Seatrium Limited (OTCPK:SMBMF) Q2 2024 Earnings Conference Call August 1, 2024 10:00 PM ET
Company Participants
Judy Tan – Investor Relation and Corporate Communications
Chris Ong – Chief Executive Officer & Executive Director
Adrian Teng – Chief Financial Officer
Conference Call Participants
Unidentified Participant โ Unidentified Company
Luis Hilado – Citigroup
Rahul Bhatia – HSBC
Rajiv Bose – AGC
Siew Khee – CGS-CIMB
Horng Han – CLSA
Paul Chew – Phillip Securities
Benjamin HO – SPH
Zhiwei Foo – Macquarie
Ada Ng – OCBC
Yao โ Retail Investor
Liu Peng – Fullerton
Adrian Loh – UOB Kay Hian
Ryan – Morgan Stanley
Mayank Maheshwari – Morgan Stanley
Felicia Tan โ Unidentified Company
Jiang Jie – Cambridge Partners
Judy Tan
Good morning ladies and gentlemen. I am Judy, Head of Investor Relation and Corporate Communications at Seatrium. Welcome to Seatrium’s Limitedโs First Half 2024 financial Results Webcast Briefing. We have with us today, Mr. Chris Ong, Chief Executive Officer; and Mr. Adrian Teng, Chief Financial Officer.
To follow today’s webcast, please refer to our latest financial results documents, which are available on the SGXNet and our corporate website.
To commence today’s webcast, I would like to welcome Mr. Chris Ong to deliver the CEO address. Chris, please.
Chris Ong
Thank you Judy. Good morning, and welcome to Seatrium Groupโs First Half 2024 results presentation. I’m pleased to have with me, Mr Adrian Teng, Chief Financial Officer.
First Half 2024 was a busy, fruitful first half for Seatrium. We clinched several prized contracts to value add to our portfolio of projects, including the much-anticipated newbuild FPSO platforms P-84 and P-85 for Petrobras and the third 2GW HVDC Offshore Converter Platform for TenneT, as well as a number of Repairs and Upgrades projects worth over half a billion to date. We have also successfully completed our share consolidation exercise in May, and embarked on our inaugural SGD100 million share buyback program. At our Investor Day held earlier in March, we have laid out our longer-term strategy and 2028 financial targets, providing clarity on how the Group intends to leverage the strong industry tailwinds to chart our transformation journey from here.
This morning, we reported our first half 2024 financial results. I will spend some time to go through our operational performance and business outlook. Adrian will cover the financial performance in greater detail. I am pleased on behalf of the Group that Seatrium has delivered its first positive financial results in first half 2024 first half2024. First Half 2024 Revenue crossed SGD4 billion, a 39% increase from SGD2.9 billion in first half 2023. Underlying EBITDA was SGD390 million in first half 2024, a more than nine-fold increase over SGD36 million in the same period last year.
The Group achieved an underlying net profit of SGD115 million for first half 2024, reversing from a net loss of SGD264 million for first half 2023, a SGD379 million increase in absolute dollar terms.
Our profitability turnaround in first half 2024 and a significantly improved EBITDA reflects our strong focus on project execution, prudent cost management and improved operational efficiencies.
Seatriumโs net order book at SGD26.1 billion is at a decade high. In first half 2024 alone, we have secured over SGD13 billion in new orders. Our strong order backlog, comprising 32 projects with deliveries till 2031, will underpin our revenue visibility for the next few years, supported by our One Seatrium Global Delivery Model which enables us to scale our business. Today, we have orders from the worldโs largest oil & gas and renewable players, many of whom are repeat customers. This reflects the trust that our customers have in our ability to deliver quality assets on time and safely.
Across our key business segments, Seatrium is actively building a franchise of series-build projects to achieve operational efficiencies from project repeatability. In the renewables space, our order book has three 2GW HVDC offshore Converter Platforms for TenneT other than DolWin epilson and the Sofia HVDC platforms which have sailed away, as well as two wind turbine installation vessel (WTIV) projects and HVAC offshore substations. In Oil & Gas, we will solidify our leadership in offshore production assets across EPC projects in Floating Production Storage and Offloading platforms (FPSOs) and Floating Production Units (FPUs), as well as FPSO topsides fabrication/ integration contracts.
Our robust order book currently comprises six P-series new-build FPSOs for Petrobras, and we would have worked on six FPSOs for Exxon Mobil through SBM Offshore for Guyana, once the FPSO Jaguar comes online by 2027.
