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Executives

Bunny Nooryani – Chief Communications Officer

Øyvind Eriksen – Chairman

Leif Borge – CFO

Analysts

Frederik Lunde – Carnegie

Haakon Amundsen – ABG Sundal Collier

Eivind Tønnessen – Swedbank First Securities

Simon Sigvardsson – DNB Markets

Terje Fatnes – SEB Enskilda

Tord Augestad – Arctic Securities

Phil Lindsay – HSBC

Christyan Malek – Nomura

Mukhtar Garadaghi – Citigroup

Mick Pickup – Barclays

Alex Brooks – Canaccord

Daniel Råvik – Handelsbanken

Amy Wong – UBS

Asad Farid – Berenberg Bank

Aker Solutions ASA (OTCPK:AKKVF) Q2 2014 Earnings Conference Call July 17, 2014 3:00 AM ET

Bunny Nooryani

Good morning. Welcome to Aker Solutions’ presentation of results for the second quarter of 2014. I am Bunny Nooryani, Chief Communications Officer here. And with me here today are Øyvind Eriksen, our Chairman; and Leif Borge, our CFO. They will go through the developments in the quarter.

As a safety precaution, I just want to point out that the emergency exit is on this floor. You go out the door there and continue going straight forward and out of the building. But please note that we don’t have any fire drills planned today.

Øyvind, I’ll leave it to you.

Øyvind Eriksen

So good morning, and welcome to the current Aker Solutions’ very last earnings presentation. Today I will go through the quarter that was, but even more importantly we will also go through what we’re going to become.

In April, we announced plans to split the current Aker Solutions in two. The purpose is to reduce complexity, realize synergies and to drive down costs. The separation demerger is set to be completed in September this year by listing of the two new companies on the Oslo Stock Exchange.

One company will be an integrated Field Design and Subsea business, consisting of our Subsea, Umbilicals, MMO and Engineering businesses. This company will keep the name Aker Solutions.

The other will be an Oil Services Investment Company named Akastor. Its portfolio will include businesses such as Drilling Technologies, Process Systems, Surface Products, Aker Oilfield Services, as well as Business Solutions, Real Estate and the Financial Assets.

With the split fast approaching, I know that many of you are curious to learn more about both the financial figures and the prospect for the two new companies. That’s why I planned to go through not only the second quarter for Aker Solutions as it is to-date, but also for the performance for each of the two new companies.

And let’s start with the New Aker Solutions. After the split, this will be a much more streamlined company with two external reporting segments; Field Design and Subsea. The New Aker Solutions’ pro forma figures for the second quarter show the following development.

Revenue rose to NOK 8.1 billion. The EBITDA increased to NOK 592 million. The margin widened to 7.2%. The order intake more than tripled to NOK 21.4 billion, bringing the backlog to NOK 54 billion for the New Aker Solutions at the end of the second quarter.

This is satisfactory performance, particularly the orders which were helped by two major subsea contracts; the first, an order worth NOK 14 billion from Total to provide the subsea production system for the Kaombo development in Angola; and the second, a contract worth almost NOK 2 billion from Petrobras to supply subsea manifolds for Brazil’s pre-salt fields.

The pro forma figures also show that the New Aker Solutions will benefit from two strong reporting segments; Subsea, which going forward will include our Umbilicals business accounted for 58% of revenues in the second quarter, while Field Design represented the vast.

Sales in Subsea were NOK 4.7 billion, up 13% from the year before. The units EBITDA margin widened to 11.1% as we improved performance at our Umbilicals plant here in Norway and made good progress in subsea projects in both, Norway, the U.K. and Brazil. Subsea’s order intake jumped to a record of NOK 18.5 billion. This bought the backlog to NOK 38.4 billion for the new Subsea business area and reporting segment.

We are of course pleased with the huge increase in orders and we are more than ever focused on ensuring the best possible execution of the projects in the current Subsea order backlog.

The Field Design reporting segment, which will consist of the MMO and Engineering units wasn’t quite as strong as Subsea in the second quarter. Revenue rose to NOK 3.5 billion, helped by increased sales in the Engineering business. Still the EBITDA margin narrowed to 4.2% from 7.5% a year earlier, driven by weaker performance in MMO which had overcapacity caused by slower market in Norway and issues with final settlements on some projects.

This disappointing quarter for MMO was somewhat offset by a positive development in Engineering, which show its margin widened to 9.2% as we made good progress on major projects, and have better capacity utilization in our new engineering hubs both in London and in Houston, Texas.

Also on the plus side, Field Design order intake rose 17% in the quarter as MMO secured two new framework agreements. One was a contract with BP in Norway worth up to NOK 1.8 billion during the next two years. The other was a five-year agreement with Statoil to provide MMO services for their Mariner oilfield in the U.K. Both agreements had extension options for up to four additional years.

Regardless of the order intake, we’re not satisfied with the recent margin development in MMO, and we’re taking actions to reduce costs. We are transferring about 100 MMO staff to a new subsea, engineering and product management hub in Stavanger. And we have already moved another 100 employees to our recruitment agency, Aker Advantage, which will seek to find employees new jobs inside or outside the Aker Group. The agency will be a part of Akastor going forward, and Aker Advantage will assume all costs related to the set employees effective from July 1 this year.

Finally, we’re pursuing new business opportunities with a Sidam [ph] field development as the biggest opportunity short term. A successful outcome of the tender process during the course of this quarter will be key to maintain our current MMO capacity and competence.

So let’s move onto Akastor, which will operate and trade in this great new logo. The second part of pro forma key financial numbers for Akastor were; revenue NOK 6 billion and EBITDA loss of NOK 129 million, and EBITDA margin of minus 2.2% and order intake of NOK 4.6 billion leading to a backlog of NOK 13.9 billion at the end of the quarter.

The EBITDA was of course impacted by the impairment costs of OMA assets announced last Friday. Adjusted for these one-off charges, the EBITDA was NOK 322 million in the quarter and the margin was 5.8%.

Aker Oilfied Services was the weak performer in the Akastor portfolio in the second quarter, with an EBITDA loss of NOK 481 million in the quarter. The earnings were impacted by idle time for the Skandi Aker vessel and impairments of about NOK 1.6 billion of some assets and goodwill in the Aker Oilfield Services unit.

As announced last month, Total cancelled a two-year contract for the Skandi Aker vessel which had been idle since the end of March due to some technical issues.

We’ll now seek work for the vessel in the spot market while exploring longer term opportunities in parallel. We are also in negotiations about a possible contract in Brazil for the Aker Wayfarer Vessel. And we expect that tender process to be concluded over during the course of this quarter.

Both, Aker Wayfarer and the Skandi Santos vessel, Aker Oilfield Services’ third vessel had stable performance in the quarter contributing to revenue of NOK 613 million.

