Seatrium Limited (5E2) Earnings Call Transcript & Summary

Good morning. Welcome to Seatrium Limited First Half 2023 Results Presentation. Today, we have with us Mr. Chris Ong, Chief Executive Officer; and Mr. Paul Tan, Acting Group Finance Director. Before we begin, a general disclaimer, please. Thank you for the kind attention. We will now have our CEO, Mr. Ong, please?

Good morning, everyone. Thank you for joining us at Seatrium Limited's First Half 2023 results webcast. Since the completion of the combination in February this year, Seatrium has made notable progress in the delivery of our pipeline of projects. The continued buildup of our order book is also a testament to Seatrium's ambition for sustainable growth as a premier global player, leveraging on our combined competencies and capabilities to meet our customers' needs. Through our suite of products spending across oil and gas production facilities, floating liquefied natural gas solutions, offshore renewables and cleaner/green solutions, Seatrium is building future-ready capabilities by leveraging our engineering knowledge and solutions to support the industry's energy transition towards a sustainable operative environment. The group secured SGD 4.3 billion of new orders in first half 2023, bringing our net order book to over SGD 19 billion, with deliveries till 2030. Renewables and cleaner/green solution comprise approximately 40% of this net order book. Supported by the delivery of 4 major projects during this period, the group recorded a revenue of SGD 2.9 billion for first half 2023 compared to SGD 1.1 billion during the corresponding period last year. This increase in revenue was attributed to the combination's consolidation of projects and their continued operational milestones and deliveries. Our strong operational performance has enabled the group to achieve a significantly improved EBITDA of SGD 258 million before provisions. Even after accounting for provisions for contracts and merger expenses, the group still achieved a positive EBITDA of SGD 27 million. We will continue to focus on our project management and executions, in order to further strengthen our EBITDA performance. While the group still reported a net loss in first half 2023, key measures are being worked on to steer the group back to net profitability. This includes the streamlining of the group cost structure and the completion of the ongoing capital restructuring. We will closely monitor the working capital needs of the group and will continue to adopt a disciplined approach to cash flow as well as liquidity management. This will be further addressed in the financial performance segment of this briefing. We have had a busy start to 2023 with successive deliveries of 4 major projects in first half 2023. We delivered the third zero-emission full battery-operated Ropax ferry designed and built for Norled; third dual-fuel newbuild LNG-powered trailing suction hopper dredger for Van Oord; second of the 2 LNG-powered containership for Pasha Hawaii; FPSO modification and upgrade for BW Offshore. Seatrium continues to demonstrate our market leadership in Repair & Upgrade segment with 144 vessels serviced at our network of yards in first half 2023, compared with 96 projects in the same period last year. This include 28 LNG carrier refits, 14 cruise ship repair/upgrades as well as conversion and major refits of offshore projects such as FSRUs and FPSOs. The group currently has more than 25 projects under execution. I will highlight some of the key projects. Shell Whale FPU - We recently completed the integration of a mega topside with Shell Whale FPU hull in a single lift using our game-changing 30,000-tonne Goliath crane at Tuas Boulevard Yard in second half -- second quarter 2023. This project will also benefit from the synergies and experience from earlier Shell Vito FPU project. It also demonstrates how the yard's enormous lifting capacity has become a winning differentiator for Seatrium's project executions. Petrobras EPC FPSOs - A series of EPC FPSO newbuild projects, P-78, P-80, P-82 and P-83 are in various phases of construction for Petrobras, for Buzios pre-salt development in offshore Brazil. These are being executed across different facilities in Singapore and Brazil, made only possible through harnessing Seatrium's global network of yards. Gimi FLNG - Gimi, the second of the 3 EPC FLNG conversions for Golar LNG, is undergoing final phase of commissioning and testing, with scheduled completion in third quarter 2023 for deployment in offshore Mauritania and Senegal. RWE Renewables HVDC Offshore Converter Platform - Fabrication is on track for RWE Renewables' 1.4 gigawatt HVDC Offshore Converter Platform for Sofia Offshore Farm in U.K. North Sea. Sofia is slated to be one of the largest wind farms in the world when completed. DolWin 5 - TenneT's Offshore HVDC