In repairs and upgrades, we have inked 26 alliances and long-term strategic partnerships over time, and will continue to do more. The ability to simplify and replicate designs and processes enhances productivity, reduces errors and quickens construction time, ultimately making it more sustainable and cost effective over time. We are now organized around a One Seatrium Global Delivery model where operations are closely coordinated across different yards globally, supported by centralized engineering and integrated technology resources. It effectively integrates our global assets and workforce onto an efficient operating platform, enabling Seatrium to be the only global player with end-to-end delivery capability in key continents. This will allow us to effectively scale, taking on new projects at any point in time, while harnessing the competitive advantage of the locations we operate in.
We are looking at an artist impression of the 2GW HVDC Converter Platform which we are currently working on for TenneT. We announced our Framework Cooperation Agreement with our consortium partner, GE Vernova and TenneT in March last year, and more recently in June, the award of the third contract for the Nederwiek 2 offshore wind farm in the Netherlands. We spent 18 months on design and engineering work, with construction to commence shortly for the Beta project and Gamma thereafter.
Seatrium continues to play a critical supporting role in maritime decarburization. In first half 2024, the Group added over SGD2.9 billion of projects in renewables and cleaner/ green solutions to the net order book. Even in the oil & gas space, we are helping our customers to extract more sustainably.
The latest P-84 and P-85 platforms, which are part of Petrobras’ new generation of FPSO platforms, are characterized by a high production capacity that prioritize sustainable practices with innovative technologies. Both FPSOs will incorporate advanced technologies such as zero routine flaring and venting, variable speed drives and measures to control emissions and capture CO2, including an all-electric concept, which focuses on efficient power generation and increased energy efficiency to achieve a 30% reduction in greenhouse gas emissions intensity. These features will enhance operational efficiency and reduce environmental impact, showcasing Seatrium’s commitment to responsible and sustainable operations.
In addition, the HVDC offshore converter platforms that we are working on underscores our commitment to helping our customers achieve their renewable energy goals by providing innovative and cost-effective solutions to accelerate the global energy transition.
Our R&U business has been growing, contributing to a steady baseload revenue for us. In first half 2024, we completed over 130 repairs, upgrades and conversions projects that contributed SGD517 million in revenue.
We have signed a total of 22 Favored Customer Contracts (FCCs), including the six we have announced year-to-date. FCCs facilitate forward capacity planning, joint value creation and support a steady flow of Repairs & Upgrades orders that contribute towards a recurring revenue base. Every docking space in our shipyard is valuable, and forward planning allows us to plan ahead for future projects.
The outlook for the offshore & marine industry remains positive, supported by broad-based demand across both the oil & gas and renewables sectors.
Seatrium is committed to sustaining its improved financial performance for the full year of 2024. The Groupโs overall performance for the year will depend on the completion of its legacy projects, the safe, timely, and on budget execution of its order book, and the implementation of identified cost saving initiatives to achieve a leaner cost structure.
Seatrium is well-positioned to benefit from the industry upturn, supported by a One Seatrium Delivery Model that integrates its global assets and workforce onto an efficient operating platform, allowing the Group to scale its business for accelerated growth.
We still have our challenges, and we are a work-in-progress in our transformation journey. We have a strong management and board that is focused on righting the ship, resolving legacy issues and putting us on the path to profitability. We are committed to delivering on our longer-term financial targets and creating value for our stakeholders.
I will now hand over to Adrian, our CFO, for the financial results review. Thank You
Adrian Teng
Thank you, Chris, and good morning to all. 2. I will now take you through the Groupโs financial performance.
For first half 2024, the Groupโs Revenue was SGD4.0 billion, a 39% increase year-on-year from our strong project execution. The Group achieved an Underlying EBITDA of SGD390 million in first half 2024, a more than nine-fold increase as compared to SGD36 million in first half 2023. Group Underlying Net Profit was SGD115 million, achieving a significant turnaround from a net loss of SGD264 million in the same period last year.
Our balance sheet is much stronger today. As at 30 June 2024, the net current assets stood at SGD700 million, reversing from a net current liabilities position of SGD1.5 billion last year. This positive swing of over SGD2.2 billion was driven by proactive capital management efforts in refinancing bank lines, obtaining new facilities, and managing key outstanding accounts receivables.
In first half 2024, our P-series projects contributed 55% to the overall revenue of SGD4.0 billion. There was good progress made in our P-series projects, including hull arrival and integration of topside modules prior to commissioning for P-78, and ongoing construction of the hull, living quarters and topside modules for P-80, P-82 and P-83. The Sturgeon Wind Turbine Installation Vessel and the 2-gigawatt High Voltage Direct Current Offshore Converter Platform projects were the other material revenue contributors in first half 2024.
Revenue from Repairs & Upgrades was SGD517 million in first half 2024, compared to SGD504 million in the same period last year, contributing to a growing baseload revenue for the Group.
