AKCCF - Aker Carbon Capture ASA (AKCCF) Q2 2023 Earnings Call Transcript

2023-07-11 16:06:05 ET

Aker Carbon Capture ASA (AKCCF)

Q2 2023 Earnings Conference Call

July 11, 2023 09:00 AM ET

Company Participants

David Phillips - Head, U.K. & IR

Egil Fagerland - CEO

Conference Call Participants

Presentation

David Phillips

Good afternoon, and welcome to the presentation of Aker Carbon Capture's Results for the Second Quarter of 2023. My name is David Phillips, Head of the U.K. and Investor Relations, and I'm joined today by my colleague, Egil Fagerland, our newly appointed CEO. Egil will start with the main presentation, then this will be followed by Q&A with the audience.

So firstly, Egil will take us through our main achievements and progress from the second quarter of this year and will run through a number of topics that are important to our strategy. Then he will take us through our key Q2 financials, including some outlook commentary for the rest of the year. And finally, we will take your Q&A via the online system. Just as a reminder, as before, you can post your questions into the system at any time. And at the end, we will try to work through as many of them as time allows.

So Egil, over to you.

Egil Fagerland

So this is the agenda for our presentation today, and thank you, David. Following a very active and promising second quarter, we will address the highlights of the quarter, our operational and business development, our delivery models, the financial highlights, and finally, our way forward. Then we'll move on to the Q&A.

First, before we start the highlights from the second quarter, we have a short introduction to the company. Aker Carbon Capture is a pure-play carbon capture company. We're offering modular and configurable capture plants with the strength of the Aker Group behind it. Today, we're already delivering seven carbon capture plants. We are making carbon capture happen.

Our proprietary and patented technology has been developed for over 20 years and is validated through more than 60,000 operating hours and verified across a range of industries. Aker Carbon Capture's technology uses a biodegradable mixture of water and organic amine solvents to absorb the CO2. Our technology is modular, cost and energy efficient and has a market-leading agency profile.

Since mid-2020, Aker Carbon Capture is focused on the European market with Scandinavia, Benelux and the U.K. leading the way. With increased policy support for CCUS in North America, we've started our market entry. With a growing pipeline of opportunities, our first local employees in place and partnership discussions is ongoing as we're continuing our strategic journey to enter this important market.

Also, we're exploring the potential position we will take in the rest of Europe and the Middle East. We continue to prioritize four market segments with high market activity; cement, bio and waste-to-energy, gas-to-power and blue hydrogen. And we're also seeing good engagement with a number of additional segments where our technology is well suited to capture CO2, such as refining and process industries. Our technology has been tested and verified across all these segments.

Now to the highlights of this quarter. This quarter, we secured our largest contract ever, a contract to deliver five modular Just Catch units to Orsted in Denmark. The contract value is more than EUR200 million and has been -- has lifted our revenue backlog to NOK3.3 billion. We now have a total of seven carbon capture units under development. And this represents a leading share of the major projects that have so far moved forward to secure contracts in Europe.

We continue to see significant study activity and we've secured studies in the biomass industries across the U.S. and Sweden. We won two studies for Just Catch Offshore, validating the importance of this offering to help decarbonize the offshore industry. We've seen good progress on our major projects in the period. At Orsted, key purchase orders have been placed. For Brevik CCS, the installation of equipment and piping continues. And at Twence CCU, all the major equipment has been installed on site.

In addition, two of our U.K. flagship FEED and pre-FEED projects are in the final negotiations for government support. We continue to see high mobile test unit activity, having finalized the successful campaign at CO2 Hub Nord in Norway and we've started the EU funded Aurora solvent research project.

We're continuously strengthening and investing in our portfolio of offerings. And this quarter, we've launched a new modular unit or units, including the third-generation Just Catch 100 and we're introducing the Just Catch 400, both are modular offerings targeting the mid and large-scale emitting market.

Although mentioned earlier, it's worth noting that our backlog has been strengthened to NOK3.3 billion on the back of the Orsted award. And I'm also happy to share that we have seen a continued revenue growth in the quarter, growing our top line close to 60% compared to the same period last year. All this, while we've been maintaining a solid cash position at NOK1.1 billion.

Also worth mentioning is our share purchase program, which was launched in the quarter for the first time for all employees. And this program allowed all of our employees to acquire shares in the company and participate in our progress. So it's clearly been a busy quarter for our people at Aker Carbon Capture.

And let's look closer at our latest key award, Orsted Kalundborg CCS. At Orsted Kalundborg CCS, we're delivering five modular and configurable third-generation Just Catch 100 units and additional equipment such as liquefaction systems and temporary CO2 storage and on and offloading facilities. This is a materialization of the MOU between Orsted, Aker Carbon Capture and Microsoft, which was signed in March 2021. We see this project as a milestone for serial production of Just Catch units. This will enable us to deliver cost efficiency and fast deployment of carbon capture.

