Eneti Inc. (NYSE:NETI) Q3 2023 Earnings Call Transcript

Eneti Inc. (NYSE:NETI) Q3 2023 Earnings Call Transcript November 14, 2023

Eneti Inc. beats earnings expectations. Reported EPS is $0.48, expectations were $0.31.

Operator: Good morning, and welcome to the Eneti Inc. Third Quarter 2023 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 Investor Relations. Please go ahead.

James Doyle: Thank you for joining us today. Welcome to the Eneti Inc. Third Quarter 2023 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; Michael Ferrante, Chief Accounting Officer; and Sebastian Brooke, Chief Executive Officer of Seajacks. Earlier today, we issued our third quarter earnings press release, which is available on our website, enetiinc.com. The information discussed on this call is based on information as of today, November 14, 2023, 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 Eneti Inc.’s SEC filings, which are available at enetiinc.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. After opening remarks, we’ll go to Q&A. Now I’d like to introduce our Chief Executive Officer, Emanuele Lauro.

Emanuele Lauro: Thank you, James. Welcome, everybody, and thank you for joining us today. The third quarter was a productive quarter for the company on many different levels. We have generated more than $53 million of revenue and an adjusted net income of $18.5 million. Since September, we have announced 3 employment contracts which are expected to generate between $250 million and $330 million of revenue. This is figures after project costs. For our new buildings, we have secured 2 major contracts at rates in excess of $350,000 per day. And even more impressively, we’ve secured $255,000 per day contract for the Scylla, which is starting in 2024 with a perfectly timely start upon conclusion of our current employment. Recently, the increasing attention on the U.S. offshore wind market and its challenges has somewhat overshadowed the strength in Europe and Asia for offshore wind.

We do expect the U.S. to overcome these challenges, but we must highlight that this is a global market and one in which the U.S. represents only a portion of the overall demand. And this is where our Eneti via Seajacks makes a difference with its global presence in markets like Asia and Europe as well as the United States. The day rates on our new contracts are reflecting a tightening of supply and demand for offshore wind on a global level. And in addition, they are rates which generate significant returns on equity. Today, our total contractual backlog, including options for 2024 to 2027, it is just shy of $450 million. On the operational front, we expect to close very shortly, the previously announced $436 million new building financing for our 2 vessels, which are currently under construction in Korea.

In October, so last month, we completed the sale of the first NG 2500 vessel, the Seajacks Kraken, and we’ve delivered her to our new owner. In conjunction with this, the company has repaid $12.6 million of debt related to all 3, the NG 2,500s. And thus, the subsequent delivery of the 2 additional sister vessels will not have any further debt repayments. On the merger front, as we all know, in June, we’ve entered into a business combination agreement with Cadeler, the transaction remains on schedule. All antitrust and foreign direct investment regulators have either cleared the transaction or confirmed that they have no intention to do more work on this file. Last week, Cadeler announced the commencement of the share exchange offer for Eneti’s outstanding shares.

The merits and rationale of the transaction remain the same as a combined entity. The scale and our respective capabilities will create significant value at a time when offshore wind needs reliable partners and reliable solutions. We are confident that this combined entity will continue to drive positive outcomes for our shareholders as well as our customers. Scorpio Holdings will remain the second largest shareholder after the BW Group in the combined entity. And I myself will be nominated to serve as Vice Chairman of the company. Before turning the call over, I would like to ask you to continue to support us by tendering your shares in the exchange offer in support of the business combination. Thank you very much, and I would like now to open the call for questions, if any.

Thank you.

See also Top 10 Most Religious Catholic Countries With Highest Church Attendance In The World and 20 Countries That Have the Largest Oil Reserves in the World Heading into 2024.

Q&A Session

Operator: [Operator Instructions]. And our first question comes from Greg Lewis of BTIG.

Gregory Lewis: James, maybe you could remind us, as we go through the tender process, how much of the shares need to be tendered to push the merger forward?

