Earnings Transcript for NETI - Q1 Fiscal Year 2022

Operator: Hello, and welcome to the Eneti Incorporated First Quarter 2022 Conference Call. I would now like to turn the call over to James Doyle, Head of Corporate Development and Investor Relations. Please go ahead, sir.

James Doyle: Thank you for joining us today. Welcome to the Eneti, Inc. first quarter 2022 earnings conference call. On the call with me are Emanuele Lauro, Chief Executive Officer; Robert Bugbee, President; Cameron Mackey, Chief Operating Officer; Hugh Baker, Chief Financial Officer; Sebastian Brooke, Chief Operating Officer of Seajacks. Earlier today, we issued our first quarter earnings press release, which is available on our website eneti-inc.com. The information discussed on this call is based on information as of today, May 12, 2022 and may contain forward-looking statements that involve risk and uncertainty. Actual results and events may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, you should review the forward-looking statement disclosure in the earnings press release issued today, as well as the Eneti Inc's SEC filings, which are available at eneti-inc.com and sec.gov. Call participants are advised that the audio of this conference call is being broadcast live on the Internet and is also being recorded for playback purposes. An archive of the webcast will be made available on the Investor Relations page of our website for approximately 14 days. We will be giving a short presentation today. The presentation is available at eneti-inc.com on the Investor Relations page under Reports and Presentations. The slides will also be available on the webcast. After the presentation, we will go to Q&A. Now, I'd like to introduce our Chief Executive Officer, Emanuele Lauro.

Emanuele Lauro: Thank you, James. Good morning, and afternoon to everyone. Thanks for your time today. The contract backlog on our existing fleet continues to grow. Since we last spoke, we've added nearly $80 million of additional revenue backlog for 2022 and 2023, including options. From November 2021, we have increased our contracted backlog by almost $170 million for 2022 and 2023. This includes a contract for our second largest WTIV, the Zaratan for employment with Siemens Gamesa Renewable Energy in Taiwan in 2023. These projects will generate between $32 million and $36 million. So now the Zaratan and Scylla are both contracted for 2023, giving the company the necessary visibility. In addition, we have announced several contracts for our NG 2500s significantly increasing the utilization of our smaller class vessels. On the cost fronts, we are working diligently to reduce our operating expenses, which have increased as a result of COVID-19, reactivation of a number of smaller class vessels, and positioning of some of our ships in preparation for contracts. We do expect that these costs will decline as efficiency improves and COVID eases. COVID has specifically impacted negatively our operating costs due to the restrictions and constraints imposed by Asian governments, where both our biggest assets are currently working. As just mentioned, we do expect that the costs will decline as efficiency improves and COVID eases. Our G&A costs declined from last quarter and we feel that this quarter is a realistic run rate for the remainder of the year. On another note, one of our shareholders INCJ (ph) has indicated to the company that it is looking to sell between 1.1 million and 1.2 million common shares in an orderly fashion over the next several months. In conjunction with the sail (ph), Mr. Peter Niklai, a Board Designee of INCJ has resigned from the Board effective today. INCJ will cease to be a party to the shareholders agreement dated August 12, 2021 as of today. I personally would like to thank, Peter, for his contribution to the company's Board and I do look forward to interacting more with him in his capacity as a valued shareholder in the months to come. On the financing front, we expect to draw on our new $175 million green multicurrency term loan and revolving credit facility at the end of this week. This will reduce our interest cost from a 7% run rate to a LIBOR plus 315 basis points and complete the repositioning of the Seajacks balance sheet. On the operational front, we will hear from Sebastian Brooke in a minute during the slides but the company has installed so far 12 turbines year-to0date and is on pace to install a 144 turbines, by the end of this year, generating over 1,000 megawatts per year of renewable energy. So we do our -- we do remain excited about the outlook for offshore wind and our role in the transition to a cleaner and more sustainable future. I would like to turn the call now to Sebastian Brooks and James Doyle, which are going to walk through some of the slide. Thank you. James, are you on mute?

James Doyle: I'm here. Sebastian, you're going to be starting the presentation. If we could please go to Slide 7 and Sebastien will start.