Converter Station for DolWin 5 Offshore Wind Farm is on track for sail-away in third quarter 2023 for the next phase of works prior to installation in the German sector of the North Sea. Two WTIVs for the U.S. Market - Seatrium is constructing 2 wind turbine installation vessels for Dominion Energy and Maersk Supply Service to service the U.S. market. We expect continued strong execution with successive project deliveries and good progression on these existing projects. In fact, we have 11 more major projects scheduled for completion by the end of this year. The new orders of SGD 4.3 billion secured in first half 2023 include a landmark win from TenneT to construct three 2 gigawatt HVDC Offshore Converter Platforms. These will be the biggest and the most powerful of the kind in the industry to serve TenneT's 3 offshore wind farm projects off the coast of Netherlands. A SGD 500 million contract for 2 offshore wind farm substations for Empire Offshore Wind for installation in the east coast of the U.S. to power more than 1 million homes in New York and support U.S. energy transition goals. An EPCI contract win from Chevron for its LNG fleet modification. Innovation and technology are enablers of our industry's commitment towards decarbonization and a sustainable operating environment. On this front, Seatrium continues to advance our technologies and new product development through strategic collaboration and partnerships. In a tie-up with Technology Centre for Offshore and Marine, Singapore, the Seatrium-TCOM Ocean Lab has been established to advance the design and operational performance of smart ocean system and infrastructure. This also saw a master research collaboration agreement signed on 27 April 2023. Seatrium and ABS have collaborated to advance Pioneering Digital Transformation with Smart Yard Initiatives. In fact, Seatrium Mobile Wearable Personal Device Monitoring System has received Product Design Assessment approval from ABS in April 2023. Our wholly-owned subsidiary, LNG Marin, has entered into a joint development project with partners GTT, TotalEnergies and Bureau Veritas to develop a 150,000 cubic meter liquid hydrogen carrier concept design. This is to pave the way for safe and efficient transport of hydrogen at sea for maritime decarbonization. In the area of sustainability, the group's efforts to put sustainability in the forefront of our business are outlined by our collective affirmation of commitment to ESG. We have in place a dedicated Corporate Social Responsibility committee established to support the Board and the Management on ESG matters. Honing in on our execution centers, the drive for sustainable yard operation has resulted in the adoption of renewable energy sources to power Seatrium's yards in Singapore, the Philippines, China and Brazil. We have also gained traction in this area from a financing perspective. The group has secured green trade finance facilities for banker's guarantee worth SGD 1.1 billion to finance our sustainability efforts. We will continue on our sustainability journey in order not only to do well for our stakeholders, but also to do good for the community and environment. In the face of our rapidly evolving industry, we continue to take steps to position Seatrium at the center of global energy transition to a low-carbon economy. Amid the ongoing energy transition and heightened concerns for energy security, the industry outlook for oil and gas, offshore renewables and other green solutions continues to improve and strengthen. In particular, the prospects for offshore wind-related orders will continue to be driven by Europe and the U.S. needs to meet the capacity targets by 2040. These targets are likely to be accelerated due to the above-mentioned increasing momentum of energy transition and governmental goals of net zero emission. Riding on these prospects, Seatrium is working on multiple tender opportunities and endeavors to strategically convert this into firm, quality contracts. We anticipate operational and financial performance to continue to improve in tandem. Since the kickoff of our Seatrium brand launch in March, the group continues on our drive to engage all our stakeholders on our new corporate identity and brand promise. As I had covered during the first quarter 2023 business update, Seatrium's post-merger implementation plans we are being executed, including a focus on unlocking synergies to create long-term value for the future. We are on track on our transformation journey, with oversight through a dedicated Board Committee and Transformation team. The organization's capital structure and strategy reviews are also both underway and are expected to be completed by end 2023. Let me now pass the discussion to Paul Tan, our Group Finance Director, who will share more details on our first half 2023 financial performance. Thank you.