Modularization is already an accelerator in this industry. This is proven by our ongoing delivery of seven carbon capture units across several industries. The total contract value is about EUR200 million and has a design capture capacity of 0.5 million tonnes of CO2 per year. As the five Just Catch units will be capturing biogenic emissions, which will be stored in the North Sea, this landmark project will deliver large-scale carbon removal.

Microsoft will purchase several million tonnes of high-quality carbon removal credits from Orsted. This represents one of the world's largest carbon removal offtake agreements by volume to-date. So we're truly proud to be able to help deliver the first full-scale carbon capture and storage value chain in Denmark, which will be an important contributor to reach Denmark's climate targets.

This quarter, we also made headway in new markets and industries. Apart from the very important contract award from Orsted, we've secured several studies in different regions and in different industries, including several Just Catch and Just Catch Offshore studies. First of all, we won a strategic U.S. study covering biogenic emissions.

The study will cover emissions targeting 800,000 tonnes of CO2 per year, including the assessment of implementing two Just Catch 100 units. A combination of Just Catch 100 and Just Catch 400 units or Big Catch are potential solutions for this client to help decarbonize its business.

In Sweden, Aker Carbon Capture secured a study to help Soderenergi decarbonize the country's second largest biomass combined heat and power plant. This project offers the potential to capture 500,000 tonnes of biogenic emissions from Soderenergi's facility at Igelstaverket. This is close to Stockholm.

In Europe, we continue to strengthen our foothold in the waste-to-energy sector with a new study for a waste-to-energy player with a capture capacity between 200,000 and 400,000 tonnes per year. Together with our client, we will explore options across the Just Catch portfolio for this study.

We also secured two Just Catch Offshore studies, including one for Petoro's Power Hub in Norway, targeting 720,000 tonnes of CO2 per year. Last October, Just Catch Offshore, our modular facility for offshore installations specialized for offshore gas turbines was successfully qualified by D&D, the global independent energy and assurance provider. The unit is now ready to be deployed in offshore oil and gas fields where it can significantly reduce emissions from offshore power generation.

Finally, the policy backdrop in Europe showed a clear step-up in the quarter, specifically in France, which released its carbon capture storage and utilization strategy as a part of its aim to reach carbon neutrality by 2050. And Germany, where the government released funding programs for climate protection contracts. These are important steps to realize and accelerate the broader industrial decarbonization across the continent.

Then to our pipeline. When we launched in 2020, we set an ambitious target to secure contracts to capture 10 million tonnes of CO2 by the end of 2025. As before, we're visualizing the progress towards this target across four categories; secured development contracts, secured FEED contracts and tenders for development contracts, FEEDs, pre-FEEDs studies and mobile test unit campaigns, and finally, our prospects.

Here, the 1 million tonnes represent our already secured contracts with Heidelberg Materials, Twence and now also Orsted, which was awarded this quarter. This is important progress that shows that we're able to successfully convert our four pipeline of opportunities into secure work, with timing of course strongly influenced by the pace of the market itself.

Then our tenders and FEEDs, which now stands at 6.6 million tonnes. This reflects net zero Teesside Power and SEE Keadby 3 (ph) and also includes ongoing tender activity for development contracts. This category is slightly lower than the last quarter, which reflects the progression of Orsted to secure the contract status and some new work in Europe, offset partially by one tender that is currently on hold in another region.

Also in the quarter, we've seen a continued growth in pre-FEED studies and mobile test unit campaigns. This category now totals 16.7 million tonnes, up from the last quarter, reflecting one pre-FEED moving to the tender phase, offset by new study work, both in the U.S. and Europe.

To give you an indication of our progress in North America, our study intake during the second quarter includes roughly 1 million tonnes per year from the U.S., and we see something like 2 million to 3 million tonnes per year that could become study work over the next three months to six months.

Now we move on to look in more detail at our operations and business development. In Aker, we have developed carbon capture technology since the late 1990s. And over the 15 last years, we've been scaling, industrializing and commercializing our technology and products. This has been an essential part of our journey.

Scaling from a pilot plant to an industrial size plant was demonstrated already back in 2012 when we delivered the technology center Mongstad in Norway with a capacity of 80,000 tonnes of CO2 per year, 80 times the size of the mobile test unit.

Through standardization, modularization -- and modularization, we are in a position to deliver similar plants today, such as the Just Catch of 100,000 tonnes of CO2 per year. We're delivering this to Twence already today with a footprint and cost which is close to 90% lower when you compare it to the plant from 2012.

And now Orsted CCS will be the first proof point of serial production of five Just Catch 100 units. In addition, we're delivering a Big Catch Brevik CCS. This is 4 times the size of the Just Catch. We're delivering also two FEEDs for mega scale carbon capture facilities for the gas-to-power segment in the U.K., each of them 5 times the size of the Brevik plant.

Our technology is proven, scaled and industrialized. So let's have a closer look at the projects we are building right now. Through the past quarter, we've seen high mobile test unit activity. We finalized the successful campaign at CO2 Hub Nord, Norway, where we tested and verified our proprietary technology on the flue gases of Elkem smelter and SMA Mineral's calciner. We achieved high capture rates, both on Elkem's low CO2 concentration and for SMA Mineral's higher concentration flue gases.