Drilling Technologies is the largest business in the Akastor portfolio, accounting for more than half of Akastor’s revenues. Sales in this unit rose 25% in the quarter from a year earlier, boosted by demand for single equipment and lifecycle services. Still the profit margin decreased to 8.6% mainly due to some execution challenges on some projects. The drilling market has slowed this year with new projects being put on hold. This impacted the order intake, which was lower than a year ago at NOK 2 billion.

Sales in Process Systems rose 7% in the quarter to NOK 567 million. The EBITDA margin narrowed to 4.2%, led down by low capacity utilization in some areas and high tender costs.

Surface Products which used to be part of Subsea is another unit to emerge as an independent entity within Akastor. The unit’s sales rise 7.8% in the quarter, bolstered by high demand in both Asia Pacific and the Middle East. The margin widened to 16.3% in the quarter.

Business Solutions is the second largest unit by sales in Akastor, with NOK 1.4 billion revenue in the quarter and 5.9% margin. The unit set up 10 years ago to provide key in-house support services. Today, it employs 1,500 people with specialist skills in areas such as payroll, recruitment, HR, IT, finance and more.

We see this business as scalable for growth with Aker Solutions, Akastor, Kvaerner and Jacobs as the four initial customers. Starting next month, Statoil too will be a customer as Aker Advantage recently signed a framework agreement with Statoil to provide personnel with engineering and technical experience. Akastor will also hold significant financial assets and property accounting for about 20% of its balance sheet.

In summary, the Akastor companies present a somewhat mixed bag in the second quarter, but also a great opportunity to invest in businesses with growth project and prospects in key markets across the world. The demerger of the current Aker Solutions is set to be completed in September this year, after an extraordinary shareholders’ meeting scheduled on August 12. So today, I will also for the very last time present quarterly figures for Aker Solutions before the split.

Combined for the current Aker Solutions, the earnings are as follows. Revenue rose to NOK 13 billion. EBITDA fell to NOK 429 million. The margin narrowed to 3.3%. We had an order intake of NOK 24.8 billion, bringing the backlog to NOK 67.7 million. Excluding the one-off impairment costs in OMA, the EBITDA was NOK 936 million and the margin was 7.5%. The numbers tell the past.

Let’s now touch on how we view the markets going forward. Capital discipline is the most crucial driver in E&P companies for the time being and is expected to remain tight over the next one to two years, after which we anticipate a next wave of offshore development projects.

Our job is to manage the balance between short-term capacity adjustments, while positioning ourselves for the next upturn cycle. The North Sea as you know, our home market and the NCS will continue to play an important role. Between 50% and 60% of revenue in the New Aker Solutions will be based on offshore Norway activities, and MMO will make up almost 30% of this.

It’s no secret that we have been seen a slowdown in the Norwegian MMO market, and we predict a challenging time in that segment over the next couple of years. But more broadly, we expect robust level of activity offshore Norway going forward. There is a strong pipeline of project, though with some risk of delay due to capital constraints.

Brazil is set to become the single largest offshore exploration and production region over the next five years with Petrobras planning large investments as it sees to double production by 2020. There are indications of strong demand for subsea equipment in Brazil that should be visible to the market later this year.

Most of the investments will be made in the pre-salt developments, and there will be a continued demand for production systems also and times also well related to existing fields. Aker Solutions’ deepwater technology combined with our significant local presence in Brazil positions the company for continued growth in that market.

In West Africa, deepwater markets continue to provide significant opportunities. Offshore spending is expected to grow more than in any other region at probably as much as 11% annually over the next six years. We also see opportunities attractive to Aker Solutions and Akastor in Atlantic Canada due to recent discoveries, and in Mexico due to regulators opening up for more private and foreign investments.

Finally Asia Pacific, a market that remains focused on natural gas with several large projects slated in the region. Akastor is positioned to win drilling equipment contracts from yards in Singapore, China and South Korea. And in the New Aker Solutions, we expect to benefit from both Field Design and Subsea spending in the Asia Pacific region.

So all in all, we maintain a prosperous market outlook, though with some more short-term challenges and risks in certain regions and segments mainly due to capital constraints.

Well, it’s now time to wrap up with the big picture. In the New Aker Solutions, the prosperous trend continues in both, the Subsea, Umbilicals and the Engineering businesses while the MMO business in Norway is going through a challenging time. Capacity adjustments have already been made, but wining the Sidam [ph] field development contract will be key in order to maintain our MMO capacity and competency at the current level.

The starting point for the new CEO, Luis Araujo, is robust and the expectation is clear. At the New Aker Solutions, additional shareholder value must be unlocked by continued improvement of operational execution. The Akastor CEO, Frank Ove Reite has different mandate. Each Akastor business will be developed independently to unlock its full potential, be it through organic growth, partnerships or M&A activity.

The initial portfolio of Akastor constitutes a unique start, but an allocation strategy should be developed at an early stage in order to make sure that the capital invested yields the best shareholder return possible.

The two new companies will be quite different by nature and by strategy, but both have great oil services management teams in common, and I look forward to collaborating with both teams in my future capacity as chairman of the two boards. So for the very last time in this setting, I leave the floor again to you, Leif. And he will walk us through the second quarter financial performance in even a greater level of detail.

Leif Borge

Thank you, Øyvind, and welcome to all of you. I am very pleased to see that some of you are coming in the middle of the holiday season. Well, as you have already seen, the second quarter numbers are impacted by several one-offs that I will come back to. But first, let’s have a look at the numbers as such.

Revenues in the second quarter, NOK 13 billion compared to NOK 11 billion last year, year-to-date growth of 13%. The EBITDA was NOK 429 million, but adjusted for one-off items, it ended on NOK 936 million, very marginal 7.2% compared with 7.1% last year.

Depreciations were impacted by the impairment on the OMA assets. NOK 1 billion of impairments impacted the depreciations. Net financial items saw NOK 123 million, reduced further due to the fact that we repaid the most expensive part of the debt at the end of June. All of this gave a net profit of NOK 807 million negative.

Then let’s go through the one-off effects in the second quarter more in detail. First of all, the demerger and listing expenses are expected to be around NOK100 million, of which NOK 47 million was booked in the second quarter, and then of course most of the remaining will come in the third quarter.

The divestment of the shares in the Hotel Expo Fornebu have been announced. It gave a gain of NOK 113 million. The termination on the Skandi Aker contract actually gave a positive accounting effect of NOK 241 million. Part of this is due to the fact that we have hedged future cash flows for the contract. Luckily the hedge was in only at the time of the cancellation and we could release around NOK 150 million in hedging effects. The second part is the remaining part of the mobilization fee that was paid in the beginning of the project.

In the demerger process, we also moved a number of office leases between the groups mainly to the Akastor Group. These have had a negative value due to unused capacity. We have provided NOK 150 million in provisions for expected future losses in case we are not able to sublet these offices.