Thank you, Chris, and good morning to all. Before I take you through the group's financial performance, I would like to highlight that the financial results reflect the completion of the combination with Keppel Offshore & Marine, now known as Seatrium Offshore & Marine on 28 February 2023. For the first half of 2023, the group achieved a positive EBITDA of SGD 27 million. However, if we strip out the provision for contracts and merger expenses, EBITDA will be SGD 258 million. Both this compared favorably with a negative EBITDA of SGD 19 million for the first half of 2022. The group's revenue was SGD 2.9 billion, representing a significant 164% increase year-on-year. This was due to the consolidation of projects following the completion of the combination, strong operational execution, achievement of production milestones as well as initial contribution from new projects. Free cash flow -- free cash outflow was SGD 173 million compared to free cash inflow of SGD 297 million in the corresponding period in 2022. Higher receivables, purchases of inventories and materials for contracts resulted in the cash outflow. There were 4 projects deliveries compared to 7 project deliveries in the first half of 2022. Net gearing was 0.17x on 30th June compared to 0.26x on 31st December '22. The decrease was due to higher equity because of shares issued for the acquisition of Seatrium Offshore & Marine. Net loss was higher year-on-year at SGD 264 million compared to SGD 143 million in the first half of 2022, due to the provision for contracts and merger expenses, higher net finance costs and tax expenses. Excluding the provision for contracts and merger extreme, net loss was an improved SGD 33 million. Net asset value per share was SGD 0.12 and net tangible assets per share was SGD 0.06. This is because of the goodwill on acquisition of Seatrium Offshore & Marine. To date, the group has secured new contracts of SGD 4.3 billion, primarily from cleaner/green solution. Our net order book remains robust at SGD 19.7 billion with deliveries extending into 2030. For the first half of 2023, the group revenue increased to SGD 2.9 billion compared to SGD 1.1 billion in the same period last year. However, losses were higher because of provision for contracts and merger expenses. The group result was also impacted by the higher depreciation and amortization of intangibles of SGD 200 million in the half year compared to SGD 96 million in the first half of 2022. Consequently, the group registered a higher net loss of SGD 264 million. The group expects to continue to report a net loss for the full financial year 2023. Shareholders' funds increased significantly from SGD 3.8 billion at the end of last year to SGD 8.2 billion at the end of June 2023. This is attributable to new shares issued to Keppel Corp. as consideration for the acquisition of Seatrium Offshore & Marine. The group's net debt increased to SGD 1.4 billion on 30th June 2023 as borrowing increased to execute the order book. Despite the higher net debt, net gearing ratio improves to 0.17x. This is due to the higher equity base. On 30th June 2023, we recorded a negative net working capital of SGD 1.45 billion. However, if we take into consideration balances such as advances, prepayments and contract liabilities that are not expected to realize in the next 12 months, the group's’ negative working capital lowered to SGD 532 million. The negative working capital was due to reclassification of loans to short term as they become due in the next 12 months. We plan to refinance the loan of the group with longer-term arrangements. We are in discussions with banks on refinancing the loans. We continue to adopt a disciplined approach to cash flow and liquidity management. Barring unforeseen developments, we believe we have sufficient debt headrooms and with existing facilities and continued support of our bankers and bondholders, we will be able to execute our secured orders and meet our liquidity needs. This slide shows our free cash flow, which I have explained earlier. Gross debt on 30th June was SGD 3.7 billion, and cash and cash equivalent was SGD 2.3 billion. We have just announced the utilization of SGD 200 million of our 2021 Rights Issue proceeds. The balance from the Rights Issue now is approximately SGD 400 million. The group will continue to be prudent in its fund management and will manage towards the right mix of borrowings. I will now hand over the webcast to Chris for the question-and-answer session. Thank you.

Thank you, Paul. Now we will now open the floor to Q&A. Please feel free to ask your question online. I think we have the first question from CIMB. Siew Khee asked 5 questions in total. First one, can you please share how much is the provision for merger expenses? What are the key expenses? Are there any more in the quarters ahead? I think I'll let Paul answer that first before I move on to the second one.

Okay. Siew Khee, the merger expense comprised principally professional fees for the combination as well as transformation and integration costs. This cost will reduce over time.

