Earnings Transcript for NETI - Q3 Fiscal Year 2022

Operator: Good day and welcome to the Eneti Inc. Third Quarter 2022 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to James Doyle, Head of Corporate Development and IR. Please go ahead, sir.

James Doyle: Thank you for joining us today. Welcome to the Eneti Inc. Third 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 third 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, November 8, 2022. It may contain forward-looking statements that involve risks 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 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 it 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 & Presentations. These 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 or afternoon to all. Thank you for joining us today for Eneti’s third quarter 2022 results. In the third quarter, the company generated more than $69 million of revenue and close to $28 million of net income. And this excludes a realized meaningful gain in our investment in Scorpio Tankers. The demand has increased, rates are trending higher and utilization is picking up. And this is true for all different sizes of WTIVs. In addition, also the COVID related challenges like long quarantines or crew movements that have been affecting a global player like Eneti, who's operating assets worldwide have started to show signs of normalization. I am referring more specifically to Asia where a few of our assets are operating, that is gradually going towards a more westernized COVID approach. But recently, we have contracted one of the NG2500 for employment in 2023. And we're optimistic about further contracts at higher rates and longer duration in this class, but also in our bigger classes. We are in a fortunate position as these assets the 2500 more precisely can generate positive cash flow whilst we are exploring alternative solutions, including potential sale of the 2500. We are excited to contract our existing assets base and newbuildings at higher rates in what appears to be a very undersupplied market going forward. The contractual backlog continues to increase, the pipeline of potential projects for our newbuildings is becoming increasingly attractive. On the financing side in October, we have received an underwritten proposal from Crédit Agricole and Société Générale for $436 million term loan facility to finance approximately 65% of the purchase cost of the companies two WTIV newbuildings under construction currently in Korea. And our balance sheet continues to improve, strong operating cash flow from our existing fleet. And the divestiture of our holding in staying has created a strong liquidity position, in a position which given our conservative leverage allowed us to repurchase 2.3 million shares of the company at an attractive valuation. And looking forward we anticipate significant opportunities for the existing fleet, as well as for our newbuildings, as offshore wind demand accelerates and expands into new markets. We are excited to capitalize on these opportunities and as well as play our role in the transition to a cleaner and more sustainable future. I'd like to thank you for your support and I will now turn it over to Sebastian and James that will go through a few slides Thank you. Sebastian, please.

Sebastian Brooke: Thank you, Emanuele. I'm Sebastian Brook, I am COO and Co-Founder of Seajacks which has been installing wind turbines since 2009 and the operating platform of Eneti, responsible for operating and contracting the fleet of five vessels that are currently underwater, as well as the two next generation newbuilds which are scheduled for delivery in the second half of 2024, and the first half of 2025, respectively. Slide 7, please. As Emanuele says we have been building backlog over the past year. You can see from the chart on the bottom left of this slide that we have made good progress. This time a year ago, we had $104 million of contracted backlog. But over the past 12 months, we've increased this significantly, and it now stands at approximately $283 million. The Gantt chart on the right-hand side of the slide shows that we have secured employment for our two installation vessels Scylla Zaratan through the end of 2023. And there are conversations ongoing about potential follow-on work in Europe, Asia Pacific and North America. Contracting activity for these vessels is high and we believe that rates in the sector will continue to trend upwards. We're also busy building backlog for Kraken, Leviathan and Hydra in 2023. These vessels installed hundreds of the four megawatt turbines in the North Sea, and a typically employed in turbine maintenance, hookup and commissioning of offshore wind substations, and the maintenance and decommissioning of gas platforms in the region. Historically, these vessels have had shorter contracts which attended closer to the project start date, but given the increased levels of contracting activity, and limited supply of similar vessels in the region, clients are starting to commit now for work in the summer of 2023. From a supply side, it's worth noting that a few years ago, there were six similar vessels operating in the North Sea, but today there are only four which is effectively a reduction in supply by a third. From the demand side, we're seeing increased demand in all areas, as the smaller turbines approach 10 years in the water and require increasing levels of maintenance. The number of substations requiring hookup, commissioning and maintenance in the North Sea continues to increase in line with installed capacity. And the energy crisis has prompted utilities and oil and gas companies to maintain the critical gas infrastructure in this region. Slide 8, please. Eneti’s core market is wind turbine installation. And based on industry fundamentals, the outlook here is bright. Why is that? Firstly, we're operating in a growth industry. While analysts may have differing views on exactly what that growth rate is, they're all agreed that growth is robust and the revisions to forecasts are up rather than flat or down. This will lead to increase in demand for installation vessels. Secondly, there are significant barriers to entry. So the increases in supply are relatively muted and typically limited to companies with an existing footprint in the offshore wind industry. Thirdly, the CapEx associated with WTIV installation vessels is relatively low, around 2% of the total CapEx of an offshore wind farm. So increases in day rates are not going to jeopardize the financial viability of any specific wind farm, Eneti is well positioned to benefit from these positive market fundamentals, not only with Scylla Zaratan but also the two newbuildings that are scheduled for delivery in 2024 and 2025. Slide n9, please. Eneti’s two new buildings are scheduled for delivery in the second half of ‘24 and ‘25 respectively. When delivered, they will be amongst the most capable vessels on the water. And with the 2600-ton cranes are able to install the next generation of wind turbines, as the trend is for clients to install larger turbines, Eneti will be well positioned to benefit from the tightness that is forecasted at the high end of the installation market. Eneti newbuilds also provide our clients with flexibility, as they're not only able to install the largest turbines, but also foundations in the most challenging locations around the world. We believe that our clients value the added capability and the flexibility that these vessels provide. And this will ultimately be reflected in day rates and utilization. Contracting activity as high for the newbuildings. And we continue to see serious interest in work in Asia Pacific, Europe and the US from delivery and through to the end of the decade, as clients look to secure capacity early in a market that is predicted to have a shortage of vessels as we move into the second half of this decade. We are focused on finding the right contracts for these highly capable vessels, as they should enable us to generate, jet to generate the most attractive returns for our shareholders. We are an advanced discussions with a number of clients and are looking forward to announcing them to the market once they have finalized. With that I'll hand over to James Doyle. James?