James Doyle: 85%.

Gregory Lewis: Okay. And so in the event week — is the event date, is that 85% of total shares outstanding?

James Doyle: Of Eneti total shares outstanding, that’s correct. 85.01% according to the prospectus.

Gregory Lewis: Okay. And so in the event, just for clarity in the event that we’re unable to get to that, does then the time line expand which could then result in maybe — I guess if we don’t get to the 85%, how long of an extension do we get to kind of track down the other outstanding shares for the vote?

Emanuele Lauro: There are mechanism — it’s Emanuele here, Greg. There are mechanism to address that. However, at this stage, we are confident that we’re going to reach that threshold. So we are looking forward to reaching that threshold very soon.

Operator: The next question comes from Ben Nolan of Stifel.

Benjamin Nolan: Great. Mine are — I have two actually. So first of all, could you give a little bit of clarity with how the vessel reservation agreement works? At what point does that turn into a firm contract or maybe just a little detail around that.

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

Sebastian Brooke: Yes. I think without getting into any more detail than — has been made public already, it depends on the specific contract. But typically, you will have a period of months during which time you will conclude the charter contract around prearranged terms effectively to the main commercial terms and what have you, and that period of time varies depending on the client.

Benjamin Nolan: Okay. And I guess, in this case, it’s — you’re not able to disclose that time frame. Is that correct?

Sebastian Brooke: Correct. It’s — yes. Maybe you can disclose what’s been made public.

Benjamin Nolan: Yes. All right. Actually, for you, Sebastian, the second question — or my second question here is, obviously, in the last month or so, there’s been all sorts of turmoil as it relates to U.S. offshore wind, it’s been a challenge for a while. Does it — in your opinion, are we getting to that point where things are finally starting to reach the level of rationalization where pricing is going to be adjusted accordingly, and we’re — this is a sort of rip the band-aid off moment. And finally, the industry is in a position that it should be able to move forward? Or is it just going to take a lot longer, do you think?

Sebastian Brooke: No. I mean I think the way I look at it is if you — is the way that all the other markets have evolved. So there were these kind of turbulences in Europe in the early years when again, the industry is trying to rationalize itself. But in the end, it works itself through. You see the same in the Asia Pacific markets, in Taiwan. So I think that the U.S. is just kind of — it’s just a reflection of those other markets and it will be — it will study itself and it will perpetuate itself but on a kind of more reliable footing. So I don’t have any worries that it’s going to continue to develop like the other markets have. It’s just you have a few tumultuous moments early on.

Benjamin Nolan: Okay. And I guess, the — does this feel like a tipping point? Maybe as my question, is it like finally things can begin to move forward from here.

Sebastian Brooke: Yes, I think so. I mean I think like you said, it’s rip the band-aid off and not just trying to find a constructive way forward where it just becomes sustainable business. Yes. So I think it is a tipping point.

Operator: The next question comes from Liam Burke of B. Riley.

Liam Burke: On the new builds, the projects proceeding on schedule and on budget, Emanuele?

Emanuele Lauro: The short answer is yes, Liam. Proceeding on schedule and on budget so far. I don’t know if any of my colleagues want to add something, but that’s the short version.

Liam Burke: That’s fine. That will work. And on the last 2 assets, will they be sold or will you deliver them before the end of the fiscal year.

Emanuele Lauro: The expectation is to do so. We have time, I think, a month into the new year, but the expectation is to deliver a bit before the end of the year. But it may vary for one ship. For the last vessel, it may vary, but it’s largely relevant to the meaning of the transaction, right? It depends on the employment positioning and when the owner can step on board. So that’s a variation which is not going to be meaningfully impacting Eneti.

Operator: The next question comes from Adam Forsyth of Longspur Capital.