Together with several leading industry and research partners, we've initiated the EU-funded Aurora solvent research project. This project offers the opportunity to test our absorption technology with the open-source solvent CESAR1 at Heracles cement plant in Greece and at the Umicore materials recycling plant in Belgium. The ambition is to further strengthen Aker Carbon Capture's world leading position in providing amine-based CO2 capture solutions and derisking solvent technologies.

In the Netherlands, at Twence's waste-to-energy plant in Hengelo, we are delivering solid progress. All major equipment has been installed, including three columns and the Just Catch containers. Currently, the installation and piping and cable pooling is taking place. And we are rapidly heading towards the planned delivery at the end of this year. Aker Carbon Capture is delivering a standardized container based Just Catch, which is first-of-a-kind. And the capture plant will be delivered by the end of this year, capturing 100,000 tonnes of CO2 per year.

Just to give you an example of the efficient installation process, the container modules were transported through the gates at Twence's facilities at 9:00 AM in the morning and they were installed within the same day. The following week, the installation team has started hooking up the platforms, support steels and had started connecting piping. And for those of you who remember, I also mentioned this during our Q1 presentation. But as the time efficient deployment of our modular units is a clear differentiator in the industry right now, it's worth a reminder.

Also, at Brevik CCS, we're making progress. All waste heat recovery units and the internals of the direct contact cooler have been installed. All the columns and CO2 storage tanks are on site. Installation of piping is ongoing in the various modules. On the image, you see the ongoing installation of pipe spools and associated pressure testing in one of the Brevik CCS modules.

The installation work will gradually accelerate during the second part of 2023 as more equipment arrives. When complete, the plant will be ready to capture 400,000 tonnes of CO2 per year. And Orsted, we've already discussed. However, I just wanted to add that last month we both signed the contract with Orsted and we placed several of our key purchase orders already. The planned delivery of the five Just Catch units is at the end of 2025.

And in the U.K., the U.K. remains a very important market for CCS and one that is moving towards some important decision points in the next six months to 12 months. At the end of March, the U.K. government confirmed which projects proceeded to find negotiations for Track-1. And this is the Track-1 of government funding and highlighted the potential for further projects to move forward on the Track-1 expansion and Track-2 processes.

In the U.K., Aker Carbon Capture is the capture provider for FEED for BP's net zero teesside power and the FEED for SSE Keadby 3 and the pre-FEED for Viridor's Runcorn CCS, all potential mega scale carbon capture projects. Both BP's and Viridor's projects are now in the final negotiation stage with the U.K. government for Track-1 funding.

For SSE's Keadby 3 project, the U.K. government will launch a process later this year to enable expansion of the Track-1 clusters beyond the initial eight projects announced. This aims to identify and select projects to join the high net and East Coast cluster, including the Humber where Keadby 3 is located and their associated storage facilities as they become viable with a clear aim to be operational by latest 2030.

These projects in the U.K. are important steps forward for the delivery of our license and key equipment offering from mega scale carbon capture plants where for both the BP and SSE projects, we are the capture partner to a consortium of Aker Solutions, Siemens Energy and Altrad Babcock.

Now I will take us through our delivery models and financials. We have two main approaches; Just Catch and Big Catch. And importantly, we're now highlighting our expanding range of carbon capture units built around our modular Just Catch offering. Our modular carbon capture plant is based around our configurable container and skid-based Just Catch design. It comes with standard capture capacities of 40,000 tonnes, 100,000 tonnes and an offshore optimized version.

In addition, we are introducing a Just Catch of 400,000 tonnes, a concept for which we shared for the first time today. Several Just Catch modules can be installed in parallel trains or allow a higher total capture capacity. For instance, up to 300,000 tonnes of CO2 per year based on three Just Catch 00 units in parallel. In the first quarter, we launched our third-generation Just Catch 100, which comes with improved energy efficiency and even smaller footprint and fewer modules compared to the previous generation.

We delivered the Just Catch on an EPC basis or to be even more accurate, due to the high level of standardization under a Just Catch supply agreement. This is the Just Catch's standardized offering where we prefabricate the modules with limited customized scope, its delivery carries lower risk and potential higher long-term margins than typical full EPC projects.

We also see the potential to improve margins further over time as we gain experience through serial production of Just Catch units. This modular market offers a very large opportunity. Our view of the market shows that emitters with between 100,000 and 500,000 tonnes of CO2 per year account for around 3,000 industrial plants across Europe and North America.

Our Just Catch unit is also the key to our carbon capture as a service offering, where we are -- where our customers simply pay per tonne CO2 capture. The standardized nature of these units make them attractive investment objects for yield companies and infrastructure funds who purchase the units on the supply agreement from Aker Carbon Capture and lease them back to us or to the emitter for a stable return. The model allows us to provide and operator the Just Catch for the emitter on a pay per tonne basis, supporting our long-term aftermarket revenue ambition.