Then hedging. Not qualifying for hedging accounting were negative at NOK 28 million in the second quarter.

And finally, the impairments on the OMA assets, Skandi Aker, Aker Wayfarer and goodwill had a negative effect of NOK 1.6 billion as announced separately last week. NOK 636 million of this was the provision for future leasing cost, which then impacted the EBITDA result, while the remaining part of the impairments then impacted the EBIT only.

So adjusting for all of these effects, the underlying performance of the Group show then EBITDA of NOK 936 million for the quarter, and an EBIT of NOK 559 million in the second quarter.

Cash flow from operations were positive in the quarter with NOK 1.2 billion. Most of the one-offs is of course not having the cash effects. The working capital also reduced from NOK 3.9 billion last quarter to NOK 3 billion this quarter. The provision of NOK 636 million for future lease commitments is for the remaining periods of the ship lease contract and is consequently booked as a long term liability and have no impact on the reduction in the working capital level.

The reduction is though mainly in the New Aker Solution companies and especially subsea where installments on some big projects required tie-in the quarter.

The working capital level in Drilling Technology increased though to a quite high level. We expect this to go down in the second half of the year. On the working capital level on the New Aker Solution part will most likely increase somewhat.

The divestment of the shares in the Hotel Expo Fornebu gave a positive cash effect of NOK 447 million financing the investments in the period. And then finally, we paid NOK 1.1 billion in dividends in May. So with all of these numbers, the debt position remain at around NOK 4 billion at the end of the quarter.

With regards to funding, now of course with the split we are refinancing Aker Solutions. Two of the bond loans with maturity in 2017 and 2019 survives the demerger and will be part of the debt of the New Aker Solutions going forward. Secondly, we also have around NOK 1.1 billion in debt in Brazil, mostly it will be part of the debt on New Aker Solution.

Then finally, we are putting in place new credit facilities for the new groups. The loan agreements were signed a couple of weeks ago. For the New Aker Solutions we have signed a five-year credit facility of NOK 4 billion with 13 Scandinavian and international banks, while for Akastor we have signed three-year NOK 2.5 billion term loan and a five-year NOK 2 billion credit facility with seven Scandinavian and international banks. Thus the financing of the two new groups with solid liquidity reserves is secured.

Then let’s have a look at the business areas. So then we have still own the business areas of the old or existing Aker Solutions.

Subsea delivered a quite strong quarter with the revenue growth of 18%. The growth can simply be explained by the strong order intake over the last 18 months. The margin marginally lowered than the previous couple of quarters, but the underlying trend of improved margin remains. Very high order intake, especially then due to the two contracts with Total and Petrobras, bringing the backlog up to record high level of NOK 37 billion.

Umbilicals continues its journey to get back on track. Revenues of NOK 608 million reflects a quite high capacity utilization at both yards while the umbilicals is very high.

Drilling Technologies show a quite strong of 25% in the second quarter is mainly driven by phasing of contracts which means that several system contracts have reached the phase in the production where revenue recognition becomes quite high. However revenues from single equipment and services were also good in the quarter.

The margin declined to 8.6% as a lot of the revenue growth comes from systems that have lower margins and services and single equipment that of course dilutes the margin. And as mentioned by Øyvind already, we also have some projects in the portfolio where we have been struggling over the last quarters with execution.

Order intake of NOK 2 billion includes one contract for – or a contract for one new drilling package for a work or a rig, while the remaining order intake is in single equipment and services.

Process Systems. Revenues of NOK 566 million in the quarter, margin of 4%. So the picture remains the same. Parts of process systems delivered good results while all the parts are still struggling with capacity cost and high tender cost. However the order intake was quite strong in the second quarter, NOK 800 million.

Engineering. Revenues increased with 16% to NOK 1.1 billion. Margins slowly recovered after low capacity utilization in London, 9.1% in the second quarter. We still have capacity cost diluting the margin though, especially then in London and Houston.

MMO had a weak quarter. Revenues of NOK 2.8 billion is more or less on same level as last year. However the activity level on the Norwegian Continental Shelf has come down in the first half of the year. This caused us some capacity cost. And as explained by Øyvind, we are now adjusting the capacity level for MMO business in Norway. Also close-out of several projects have had a somewhat negative effect as we had not been able to achieve the bonuses and incentives that we have been targeted.

We expect the margin to recover in the second half of the year, but it is to some extent dependent on what happens with tenders and then the capacity utilization also going forward.

OMA delivered a very poor quarter with a negative EBITDA of NOK 481 million. We have been through the impairment of the OMA assets and the one-off effects on the cancellation of the Skandi Aker contract. Adjusting for these, OMA delivered a negative EBITDA of NOK 84 million in the quarter. Skandi Aker did not have any revenues in the quarter as the vessel was struggling with the equipment until the contract was eventually cancelled by Total in Angola. Skandi Santos and Aker Wayfarer were operating at more or less full utilization in the quarter.

The asset values of AKOFS has been reduced from NOK 3.8 billion to NOK 2.1 billion due to the write-downs. And in addition we have around NOK 900 million in the assets of Ezra shares and Aker DOF Deepwater.

Order intake of NOK 25 billion in the second quarter was of course impacted by the subsea order intake, bringing the backlog up to NOK 68 billion, and needless to say this is of course a record high level. The cancellation of the contract on Skandi Aker by the way reduced the backlog with US$150 million or NOK 900 million.

Then subject to final approval, of course in the shareholder meeting in August and then final demerger at the end of the September. This is the last time we present numbers for the old Aker Solutions. So in order for you to be able to understand the underlying performance for the two new groups and to able to make your models for the two new groups, we have prepared some preliminary numbers, which Øyvind to some extent have been through already.

These numbers are not audited and still a bit work in progress, thus the final numbers may deviate somewhat when they are finally concluded being part of the prospectus of listing of the New Aker Solutions.

First some explanations on the reporting structure of the Group starting with New Aker Solutions. We are going to report numbers on two reporting segments; Subsea and Field Design. However, we are also going to give you some numbers like revenues, EBITDA, EBIT, working capital, order intake and order backlog for the sub-segments; Subsea, Umbilicals, MMO and Engineering.

In order to be able to build a bridge from the existing business areas, you should be aware of a few things. First of all with regards to Subsea, the existing business remains of course the same with one exception and that is the sub-segment Surface Products which has been fairly standalone business, mainly operating in Asia and the Middle East will become part of Akastor and be reported as a separate business in Akastor.

In addition, we’re also making some changes in the way we report revenues and earnings on family joint venture projects. Then you may ask, what is a family joint venture project? Well, actually it’s a project where several business areas are involved in a same project. The best example is actually the subsea [indiscernible] project. Their engineering is involved doing a system integration project management part of the engineering. MMO is involved in a lot of the fabrication at the yard of Egersund. While at the end of the today, most of the scope is subsea scope, but of course it’s part of the subsea business. It’s part of the subsea strategy.