First half 2024 Underlying EBITDA improvement from same period last year was driven by higher revenue, operating margin improvement, and lower overheads.
Our profit turnaround reflects our strong focus on project execution, improved gross margins, and prudent cost management. We are on track to realize the annual recurring savings of SGD300 million by next year.
First half2024 underlying return on Equity was positive at 3.6%, a step towards our ROE target of 8% or more, by 2028 or earlier.
In first half 2024, the group successfully divested the Batangas Yard in The Philippines and entered into an option to sell Crescent Yard in Singapore. These divestments come from the Groupโs strategic review to optimize its operations and yard footprint and will further contribute to savings on operating expenses going forward.
Net debt at 30 June 2024 increased to SGD1.8 billion from over SGD0.7 billion at the end of last year mainly due to increased working capital needs for ongoing projects. Net leverage ratio was 2.9 times as at 30 June 2024, within the 2028 Net leverage target of 3 times, which was shared during our Investor Day.
In first half 2024, free cash outflow was SGD1.0 billion mainly due to working capital needs for ongoing projects. We continue to adopt a disciplined approach to cash flow and liquidity management. We have adequate liquidity with more than SGD2.5 billion of cash and undrawn credit facilities as of 30 June 2024. To support Seatriumโs project needs for future business growth, we have secured a SGD1.1 billion three-year committed Global Syndicated Bank Guarantee Facility supported by a group of eight financial institutions. The flexible structure of this facility is a first-of-its-kind in the offshore & marine sector in Singapore.
As part of integrating sustainability into our financing strategy, we have also established Seatriumโs inaugural Sustainable Finance Framework which provides overarching principles and guidelines on the execution and management of sustainability-linked financing transactions and use of proceeds. The first sustainability framework in the offshore & marine industry to obtain an all-round strong and very strong ratings, the SFF is developed in accordance with international sustainability principles and guidelines which include key performance indicators and sustainability performance targets which are material to Seatriumโs sustainability strategy and business operations.
The three KPI are: 30% reduction in gross greenhouse gas from 2008 baseline by 2030. Second, doubling revenue from renewable energy solutions from 2023 baseline by 2030 and third a workplace injury rate below the Singapore national benchmark for the marine industry by at least 30% on a three-year rolling average basis.
Standard Chartered Bank was our sustainability advisor on this SFF and these targets were implemented into the $500 million credit facility Seatrium secured from SCB last year. We believe with this SFF in place, Seatrium can continue to diversity its funding base and further grow our sustainability-linked and green banking facilities to enjoy lower financing costs.
Seatriumโs net order book at SGD26.1 billion, comprising 32 projects with deliveries till 2031, will underpin our revenue visibility for the next seven years. Renewables and cleaner solutions comprise approximately 35% of our current record net order book.
We will now proceed to the Question-and-Answer session. 26. Thank You.
Question-and-Answer Session
Judy Tan
Thank you, Chris and Adrian. We’ve got various questions coming in on the webcast.
Unidentified Participant
The first question is, congrats on the set of positive first half 2024 results. Does management except second half 2024 to be profitable as well?
Chris Ong
Well, we are encouraged by these sets of results and to have achieved profitability in first half of 2024. The key to us is actually the improved EBITDA that reflects our strong focus on project execution and also operation efficiency as we have always communicated to the market. Of course the standard answer we do not provide forecast but we are committing — very committed to sustain our improved financial performance for the full year of 2024.
Now as I’ve mentioned in my speech that the overall performance will really depend on our ability to convert our order book, complete the legacy projects and also make sure that we are able to do our cost savings initiatives and land with a leaner cost structure. Right.
Thankfully the industry outlook remains positive and I think building on the progress that we have made, we will continue to stay focused to drive our operational excellence to sustain our financial performance.
Unidentified Participant
We’ve got a second question as well. You have a strong order book today, are there more billion dollar contracts we can expect?
Chris Ong
Well I won’t say every project is important regardless of value, but the order pipeline is healthy, supported as we mentioned, always mentioned that the megatrend in energy security and energy transition is on our side. We have announced on the 5th June that we have been awarded the letter intent by BP for Kaskida to do the early engineering works and we will continue to work with our customer around this area and we also have more Series B opportunities like FPSOs, FPUs and WTVs and also the Offshore Converted Platform, but more importantly, the decade high order book reflects our strong customer confidence in Seatrium and after one year of integration and our transformation still ongoing, it is attestation that our customer actually believe in our journey. So that’s very important to us.
Luis Hilado
The first question, underlying EBITDA margin was at almost double digits. Should we expect further improvement in the second half of 2024 or will the S curve of new large projects initially dampen the margin?
