactions with clients is, number one, confidence in their forward activity; and number two has been, I would say, a good solid pull on Subsea 7 as a reliable contract for them that they want to work with. So I would say that is the backdrop for obviously discussions about pricing and discussions about terms and conditions, which we are working under. And if we take the example of the Board contract that we signed in Norway, it's a different way of working where risk balance is different from what it's been in the past and where I would tell you, the risk terms are more favorable than we've seen before. So the general momentum, I wouldn't like to go into specifics, but the general momentum is good client pull on Subsea 7 as a preferred supplier, and with that comes obviously improved working conditions.

We're now going to take next question, and this question comes from Kevin Roger from Kepler Cheuvreux.

As a kind of follow-up following the question from Mick, where is basically the landing point for your EBITDA margin in the Subsea and Conventional business? Because over the past few quarters, you have continued to positively surprise the Street. So I was wondering if you have the better terms and conditions, the bottleneck on the vessel, et cetera. I guess the EBITDA margin will continue to gradually improve. So any sense on where this EBITDA margin could land, please? Because I remember a few times ago, we were saying that the 30% plus number that you had back in 2017, '18 was a kind of one-off effect, but now we are not so far from this level. So any color that you can share with us? And the second one is just to try to understand a bit the '26 top line guidance now because when I make the, in a way, sum up between the H1 plus already, what you have in the backlog for execution in '26, we are already in the high end of the range roughly. So is there any risk on those H2 -- on this H2 top line that is preventing any fine-tuning of the top line guidance for '26?

Thanks. I'll let Mark comment on the top line question and I'll make some color around the margins without being specific. So obviously, not going to provide any specific guidance on achievable margin. What I would say though, Kevin, is this is partly market conditions, which we have obviously expressed our confidence in, and that was part of our commentary. Do not underestimate the execution side of it. So in terms of our efficiency of execution, consistency of execution and quality of execution, we continue to push hard in the organization, continues to perform well there, and that continues to improve, and we will continue to push for further improvement. And then the second thing that we are seeing is in certain geographies as we get portfolio effects really coming through. So there, I'd call out Brazil and I'd call out Norway, and I'd call out the Gulf of Mexico where we get scale, where we get standardization even if it's with different customers, we are able to expand the margin through, I would say, good portfolio effect. So don't only think about the market when you're thinking about margin expansion that's happened. I'll then hand over to Mark to talk about the top line.

Thanks, Stuart. Thank you, Kevin. So we have maintained our guidance on revenue between $7.4 billion to $7.8 billion. Based on the first half of the year and what we have in backlog, I think it would be fair to look at the upper end of that $7.4 billion to $7.8 billion range. Certainly, don't infer any downside risk that we have in the portfolio. So the $7.4 billion to $7.8 billion, we think about the upper end of that range.