James Doyle: Thank you, Sebastian. Slide 11, please. Third quarter revenue was $69.2 million, an increase from $8 million from the second quarter and the highest quarterly revenue as a wind turbine installation company. We recently contracted an NG2500 for a minimum of 103 days for next year, and are in the process of tendering for an additional contract in 2022. Seajacks has continued to demonstrate their ability to contract the existing fleet. And we're optimistic about the pipeline of contracts for newbuilds and outlook for the industry as a whole. Daily vessel operating expenses decreased on Scylla and experienced a slight increase on the Zaratan and NG2500 as all vessels were employed during the period. We recommend using daily OpEx of $50,000 a day for the Scylla, $20,000 a day for Zaratan and $24,000 a day for the NG2500 in the fourth quarter. Slide 12, please., Our balance sheet continues to improve with conservative leverage, strong operating cash flow and a healthy liquidity position. The financing of our newbuild vessels is underway. And we have received a proposal from Crédit Agricole and [Foxchain] for a $436 million term loan facility or 65% of the purchase cost of the newbuild. The bottom right, you can see the CapEx payment schedule and expected finance at a 50% financing arrangement. With that, I will turn it over to Q&A.

Operator: [Operator Instructions] And the first question will be from Greg Lewis with BTIG

Greg Lewis: Hi, thank you. And good. Good morning, and good afternoon. And thank you for taking my question. The first question I did want to ask is around the contract opportunities for the newbuilds and really around, realizing there's still plenty of time, but as we think about contracting cycles, and as people start positioning for ‘24 and ‘25, and just given the tightness in the market. Is there a sort of a seasonal cadence to when projects have these long lead time items fixed? i.e. yes, that's kind of what I'm wondering about.

Emanuele Lauro: Sebastian, do you want to take this?

Sebastian Brooke: Sure, Emanuele. No, I mean, in short, there's no real seasonal cadence to the announcement of contracts. All of our clients have different kind of procurement regimes and strategies. And so it makes it quite difficult to predict the exact timing of the conclusion and negotiations. But no, it’s steady trickle throughout the year.

Greg Lewis: Okay. Great. And then and then just another question I had around, you alluded in the prepared remarks about potential opportunities for monetizing the NG2500s. And how should we -- is there any kind of benchmarks or like, how should we be thinking about that realizing that it's my understanding that some of those vessels are working in the more conventional energy markets and those conventional energy markets are tight. That being said, we're in the North Sea, where typically we see some seasonal softness, any kind of color you can give around the potential around those assets.