Our Big Catch offering is focused on carbon capture capacities beyond 400,000 tonnes and up to several million tonnes per year of CO2. Right now, we're delivering Brevik CCS on an EPC basis. But in the future, we will offer large Big Catch plants on license and key equipment packages. This is in line with our contracting model for the U.K. projects outlined earlier, where we can be the carbon capture provider directly to the end customer or work with a designated EPC contractor.

As a rough guidance, you could expect the license and key equipment contract size to be in the range of 1/3 of a full EPC delivery, but with a higher long-term margin potential. And the Just Catch Offshore is a modular design specialized for offshore gas turbines on FPSO vessels. Today, the Big Catch offering dominates our revenues, which is natural with the ongoing major Brevik CCS project in its construction phase.

However, over time, we believe that the revenues from Just Catch supply agreements can become as large or even larger than the revenues from Big Catch. As a final reminder, we do offer aftermarket services, solvent management and supply to all our clients across all our offerings. Aftermarket revenue streams are expected to pick up over time, in line with our growing installed base of Just Catch and Big Catch units.

Since the third quarter of 2021, we've shared updated quarterly estimates for the levelized cost of the full value chain carbon capture as a service offering based on our modular Just Catch unit. Given our interest and activity in North America, we've now also started sharing our estimated figures for the North American market. Please note that the numbers are in both euro and USD depending on the part of the chart that you're looking on. And for reference and simplicity, we've assumed roughly equivalents between the two currencies here in this slide.

For our European delivery model, the full value chain range is unchanged since the last quarter between EUR75 and EUR175. This has been stable for the last quarters and validated by our ongoing Just Catch deliveries. For North America, we see the potential to realize lower costs across the value chain, mainly due to lower transport and storage costs, but also lower operating costs. This gives an overall levelized cost range between $55 and $120 per tonne for that market, which you have many projects within the $85 that is a potential credit achievement today.

I will now take you through the key financial highlights of the first quarter before we move on to our summary and Q&A. Bear in mind that all numbers are mentioned in Norwegian krone. Let's start with the income statement. Overall, revenue for the second quarter was NOK305 million, which is up 57% compared to the same period last year. The growth is mainly driven by Big Catch and Just Catch projects, including the commencement of Orsted Kalundborg CCS project. The ongoing FEEDs, pre-FEEDs, studies and MTU campaigns also contributed to revenues this quarter.

Our reported second quarter EBITDA was negative NOK53 million, which is NOK4 million lower compared to the same quarter last year. Big Catch and Just Catch projects contributed positively in the quarter. However, for the Orsted Kalundborg CCS project, profit has not yet been recognized. The overall negative EBITDA continued to be driven by high sales and tender activity and R&D activity.

Our second quarter net current operating assets ended at negative NOK526 million, which represents a continued positive cash position on our key projects. Overall, operating assets and liabilities or net capital employed, which includes fixed and tangible assets was negative NOK352 million. This shows that both our short and long-term business activities are funded by our working capital position. We continue to have a healthy cash position of NOK1.1 billion and this could cover all of our liabilities 1.7 times. And finally, our equity remained strong at NOK0.8 billion.

We started the second quarter with NOK1,348 million in cash and cash equivalents. Through the quarter, we saw an overall cash outflow of NOK210 million. The main driver was vendor payments on key projects represented by NOK146 million net current operating asset outflow, loss before tax of NOK46 million and CapEx of NOK25 million, mainly related to our product development and the construction of a second mobile test unit. In total, cash and cash equivalents ended the quarter at NOK1,138 million. These were the highlights of our historical financials.

And now let's have a look at the outlook ahead. So other than the strength in backlog, our financial outlook remains broadly in line with the outlook presented in the previous quarter. Our backlog ended the second quarter at around NOK3.3 billion after securing the Orsted Kalundborg CCS contract. A year of execution, we see this work at roughly NOK1 billion for the rest of 2023, around NOK1.2 billion in 2024, and another NOK1.1 billion in 2025 and beyond. As a reminder, order intake are only included in the backlog once a firm contract award has been announced.

The profit margin is expected to improve in due course with the Orsted Kalundborg CCS project and further over time with the benefits of serial delivery of multiple Just Catch units. The salary and personnel cost is expected to increase gradually with our activity growth, whereas our other operating expenses and CapEx are expected to remain around current levels through the next six months to 12 months.

We continue to show a strong liquidity position, ending the quarter with a net cash position of NOK1.1 billion, which is expected to remain around these levels through the year. And please note, as usual that these comments do not include any assumptions for cash spend on M&A or additional investment opportunities that might arise going forward and might be subject to short-term working capital fluctuations.

Now let me share with you a short summary and our way forward. We have set a clear direction to position for the huge market ahead of us. We're here to accelerate planet positive through carbon reduction and removal. We've prioritized the European market in four segments; cement, bio and waste-to-energy, gas-to-power and blue hydrogen. And we see opportunities in other segments as well, such as refining and process industries.

We've articulated a strategy with a focus towards entering North America and we're now exploring also our position in the rest of Europe and the Middle East. Our proven technology is market-leading. We will further improve our energy efficiency and capture rate and increase our focus on new technologies going forward. Through standardization and modularization and digitalization, we're expanding our cost efficient product portfolio.