Sebastian Brooke: Thank you, James. As Emanuele said, since February, Eneti has increased its revenue backlog by $80 million for 2022 and 2023 taking into account all of the options. This increase has been driven by several new contracts on our vessels. Firstly, we have signed an amendment to the Zaratan and was originally contracted from April through June 2022 at the Akita and Noshiro Offshore Wind Farm in Japan and expected to generate $36.6 million in revenue. Seajacks (ph) now contracted from April through November 2022 and is expected to generate an additional $18.5 million in revenue for a total of $55.1 million from April through November. Secondly, we have signed a contract with Siemens Gamesa to utilize the Zaratan in 2023, which were installed turbines at the Yunlin Offshore Wind Farm in Taiwan. This project is expected to start in the second quarter of 2023 and to generate $30 million to $36.3 million. Thirdly, we signed three contracts from NG 2500s, including a contract with Siemens Gamesa, Seajacks Hydra, which will keep it occupied for a minimum of three months in each of 2023, 2024 and 2025. In November of last year, we did not have any contracted revenue in the NG 2500 and 2022 or any contracted revenue for the Scylla and Zaratan in 2023. The company has now contract two of its largest WTIVs three 2023 (ph) and adds a significant pipeline of work, the NG 2500 this year. The Seajacks team has done a great job in securing employment the existing fleet, I'm happy to be able to report such positive news with regards to our project pipeline. We're also happy to report the Seajacks shore-based organization and crews continue to conduct themselves an inefficient and based importantly safe manner. And in spite of all the challenges to the global supply chain, Scylla and Zaratan managed to continue to mobilize and operate on their respective jobs without disruption. In February, the Seajacks Scylla arrived in Taiwan to start work on Orsted's Greater Changhua Offshore Wind Farm, which is completed installation of 12 megawatt Siemens Gamesa turbines should (ph) complete the contract to Greater Changhua in Q4 of this year and is then scheduled to mobilize from APAC to Europe, where Scylla commence its 2023 contract in Europe with Van Oord. Zaratan is currently mobilizing for installation of turbines that Akita and Noshiro Offshore Wind Farm, where she is scheduled to install 22 4.2 megawatt turbines. After this, she will head to Taiwan to work on the Yunlin Offshore Wind Farm. We go to the next slide, please. One of the most interesting part of the industry is the macro outlook as offshore wind is expected to grow at a compounded annual growth rate of 14% through 2027. This growth is reflected in the high tendering activity that we continue to see across multiple regions involved in offshore wind, particularly APAC, Europe and the U.S. and supports the views of demand for offshore wind services will continue to increase through the end of the decade and beyond. While the demand for offshore wind continues to increase, additional supply has remained relatively subdued, which implies that the future is bright and that the market will continue to tighten in the coming years. While we believe that the best years are still ahead, we really are very pleased with the contract coverage we have recently added for ‘22 and ’23, and note that we've been able to do so at increasingly attractive rates. We remain optimistic about the future, especially with regards to activity and how pricing will develop in light of the increasing demand and the fact that we’re taking delivery of our two new builds, which are among the most capable planned or under construction at Q4 2024 and early 2025, which will set them up well for the forecasted growth for 12 plus megawatt turbine. Thanks, James.

James Doyle: Thanks, Sebastian. Slide 10, please. First quarter revenue was $22.4 million, an increase of $5.8 million from the fourth quarter. The contracted revenue for 2022 now stands at $152 million, and (ph) $167 million including options. Compared to last quarter, we've increased our 2022 annual EBITDA by $25 million to $30 million with the amendment to the Zaratan contract and additional contracts on the NG 2500s. Daily vessel operating expenses decreased on the Scylla and Zaratan, but still remain elevated due to higher crewing and travel costs as a result of COVID. Operating expenses increased in the NG 2500s and this was largely due to getting the vessels ready for upcoming employment contracts. In addition two of the NG 2500 vessels were idle last year and incurred additional costs ahead of their contracts. We expect these costs to decline as COVID eases, but we recommend using a daily OpEx of $50,000 a day for the Zaratan and Scylla and 21,000 per day for the NG 2500s for the second quarter. Similar to last quarter, we've updated the estimated revenue and project cost by quarter and feel this is the best way to simplify and improve the transparency of earnings and costs. I think I speak for all of us, but we are certainly looking forward to the materialization of contracts in the upcoming quarters. Side 11, please. Our new $175 million loan facility completes the restructuring of the balance sheet inherited by – from Seajacks. We expect to draw on this facility this week, after which we will repay the remaining $78 million in outstanding debt and it will be the company's only credit facility. The new loan facility, our increasing contractual backlog and unrealized gain in Scorpio Tankers will continue to strengthen the balance sheet. To the bottom right, we can see the expected CapEx payments on our two new building vessels by year, as well as the expected debt drawdown on the vessels upon delivery. We expect the new builds to be financed at 60% of their contract value. Slide 13 investment highlights. And that is leading on our wind turbine installation vessels and the only U.S. listed company and its type. We have an experienced management team and developed global platform with operations in Europe, the United States and Asia. Since November, the company has increased its contractual backlog on our existing asset base by almost $170 million including options. In addition, we have contracted, our two largest WTIVs Scylla and Zaratan for 2022 and 2023. Our two high specification newbuilds offer attractive returns and allow the company to install next generation wind turbines. The outlook for offshore wind is significant. Demand for offshore wind as increase where suppliers remained relatively subdued. We are excited about the future of the company and our role in the transition to a cleaner and more sustainable future. With that, I would now like to turn it over to Q&A.