Emanuele Lauro: I think, Greg, thanks for the question. I think we've been clear that we are evaluating alternatives on the assets, including the potential sales, so disposing of them. In the meantime, we are enjoying what is a positive momentum market, both in the offshore wind as well as the more traditional energy markets. Having said that, as we know NG2500 which were built installation vessels as we approached the new more modern turbines, it is apparent that they will not be capable to install those turbines and some that are already actually existing. When we merged with CJX, we've described one of the potential uses of these vessels in the maintenance field. And we came to the conclusion that we're happy to do alternative jobs until we find the right home for them. And if the right home is selling them, we are prepared to do that, too. So we don't -- it's not that we want to hide from plans. We've been upfront and open. But we just did not find the ultimate solution. But we are pretty relaxed, because whilst we are looking for the ultimate solutions, we are generating positive cash flows on the assets.

Greg Lewis: Yes, okay, great. And then just one for me around the buyback, realizing, hey we saw the sale of the Scorpio Tankers during the quarter. You have the cash position. I mean, it looks like the financing, I guess it looks like the potential amount it was greater than we were thinking. Is there any kind of way you think about the buyback versus like, how should we think about the buyback going forward here, knowing that you do have some capital commitments coming up over the next couple of years. That being said, you are -- it looks like we've lined up some financing, that's probably going to be available as we look at those next two years.

Robert Bugbee : Emanuele, maybe I can take that one. So, hi, this is Robert.

Emanuele Lauro: Please.

Robert Bugbee : Great. Thanks for the question. I think you should always, I think you're correct. This company is -- there's sort of a couple of stages here. The company took a great opportunity in buying the blocks, and it did. Very good opportunity, nice price. And the priority right now in the company is to get the first newbuilding employed. Once that newbuilding gets employed, then we get a lot more flexibility, a lot more flexibility over finances, a lot more certainty. So I think it's fair to say that we wouldn't -- we're not looking to buy back stock at the moment in Eneti, obviously as we say to an affiliate has been doing so Eneti’s buyback. But things can change once we get the first employment announced on the newbuilding.

Operator: And our next question will be from the line of Turner Holm from Clarksons.

Turner Holm: Hey, good morning, good afternoon, gentlemen. I just wanted to ask direct question on the contracting maybe in a slightly different way. I mean, given that most of these offshore wind projects are contracted several years ahead of time. What's the window, forgetting sort of matching up the delivery of the vessels with the appropriate contracts? I mean, do we have – what’s that timeline look like?

Emanuele Lauro: I think I asked that too, I mean, we're not, I think as a policy, we're not really going to follow what some of the peer group has done, which is sort of anticipate a contract and give some sort of timeline and then run risk of delays with the policy. We're going to not give any timelines since all contractors has been announced. And so [inaudible] or contract has been signed sorry, and they're just come with a press announcement. I think that I would follow what Sebastian has said that the market is busy that the whole space is improving. And we are negotiating with various customers, but it's important that we have the best asset out there, we've got the balance sheet that we can afford to wait and a little bit of patience is proving to be a good thing at the moment in the negotiating process. And I would just leave it at that.

Turner Holm: And understand and then obviously you all are doing a lot to narrow the discount to NAV and the stock. Stock has come up but I think most analysts have NAV numbers which are quite a bit higher than what it is but no, again you all have been I think taking a lot of actions that suggest that that gap should narrow, you're selling the sting shares talked about the potential to monetize the smaller assets. You bought back some stock? At what do you say you start considering, let's say broader strategic alternatives to narrow that gap for now.

Emanuele Lauro: Turner, Emanuele here, I think we are just doing what we said we would do. And we had some positions to clear like the sting stock, like the two newbuildings financing, which is coming along, we are now focusing on delivering, rather than thinking about anything else. So that's the focus, our head is there, we're happy with the last couple of quarters the way they have gone, focusing to make sure that we continue in this direction. And that's where we are. In the meantime, we were able to take advantage of the fact that the stock was trading massively at a discount to NAV and not only the company has purchased, buy, as done some buyback, but also some of our affiliates have taken advantage and bought a significant or meaningful amount of shares. So from a managerial standpoint, we're focusing on delivering from an opportunistic standpoint as a shareholder. We're looking at capitalizing on what is a clear dislocation in the stock price at present.

Operator: And our next question will be from Ben Nolan from Stifel.

Ben Nolan: Yes, thanks. So my first one, actually, it's probably a series of questions that are related to the 2500s. It's encouraging to maybe not surprising to hear that there's positive momentum there. I wanted to maybe see if you could frame out how you're thinking about those in a few ways, first of all, how you would maybe suggest that we think about utilization for those over the course of the year? Appreciating that you haven't yet won contracts, but just how you would think that would play out? And specifically also, if you think there's any chance of anything in the first quarter? I don't believe currently there's anything there for those. And then is it possible to frame in? You talked about rates being better. Is it possible to sort of even approximately say, okay, well, here's where we were maybe a year ago at this time versus now.