Historically or going forward, we are going to split the scope in line with what each of the parts are actually contributing, while in the past the split of revenues and earnings has been agreed upon in the beginning of the project. So for example on subsea [indiscernible]. Subsea have received 50% of the revenues and earnings and MMO and Engineering have received 25%, even though the subsea scope is in effect much higher than 50%. So this will be changed going forward.

So to the analysts, sorry for making the life a bit more difficult the first time. You have to update your models, but I am confident that this will give a better understanding of the underlying activity on earnings in each of the segment. Of course it’s more based on what we earn in the market segments and not reflecting how we from time to time organize ourselves internally.

Then to the numbers. The Subsea revenues – and by the way, all of these numbers are shown as enclosure in the presentations. You will receive the tables. We will also release a spreadsheet on our homepage, so you don’t have to write down all the numbers.

First, Subsea revenues have not changed much relative to the existing business reporting, which means that they are around NOK 250 million in revenues per quarter of surface products that’s moved out of subsea is then compensated by increased revenues from the family joint venture project than mainly on [indiscernible]. The margin level is more or less in line with the margin level of the current BI Subsea.

And with regards to Umbilicals. The Umbilicals is more or less 100% in line with existing BD report. With regards to MMO, you can see that the revenue drops with NOK 200 million to NOK 300 million per quarter as we have removed the revenues that MMO historically has got on subsea scope. This is especially the scope deliver from the Egersund yard to subsea projects for manifolds as an example.

With regards to Engineering, the revenues have also dropped somewhat as we have removed part of the family joint venture volumes and moved into subsea. Interesting with these engineering numbers though which better reflects actually the activity level, the number of engineers working in that business area. You see a stronger growth and you can see in the existing business area reporting. These numbers reflects better the activity level of the Engineering business.

The margins of engineering increases somewhat compared with existing business areas, simply because we are taking away lower margin construction procurements scope, while on the pure engineering scope we have higher margins.

In addition to these two reporting segments with four sub-segments, the New Aker Solutions will have a corporate with a running negative cost not charged to the segments. As you can see from the enclosure in this presentation, the corporate New Aker Solution has a negative effect of NOK 75 million in the second quarter.

However, of this NOK 25 million was related to hedges not qualifying for hedging accounting and NOK 34 million related to demerger and listing expenses. Thus the ordinary corporate costs were around NOK 16 million for the New Aker Solutions in the second quarter.

As an indication, we expect the run rate going forward to be in the range NOK 20 million to NOK 25 million per quarter on the corporate segment of New Aker Solutions.

Then moving onto Akastor, and here we use the new names of the business portfolio. Akastor will have five businesses or five businesses that we will report externally. MHWirth is equal to the existing BD Drilling Technology with the exception that a small sub-segment, Step Oiltools, is moved to other holdings.

AKOFS Offshore is equal to Aker Oilfield Service which is then part of OMA. The revenue and EBITDA and EBIT numbers is exactly the same as the OMA numbers, because the financial assets, Ezra and Aker DOF Deepwater that is moved into real estate and other holdings have been booked as financial items historically.

KOP Surface Products is the sub-segment which historically has been part of Subsea, delivering dry trees as mentioned mainly in Asia and Middle East markets, while Fjords Processing is equal to the current Business Area Process Systems.

Frontica Business Solutions is the service provider of IT, HR, finance, facility management services to, in the future the New Aker Solution businesses, the Akastor businesses and the Kvaerner Group. And then the strategy is also to over time develop the business to deliver to also other external clients.

Then finally, we will have some financial assets and real estate assets representing around 20% of the capital of Akastor.

These are the number for the businesses. I have not included Process Systems and AKOFS as these numbers are equal to the DA numbers that we have already gone through.

In regards to KOP Surface Products, you see that it’s a business around NOK 1 billion revenue per year and a margin level in the range 13% to 15%.

Frontica Business Solution is a business with close to NOK 6 billion revenue per year. And then EBITDA margin in the range to 5% to 6%.

With regards to balance sheet and capital structure of the two new groups. Not all the numbers are ready yet, but some key figures. As already mentioned, the working capital of the New Aker Solution as of June is around – was NOK 346 million. This was a very low level taken into account that the Subsea business normally will operate with working capital levels substantially higher than this, while the working capital for Akastor as of June was NOK 2.7 billion. This is somewhat high and we expect to decline in the second half of the year.

As of June, the net debt of existing Aker Solution was around NOK 4 billion. Roughly half of this will remain with Akastor and half will follow New Aker Solutions. As we have said before the intention has been to capitalize New Aker Solutions based on the gearing of net debt equal to 1x EBITDA.

With these numbers, the gearing is somewhat lower. However have in mind that the working capital level was also on somewhat low level as of June.

The equity capital of Aker Solutions’ existing group as of June was NOK 14.6 billion. Based on the assets and the net debt that will be transferred into the New Aker Solution, we expect that around NOK 5.2 billion of the equity will follow New Aker Solutions, while the remaining NOK 9.4 billion remains in Akastor.

Akastor have real estate and financial assets of around NOK 2 billion. So if you are able to realize most of the financial assets, the debt level will be close to zero for that Group.

Well, with this capitalization we will establish two financially strong groups going forward. And as I already said, the financing have been signed with the banks already.

That concludes my presentation. And I guess Bunny we can open up for the Q&A session.

Question-and-Answer Session

Bunny Nooryani

Yes. Thank you, Leif. We will be able to take some questions from the audience gathered here in Fornebu. And after that, we’ll also open up for questions from our webcast audience who can call in on the number. At the very end, we will take questions or have some short interviews with media right here. So any questions in this room? Gentlemen over there.

Frederik Lunde – Carnegie

Frederik Lunde, Carnegie. Just on the Skandi Aker. You mentioned seeking short term employment of the vessel. How should we think of the cost base in that for next couple of quarters?

Leif Borge

Well, in a number, so that just went through I said that the loss of – adjusting for the one-offs, OMA had an EBITDA of minus NOK 84 million. And I said that Wayfarer and Skandi Aker will be operating on full utilization which of course means that those vessels were earning money. In other words, Skandi Aker had a loss in a quarter when it has had no revenues or more than NOK 100 million. That’s kind of the indication of the cost level.

The exact OpEx of Aker Solution will of course – of Skandi Aker will of course depend on the scope, and with further scope to do well intervention services, which will have ROV crew and so on or not, but the typical OpEx depending on the scope will be in the range of US$200 to US$220 per day. So that’s the OpEx.

With regards to revenue, it of course totally depends on the services. If it operates on subsea installation, you can achieve rates from US$200 to US$300, little bit depending on how urgent the client needs the vessel. If you get more long-term contracts, the rates would typically be lower.