Adrian Teng
Improved margins in the first half is a very positive step in the right direction. As guided previously, we target mid-teens project margin levels since the merger and we continue to remain focused on that. Series building strategy should help us as well as repeating projects due to the ability to benefit from lessons learned and leveraging supply chain synergies and economies of scale.
Project management and delivery is a lot of hard work, there is a lot of focus on execution and we continue to remain very focused on that front.
Luis Hilado
How much was the Batangas sale, yard sale and is it not normalized for or basically breakeven?
Adrian Teng
We do not comment on the financial value of the divestment. We have said it before the divestment is part of the group’s strategic review to optimize our operations and yard footprint and this aligns with our One Seatrium global delivery model. The important thing is that this transaction is not expected to have a material impact on our annual, results.
Luis Hilado
Is there any update to the MAS, CAD investigation?
Chris Ong
There’s no latest update, keeping we are also eager for to put this behind us but at the present moment we can only fully cooperate with authorities and let the process run its cost and we will be very transparent in our disclosure and share any updates accordingly.
Unidentified Participant
A common question from a number of the analysts, the underlying numbers excludes the one off provision for the full and final settlement to MH Wirth, the SGD79 million. Where is this one off provision of SGD79 million recorded on the income statement?
Adrian Teng
This is recorded under cost of sales of SGD3. 9 billion.
Q โ RahulBhatia
Can you share more color on the gross margin evolution from first half 2024 versus the second half of 2023? From the net order book, it appears that the high proportion of revenue is related to projects for delivery in 2026 or 2027 and the legacy projects are at best at 0 margin. Considering this, why is the gross margin uplift half on half at 1.3% to 5.6% in first half 2024 versus the 4.3% underlying as that second half of 2023 and which of the project and which projects do you see contributing to the mid-teens gross margin?
Chris Ong
Well, I think I can start. CFO can take on the numbers. Key thing is that we have always said that the internal hurdle, risk adjusted hurdle that we always look for would be in the mid-teens and I think most of the contracts that we are getting satisfy that criteria, but if you look at the gross margin that’s in the report, it’s basically a blended gross margin and that includes some of the legacy projects that has impacted our overall margin itself.
Q โ RahulBhatia
Can you share what is the current cost of debt? How much of it is fixed versus floating? And do you see further refinancing opportunities to reduce the cost of debt?
Adrian Teng
If you work out the interest expense over the average loans outstanding, I think you would derive an approximate value of about 6%. We believe that we have guided the market in the range of We continue to look to reduce margins on our financing. We adopt a minimum 50% fixed ratio to provide certainty in our interest expense, while maintaining flexibility to take advantage of possible lower interest rate environment and we continue to proactively manage down our cost of capital.
Q โ RahulBhatia
The free cash outflow in the first half of 2024, is it fair to say it is more of timing issue given majority of the projects have milestone payments?
Adrian Teng
Timing wise we collect advance payments for most of our projects and we utilize these funds during the period which results in the cash outflow. As an update, we have also received the down payments for projects P-84 and P-85 of approximately a SGD1 billion in July and that will further improve our overall cash flow position.
Rajiv Bose
The new approach by Seatrium, it seems that for a new build FPSOs of subcontracting the house to an overseas yard as opposed to building the hull at Tuas Boulevard Yard. Is that a result of challenging experiences from the johan castberg FPSO hull constructed at TBY?
Chris Ong
Well, I think this is a fundamental misunderstanding of our execution model. It is not because of any projects in particular but I think I will focus your attention to what the One Seatrium Global Delivery Model means. Now first, key thing is that throughout the whole global footprint that we have, I have said many times that we have gone on to take a look at how to do the projects the most efficient and profitable way in each of our facilities.
Now, the decision to actually subcontract out the hull is not about anything other than the ability to scale, because when we take a look at construction of hull, we believe that we have partners that can actually get give us a better value from a holistic manner for the full contract. So that is the main decision around that. Without which, if we have not taken that decision, it will be very challenging to continue to scale the business in a way we want.
Rajiv Bose
Sevan Marine has been a wholly owned subsidiary of Seatrium for a number of years but has yet to build any new build cylindrical FPSO to date in its Singapore yards. Is there any prospect to cylindrical FPSO planned in the pipeline for the future?
Chris Ong
Well, Sevan continue to be a preferred solution especially in the harsh environment for some of our customers. They are constantly supporting not only on concepts for new build but they are also supporting existing customers on some of the engineering upgrades or questions. So, prospect for Sevan, moving forward, there will still be people looking for this type of solution. So, but we can’t dictate when the E&P FID is going to happen or when will they take a look, it’s largely dependent on fit for purpose type of approach.
Siew Khee
Congrats on your results. The first question, what were the key reasons for a strong EBITDA margin of 9.6%? Was there any cost write backs?