Emanuele Lauro: Sebastian, do you want to take -- you want to take this or shall I?

Sebastian Brooke: Emanuele, I'm happy to give kind of color on the activity levels. I mean, for us, we sit down and historically, or not historically, in recent years it's become a seasonal business. But in the good years, it wasn't. We had 100% utilization on our vessels. This is going back quite a few years now, what we're seeing is rather like on the installation side, for the 2500s, people are concerned about being able to secure the availability of next year, this means that people are actually inquiring about work in the shoulder seasons, again, just to secure availability, and that'll drive utilization. And with that comes rate. So a lot of the work that is being tendered at the moment is without being too specific about it is significantly above what I've seen in the last in quite a few years. So, without being more prescriptive than that, that's the general trend.

Ben Nolan: Okay, and so does that mean that there's possibility of first quarter revenue from this? Is it the pointer?

Sebastian Brooke: Yes, bidding on -- we're bidding on getting old contracts that are -- that have a start outside of what has recently become the kind of seasonal window of the spring and summer.

Ben Nolan: Okay. That's helpful. And my second question relates to the financing on the newbuildings. It's good to see that you're making progress there. I'm curious though, are you finding or it would seem to me I guess a way to phrase it is, it would seem to me that the terms and everything pricing everything around that financing would be better or easier if there were contracts on the assets. And, Robert, you talked about how you think about the contract, and which I totally understand, but if does it matter, I guess, am I wrong? Does it matter whether or not the assets or finances relates to the ability and pricing of financing?

Emanuele Lauro: I think it’s more of a psychological aspect than anything else. Because as you know, these are assets that have a lifespan of a couple of decades at least. And the contractual employment that one could announce is probably for a 12 months period instead. So I think that the what the lenders are coming to conclusion is that if you are building the right assets of the future, for the future, in quality yards, operated by quality management teams or operators, then they're happy to back this, whether they are going to put a price differentiation between the vessel that is employed or not, we haven't experienced that. They were not -- this is not what we've been proposed. And we are actually very satisfied with the terms and conditions that were offered to us on a fully underwritten deal that we are looking forward to finalize in the next couple of months.

Ben Nolan: Okay, so they don't, it's not a navigating issue for them, I guess.

Emanuele Lauro: No, it has not been. I think that the general mood on the renewable space and more specifically, the offshore wind space has been improving in the last couple of years from capital providers, both on the equity side as well as the lending side. So it's a general trend. But maybe it was a gating item two years ago, it is not today, or at least it is not for Eneti.

Ben Nolan: Okay, and just to make sure that I'm thinking about it, right. This is post-delivery financing. And prior to that you have shipyard financing program, I suppose at this point, much of the balance of the remaining CapEx there, is that right?

Emanuele Lauro: These are -- aspects to be considered. If you please.

James Doyle: [Inaudible] to ask that question. It's, we, at delivery, we receive the financing from the financial institutions and up to delivery, we pay the installments with available cash, which is which we have on hand and we're going to generate in the next two years.

Operator: Our next question is from Ethan Widell from B. Riley.

Ethan Widell: Hi, this is Ethan Widell calling in for Liam Burke, thanks for taking my question. So given the strong outlook from 2025 onward, should we expect to start seeing longer contracts from customers? And as you've been seeing that yet?

Sebastian Brooke: I'll take that. So we have -- so historically it has been a project-by-project industry as you're aware. And each of our clients has a different profile and a different kind of risk profile and ability to break out of this kind of project-by-project approach to the industry. But in short, the answer is yes. There are clients that understand there's going to be a shortage of vessels. There are discussions about potentially longer-term contracts. It's just that each of our clients goes at different speeds, so tough to work out when they'll materialize.

Ethan Widell: Helpful, thanks. And then do you anticipate being able to deploy the Zaratan again before for starting next large projects in mid-May ‘23.

Emanuele Lauro: No, I think the Zaratan is going to be demobilizing and transiting and re-mobilizing during that period.

Operator: Thank you, ladies and gentlemen. This concludes our question-and-answer session. I would like to turn the conference back over to Emanuele Lauro for any closing remarks.

Emanuele Lauro: Thank you, operator. No closing remarks, would just like to thank everybody for your time today and look forward to speaking to you individually in the next weeks and months. Thanks a lot. The call is finishes here.

Operator: Yes. Thank you, sir. Conference has now concluded. Thank you for attending today's presentation.