Cost reduction through serial production and working together with strategic suppliers is an important part of our journey. We will continue to offer EPC or that is Just Catch supply agreement at slightly lower risk than normal EPC and license models with key equipment for Big Catch. The supply agreements are for the Just Catch. All these will be followed by long-term service and solvent supply agreements.

And also as a part of our aftermarket services, we can offer solvent and performance management and optimization, digital operations and maintenance. For the Just Catch, we are also bringing the full CCUS value chain together through carbon capture as a service. And to meet the expected high growth in the market, we will continue to build strong partnerships.

Finally, we are building our company through purpose-driven people. We are making carbon capture happen now. So by delivering on our ongoing projects and setting ambitious carbon capture targets, we are in a strong position to make a positive impact on our planet and help our clients drive a sustainable future.

Thank you. And now we move on to the Q&A section of our meeting.

Question-and-Answer Session

A - David Phillips

Okay. Thank you for joining our Q&A session. I hope the rest of the presentation went well for you. As always, we have an electronic system online to run through our questions. We will take them in order. Hopefully, we'll try and get through all of them in the time. But let's get things going. So first question. First question from [indiscernible] asking about utilization in CCUS. Maybe I'll take this one, it's a relatively short question whether we're involved in CCU as well as CCS?

We are really involved in CC, so the carbon capture piece. The U and the S really are the drivers of our demand. We actually are involved in a CCU project with Twence. So as you would see on the slide in our presentation, that is a CCU project. We are capturing the CO2 with our equipment. And then our clients, our customer, Twence will use to capture CO2 to go into the local commercial market, the CO2 in Holland, and that's actually going into horticulture. So we are involved in that. We don't have any specific utilization technologies under our umbrella at the moment. But for us, we're really, really focused on the carbon capture piece.

Jumping over, so we have quite a number of questions from Kerry Elizabeth Hardved (ph) now. So backlog, looking at the backlog progression has obviously jumped up quite a bit since we last reported. I guess, the question is, does this order intake come from Orsted or is there anything else in there?

Egil Fagerland

This quarter, the majority of the order intake comes from Orsted, that's clear. But we also have quite a few studies in the period, which is important, but they're not of the same size, of course.

David Phillips

Absolutely. Next question from [indiscernible] looking at the concept page. The Just Catch concept we talk about do not mention license key equipment. Why this is different from Big Catch?

Egil Fagerland

So for the Just Catch offerings, we are building the full capture facility as a full offering, a standardized unit and plant. So when you buy such a plant, you also get it with a license to operate it and run it and utilize it the way you want. However, for the larger scale plants, we offer it on a license and key equipment basis, meaning that we will work with the end customer or the EPC to deliver the design package, the license to use it and the key equipment you need to use it in one package to the end customer or the EPC that we would be working with to build it. So we wouldn't build those major scale plants ourselves. We would let someone else do that, another EPC company.

David Phillips

Absolutely. Last question in this group here is a backlog. So we -- on our backlog phasing in the financial section of the presentation, you've probably seen that phasing over '23, remainder '23, '24 and '25 of NOK1.2 billion backlog in 2024. Does that reflect the remainder of Norcem Brevik and Orsted alone?

Egil Fagerland

It's not those two alone, but those are the major drivers next year. There's also some backlog related to other activities such as mobile test unit campaigns.

David Phillips

Yes, absolutely, but they are very much dominated by the two contracts. Absolutely. Okay Moving on. Victoria from RBC, working capital. We guided previously to outflows during H2. How should we now think about working capital through H2 this year, 3Q and 4Q?

Egil Fagerland

So as we said in the presentation, the working capital through the second half this year we think will remain around the same level that we have today or the cash position will remain around the same level. The working capital will move slightly as we progress the projects, but it's not going to change significantly. However, there might be periodic timings where early payments or late payments can fluctuate that number a little bit. But you should think about it as a gradually changing number. But as long as the cash position is fairly stable, the working capital should remain fairly stable as well.

David Phillips

Absolutely. Good alignment. And Victoria's next question is really around modular. Are we seeing wider interest and acceptance from modular solutions? And also, are we seeing the costs move lower for these modular solutions versus, let's say, the full cycle costs we talked about in our capture as a service levelized cost model?

Egil Fagerland

With the projects we are delivering right now, both the Twence project and now also Orsted, we have validated that we're within the range that we are sharing. And our ambition is of course to drive down that cost over time. Serial production is one of those elements that can help drive it down. What we are aiming for now is to move it within the range that we're seeing into the lower end. So I don't think you can expect to see a major change down from the range that we are already showing because we are showing that by delivering 5 or 10 units of these. That's how we can drive it down to the lower end that we are showing you already.