Frederik Lunde – Carnegie

Is that keeping the organization in place for well intervention in Angola or is that being demobilized entirely?

Øyvind Eriksen

We are keeping in place the organization for the Skandi Aker vessel as such, but we are demobilizing from Angola. Then again we will of course be able to get back to Angola and operate in Angola, but we are adjusting the organization locally due to the fact that we don’t have a long-term contract.

Leif Borge

And you should add that parts from the operational crew was from sub-supplies as well, so that created some flexibility.

Frederik Lunde – Carnegie

Thank you.

Bunny Nooryani

Any further questions? Next one.

Haakon Amundsen – ABG Sundal Collier

Thank you. Haakon Amundsen, ABG. Just wondered a couple of questions on the MMO. Can you just quantify how much the Norwegian MMO revenues are down in the first half relative to ‘13 and how much they would potentially decline further?

Leif Borge

Well, let me put this way. I think the key client has talked about a reduction in the MMO investments, so some 15% to 20% from 13% to 14%. This is in line with what we see internally.

Haakon Amundsen – ABG Sundal Collier

Okay. Thank you. And also on the margins. I believe you have 6%. I think now you have slightly more than 3%. And for the second half assuming that you are successful in the tenders, is the 6% reflective of the current market and your capacity utilization?

Leif Borge

Yes, if – we have now adjusted the capacity. Then Øyvind talked about some tenders and so on. So it’s not like the capacity utilization is given for the second half of the year, but if we win our target projects and based on the capacity adjustment we have made, it should be possible to get back to that margin level. Then again I think I was quite precise in my presentation that of course with still uncertainty then whether further capacity adjustments had to be made to get back to that margin level.

Haakon Amundsen – ABG Sundal Collier

Thank you. And then just a final question in Subsea. You still have very good margins. Have you – what’s the progress on Moho Nord and is that contributing on the margin side and how is that developing?

Øyvind Eriksen

The Moho Nord project is going according to plan. So of course it’s one of the projects – it was signed a year ago. This is one of the projects that now start to contribute a lot on the revenue side. Then again it’s not these huge greenfield projects that normally drive the margins in the subsea business.

Haakon Amundsen – ABG Sundal Collier

Okay. Thank you.

Bunny Nooryani

Thank you.

Eivind Tønnessen – Swedbank First Securities

Hi, it’s Eivind Tønnessen, Swedbank. Just first of all on your backlog and backlog scheduling made for next year, you have NOK 23 million in the presentation here. Can you provide us with a rough split on the two segments you will be reporting going forward? How much of that is related to Akastor?

Leif Borge

I don’t have that number now, but for Akastor, it is of course mainly on the Drilling Technology and somewhat on the Process System. So Akastor probably represent 25% to 30% of that and the remaining in the New Aker Solution businesses.

Eivind Tønnessen – Swedbank First Securities

For 2015 as well? Okay. And also can you elaborate on the size of the Sidana [ph] project on potential win on Sidana [ph] for MMO? The size of the scope?

Leif Borge

I don’t think that’s a number that we have.

Øyvind Eriksen

We can’t guide on the exact size, but it’s a significant redevelopment project which will make a big difference for us if the contract is awarded to the New Aker Solutions.

Eivind Tønnessen – Swedbank First Securities

And finally on the book value now on AKOFS NOK 2.1 billion. How much of that is really to Skandi Aker?

Leif Borge

The Skandi Aker vessel now have a book value of around NOK 2.1 billion.

Eivind Tønnessen – Swedbank First Securities

Okay. Thank you.

Bunny Nooryani

Question there in the middle of the room.

Unidentified Analyst

Thank you. [indiscernible]. Considering the increasing position you have in emerging markets, in global markets where we see also an increasing amount of political and security risks, both in potentially South America, in West Africa, East Africa. You also consider opportunities in the Middle East with increasing security risks, Southeast Asia. And now you’re structuring two companies. Considering the extreme importance of these risks and the major impact it may have, could you elaborate a little bit on how you intent to structure the risk organization within these two companies and how you foresee that to be handled considering the massive plans you have in these emerging markets?

Øyvind Eriksen

You’re right that we have expanded in as I said markets recently. However if you take portfolio perspective to the analysis, it’s mainly Subsea and Drilling Technology that has made progress in those markets. The Drilling Technology is not as exposed due to the profile of the customer portfolio, mainly the Asia Pacific yacht and the international drillers. So the risk is – the business area mostly exposed is the Subsea business which has expanded significantly in Brazil and in West Africa and we also expect growth in Asia Pacific, less in the Middle East.

And to develop our HSE resources including how to prepare for security issues that you mentioned has been a macro priority for Aker Solutions during the last years.

And basically it will not change as a result of the split. So we will continue to focus on this particular risk factor. We will continue to develop our expertise and capacity in general, but more specifically we rather than building up an organization in Norway, we have prioritized to recruit leaders and employees from the relevant local markets with a particular knowledge about the risk factors in that region and strengthen the local teams rather than building up corporate teams.

Bunny Nooryani

Are there any further questions? Yes.

Simon Sigvardsson – DNB Markets

Simon Sigvardsson, DNB Markets. You talk about the capital discipline with the E&P companies going forward and you also talk about the next wave coming in a couple of years time. So just wondering if you can give us some more flavor about where you see the wave, and if you have some special project you want to highlight?

Øyvind Eriksen

First and foremost the slowdown is partly about cancelled project but even more about postponed project. And we have a continuous dialog with key customers about when we should prepare our organization for contract awards regardless of current delays. So when I indicated that we expect a pickup in the market activity in a couple of years time, it’s partly based on that dialog. And the answer to your question about when could we expect the projects currently delayed will be revisited.

The most prominent example here in Norway is [indiscernible]. The other backdrop of that indication is what’s going in the MMO market. From a customer perspective, the intention is not to reduce the ultimate level of activity, but to reduce the level of cost. So the slowdown in the level of activity will by nature be temporary, and I expect that the amount of work will gradually increase.

Then I see the hope that we’ll be able to help the customers with a lower cost level as well, but that will require structural changes because as the industry operates today, MMO is, to a large extent, a local business and we as suppliers are actually penalized if we don’t execute their number of projects locally. So it’s not an option available to us today to move engineering to pick up a sample to low cost hubs like Mumbai to the same extent as we have already done in other parts of Aker Solutions like the greenfield engineering projects.

Simon Sigvardsson – DNB Markets

Thank you.

Terje Fatnes – SEB Enskilda

Terje Fatnes, SEB. Two questions. First one is on the Aker Wayfarer, the charge you make of NOK 536 million on the future lease commitments. How much will that reduce the annual lease cost on the vessel?

Leif Borge

Well it’s quite simple calculation because the ship lease contract remains for another six years on one quarter, so around NOK 100 million per year.