Operator: Thank you, James. [Operator Instructions] Your first question comes from the line of Greg Lewis with BTIG. Your line is open.

Greg Lewis: Yeah. Hi. Thank you. Good afternoon, and you could asked to do everyone (ph). Realizing that the new builds are still a couple of years out, maybe if you could provide some color around how that market is evolving in terms of the contracting and the appetite from customers for those assets and maybe how we should be thinking about the timing of potentially, whether it's in LOI or maybe even a more firm contract as we kind of move forward here?

Emanuele Lauro: Yeah. Sure. I can answer that. I think it's safe to say that the tendering activity has increased kind of considerably year-on-year and we continue to see demand growth for these very capable assets. With regards to timing, it's difficult to give kind of particular guidance on that, because what we're really looking for is, is to find the right job for those assets. The right project that allows us to optimize the economics. That being said, our clients are definitely feeling that there is limited supply of these vessels, as we get into the ‘25, ‘26 years. And as a result of that we are actively looking to secure vessels to even a reservation agreements in place and what have you. So I can't give you more specific guidance than that, other than there is definitely a feeling from the client side or we understand from the client side that as soon they can secure capacity the better -- they've just got to still run the project through their procurement teams.

Greg Lewis: Okay. Great. Thank you for that. And then, I did want to touch on the multi-year contract in the North Sea, it was interesting to see that the customer was willing to take contracted for ’23, ‘24 and 2025. Is that kind of just -- do we think that's a potential function of the strengthening environment for all maritime assets in the North Sea on the back of a more constructive oil price and increasing activity. But really what I'm trying to understand is they're becoming more scarcity in the North Sea after, really a couple of years where it seems like that vessel market was having challenges on multiple fronts. It seems like several merchants kind of [Multiple Speakers].

Sebastian Brooke: There were a number of [indiscernible] But yes, I'd say the trajectory changed. I think that that's reflected in day rate, that's reflected in utilization and that's reflected in the fact that there is just increased activity across the board like you rightly say there are maintenance requirements. There are people wanting to upgrade their infrastructure, so that they can continue to produce gas. There are people, as the installed capacity goes in offshore wind, a lot of these, some of these turbines are getting older and they need maintenance. So, and also on the oil and gas side there's obviously increased demand there. So the way, I would just from a very basic kind of level look at it is, rates are headed up across most asset classes included ours, utilization is improving for sure. And people are beginning to get the kind of mass in the baseline of work to be able to commit for a number of months, multiple years in advance.

Greg Lewis: Okay. Great. And then, I did want to touch on one other question. I'm not sure, if you use on the line or not, but as we said, congratulations on that amendment that $8.5 million amendment on Zaratan, as we realize that in 2022. How should we think about that on a revenue recognition. Is that a lump sum payment or is that something that get delivered? Does it kind of just amortize over the life of the contract and any kind of color around that?

James Doyle: Well, Greg, I mean we amortize, sorry we recognize revenue when it's invoiced and we're obviously you're expecting to be invoicing during this quarter. So you will expect to see that coming into the results in future quarters.

Greg Lewis: Okay. But that's more of a lump sum. I mean, that [indiscernible]. A lump sum if we amortize either we realize it over the court -- over the life of the contract?

James Doyle: Yes.

Greg Lewis: Okay. Perfect. Thank you.

Operator: Thank you. And our next question comes from the line of Turner Holm with Clarksons. Your line is open.

Turner Holm: Hey, gentlemen. Good morning and good afternoon. I just wanted to follow up on the Zaratan. Congratulations on new contract there in 2023, but wanted to see if you could provide any more color. Is there a lot of project costs in that new contract or is that a clean rate and kind of how does that rate look like relative to what you're working on in 2022?