Adrian Teng
Thank you, Siew Khee. Clearly the strong EBITDA contribution is very much on the execution of our projects, on cost management and on supply chain management. There were divestment gains, which is in the numbers, but this is part of our overall strategy to divest noncore assets. We do have projects margin recoveries as well. Again, this is part of our overall project execution approach.
Siew Khee
What does the SGD69 million of provision for onerous contract relate to?
Adrian Teng
This provision pertains to legacy projects that we have mentioned in the past. We intend to focus on completing these legacy projects by this year, and the whole group is very committed to achieving that.
Siew Khee
SG&A has seen a major improvement of 4.2% over sales versus 4. 8% in second 2023. Other than slightly lower depreciation, is the pure SG&A reduction a new run rate?
Adrian Teng
The G&A reduction from the second half of last year is driven by identified synergies and savings, which we are starting to realize through lower overheads. We believe that the SGD300 million recurring savings that will impact gross margins and G&A will be fully realized in FY2025.
Siew Khee
Are there any updates on the Kaskida FPU since BP has achieved FID and does this field require more FPUs?
Chris Ong
Thank you, Siew Khee. We are working closely with BP. Right now, the letter intent is still on the advanced engineering work but we are hopeful that we will be notified by BP as expected. Well, we all know that the key competitive advantage is our ability to construct FPU and lift it, the top site fully tested in one single leaf. So, we think that we will add value to many of the customers that are looking at fuels in the same locality and we’ll continue to work on them. With the lean and repeatability that the customers are looking for, it would be very advantageous to Seatrium operating model.
Siew Khee
Are you still hopeful for more HVDC contracts from TenneT?
Chris Ong
Well, under the framework agreement with TenneT can award up to 40 units, that’s 80 gigawatts. So, there’s still a remaining of 26 projects to be awarded, but of course contracts will only be awarded after FID — if they reach FID. Yes, we are definitely right there competing for more and this part of the contracts would be very interesting to us because it is a series build contract. So, we will be working with the customers to take a look at how we can support them moving forward.
Siew Khee
Can you share your thoughts on new build contracts for rigs?
Chris Ong
Well, my thoughts as I’ve always shared, I don’t think that there will be big rigs inquiry in the near term but there will be very bespoke type of inquiry based on geography and status of fleets, but of course, there are still status of fleets, but of course, there are still present inquiry for some of them and I think if you take a look at Seatrium, we’ve and we hold three big and very proven designs. So, we are definitely looking out for how we can value add on fleet expansion and renewal.
Siew Khee
What are the rates for the recent SGD1.1 billion bank facility?
Adrian Teng
It was done at a very competitive rate, but I think more importantly, this facility will continue to support our growth in the issuance of bank guarantees as we secure more order books wins in the future.
Siew Khee
Can you please share the progress of the MAS, CAD investigation? I think we have mentioned that just now. Why did this happen when we had settled fines and said no major contingent liabilities relating to Car Wash previously?
Chris Ong
Well, that’s the purpose of the whole settlement that we are talking about, that we work closely with the authorities. This is on past issue. So we will fully cooperate with the authorities and when they have more queries, we would be very transparent with our disclosure with the market which is what we’re doing. So there’s no provision made at this time but a request for information and investigation and we will update the market further when we have progressed on this.
Horng Han
What is the value of the loss making orders that contributed to the first half 2024 revenue? What is the estimated value of the loss making orders to be recognized in 2024 and 2025?
Adrian Teng
As you can see in the first half interim financial statements, we did provide for ownerโs contracts of SGD69 million. The focus very much is to complete these legacy projects in 2024 and so that we can move on from the past and focus on the new orders that have been secured since the combination last year.
Horng Han
Seatrium had earlier guided that the group had made provisions for the loss making orders based on market conditions as at end 2023. Thus, can we know what is the actual margin for the loss making orders in first half 2024?
Adrian Teng
Well, we do not disclose such project margins.
Horng Han
How much did Petrobras contribute to first half 2024 revenue and how would the contribution be like in 2025 and 2026?
Adrian Teng
I think we’ve guided that the contribution from the P Series was almost 55% of the SGD4 billion revenue recognized in the first half. We will continue to execute on a P Series projects and be able to record revenue in our numbers. At this point in time, we do not provide forecast in terms of financials.
Paul Chew
How many FPSOs is Petrobras planning to award over the next two years?
Chris Ong
hanks Paul for the question. Well, I think that this would be answered with Petrobras forward planning for their fuels more than Seatrium. We react if an inquiry comes along but if you take a look at that, they have the ambition to have seven more units until end of 2030 to be awarded.