Terje Fatnes – SEB Enskilda

Okay. Thank you. The second one is on Drilling Technologies. I guess no one really expects a rush of newbuild orders in the drilling space going forward. At what point will you have idle capacity in the Drilling Technologies division?

Leif Borge

Well, as a matter of fact, the drilling market is not totally dead as we talked about. The single equipment is not so bad. And that used the same capacity as the system contract. And also the jack-up market is quite active. So it’s mainly the deepwater rigs that of course the market looks a bit different than six, nine months ago. With the current backlog, we will not have to make any capacity adjustments during this year.

However, we have already as part of an improvement plan to reduce the costing in Drilling Technology started to take out quite a few hired-ins because also in drilling we create flexibility in our capacity by having hired-ins in organization. But I don’t foresee any further substantial reductions in organization throughout this year, but needless to say we need of course to win some contracts in the second half of the year.

Øyvind Eriksen

In addition we should highlight the difference in our execution model compared to our main competitors, as the competitors’ have a more integrated delivery model. Aker Solutions has over the – yes, developed a great level of an execution model with a great use of sub-suppliers. And that creates more flexibility and optionality in a downturn market than most probably as we’re facing now.

Bunny Nooryani

Were there any further questions? There is one here.

Eivind Tønnessen – Swedbank First Securities

It’s Eivind, Swedbank again. Just back to Oilfield Services in Skandi Aker. Is that vessel now available for new work?

Øyvind Eriksen

Yes it is, and we’re negotiating short-term contracts as we speak.

Eivind Tønnessen – Swedbank First Securities

And the contract you’re talking about on Aker Wayfarer in Brazil, would you know that Subsea 7 contract is now terminating in August, when should we expect – if you want to win the Brazil contract, when will that commence?

Øyvind Eriksen

I said in my presentation that we expect current tender process to be concluded during the course of this quarter, third quarter 2014.

Leif Borge

But it’s a contract for a vessel equal to this Skandi Santos vessel which means that we have to not rebuild but we have to make some changes on the vessel. So the contract as such will commence in the first half of 2016.

Øyvind Eriksen

And it’s a five year contract, so we have options for additional five years.

Eivind Tønnessen – Swedbank First Securities

So in the meantime let’s call it in 2015 – if you have to win this contract in 2015 then, that’s going to be used mostly for putting the vessel ready for that contract, or can you use it for all the spot work in the meantime?

Øyvind Eriksen

Based on the current timeline, the vessel will go to the yard at end of 2015 beginning of 2016. So for 2015, we still need to sell the vessel in the spot market as a construction vessel.

Eivind Tønnessen – Swedbank First Securities

Okay, thank you. And just finally for me. On your plant in Brazil for Drilling Technologies, I guess it’s going to be ready next year or mid-next year or so. How is the progress been on the plant?

Øyvind Eriksen

Well, that’s going more or less according to plan.

Eivind Tønnessen – Swedbank First Securities

Okay. Thank you.

Bunny Nooryani

Any further questions in here? Yes, in the back row there.

Tord Augestad – Arctic Securities

Tord Augestad, Arctic Securities. A couple of quarters ago you said that – on MMO, you said that you have been discussing this with Statoil for over a year, and that you are prepared for a market downturn. How that has developed relative to how you looked at it back then? Has it become worse or is it in line with that view?

Øyvind Eriksen

The level of activity had dropped more than what we said half a year ago. So we have adjusted our plans accordingly, but at the same time and as I also said in my presentation, it’s from a management perspective we have to balance the short-term capacity adjustments with our long-term market outlook in order to position the New Aker Solutions for the next upturn cycle. That’s also a dialog with key customers.

Bunny Nooryani

Thank you. Are there any more questions in here? Okay, if not then we can take questions from our webcast audience if there are any questions.

Operator

Our first question on the line comes from Phil Lindsay from HSBC. Please go ahead.

Phil Lindsay – HSBC

Yes, good morning. So two questions on workload and capacity. The first one is related to Subsea. Given the strong order intake that we see for that business, clearly we [Inaudible – Microphone Inaccessible] from the delivery programs quite a lot of time, but perhaps you can just talk about the ramp-up of the main projects when you expect to [Inaudible – Microphone Inaccessible] and talk about your ability to take on new work? That’s first question. Second question, just on Engineering. Can you discuss the progress on Johan Sverdrup. If that is in line but perhaps you can discuss how we should think about how you will need to develop on that project and again when do you think you will see [Inaudible – Microphone Inaccessible]. Thank you.

Øyvind Eriksen

Let me start with you on Sverdrup. The short answer to your question is that we are progressing according to plan. As far as your questions related to subsea concerns, I should remind you about the fact that Aker Solutions prepare itself for this upturn cycle by making investment decisions over the couple of years back. And so we have expanded our capacity both in Norway, in Malaysia and we are about to expand or double the capacity in Brazil in order to prepare ourself for both the contracts already awarded and the contracts we expect to be awarded going forward.

And by that answer I’ll partly also answer your question about whether or not we have capacity to take on more work. The short answer is that yes, in general the subsea business area has capacity to take on even more work.

In Brazil, it goes without saying as we’re doubling the capacity but we also have capacity for more work in other Subsea hubs like Port Klang in Malaysia.

Phil Lindsay – HSBC

Okay, thank you.

Operator

Our next question comes from Christyan Malek from Nomura. Please go ahead.

Christyan Malek – Nomura

Hi, good morning gentlemen. So two questions for me. First, in terms of these new projects, there is a slowdown in CapEx particularly in MMO and so it makes [Inaudible – Microphone Inaccessible]. What are you doing in terms of driving your deficiencies in business, so [Inaudible – Microphone Inaccessible] in the next 12 months. And the second question is regarding potential M&A prospects for business lines. [Inaudible – Microphone Inaccessible] from the market, from the industry to probably [Inaudible – Microphone Inaccessible].

Øyvind Eriksen

Okay. If I start with – so taken or to be taken in order to drive down costs. As I said over in my presentation that as far as the MMO business concerns we have already reallocated more than 200 employees. More than 100 to a new subsea, engineering and project management hub and another 100 to our recruitment agency, Aker Advantage.

In addition to that, we have developed specific plans and about additional capacity adjustments in different scenarios. And the main scenario is related to Sidana [ph] contract award. We can see the hope that we will win that contract and we will fight hard to win it. But if we lose, we have already established plans which will fulfill additional capacity adjustments.

And as we had communicated externally already, the family connection and the fact that the Aker Group in general and Aker Solutions in particular had so many different businesses and business needs that have created some flexibility available to us as we develop capacity adjustment plans.

And the second question was about M&A. And we continue both in the New Aker Solutions business as well as in the new Akastor business to pursue acquisition opportunities, but primarily bolt-on technology acquisitions rather than big moves. And in the new Akastor business, we have already indicated that we expect a high level of M&A activity as a tool for shareholder value placing.