David Phillips

Absolutely. Worth remembering on that levelized cost diagram, I mean, when you're talking about Just Catch, the original Just Catch was the great, great grandchild of Mongstad which we built in 2012. And that is effectively is 90% smaller and 90% cheaper than its great, great grandfather. So a big change already. And just on the comment about wider interest, I mean, it's a new market. So this is -- there's a lot of precedent. But clearly, what modular offers potentially, as Egil was explaining, is the lower cost, also quick delivery, less engineering challenges for the customer in terms of pre-discussing some of the details around the plant and so on.

The level of interest in the market, I mean, we talked -- I think you talked a little bit in the presentation about our own work. But there's a report out looking at, let's say, the small and medium-sized industrial emitter world. And there are -- I think it's somewhere like over 75% of all the plants that you look at in North America and Europe, there are emitters fall into this, let's say, small and midsized categories, so between 100,000 and 1 million tonnes a year. And there's about 4,000 facilities under that umbrella.

And if you look at the ones between 100,000 and 500,000, so between 100,000 and 0.5 million tonnes a year, which is a very good fit for our growing modular portfolio. And those ones -- I think there are around 3,000 plants. And there's a usual mixture of industries in there, all the usual suspects of gas-to-power and some cement and waste-to-energy and so on. And that's really what's really exciting for us in this. It will always be about when the storage starts as always. But the ability to fit our offering to that market is really, really very exciting. But we'll talk more about that in the quarters to come.

Okay. Moving on. We now have from George Sherman (ph), asking about giving a rough estimate of the size of opportunities developing in North America and the Middle East.

Egil Fagerland

Yeah. So let's start with the Middle East. I think it's a bit early to say something about the size of the opportunities. What we do know is the Middle Eastern region will probably account for 10% to 15% of the emissions that needs to be reduced to reach the UN's climate goals and ambitions that we have. However, we know a little bit more about the North American market and that's where we are really focusing now to get in and to take a position.

And our assessment of the addressable market for Aker Carbon Capture is close to 2,500 million tonnes. So it's enormous market for us to address. And then for us, the task becomes finding the right angle to attack that market and find the projects that can actually move forward earlier rather than later. But it's a huge market and the set of opportunities it's vast in the North American region.

David Phillips

Absolutely. And that 2.5 million is roughly half the overall U.S. footprint. I think vis-a-vis roughly about 5%. But in that mix, there's a lot of -- I mean, the reason -- one of the obvious reasons why we think it's such an interesting market is there are a number of industries there that are a good match with our experience, what we've done over the last 15, 20 years.

Okay. So let's jump on. Rachel Fletcher. Congrats on the new role, Egil.

Egil Fagerland

Thank you, Rachel.

David Phillips

So a number of questions here, really around the U.K., so this may well fall to me for the moment. So final negotiations for funding for the U.K. Track-1 clusters, when can we expect a decision? What's the timeline moving forward with expansion? And what data points should we really look for?

So the U.K., as we mentioned in the presentation, there are some very important events that will come in the next six months, 12 months, no question. Back from the announcement to the end of March, end of Q1, on the 8 projects moving forward as part of Track-1. We knew then there was going to be a bill going through parliament. We knew then there would be an expansion plan announced later this year for Track-1, which is able to include other projects linked to the storage auctions for the Northeast and Northwest. We also know there's going to be some update around Track-2, which will bring in at least 2 other clusters in the U.K.

Now since then, I would say, there's not -- there's been a lot of discussion. The bill is moving through parliament very well, being through the committee stage. There's not been a lot of new news, although the noise around an update on Track-2 is very clear. And it feels like late summer you're going to see Track-2 come out in some sort of detail in terms of timing, which is what everyone is asking in the industry is we want some firm timelines around when those will happen. The Track-1 expansion has not been mentioned as obviously, but we expect it probably isn't the same breadth.

I guess the question is, what is that expansion? Is it a guaranteed next step or is it another sort of additional process to go through to select other projects for that list, but let's see. It doesn't want to look for. I think some of it's always quiet, you're not very far away from the U.K. parliament recess. So really you're looking at late summer for the real noise to pick up again. There's the parliamentary conference season coming up in early October.

So normally, after summer, there's normally a bit of a rush of noise ahead of the conference season. So we would -- and this is just a personal view. Expect to see more updates coming out in the late summer, maybe towards the end of Q3 around -- especially around Track-2. The tender that's been put for hold. There's a question on our progress chart. We talked about one tender being put on a hold in that segment. What was behind that?

Egil Fagerland

So we are continuously updating our pipeline and keeping it live. So what you see in this pipeline is real FEEDs, real tenders, real studies and test unit campaigns that we have performed and where we have active clients. Also the prospects are real prospects that we are working on. And when we remove something from the tender pipeline, it's either because we've lost the job or because it's been put on hold or they've changed their strategy. In this particular instance, there is one client in another region, not one of our core regions, that doesn't see line of sight to funding or moving this project forward in the short-term, so they've put it on hold.

And when they put it on hold, we've taken it out of that tender list for now. It might come back. But at this moment, we're showing that that pipeline is a little bit smaller. And the reason to show you that is also so that you can see that there's a reasonable timeframe for that to potentially convert into secure contracts. So it's kind of trying to keep it alive so that both us and you can see the visibility that we are working towards.