Unidentified Participant
We’ve got three questions from an audience. Congrats on the promising set of first half 2024 results. First question, may I clarify which line item does the SGD79 million provision, where is it accounted for? Is it in a COGS line? And if so, does core gross margin account for about 5.6%?
Adrian Teng
Yes, for both answers. It is in the cost of sales and if you exclude that provision, gross margin will indeed be 5.6%.
Unidentified Participant
As previously communicated, legacy contracts are expected to be fully delivered by end 2024. Can we get an update on this and are there further issues with these projects?
Chris Ong
Well, the legacy projects we have mentioned that they will be completed end of 2024. I think the Group is tackling the complexity and some of the challenges attached to these projects, but we are fully committed to deliver them by end of the year.
Benjamin HO
What is the ideal business mix between O&M and de-carbonization projects? How is Seatrium going to work towards that mix?
Chris Ong
Thanks Benjamin. I believe you are referring more than de-carbonization. I believe when we talk about oil and gas and greener and renewable projects. So we have still that 40% of order book mix that we have committed in our sustainability target, we’ll continue to work on that, but of course, the caveat is that we cannot control how the FIDs of projects of the various segment come across, but what we are actually doing, that target actually guides the Group basically to target our capability, our capacity and also at the end of the day, how we approach market with our customer.
So we’ll continue to work very closely with the customer, train our people to be able to handle the problems and the complexity of these contracts. So, being forefront in the race and customer will see the value to come to us. So, that is how we actually always front the market and that’s how we can actually build up the different sizes in each of the areas.
Q โ Zhi Wei Foo
Congrats on the results. Glad to finally see the turnaround. First question, how much is the legacy order book now and how much will be recognized in 2024?
Adrian Teng
As shared earlier and repeated a number of times, we expect to complete majority of our legacy projects by the end of this year, the whole group is very much focused on achieving that.
Q โ Zhi Wei Foo
Was the P Series or the HVDC platform a bigger driver of the 4% gross profit margin in first half 2024? In which period can we see the HVDC and P-84, P-85 projects move up the middle part of the S Ccurve?
Chris Ong
Well, all the projects are important. The P Series, the HVDC contracts, basically, we are very focused in execution excellence regardless of which part of Seatrium is executed and also which team have been executing that. So, really, they all contribute to that gross profit margin. Now, which period we will see? HVDC, we have three and also for P-84 and P-85, suffice to say, it would probably reach its peak, later half of next year.
Q โ Zhi Wei Foo
Have you taken on sufficient working capital loans to complete your legacy projects or will you need more?
Adrian Teng
As mentioned, we have over SGD2.5 billion dollars of cash and undrawn credit facilities currently available, which means that we have adequate liquidity to complete all of our projects. We are very, very fortunate to be well supported by the banking community and this is something that we are certainly grateful for.
Ada Ng
I note that the quantum of tax expense this quarter is disproportionately high. Why was this the case?
Adrian Teng
In the medium term, tax expenses will generally continue to depend on where profits materialize and this is how we record our tax expenses. The group has substantial tax losses in Singapore that we will look to offset against future Singapore tax. This is noted in the annual report. We will reevaluate tax exposure at the end of the year.
Ada Ng
How much more legacy projects do you have on your order book and when do you expect this to be completed?
Chris Ong
We have answered that, that the legacy projects should be completed by end of 2024.
Yao
Are there any updates on the CPIB prop that pertains to Operation Car Wash?
Chris Ong
Yes, we’re right now, what we’re supporting is the MAS and the CAD investigation and we will cooperate with them on the information that’s required. We’ll update all and the market when they are material development.
Liu Peng
Hi management, congratulations on the strong execution. Based on the delivery pipeline, can we look for free operating cash flow basically the outflow to reverse in second half 2024?
Adrian Teng
Similar to earnings, we do not provide forecast on cash flow but as I mentioned earlier, we have received the down payments for P-84 and P-85 of approximately a billion in July. That will certainly help our overall cash flow position. There is tremendous focus on project cash flow management and I cannot reiterate how much attention is being spent on that and we will continue to work on improving our operating cash flow position.
Chris Ong
Yes, just like to add a little bit on that. The cash flow is also dependent on the structure of the contracts too. If you take a look at P-84 and P-85, the team has done a good job and customers have been very understanding on our focus on cash flow. That’s why there is a $1.1 billion down payment that we receive upfront from the customer, but then that will basically be spent to fund the procurement, the engineering upfront. So, fundamentally, if you take a look at a certain period of time, you will note it as an outflow but technically, there’s also inflow before that.
Liu Peng
On the cost initiatives, what are the plans needed to be implemented?