Adam Forsyth: Just some more questions probably around what we might describe as wider market turbulence. I just wonder what you’re seeing in terms of competitors. Do you think there’s any slowing down in terms of the competition putting on new orders for vessels? And actually, beyond that, do you think this could actually see a slowdown in the development of new turbine sizes? Do you think we might start to sort of cap around maybe slightly higher than current levels before we move to the next stage. I wonder also more specifically, are developers now building in longer contract lengths as a result of supply chain issues. Are they taking a more conservative view? And could that actually be beneficial to you. And then related to that, are you seeing any longer setup times between your own contracts?

I know you spoke of Scylla moving effectively seamlessly between these next 2 contracts. But could that be a rarity going forward? Or do you think that’s something you should be able to continue to achieve in the future?

Sebastian Brooke: If I start at the beginning of that, let me address the first 2. So the first one was, do we — can you just walk through the first question you have.

Adam Forsyth: Do you think given obviously, turbulence in the wider market…

Sebastian Brooke: Yes, sorry. So this is related to new buildings, right? So it’s due to additional supply. I think, ironically, that the current turbulence improve our market dynamics for exactly that reason is that those who are not already operating and don’t have a big footprint have got more queries rather than queries over the last 6 months and that actually kind of strengthens the existing operators footprint. And I think the future kind of — yes the future profitability and what have you because it’s just going to limit supply side and additional supply side. Sorry. And then the second question was?

Adam Forsyth: Slightly more tangential, I suppose. But do you think in terms of [indiscernible] do you think sizes would just keep going up or again, this turbulence, they’re under a bit of pressure now, maybe best is accepted.

Sebastian Brooke: Yes, I’ve actually thought for a while that all this, they’re going to continue to grow and grow and grow was kind of questionable theory, to be honest. And the basic premise of that is that it costs hundreds of millions of euros to develop a platform, a turbine platform. And over the last 10 years, the turbine suppliers haven’t been able to effectively get a decent return on that investment. That was my understanding on the very kind of basic level so that it was going to plateau anyway? But yes, I think you’re going to see much more disciplined probably, given their results recently from the big turbine suppliers. And as part of that, you have to deliver on — I’m sure they will have to generate profits on the existing platform before they start developing the much larger ones.

I’ve also kind of been pretty consistent in my view that I think that even if you do see some very large turbines going out, the scale of this market means that you don’t or won’t necessarily have to install the biggest turbines in the deepest water depths to be successful. Covering 80% of the market or 90% of the market will be just fine. So yes, so that’s what I think on the turbines. And then sorry, the third question?

Adam Forsyth: Contract lengths, are you seeing any change in your own contract lengths for a like-for-like project partly driven by supply chain issues, which are still seem to be out there in the wider development industry?

Sebastian Brooke: Yes. Well, I think Scylla was an interesting data point, right? She’s got direct continuation from the current employment and for an extended period, which again, we can’t go into the detail, but she could be used to cover multiple projects. So it’s — yes, I think the lack of supply of installation vessels means that the utilization and the rate structures should improve for the contracts, the installation contractors. And with regards to length of contracts kind of generally are we seeing length of contracts extend, yes, yes, you’ve still got developers trying to find out how do they secure a kind of critical part of the supply chain. And it is a critical piece. So yes, the more coverage they can give for themselves, the more comfort it gives them that they can deliver the projects that they’ve got on the books.

And so yes, I think, again, the opportunities are improving from the contractor side and whether that be long-term projects or us being able to determine what the start dates are of projects, but up until now, someone may say, you can’t compete on our project unless you are available from July 1. Suddenly, we might be able to say, well, actually, we’re not available until September 1, but that’s still good enough for the client because there aren’t any other options. So I think just across the board, yes, you’ll see improvements in utilization term, the ability to tie together projects, which has been exemplified by what we’ve just seen with Scylla.

Operator: 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 very much. We don’t have any closing remarks. We just thank you all for listening and look forward to speaking to you soon. Have a good day.

Operator: The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.