David Phillips

Absolutely. And next question from John de los Santos from Redburn, asking about Just Catch 400. How would a hypothetical Just Catch 400 project compare with Brevik CCS, for instance, in terms of CapEx, OpEx, time to market, risks and so on?

Egil Fagerland

So it's very difficult to compare specifically to that project. But comparing Just Catch 400 versus a Big Catch approach is, when we are ready with the client to deliver Just Catch 400, it will be a standard offering with a product design, meaning the engineering, the Big E that we do in an EPC is much less. We've already designed the units, so you know what to build. So once you're at that stage, it's probably around 36 months to deliver a project the first time we do it. And that's a rough estimate for me right now and we'll see when we deliver the first one.

In terms of CapEx and OpEx, it's a bit early to say exactly what those numbers will be. What we do believe is that there will be some scale effect per tonne on the OpEx side and there will be some scale effect on the CapEx side as well when you're building one larger unit rather than four units in parallel. However, building three Just Catch 100 could in many cases make more sense or the same sense as building a Just Catch 400, which is why it's very important that we do studies with our clients and help them understand what's the most optimal selection of products when they work with us.

David Phillips

Yes, exactly. And on the OpEx front, of course, as you all know, the energy cost is a major input and probably the largest single piece of the OpEx of our life. And so to the extent to which you can recycle waste heat from our plant and also from the plant you're capturing CO2 from that is always going to be a major driver of keeping that net OpEx number down.

And he also asked the question around, does it lower the bar materially in terms of breakeven carbon price? I think number one, this does not reflect to Just Catch 400, but one comment, one of our colleagues said I think last year was, if you went from purely non-modular to modular, just the simplification and the derisking of the construction phase going from piece-by-piece construction to hook-up and so on, you could probably take 20% to 30% of the cost, something like that. But that's a very, very high level rough number which probably has engineers cringing. So it's...

Egil Fagerland

And of course, over time, we will see that as we deliver more of these units, costs will come down. So now we're on a strong journey with a Just Catch 100, currently delivering six units, five of them, we will be able to deliver in a serial, and that will help. And the same I think we will see when we start delivering Just Catch 400 and selling those to the market, delivering more of those, getting that serial production experience with a larger standard modules as well will take down the cost curve. I'm very confident about that.

David Phillips

Yeah. Absolutely Next question, U.S. strategy. Can we expand of our plans to enter the U.S. market, especially in terms of potential partnerships?

Egil Fagerland

So what I can share right now is that we are in dialogue with several potential partners in North America. But we're also working with our existing partners such as Microsoft and Siemens Energy to find good angles to enter that market. So I think that's about what I can say in terms of more specific partnerships, but we are fairly well known. When we go out and talk to potential partners, most of the companies that are interested in carbon capture have heard about us. Although we're a Norwegian European-based company, we are also fairly well known in North America by both investors and potential partners on the industrial side. So that's quite interesting. And we are engaging with many in good dialogues right now.

David Phillips

Absolutely. So a question from Victoria again at incoming inquiries. Have we seen more incoming inquiries from customers in the quarter? And where do we see the near-term opportunities in terms of contracts, either market or geography?

Egil Fagerland

Yes, we have seen more incoming work, both on the study side and also on the prospect side this period. And we see that increasing now almost quarter-by-quarter, we can say that we're increasing the activity. What's particular about this quarter has been biogenic projects. So on the back of our Orsted award, we've won several studies from emitters with a biogenic CO2 source. I think that's quite interesting. Both in North America and Sweden, we have several of those.

And also on the Just Catch offshore side where our products can help decarbonize offshore industry and then both in Norway, but we're also seeing traction in other regions. So those are the main areas where we've seen the increase compared to earlier. And we've also had quite a good number of studies coming in every quarter. So it's an increase in these particular areas.

How fast we can convert jobs, I think if you look at our pipeline chart, we have 6.6 million. Within six months to 12 months, most of that should have converted into real jobs, either they might be put on hold or lost. So there's a -- over the next 12 months, you will see a lot of decisions, especially in the U.K. So I think that's something we are looking forward to and we're working hard towards.

David Phillips

Exactly. Okay. Moving on. Mr. Jones from Nordea, gross margins. Do we expect gross margins to increase from Q2 levels even prior to Orsted profit-taking commencing whenever that might happen?

Egil Fagerland

I think I mentioned this last quarter as well. But given that we are a project business, the normal way you do project accounting is that you have your estimate to complete. And when you're fairly certain about that, you start recognizing profit. Many times that will result in a catch-up effect the first quarter or the first couple of quarters that you do it and then it will stabilize around the level that you're delivering at, at the moment. And currently, we're delivering a couple of stable projects and we have Orsted, which is in the beginning phase.

So until you see Orsted coming into the books with profit recognition, I don't think you should expect to see increase in gross margins. They are fluctuating a little bit in the periodic numbers depending on the number of FEEDs, the MTU campaigns and other factors as well, the progress on procurement and such like. But overall, you should expect that to remain fairly stable until the next project has an uplift or if one of the ongoing projects has a change.