Adrian Teng
As reiterated, we are on track to achieve the annual recurring savings of GD300 million by next year. We have also indicated earlier in the Investor Day, the focus on these initiatives include standardizing pricing terms with our customers, reducing overheads, volume pulling of procurement items, more efficient processing as well as asset rationalization. These savings will impact both cost of goods sold and G&A.
Adrian Loh
Can you please outline what are the specific legacy low margin projects that needs to be completed by end 2024?
Chris Ong
Well, Adrian, thanks for the question. Basically, we are focused to deliver the two projects that we have manpower and issues in the U.S.
Adrian Loh
We had some uncertainty in the U.S. So that has affected Seatrium. So how has your discussions with potential clients been? What is the outlook for your renewables business?
Chris Ong
Well, Adrian, since I said something about the U.S., I’m just trying to put this into context. This in U.S. is basically for the renewable business, moving forward. Well, I mean, we are I guess this question evolved around the political situation and the election coming at the end of the year, but technically, we work with the customers on offshore wind industry and provide them solution and we traditionally still wait for the FID to happen before it can be made into the contract but longer term wise, I think the whole industry will need to adjust to equilibrium of prices that make sense for all stakeholders because the demand for energy will only grow due to the reasons that we have stated around security, around transition.
So, if it doesn’t happen in short term, we will still be very bullish around making sure that we are always at the front to provide Seatrium solution to our customer and we’ll maintain active dialogue and it is still a core area for us. So we’ll continue hopefully we can see something moving in that geography.
Rahul Bhatia
Can you comment on the gross margins for the repairs and upgrades projects that you can expect from your current order book?
Chris Ong
Well, I think we’re quite vocal about this is a very important part of our business from the angle that it does give us a good baseload and on top of that, the team has gone out to do SCCs as what we have mentioned, that gives us a lot more certainty around planning these as what we have mentioned, that gives us a lot more certainty around planning and base loading, but if you take a look at contribution, it’s difficult to actually pinpoint at contributions because projects come and go very quickly but good to see that we are on strike to increase that to SGD570 million.
Rahul Bhatia
Can you help us to understand the incremental cost that you expect to incur to for the new build FPSOs, the P-84 and P-85 versus the older generation FPSOs?
Chris Ong
Wow. I mean, all the FPSO that we’re building are all new generations. So, it depends on what you want to specify. Sometimes it boils down to capacity, right, and then on top of that, some would be about electrification when a customer wants to do it and then of course, emission I guess is everybody’s responsibility. So I can’t comment on what’s incremental cost because it’s really too general, I don’t want to put a number but if you compare a P-84, P85 that’s announced in the market versus the P-80, P-83 or P-82 price, maybe that’s the indication that you can do.
Adrian Teng
I would just add that our focus is very much on project margins and maximizing the margins as we execute the project along the way. So it’s not really about incremental cost but it’s maximizing margins on the projects.
Rahul Bhatia
The gain on the sale of noncore assets of SGD34.8 million recorded in first half 2024. Is that all from the sale of the Batangas yard in Philippines or are there some other assets as well?
Adrian Teng
Short answer is no. It’s not all from the Philippines. There are obviously disposal of PPE items in there. As we have repeated to the market, we are selling down our noncore assets, surplus assets as well as inventories and this is something that we proactively continue to do. So this helps to recycle capital by monetizing these noncore surplus assets, which certainly helps with the overall financials.
Rahul Bhatia
Can you provide more color on the SGD70.6 million dollars reported in the line item other income? We’ve got a couple of other analysts has asked the same question as well.
Adrian Teng
We had a legal cost recovery incurred as a result of settling on the Awilco case from RigCo. So that’s a major contribution to that SGD70 million. We also recognize income from sales of scrap assets as well as miscellaneous income.
Rahul Bhatia
What is the source of dividend income?
Adrian Teng
This came from past investments. There were some coming back from our Philippine yards as well as other associate investments.
Siew Khee
Can you please clarify when you mentioned target mid-teens project level margins, you meant project level EBITDA margin or project level gross margins?
Adrian Teng
It’s the latter, project level gross margin.
Ryan
Thanks for the presentation. Can we expect the SGD2 billion of receivables to unwind in second half 2024?
Adrian Teng
We continue to work on collecting on our accounts receivables but we do not provide a forecast of financial performance.
Mayank Maheshwari
Can we talk about debt refinancing and the potential reduction in the cost of debt for 2025? And do you see further increase in working capital requirements into the year end?
Adrian Teng
As mentioned earlier, we are very proactive in managing our overall cost of capital and managing our capital pool as well. So this is a target that we will continue to strive for in terms of reducing loan margins over time and we will hopefully achieve that in 2025. As we look to secure new projects based on overall cash requirements, we will calibrate our working capital requirements accordingly, but we believe the recent bank guarantee facility that we closed last week certainly helps in our working capital requirements.