That’s the headline. The most specific strategies and plans for each of the Akastor business should be developed by the new board and the new management team, and hence I am not able, nor willing to indicate what kind of more specific M&A transactions we as shareholders as you as analyst should expect in the months and years to come.

Leif Borge

If I…

Christyan Malek – Nomura

[Inaudible – Microphone Inaccessible] the question which is you haven’t [Inaudible – Microphone Inaccessible] but if there are at least scale up of technical fault within this businesses over the next 12 months, so is it more about reallocating at this point?

Leif Borge

No, it’s both. We have talked about more than 200. Firstly of course, the first thing you do is to adjust the flexible part of your capacity which is the hired-ins. So we have been working – we are also internally than replacing hired-ins. We had own employees.

Secondly it’s of course then adjusting your fixed cost space. We have communicated that more than 200 people will be affected, many of them now working for other business areas, but 140 people have also been transferred to the Advantage Group which will offer these engineers in the external market. And then it remains to be seen where we have to make final adjustments.

But if I may add because these are of course short-term cost adjustments by adjusting your cost base. Then more long-term it’s of course also a question about how we can utilize more of the, call it low cost base in Aker Solutions. Today we have close to 2,000 engineers in India on MMO contract have fairly limited scope is today used by those resources.

Going forward we also have to look into to that split of course to see where more of the scope can be delivered from lower cost bases.

Christyan Malek – Nomura

I have one follow-up on my third question. Sorry for taking some time there. The Moho Nord project which has delivered, it seems you’re realizing solid margin based on your Q2. If I look forward to the project Kaombo, can you conceptualize if the margin on Kaombo will be higher, equal or less than what you delivered on Moho Nord [Inaudible – Microphone Inaccessible] quite a bit out of the Kaombo project. So I would just like to understand [Inaudible – Microphone Inaccessible] how you want us just to compare on the new projects being awarded as where you see [Inaudible – Microphone Inaccessible].

Leif Borge

Well let me put it this way. Technology-wise, Kaombo is quite similar to Moho. So I would be extremely disappointed if the margin at Kaombo eventually ends up below Moho.

Øyvind Eriksen

And based on the rumors in the market before the contract award, I will be pleased to surprise you all.

Christyan Malek – Nomura

Great. Thank you very much.

Operator

Our next question comes from Mukhtar Garadaghi from Citigroup. Please go ahead.

Mukhtar Garadaghi – Citigroup

Hi, good morning gentlemen. Just two very quick questions for me. First of all just to talk about the general capital discipline focus you mentioned. What I see in terms of subsea margins in the [Inaudible – Microphone Inaccessible] compared to what you in your portfolio is the change of product in terms of how the customers are receiving, and secondly, you mentioned [Inaudible – Microphone Inaccessible] challenges in drilling. Do you expect that to continue into the second half? Thank you very much.

Leif Borge

Well in regards to subsea margin. First of all it’s important to have in mind that winning the subsea business, you have high margins on the services, you have quite high margins on the, call it, repetitively typically brownfield projects and then you have lower margins on the greenfield projects like the Moho and the Kaombo. So it will never be those projects that drives the margins, but those projects create of course the install base for future services.

In regards to pricing, I think it’s quite stable. Of course we are now able to create more repetitive business like Kaombo and a copy of Moho and also like the contracts with Statoil. That has the positive effect on the margins as such. But for these big projects, there will always be a tough competition because they are so important in order to create future install base.

Then your second question was on Drilling Technology. I touched upon in the presentation that the margins in Drilling Technology is somewhat impacted by the fact that we grow very – in the second quarter, we grow very strongly in the big system contracts. And it’s the same thing in Drilling as in Subsea that you have higher margins on the services and lower margin on these huge system contracts that eventually create install base and services.

I think that effect will become less, so the target is of course to start to improve the margins in Drilling Technologies going forward.

Mukhtar Garadaghi – Citigroup

Okay. And just as a follow-up on the first question. Have you seen that proportion of those larger greenfield project increasing into 2015?

Leif Borge

Well to put it this way. The services grows quite steadily. The services really kind of never increased with 20% or 30% one year. So if your top line increase with more than 15%, 20%, it’s typically the big greenfield projects or the effect of those projects that drives the revenue growth and then itself that will of course have a somewhat diluting effect. So in that sense, with the growth we see in Subsea the product makes as such will not drive margins improvements. Margins improvements have to come from execution and what we do with our cost base.

Mukhtar Garadaghi – Citigroup

Thank you.

Operator

Our next question comes from [indiscernible] from Barclays. Please go ahead.

Mick Pickup – Barclays

[Inaudible – Microphone Inaccessible] It’s Mick Pickup here. Just one final question, [Inaudible – Microphone Inaccessible] in last hour and 20 minutes. This quarter when the [Inaudible – Microphone Inaccessible] as well as capital discipline say pretty and everyone is going to talk about engineering the project. I just want to conversation that you had with your clients about the engineering the projects, how would you see that being solved going forward. Is that too much engineering [Inaudible – Microphone Inaccessible] is it too much demand in place on project by your clients themselves?

Øyvind Eriksen

That’s an excellent question and we actually have defined a program with some key customers like Statoil related to specific projects like the Johan Sverdrup project to improve jointly and that’s a joint effort improvement and efficiency, because it’s not an issue only with us, neither with the customer. It’s about how we draft and how we develop project jointly.

And just to mention one example briefly, if you delegate to the project team to initiate variation orders, it goes without saying that it will drive engineering hours. So the decision making process with respect to changes to concept has to change in order to create some more discipline in the projects as such to reduce the amount of hours spent on developing the size.

Mick Pickup – Barclays

Thank you very much.

Operator

Our next question comes from Alex Brooks from Canaccord. Please go ahead.

Alex Brooks – Canaccord

Yes, good morning gentlemen. Just couple of questions on cash. Firstly you have significantly understated in terms of CapEx this year compared to what I have understood we were thinking [Inaudible – Microphone Inaccessible] what the plans are for spend this year. And secondly you have very strong working capital performance in the second quarter and I realize you’ve already said couple of times this is exceptional but [Inaudible – Microphone Inaccessible] customer payment in the second quarter?

Leif Borge

Well to the last question, the working capital in the New Aker Solution as reported is NOK 340 million. In the New Aker Solution it will mainly be the Subsea business, planning up working capital via Engineering and MMO is quite cash neutral. So most likely you will see the working capital level increasing between NOK 0.5 billion and NOK 1 billion in the New Aker Solutions over the coming quarters to get more normalized level as we have guided previously.

Then as I also said a couple of times, then the working capital level in other part in Akastor is actually a bit high.