Thank you, Paul. Second question is how much is Repair & Upgrades revenue given that the volume has gone up by 50% year-on-year? Siew Khee, RU revenue is -- for first half 2023 is 500 -- round about SGD 500 million, and our Repair & Upgrade business is experiencing a higher book load in quarter 2 2023. And we expect a good market recovery momentum to continue to increase the incoming quarters. But we are very focused on niche market segments and the higher value-add repair projects like LNGC, FSRU, FSU, cruise ship navy vessel and periodic dry docking and life extension. Now the third question is, what projects do you need to provide for higher costs? Why is there a need for this? We have guided that the provision for contracts are recorded following management assessment of project activity largely from the U.S. operation. As what we mentioned, due to the higher cost and also for the manpower shortages in that area that we are -- we have assessed our contracts over there in the U.S. How -- the fourth question is how far ahead are your repair capacity and yard booked? Well, if you ask specifically repairs, I think that we have a good suite of dry docks and also keysight space right now. And I think the whole group is actually looking at the contracts that are visible and we are open to taking more projects. Right now, we are, as mentioned, looking at niche market and our regular customers who believe in our capabilities. And it's not only just for Singapore. Seatrium has a global network of yards and facilities. And we would partner up with our regular customers who are able to give us visibility on the long-term plan on all yard fleet so that we can build it into our slots that's available, and we are still pursuing and tendering for projects, so we are not fully booked yet in that aspect. Question number 5. Are Petrobras P-84, P-85, there's -- relatively bigger sized contracts that you are building on now? If not, what are other projects you are bidding that you can share? I think P-84 and P-85 is public knowledge. We are actively participating in that, and we are strategizing on heading in our bid. There are other opportunities. In fact, the market has quite a number of tenders out there right now, and it spans from oil and gas production facilities to floating LNG solutions and, of course, offshore renewable projects. So yes, we are not only busy executing the order book, but we are also busy out there chasing for more projects. Okay. We have a question from Rahul from HSBC. Thank you, Rahul. Rahul asked, could you provide more color on the provision for contracts and merger expenses like nature of provision? Why is there a need and split between the 2 contract versus merger expenses? And can we assume that we start at a clean account from second half of 2023? Rahul, we have already addressed that in an earlier question. Whether we can start on a clean account, management is always on lookout and also assessing our situation every quarter and every half. So we'll update when there is anything that's material. On the guidance for loss of 2023, right to say it is on reported basis. Paul, do you want to take that?

Yes, it will be on a reported basis, the loss for 2023. And I think whether we will be profitable next year, I think it's something that we are working hard towards.

Yes. I think, Rahul, as we have always shared, the group is very focused in our EBITDA performance. That goes to show that we are executing the projects and the capital structure review and also the strategic review will actually help us to tackle how do we -- how are we optimizing the way that we are structured, right? Next question is from [ Yun Sin ]. The question goes that what is keeping the group from being profitable in 2023? I think -- thanks, [ Yun Sin ] for the question. I think that right now, if we take a look at the performance itself, based on adjusted EBITDA, we are already showing a tremendous improvement of a margin of near to 9%. And on top of that, on an adjusted basis, the net loss actually has narrowed to SGD 33 million. We continue to work hard on that, and I think that there's still a tailwind coming off from the last downturn. And at the same time, the projects that we have secured are still building up. So we are building up our execution excellence to ensure that we are able to translate that to the bottom line. We have a question from Terence Chua from Mizuho. Chris, Paul, thanks for the presentation. Thank you very much, Terence. Could you share more details on the green finance trade financing? Are there incentives that you can meet that will qualify you for a better funding? Well, we have successfully secured a green trade finance facility from OCBC Bank and we secured the green trade financing facility mainly for the banker's guarantee that's worth SGD 1.1 billion to finance the group's sustainability effort. The facility can -- there's a fixed rule of how we can utilize that, and we follow very closely to the green loan principle. So with this facility, we can be more focused on securing more new renewable and decarbonization projects and, well, it goes to show that the market and the bankers are in full support for Seatrium to grow in that area. Next question is from Jame Osman from Citi. Jame asked question. You're welcome and you're always welcome to ask questions. Four questions from Jame. For the SGD 231 million of provision amount, which was made, could you provide a split between what was related more to the merger and integration versus what was for contracts, et cetera? Paul, do you want to take that first?

Yes. I think the provision for contracts is a higher amount, okay. Was the merger and integration expenses, as we said, is for the combination and harmonization of the 2 organization? I think we don't provide a split of the 2. But the bulk of it -- the significant part of it is for the provision for contracts.