Felicia Tan
How has the One Seatrium Global Delivery Model helped with Seatrium’s order book so far?
Chris Ong
Well, a lot, as mentioned, is a decade high order book, but if we really take a look at horizontal integration, that probably would be easier to understand. In the past, we have yards that have their own P&L and they will basically secure and deliver contracts that are nearer to the capability of individual yards. Today, I think we are fully horizontally integrated. We are driven by projects, which means to say that in that way, when we have centralized planning, engineering and also operation, then what we are able to do is to scale the projects because, we can manage available capacity a lot better, than the single yard itself. So, which means to say that if the projects require even overseas help to do certain components, we are in total control, which means to say that the footprint that we have today is more efficiently managed, right across the group worldwide and that will allow us to take on huge projects that we have shown that we can do, but at the same time, we do not do components of the projects that we don’t do either efficiently or it takes up too much of the capacity.
Liu Peng
What is the execution ratio for the share buyback till today? And moving forward, do you have any plans execute it further or expand it to support the share price?
Adrian Teng
As we articulated to the market on the 100 million systematic share buyback program, we continue to execute against that. Year-to-date we have bought back 4.7 million shares and we will continue to do so. Potentially once we run this buyback program down, we may look to other programs, but this needs to be calibrated against the overall capital requirements of the group.
Siew Khee
What is a proper gross margin? In the cost of sales, there is a provision of SGD69 million for onerous contracts and also a SGD79 million for MH Wirth. Should we remove these two to calculate a proper gross margin?
Adrian Teng
You can if you want. I think we’ve always guided towards a project gross margin of mid-teens, and this is where we are most focused on. In terms of your computation, I think you can remove that to look at it from a clean numbers perspective, but that’s not where we are guiding.
Siew Khee
What did you mean by project margin recovery in your earlier reply? Is it cost write back?
Adrian Teng
This are mainly project settlements with our customers.
Horng Han
How much of the SGD300 million in cost savings have been achieved in the first half of 2024? And are you able to share the breakdown of the first half 2024 savings between cost of goods sold and SG&A?
Adrian Teng
No will be the answer to the second question. I think if you compare the second half of last year versus the first half of this year, there is demonstrable savings in the G&A and we continue to work on fully realizing this annualized recurring savings by the end of next year.
Adrian Loh
Has the industry’s supply chain situation improved and how do you think that will affect cost for Seatrium in the next 12 months?
Chris Ong
Well, supply chain, we all know what’s going on around the world, whether it is capacity or whether it’s transportation, there will always be challenges and of course not to forget, we’re still in quite an inflationary environment where the rates are still quite elevated, but what is important is the ability to project manage our contracts. That’s where Adrian is trying to allude that the team is very focused to execute on time, on budget and make sure that we’re able to manage our cash flow. Now supply chain, when we sign a contract, it’s always with in conjunction with some of our major supplier to make sure that we are able to help each other to fulfil the on time delivery of their component and we’ll continue to do that and that’s form a very big part of managing our project itself.
Rahul Bhatia
Can you talk about revenue and cost connection accounting over the life of a project for which you expect mid-teens margins? Will the margin follow as curve as well over the life of the project or the accounting is done to keep margins stable over the life of the project?
Adrian Teng
On the point about margin following the S Curve, the answer is yes. In terms of revenue recognition, we follow the percentage of completion methodology and this is in compliance with accounting standards. Cost expense is recognized as it incurs and throughout the project we work to maximize the margin on the projects.
Adrian Loh
In Brazil, who are your major competitors and how do you see that evolving?
Chris Ong
Well, Adrian, the ecosystem in Brazil, there are existing yards down there that have been competing with us from a local content basis. But what we always say is that, Citroen looks at all our projects end to end.
The Petrobras contracts, if you are really targeting your question on is that, Seatrium is one of the only group that is able to deliver EPC contracts end to end and of course, our track record in Brazil in both yards is very long. So the key thing is to deliver on promise and I guess there will be new entrance, there will be competitors in whichever geography, we just had to carry our task a lot better.
Jiang Jie
Can you give us some color on the huge growth in contract assets and receivables in the last half year?
Adrian Teng
Again, I cannot reiterate how much focus internally we have on contract assets. Yes, contract assets are revenue that has been recognized, but has yet to be built to our customers due to timing of the billings or invoicing. This certainly has a downstream impact on our cash flow and this is something that the group is working very much on. So I would leave that explanation at that.
Judy Tan
With the last question answered, we have now come to the end of our earnings webcast. Thank you so much for your active participation and for joining us today. If you have further questions, please feel free to contact the Investor Relations team and we wish you a pleasant day ahead.
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