Then your first question was CapEx. Yes, the CapEx levels so far this year is somewhat below what we have guided previously. It’s going to increase in the second half of the year mainly due to the investments in the new subsea plant in Brazil and the new drilling plant in Brazil as well. The CapEx from those will increase as I said in the second half of the year.

We have historically guided that the total CapEx R&D investments in 2014 maybe up to NOK 3 billion. As it looks now, it will be less than that. Of course we have made some adjustments in the plans. So it will increase, but not – in line with what we have previously guided.

Alex Brooks – Canaccord

Okay. It’s very fine. Thank you very much.

Operator

Our next question comes from Daniel Råvik from Handelsbanken. Please go ahead.

Daniel Råvik – Handelsbanken

Yes, good morning. Just coming back to the cost a little bit. You’ve spend quite sometime in the Capital Markets Day talking about you [Inaudible – Microphone Inaccessible] where you were talking about 10% to 15% cost reductions in direct materials within the first year. So I was wondering if you could give us perhaps some update on how these have progressed in terms of these cost savings as of now. Thank you.

Leif Borge

Well, I don’t think I can give you an exact number because of course at the end of the day some of these cost savings are taken into account when you tender, but I think it is fair to say that we are following the plans and now with the split of course is initiatives that goes across the Group will mainly be relevant for the New Aker Solutions and then more focused portfolio will of course make it easier to have full focus on this cost saving program. So all in all, we deliver on the plan that we established last year with regards to savings on materials.

Daniel Råvik – Handelsbanken

And that goes for the progress you have been – for example [Inaudible – Microphone Inaccessible] which you mentioned in the Capital Markets Day where you were talking to some 3% increase in productivity as well for 2014 and finally 2015?

Leif Borge

Yes, it’s going according to plan. Over the last couple of years, we have been struggling a little bit with the fact that the organization has been growing fast. We have been recruiting 2,000 to 3,000 people per year. That have had somewhat negative effect on productivity.

Now the recruitment level that is of course substantially reduced. We would still recruit somewhat in Subsea of course but not in MMO of course. That in itself will also have somewhat positive effect on the productivity on the labor force.

Øyvind Eriksen

Maybe we should remind of ourself about how we recruit in the subsea because we actually reallocating some of the most experienced project experts in Aker Solutions to the new subsea hub in Stavanger rather than recruiting inexperienced and new employees to the business.

So it’s a combination, but the slowdown in MMO in Norway has created some opportunities to strengthen the subsea team in order to safeguard flawless execution of the projects in current Subsea portfolio.

Daniel Råvik – Handelsbanken

All right. Thank you. That was it from me.

Operator

Our next question comes from Amy Wong from UBS. Please go ahead.

Amy Wong – UBS

Hi, you actually answered my question. My question was around your Subsea and your Drilling Technologies margin. Can you give us an idea how to take about the provision of the equipment versus the aftermarket services? Actually you’re reading margin now if it’s kind of at shape and normalized level yet. Thank you.

Mayor Litman

Well, both in Subsea and Drilling, the aftermarket services represents around 25% of the overall revenue. And the remaining is a split between this huge greenfield projects and more smaller and brownfield type of contracts in subsea, and in Drilling, the drilling packages and single equipment.

So what was your question really?

Amy Wong – UBS

My question is I am trying to understand the mix going forward do you have [Inaudible – Microphone Inaccessible] quite a few big substitutes in terms of drilling packages on [Inaudible – Microphone Inaccessible] five, six years ago. We have just trying to see whether that aftermarket services [Inaudible – Microphone Inaccessible]. And taking into account what you’re accessing on now and what package you have on the market, how we should you think about the evolution of the margin in those two businesses?

Leif Borge

Well, with regards to growth it’s a steady growth in aftermarket services in both Drilling and Subsea in the level 10% to 15% per year. In Drilling it’s of course driven by the fact that we have delivered a lot of drilling packages in the last five years and many of those rigs now have to recertified, so we get more service revenues.

So we expect that growth to continue based on the historically deliveries that we have made. Whether the relative revenues increase from 25% or not, of course it depends on the overall growth of the business area. And exactly the same thing in Subsea really that it grows steadily.

With regards to margins, both in Subsea and in Drilling, we also have programs to improve the margins there. Talking about margins in the range 20% to 30% on a different type of services. So it’s still high, but of course we also have programs there to improve the margins.

But the overall margin of Subsea should be driven more by, say quality on execution on what we do with the cost base than the services.

Amy Wong – UBS

All right. Thank you.

Operator

Our final question is from Asad Farid from Berenberg. Please go ahead.

Asad Farid – Berenberg Bank

Hi, good morning. Most of my questions have been answered, but I have two leading questions remaining. My first question is regarding MMO business. [Inaudible – Microphone Inaccessible] Is it basically a timing issue and would you see payment in second half of this year? And can you also tell us as to how much of the margin in MMO in second quarter of this year was due to over to Subsea and how much was due to [Inaudible – Microphone Inaccessible] acquisition. Secondly with regard to [Inaudible – Microphone Inaccessible] economies we have seen the quarterly [Inaudible – Microphone Inaccessible] has not been that strong for the last few quarters and the outlook you are giving for [Inaudible – Microphone Inaccessible]. I just wanted to ask, is it the right time for you to retain [Inaudible – Microphone Inaccessible]. Is it the right time to do it? Thank you.

Leif Borge

Well, on the last question, as I already touched upon earlier, we have made some adjustments in the capacity of drilling as such by taking out some hired-ins. I think it’s important to understand that our cost base is quite flexible. We are outsourcing production. The only thing we produce internally is the key components like the top drives.

We mainly produce those in Germany. So it’s not like we have a huge blue-collar base to feed. If we talk about the new drilling site in Brazil, that site is mainly going to build drilling risers doing fabrication on the contracts that we have signed for Brazil already. It’s not about increasing the production capacity in drilling as such.

Then your first question was…

Øyvind Eriksen

I think one question was about the margin dilution in MMO. I will split between capacity costs and issues related to final settlements on projects about to be finished. And the risk guidance, I would say that the split is 50/50 capacity cost and it’s just related to settlement with customers on projects about to be completed.

Asad Farid – Berenberg Bank

And my final question, [Inaudible – Microphone Inaccessible] that’s timing issue what about [Inaudible – Microphone Inaccessible] picking up for this year?

Leif Borge

Well as we said, these are issues mainly related to the close-out of projects. At the end of the project you will always have discussions on where you have reached milestones, discussions on variation orders and so on. We will not have the same effects in the second half of the year or we do not expect to have the same effects in the second half of the year, but there are still a couple of projects where things have not been finally negotiated with the clients.

Asad Farid – Berenberg Bank

Thank you.

Bunny Nooryani

Thank you. Well that seems to be the end of the questions from our large international audience. Thank you for joining us.

Øyvind Eriksen

Thank you. Have a nice summer.

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