David Phillips

Absolutely. That’s fine. Very clear. And also from his side, do you think -- can you also share some thoughts around storage capacity? What's the sort of available storage capacity by 2025 in Europe and North America? Maybe I'll have a go at this as well.

Egil Fagerland

You can have a go, I can have a think about it. You start there and I'll follow.

David Phillips

I mean, I think -- well, firstly, I'll say 2025 is quite near-term, because don't forget, even if you asked us a year ago, we would have said, well, you have Norway we'll have starting in '24, '25. You have Denmark and Netherlands more like '25, '26. And you have the U.K. more like '26, '27. So already by '25, the U.K. -- sorry, the European footprint is really quite small. If you think about -- I think it's just over a year ago, we talked about our TAM, our total addressable markets in Europe. And we talked about that sort of 1 billion plus CO2 per year footprint of everything, then which drops down to 250 million tonnes per year.

If you think about what is actually in the right place to join up with some of the industrial clusters being done in the U.K., Netherlands, Denmark and so on and also the ones that could join up via marine transport, all things being equal. And I think that's -- so that 250 million at that point, and this was over a year ago, I think we reckoned there was something like 50 million, 60 million, 70 million tonnes of storage in development in the next, let's say, by later this decade. That number has expanded. That number has gone up to between 80 and 100 million now.

So there is more coming. And there's also, I would say, at least from our perception, a good understanding from policymakers that this is really the big speed bump they have to accelerate. So you have the EU talking about a minimum of 50 million tonnes a year by 2030 and that doesn't include Norway, doesn't include the U.K., as you all know very well.

So in that picture, it's catching up, but it takes time. I mean, there's regulation, there's testing and monitoring details to sort out, there's all the usual, if you like, reverse oil and gas, as someone described it to us once, work to do around seismic and drilling and stuff over the offshore plan. So it takes a while, but it is catching up. I guess -- I mean, my only -- I'd say my gut feel on the North American side, it is early days, but it could grow given the onshore potential, especially, you will see that pick-up speed quite quickly. And it probably is the company [Indiscernible].

Egil Fagerland

There's quite a few planned projects in the U.S., but still getting those Class 6 wells, which is the type of well that they need to get in place, permitting for that typically I think will take one to two years. Some are already in motion. So there might be some fields that are already earlier. And then offshore as well, there will be some development, but I think majority in the U.S., you're going to see onshore CO2 storage.

And also, I think it's encouraging to see in Europe, both in the U.K., in Norway and other areas, licensing for CO2 storage fields are becoming more and more active. So I think this market for storage will come. I think 2025, 2026, we're going to see a larger increase than '24, '25. So that's the real important period, '25, '26 when we really hope to see a lot more storage capacity come online.

David Phillips

Yeah. Interesting question from a shareholder here, asking about our whole process. So obviously, you are now in your new job. Who are the candidates or what can you say about candidates for taking over the CFO role?

Egil Fagerland

So I think I can't say much about the candidates in that process, that is not up to me. So I'd refer you to the Board and the Chairman for those specific questions. What I can say is, I was very happy this morning to confirm that I was accepting this offer and really eager to take on this task and very humbled to be able to lead such a dedicated team that we have at Aker Carbon Capture.

David Phillips

Absolutely. Thank you. Last question. And by the way, if there are any pending questions, once we finish, we will finish, you know what I mean. So if you have any burning questions, then put them in a system in the next couple of minutes. Otherwise, we'll be off for our dinner. So a question at looking -- is asking about Just Catch. How do you go about pricing Just Catch modules? Is it based on achieving a certain margin? What are the main drivers?

Egil Fagerland

So for pricing Just Catch modules, first of all, we need to understand what the cost to build them are. So that we know fairly well now. We're delivering 6 units. So then it's all about helping our clients find a way to make this profitable without us also losing money. So we don't necessarily drive this by margin in every case. Sometimes we look at what's needed to win the project together with the client and then we also secure a margin as a part of that.

But the most important for us now is to make sure that the projects get started and that the clients often in the collaborationship are able to get through their application process to win money. So I would say, the Orsted project where we've been working together with Orsted and Microsoft to make sure that they receive the Danish funding and deliver the best solution possible is an example of that how we work together and how we will be able to generate also profit because of the serial delivery and the standardized nature of the product.

David Phillips

Okay. That was the last question. So I think that really leaves it to us to say thank you so much for your attention. Well over 100 people on the webcast today, a very good audience, and thank you for your interest. We are well aware it's summer time, so some people are on whole day already. If you joined for a whole day, that's even bigger thank you. But look, we really appreciate the interest and we look forward to keeping contact.

And of course, we are now at a close period. So if you want to follow-up, please get in contact with me initially. If you haven't spoken to me before, if you look on our website under Investor Relations, you can see my exact details of my email and everything else. So just getting contact. But otherwise, thank you again and we look forward to speaking to you in the next quarter or so.

Egil Fagerland

Thank you.

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Aker Carbon Capture ASA (AKCCF) Q2 2023 Earnings Call Transcript