Sebastian Brooke: James?

James Doyle: Yeah, sure. Turner, the rate does not include project costs. We've broken those out separately by quarter for the upcoming quarters. And we haven't publicly disclosed what those are yet, but we can, at a later date.

Turner Holm: Okay. Yeah. I mean, directionally, is it similar to what you have in 2022 or higher or lower?

James Doyle: Directionally, it looks lower than the project dedicated to share.

Sebastian Brooke: Okay. As I said, there is a nuance to that. Sorry, Turner, just to interrupt, there is nuance to that. We’re talking about the T&I contracts where there are multiple as contingency more have you in the cost build-ups for the Akita Noshiro where this is fairly straightforward kind of time charter contract.

Turner Holm: Okay. Got it. Thanks, Sebastian. And then just to follow up a little bit on the discussions for potential new build contracts going forward. In the UK, there's the CFD Round 4, which is expected to conclude sometime over the next couple of months. I think early July is what's being discussed? Is there any beneficial sort of aspects if the Seajacks being UK base for those contracts and when could that type of work to be awarded?

Sebastian Brooke: Yes. There's definitely an increased focus on local content and the kind of rules around that are actually getting tighter with time compared to where they were two or three years ago. So there's increased focus on that and obviously we as really the only UK based installation contractor would benefit from that. Each of those projects are still running procurement at different speeds, they will have their procurement systems. It would -- it will enable certain projects to make larger commitments. So go beyond the reservation fee and probably start having termination fees, but I really can't be more specific than that.

Turner Holm: Okay. But it sounds like maybe potential later this year is for some of those contracts. But little bit different project by project, that's fair.

Sebastian Brooke: Yeah.

Turner Holm: Okay. And then just one quick last one for me is that I think newbuild prices for basically every type of shape have been going up and I just wonder, if you all have any thoughts about, if you're going to repeat the two orders you have today, what would that look like and then what would that cost, just trying to get an indication of the replacement value for those ships and how that might have changed, I guess in recent months? Thanks.

Sebastian Brooke: Turner, Cameron anecdotally, we're looking at 10% to 15% up on the price at which we ordered those vessels.

Turner Holm: Yeah, I suspect it, sir. Okay. All right. Thanks so much. I appreciate it.

Operator: Thank you. [Operator Instructions] And our next question comes from the line of Liam Burke with B. Riley. Your line is open.

Liam Burke: Thank you. On the Zaratan, you’ve got a gap, but I guess in the beginning of 2023 roughly the end of ’22. Is it possible to fit in another contract or the logistics of moving from one project to another make it difficult to do that?

Sebastian Brooke: So it's good question the logistics of moving from one contract to the other are complicated for sure. I think that, how I look at it is rather like Zaratan on Akita project, so we secured a kind of anchor baseline of work, it may be possible to bring that forward and equally there may be --maybe options on the back end, but it's not going to be -- we won't be bringing it forward two or three months, because we are going from one project to the other and we have to demobilized and mobilize. So there is an option to extend on the front end, but not multiple months.

Liam Burke: Great. Thank you. And on the NG 2500s, the Leviathan looks like it will get -- it looks like it's off to a good start in 2023, understanding these are shorter-term contracts and it's tough to gauge, but is the 2023 market looking similar to what you've been doing in ‘22 with the crack Hydra?

Sebastian Brooke: Yeah. I mean there's a lot of activity, and like I said there is activity across the board. So if you look at the individual markets, you've got the maintenance markets are increasing, but the installed capacity and we're definitely seeing that from the activity side. Those are involved and trying to enhance production of their offshore oil and gas platforms. They're obviously very interested in finding ways to kind of secure additional supply and equally those that are maintaining the infrastructure are very focused on keeping that up and running. So, yes, I'd say across the board there is increased activity on the 2500. Just going back to the Zaratan question. There are also -- there is also, if you look at how that contract is built up, there is an operating period, but there's also a transit period that were paid for and mobilization period that were paid for, so it already does extend a bit on the front end and it just could extend a bit more.

Liam Burke: Great. Thank you very much.

Operator: Thank you. And this concludes our question-and-answer session. I would now like to turn the call back to Emmanuel for any remarks.

Emanuele Lauro: We do not have any closing remarks, apart from thanking everybody for your time and look forward to speaking to you soon. Have a good day.

Operator: Thank you. And this concludes today's conference call. Thank you for participating. You may now disconnect.